Tax Efficient Review of Octopus Eureka EIS Fund with ... - Clubfinance

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Track Record made by the Octopus Fund Managers. This endorsement comes through the potential investee company presenting directly to a group of the VPs. Ultimately, unless a reasonable number of VPs commit to invest into a deal (typically 5-15% of the capital for each deal comes from the VPs) Octopus will not invest. Octopus sites this as being one of the key ways in which they mitigate risk. 4. Post-investment Octopus works actively with its portfolio companies in order to maximise the value from each investment. The VPs provide a significant and valuable resource in this process. Often VP members will sit on the Boards of investee companies or act as Octopus’ observer/monitor within that company. The aim of this EIS offering is to create a diversified portfolio of investments in early stage unquoted companies with a focus on the environmental, technology, media, telecoms, consumer lifestyle and wellbeing sectors. A key number for potential investors in an EIS Fund offering is the amount that, after costs, will be invested in the underlying EIS qualifying companies as this number will drive the initial income tax relief and any amount of deferred CGT. Octopus tells us "Our estimate is that the amount invested into qualifying companies will be approximately £92,000 assuming that the IFA rebates the commission" (see Table 5). We asked Octopus for its view of the time taken from the investment to investors receiving EIS certificates. Their response is "It is expected that investors will receive the EIS 3 certificates approximately 3 months after investment into each of the qualifying companies". Tax Efficient Review Strategy rating: 28 out of 30 This is an offering from Octopus that has been established for 3.5 years now (with a different strategy to previous Eureka EIS fund raisings). During this period, the economic conditions have altered substantially with the credit crunch and economic upheaval effecting stock markets globally. A total of 26 qualifying investments made into unquoted companies in this time (Table 4) and 9 into AIM listed companies (Table 5). The aggregate investment by Eureka into all of the companies managed by the Ventures team totals £11.392m. The Eureka portfolio (Table 6) of 26 unquoted investments made by the Ventures team now has three fully written-down, three impaired, increases in value from four of the businesses and the remaining sixteen held at cost. As these businesses are unquoted (with the exception of e-Therapeutics) they are valued in accordance with International Private Equity and Venture Capital Guidelines. In the case of the Eureka investments, this means the valuation of a business is generally left at cost unless a further funding round has taken place or the performance has been poor. If a further funding has taken place, the investment will be re-valued up or down to reflect the most recent issue price. The investment will also be re-valued if there has been an impairment to trading or an impairment in the business’ outlook. Here the valuation of the investment will be reduced at the six monthly re-valuation dates even though no share transaction may have taken place. On this basis, the Eureka portfolio managed by the Ventures team is currently valued at £11.412m with a cost price of £11.392m. Full details are in Table 4. Looking at the individual companies, it is perhaps worth considering two in particular. Zoopla, an investment made in January 2009, is now the UK’s second most visited website after Rightmove (Source: Nielson). Whilst significant in size, Rightmove is a listed business valued at over £1.2bn. Meanwhile, Calastone, the mutual messaging service, releases an announcement regarding new clients on an increasingly regular basis as more and more of the industry adopts the service (Source: Calastone press announcements). The AIM team have made 9 investments since Eureka was relaunched in May 2008. The total capital deployed into these investments is £4.481m. Full details of the AIM investments are detailed in Table 6. Performance for the AIM investments is straightforward as this is a quoted market. Overall the performance of the Eureka offering has not been stellar and, with no exits so far from those investments specifically made as EIS investments, we rate the Eureka performance inferior to 10 Tax Efficient Review Reprinted for the use of Octopus Investments Limited November 2011
the Calculus and MMC. Octopus Investments is one of the UK’s leading smaller company fund managers, with around 20,000 investors and over £2.5 billion under management across its range of products. In addition to the Octopus Titan VCTs, Octopus currently manages 12 other VCTs. In 2007, 2008, 2009 and 2010 independent financial advisers voted Octopus “Best VCT Provider of the Year” at the Professional Adviser awards. Octopus Investments was voted VCT Manager of the Year at the Unquote British Private Equity Awards in 2010. The Ventures team was bought by Octopus Investments in September 2007. Prior to joining Octopus the team traded under the name of Katalyst Ventures. Katalyst was set up in 1999 and has invested in early stage unquoted companies over the last 12 years. All of the investments that the Ventures Team has made since 1999 qualified for EIS tax reliefs. Of the 52 investments made since 2000, 19 investments have been realised (full exit made whether positive or negative). The IRR of the realised part of the Ventures portfolio, invested through the EIS tax wrapper, is 36.1% (05/10/99 – 31/03/2011). Details of the realised element of the portfolio are provided in Table 7. Tax Efficient Review Track Record rating: 34 out of 40 Investment Team The Ventures investment team comprises of: Alexander Macpherson has extensive experience of investing into smaller companies. Before joining Octopus, he spent ten years with SG Warburg Group and as a trader and risk manager in the equity derivatives department. He then worked with a number of small businesses. Alan Wallace has more than eight years experience making investments into smaller companies, and before Octopus he had worked in senior management and marketing roles at a number of companies, including Sara Lee UK Ltd, Dairy Crest plc, and Great Universal Stores plc. Jo Oliver is an entrepreneur who has extensive experience of working with and investing in smaller companies. He has founded several businesses and has also held senior roles in equity research at Merrill Lynch and Lehman Brothers. Jo is a chartered accountant and previously worked at Arthur Anderson. Simon Murdoch a leading internet entrepreneur, investor and former Vice-President Europe, Amazon.com. Simon has invested in and advised several early stage internet success stories including Betfair, and has also been personally involved with some of the UK's most successful internet and technology businesses including LoveFilm and Shazam. Anthony Collinson is a business angel investor and strategic consultant to small businesses, he has over 30 years of senior line management experience. Alliott Cole has a corporate finance and legal background, has held positions at N M Rothschild, ashurst and IBM and is a qualified lawyer. Luke Hakes has considerable experience in the assessment of both business challenges and strategies and prior to joining Octopus worked in both the scientific and Management consultancy sectors, having held positions with Apple, Diamond and Goldman Sachs. Simon Andrews brings ten years' experience in equity research and analysis, along with portfolio management, and has particular expertise in technology stocks. Previously he was vice president at commercial bank SVB Financial Group, responsible for business development, portfolio management and venture loan structure. Prior to this, he held senior and specialist roles at Jefferies International, Lehman Brothers, Merrill Lynch and BNP Paribas. Samantha Ling focuses on managing the Octopus Investor Group and their individual portfolios and oversees the investment process. George Whitehead was previously NESTA's Business Development Director, where he headed up all its programmes related to supporting growing companies. Before that, he was an Investment Manager at Oxford Innovations, where he managed the Oxford Investment Opportunity Network (OION), and also managed the incubations program for the University of Toronto's Innovations Foundation. Tax Efficient Review Reprinted for the use of Octopus Investments Limited November 2011 11
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Page 3 and 4: Product Provider Anglo Scientific T
Page 5 and 6: Matt Cooper - Chairman Paul Latham
Page 7 and 8: EIS companies will be changed to al
Page 9: TABLE 4: Unquoted Eureka portfolio
Page 13 and 14: Deal Flow Exits Costs Conclusion Th
Page 15 and 16: Table 8: Eureka Unquoted Portfolio

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