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

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TABLE 7: Octopus Ventures realisation events Source: Octopus Ventures Investee Company name JHC RevGen ALP (LearnLogic) Obvious Solutions Network Analytics Press Red Structure of investment Equity Equity Equity Equity Equity/Convertible bonds Equity/Convertible bonds Industry sector Support Services Software & Computer Services Support Services Transport Information Technology Hardware Media & Entertainment Early Stage Pre- Early Stage Pre- Later Stage Preprofit expansion profit expansion Revenue Later Stage Pre- Early Stage Pre- Financing stage when first invested Turn around Revenue Revenue Board seat Y N N N Y Y Co-invested with - - - - London Capital SEGF Total value of financing round £480,000 £105,000 £310,407 £211,675 £310,137 £263,902 Amount originally invested £250,000 £105,000 £230,000 £211,675 £171,990 £237,500 Date 13/4/2000 01/04/2000 28/06/2000 27/07/2002 27/08/2004 04/04/2003 Further investment amounts (if any) Realisations/Dividends £230,880 9/11/01 £101,113 100% Write Off £37,188 28/7/01 £10,000 12/12/01 £33,219 28/3/02 100% Write Off 100% Write Off £120,649 14/11/05 £17,497 26/5/06 100% Write off £26,401 6/7/05 100% Write Off Investee Company name ScreenSelect SkillsMarket Site Confidence ITM Power CityCall Equator Net JHC Structure of investment Equity/Convertible bonds Loan Equity Equity Equity Equity Equity Industry sector Media & Entertainment Software & Computer Services Software & Computer Services Electronic & Electrical Equipment Telecom Services Leisure & Hotels Support Services Financing stage when first invested Early Stage Pre- Revenue Later Stage Preprofit expansion Early Stage Pre- Revenue Early Stage Pre- Revenue Later Stage Preprofit expansion Early Stage Pre- Revenue Turn around Board seat Y Y Y Y Y Y Y Co-invested with - - - - - - - Total value of financing round £602,073 £145,000 £747,683 £715,500 £400,000 £240,000 £480,000 Amount originally invested £250,000 £145,000 £309,169 £715,000 £400,000 £240,000 £250,000 Date 11/07/03 08/05/01 08/05/01 6/3/02 16/01/01 05/10/99 13/4/2000 Further investment amounts (if any) Realisations/Dividends £352,074 14/4/04 £196,193 23/8/04 Residual in LoveFilm £962,772 £156,218 18/4/05 £150,435 30/4/02 £249,334 24/11/05 £1,000,793 25/1/07 £220,082 8/6/07 Earn out £977,916 15/1/08 £65,992 23/1/03 £10,229,751 6/3/05 £162,800 12/11/04 £480,000 3/2/00 £230,880 9/11/01 £101,113 12/6/07 Further earn-out potential Annual Internal Rate of Return 23% 2% 27% 146% -21% 709% -22% Length of investment 4.2 years 3.9 years 4.79 years 3 years 2.7 years 0.3 years 7.2 years 12 Tax Efficient Review Reprinted for the use of Octopus Investments Limited November 2011
Deal Flow Exits Costs Conclusion The investment team dedicated to investing Eureka funds and the Titan VCTs is ten people strong spending the equivalent of 3.3 man years on investing the funds (see Table 3 rows "Deal Origination" plus "New Deal doing"). The average deal size of the deals done to date is around £1,500,000 and in our view unquoted deals take around four months on average to complete. Funds still to invest in Octopus Titan 1, 2, 3 and 4 to achieve VCT qualification total £10.1m (see Table 1). Investment of Titan 5 is due to start in Q4 2011, and at the current time requires approximately £8.8m to be invested to achieve VCT qualification. Our assumptions (3.3 full-time equivalent team members, deal capacity per person per year of three deals, deal size of £1.5m) would suggest the maximum deal making capacity of the team is around £14.85m per year or £44.55m over the next three years. In our view this would be a relatively demanding workload for the team, as currently resourced, but with Eureka investing alongside the Titan Funds, the deal flow for both products is the same. Deal flow is sourced from industry contacts of the team members and there is significant proprietary deal flow from the ”Octopus Venture Partners". Octopus is one of the most active deal doers in the early stage venture capital market place (Source: Ascendant last two quarter reports of 2010). The team reviews over 3,000 business summaries, reads 1,000 business plans in detail, meets with 250 different businesses and ultimately makes 10-15 investments per annum on average. Exits will normally be by way of a trade sale. It is interesting, although not relevant to the Eureka funds, that an Octopus Venture Partners investment Plum Baby was sold in May 2010 delivering in excess of 28% IRR, and another Lovefilm was sold to Amazon in February 2011, delivering a 3.5 times return to investors. This transaction has exact parallels with the way in which Octopus’ Ventures team now invest, with the Venture Partners investing 20% of the investment round and VCT and EIS funds investing the balance. In this case, the funds were non-Octopus as Eureka and Titan VCTs had not been established at the time of investment. As detailed above, from a total of 52 investments made by the Ventures team since 1999, there have been 19 exits resulting in an IRR of 36.1%. Tax Efficient Review Management Team/ Deal Flow/Exit rating: 17 out of 20 Initial costs are fixed at 2.5% excluding any introducer commission (up to 2.5%). The Annual Management Charge is 2.0% + VAT of NAV from which trail commission of 0.5% per annum is paid to introducing IFAs. There is a dealing fee of 1% on the purchase and sale of shares. The performance fee is a standard 20% of any distributions over original investment. An average set of charges but with a performance fee without a minimum return feature. See Table 10 for a total fees comparison with Calculus and MMC offerings over a five year period. Tax Efficient Review Costs rating: 7 out of 10 The Eureka Portfolio Service is a bespoke portfolio service structured in such a way as to increase the return and reduce the risk of the investment. The aim 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. There are two aspects of this offering that set it apart from the rest of the offerings: the “Venture Partner” approach to investing and the focus on Early stage, Expansion and Development investments. This is a more recent EIS offering from Octopus – it was launched in May 2008. However, the team has been investing in EIS qualifying deals for the past 12 years. Their realised track record from the EIS qualifying investments made over that time is a 36.1% IRR but in our view this is not directly relevant to potential investors and based on no exits so far from EIS investments we rate this offering below Calculus and on a par with MMC. Tax Efficient Review Total rating: 86 out of 100 Tax Efficient Review Reprinted for the use of Octopus Investments Limited November 2011 13
Page 1 and 2: November 2011 Tax Efficient Review
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 and 10: TABLE 4: Unquoted Eureka portfolio
Page 11: the Calculus and MMC. Octopus Inves
Page 15 and 16: Table 8: Eureka Unquoted Portfolio

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

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