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

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