UK’s biggest VCT sticks with manager Octopus after dire returns 

The board of Octopus Titan VCT (OTV2 ) has issued a set of demands to its fund managers after the shares plummeted in the past three years.

The £404m venture capital trust (VCT) had a strong decade leading up to its peak in late 2021, but its share price has since fallen a sizable 70% from its highs.

Now the board has slashed the fees it pays, reduced the notice period required to terminate its contract with Octopus, and put restrictions on the manager’s strategy.

Board members noted ‘widespread and deep dissatisfaction’ among shareholders, many of whom expressed ‘understandable frustration with the fall in portfolio value in recent years’. 

‘This made it clear that “business as usual” was not a viable strategy and changes were required to improve performance both in the short and long term,’ said aptly named chair Thomas Leader in a letter to shareholders.

This was the catalyst for a strategic review, which has now concluded after being launched a year ago, that will revise its relationship with Octopus.

Before now, OTV2 had to pay Octopus a 2% management fee and 0.3% services charge annually, which together cost the company £21.2m in 2024. This is in addition to a performance fee of 20% on gains made above a certain threshold.

The board agreed this fee structure ‘has clearly delivered sub-optimal outcomes for shareholders’.

It will now pay 17% less on management and services fees under the new structure and could receive a 20% rebate from Octopus if performance targets are not met.

The board held ‘exploratory discussions with a number of potential alternative portfolio managers’ throughout the process but ultimately concluded that Octopus was ‘best placed to maximise the company’s value’ – namely, because it was cheaper than the transactional costs of switching manager.

However, the board stressed that the management team at Octopus would be ‘closely monitored’ moving forward.

It reduced the notice period for terminating Octopus’ contract from three years down to one as a precaution in case ‘the fund managers are unable to deliver satisfactory performance’.

While under review, the managers will not be able to make new investments until the existing portfolio sees an improvement in returns.

Leader said: ‘These changes are intended to best position the company for a recovery in performance. Only when the board is convinced that Titan is operating at or close to sustainable levels is it likely that Titan will seek to fundraise and make new investments.

‘Shareholders should note that it is possible that it could take several years for the turnaround in performance to be achieved and that there is no certainty of a successful outcome.’

The managers will be allowed to explore new investments once they can demonstrate a successful turnaround, but these will be limited to later-stage investments in the fintech and healthcare technology space.

It had been difficult to determine the value and timing of realisations for the portfolio’s small companies, hence the renewed focus on more developed holdings.

This had stunted OTV2’s ability to make dividend payments in the past as its lack of realisations meant it did not have enough inflows to meet its 6.9% yield. The letter referenced the company’s typical past holding period of 6.5-7.5 years and said that, while there are no firm requirements, ‘targeting a reduction in this average duration is considered desirable in order to provide more regular liquidity’. 

However, QuotedData’s head of investment company research James Carthew queried this aspect in the board’s otherwise well-advised plan.

‘The Octopus Titan plan – more follow on investments, lower fees – makes sense, but I’m puzzled by the board moaning about holding periods of 6.5-7.5 years for a portfolio of early-stage investments. I am not convinced that it is altogether sensible to encourage a short-term mentality when backing early-stage businesses,’ he said.

The board also noted the volatile nature of the Octopus investment team in previous years, which has seen a ‘significant level of turnover’.

Malcolm Ferguson ran OTV2 until March 2024 and was replaced by former lead manager Jo Oliver in the interim, before Richard Court took charge in August last year.

Board members have asked Octopus to direct more resources towards its investment team, including the ‘recruitment of additional senior members with portfolio management and realisations experience’.

Octopus Titan is the largest VCT in the UK with just over £800m of assets, according to Morningstar data. However, its market capitalisation is barely half that due to the almost 50% discount the shares trade at in the secondary market.