The democratisation of finance has been one of the key investment narratives of the last year, as investors flock to DIY platforms and apps with a big appetite for growth shares.
But while investors may want a slice of the tech sector, by the time many exciting companies come to list on the stock market they may have missed out on some of their most explosive growth periods.
Venture capital trusts, however, are an opportunity for investors to back companies at their earliest stages and get the benefit of some tasty tax breaks, including 30 per cent income tax relief.
The tax breaks reflect that this is high risk investing though. And for every successful name, such as Depop or Cazoo – two firms held by popular VCT Octopus Titan, there are many others that don’t make it.
Titan VCT invested in Depop’s Series B round back in 2018 and exited earlier this year after it was sold to Etsy
VCTs are publicly listed companies which raise money to invest in young, usually privately-owned companies not listed on the stock market.
Investors can claim up to 30 per cent income tax relief on the amount they have invested in a VCT, provided they hold the investment for at least five years.
British start-ups, Depop, recently bought by Etsy for $1.6billion, and Cazoo, which listed in the US this year, are often held up as examples of how well VCT investment works.
Both achieved valuations of more than $1billion while still unlisted, earning them the label of ‘unicorns’.
And both companies were also backed by Titan VCT, which has become the poster child of mainstream venture capital investing.
Two other portfolio companies – Zoopla and pet insurtech company Bought By Many – have also in the past racked up the coveted unicorn status.
Part of Octopus Ventures and the largest VCT in the UK, Titan VCT is now opening for new investment.
Fund manager Jo Oliver speaks to This Is Money about why the UK is a good place to invest, how the fund has nurtured its small herd of unicorns and why not all centure capital investments go to plan.
Star investment wins have boosted Titan’s returns
Titan is the UK’s largest VCT with an investment mandate to invest in hyper growth, early stage tech and tech-enabled businesses.
It has a portfolio of 92 companies, spread across its five specialist areas: consumer, health, fintech, deeptech and B2B software.
This broad spread helped total revenues across the portfolio increase by 126 per cent from 2019 to the end of 2020, while its top 10 holdings by value saw revenue growth of 179 per cent.
‘We deliberately picked big [sectors] because we didn’t want to become a specialist fund where you’re at risk, frankly, of picking the wrong sector and/or being exposed to a sector cycle and seeing returns go up and down over a five or three year period,’ says manager Jo Oliver.
‘It’s one of the advantages of VCTs generally and Titan… given that evergreen nature you can take a slightly longer term view on the return timings.’
Titan VCT fund manager Jo Oliver shares how the trust has reported strong returns this year
Indeed, Titan has proved the model can work to provide returns for its shareholders – in the 12 months to 30 June the fund delivered 32.9 per cent total returns after a string of large exits.
These included Etsy’s $1.6billion acquisition of Depop, Snap’s $500million plus acquisition of WaveOptics, and Carlyle Group’s acquisition of funds network Calastone.
This is on top of the $7billion plus listing of used-car company Cazoo, which Titan VCT was an early investor in and still held most of its original shareholding at listing. DMG Media’s venture capital arm DMG Ventures was also a major early Cazoo investor.
Titan has also had a number of smaller but material exits over the course of 2021, which should generate over £200million of cash proceeds back into the fund.
How early stage investing can pay off
How to invest in a VCT
VCTs raise funds periodically by issuing new shares through an offer for subscription.
Investors can buy shares in new offers through a specialist broker like Wealth Club, or invest directly through an online discount broker or financial adviser.
As VCTs are listed companies, investors can also buy shares on the open market through a broker.
But it is vital to realise that second-hand VCT shares do not offer the same upfront income tax relief that is available with new shares. Investors can still take advantage of any tax-free income and growth.
Last month Titan VCT launched its £125million fundraise, which will be open until 20 October 2022 but may close earlier if fully subscribed.
The minimum investment is £3,000 while the maximum investment qualifying for tax relief is £200,000.
Dividends paid from VCTs are tax free, which can make them an attractive source of income, particularly for higher rate taxpayers.
Octopus is unusual as it offers an ISA wrapper on its VCTs, which lets investors transfer any existing ISA funds (from previous tax years of 2020/2021 or prior) to a new Titan VCT VCT ISA.
These large exits are partly a result of companies staying private for longer.
The nature of VC investing means just a fraction of the portfolio will achieve success while the others will simply fail, making it a higher risk investment.
However, if you manage to invest in one of these success stories and they stay private for a long period, you could enjoy strong returns.
For VCT investors, all returns tend to be paid out as dividends.
Titan invested £8.76million into Depop in 2018 and 2019 and then received £97.36million exit proceeds when it was acquired in June.
It has consistently paid out 5 pence per annum in dividends and following its string of exits this year it will pay a special dividend of 6 pence, bringing the total to 11 pence for 2021.
Most of the returns from VCTs come from dividends paid out rather than share price growth.
‘Typically the businesses that are really successful continue to be really successful and you get a compounding effect… if you can keep them longer you will get compounding returns in the VCTs,’ says Oliver.
‘UK entrepreneurs for a combination of reasons have been possibly selling out a little bit early, so the ability to maintain yourselves privately for your winners should enhance returns.’
Now investors have the opportunity to get a seat at the table with Titan’s new £125million fund raise, which opened last month.
It is likely to garner a lot of interest given the fund’s recent performance, and the opportunity to invest in the next unicorn is a compelling one.
But investors must also remember that many VCT investments won’t become unicorns or even go on to be successful and that returns for funds and their investors can be lumpy if things don’t pay off.
Despite their higher risk nature, VCTs have become much more of a mainstream investment product.
The total invested in VCTs has risen from around £350million annually a decade ago to £685million a year, data from the Association of Investment Companies data shows.
While a main driver has been changes to pension rules, managers have reported VCT investors are getting younger. Many are indubitably attracted both to the tax relief on offer but trusts’ backing of unlisted early-stage companies is also becoming more interesting.
The average age of investors across Octopus VCTs is 56.
As we emerge from the pandemic, however, how will Titan’s investment priorities change and will there be one sector which could outperform the others?
‘We’re probably going to have a broadly even spread across these areas over the next 12 to 18 months, and that’s in part because we want diversification and in part because we see great opportunities in each of the sectors,’ Oliver says.
That said, the team is keen to invest more in deep tech, which covers everything from AI to quantum computing.
It has already secured an exit in the sector after selling augmented reality company WaveOptics to Snapchat owner Snap.
‘Deep tech is an area that actually the UK excels in for a range of reasons. It’s got an amazing pedigree historically… it’s got amazing talent across its universities as well and that has spawned out into amazing success in lots of different areas, whether that’s drones or AI or quantum computing or robotics,’ he says.
‘But it is an area which is probably under capitalised versus the opportunity. That goes in part, at least, back to the fact that you have to be a patient investor in deep tech and you need to have a lot of expertise to really understand what you’re investing in.’
What is Titan’s secret to the success rate?
Not all portfolio companies are going to be the next big thing but it’s clear Titan VCT has a strong success rate.
Names like Cazoo and Depop may make headlines but Oliver and his team have also overseen sizable follow-on funding rounds this year, such as pet insurtech business Bought By Many which is now valued at $2billion.
Oliver also tips digital addiction treatment company QuitGenius to be the next unicorn in the portfolio.
‘When we look at an investment opportunity, we’re really asking ourselves, does this have the ability to grow into a business worth billions of pounds… and the number of businesses that are out there that can achieve that and have achieved that have grown by an order of magnitude over the last 10 years or so,’ says Oliver.
Titan VCT backed Zoopla and Lovefilm founder Alex Chesterman more than a decade ago before backing Cazoo in November 2018
But what is its secret when it comes to picking out and nurturing businesses to reach unicorn status and beyond?
Where diversification has been key for returns, its go-to specialists in each of the five areas has been ‘transformational’ for its portfolio companies, according to Oliver.
‘We have venture partners who are specialists in particular areas. If you break down a tech company it is fundamentally ‘Have you got a good product? Can you sell it? Can you sell it well?’ We’ve got an ex Paypal head of product who works for us and helps our companies finesse and optimise their product roadmaps.’
‘We’ve also got two go-to-market experts … who are helping businesses work out which markets they should be addressing, how they should be positioning their product, how they should organise their sales… I’ve sat on a few boards where I’ve seen that input be absolutely transformational.’
Titan VCT also has its own talent team of four, which focus solely on recruiting for its portfolio companies.
Typically focused on C-suite hires, it is a resource provided to all of its companies for free.
‘A lot of people have got great ideas but actually it’s not the idea that matters, it’s the execution of that idea that makes the difference… taking a business from mediocre to a unicorn and maybe even a decacorn, worth tens of billions… it’s the people you can attract and retain.’
The last piece of the puzzle is Titan’s support to help its portfolio companies’ efforts to crack America.
‘Through collective experience we recognise that actually having people on the ground in the US to help our companies understand the US market and all the nuances of it [is helpful],’ says Oliver.
‘Everyone thinks of the US as one market and actually it’s 50 or so smaller markets. [We help to] build up a network and a playbook of how and when – and when not to – enter the US. Building up introductions to potential customers and funders over there has been a very big part of how we add value to the portfolio.’
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