• Octopus Apollo VCT has announced an offer for up to £50 million (£35 million + £15 million overallotment).
• The VCT has total net assets of £386 million and a portfolio of around 45 companies.
• Apollo invests in small and medium sized B2B software businesses. These aren’t traditional start-ups, with investees usually posting revenues of £2 million to £8 million a year.
• Over the five years to September 2023, the VCT has delivered a NAV total return of 50.6%
• The VCT targets a dividend of 5% of NAV
Nicholas Hyett, Investment Manager at Wealth Club commented:
“Apollo’s focus on more mature businesses in the B2B software space has paid dividends in the last 18 months.
As more mature businesses, Apollo’s portfolio companies are less likely to be dependent on repeat funding rounds for survival - allowing them to weather the storm that’s rocked venture capital with relative ease. The focus on B2B software also helps, software businesses are inherently higher margin and cash generative - a software package can be built once but sold again and again with minimal additional cost.
In the 2021 VC boom Apollo’s companies were viewed as boring, unable to deliver the sort of stellar growth that sets Silicon Valley hearts racing. But in the new higher interest rate world, the potential mix of high margins, cash generation and low capital intensity are positively sexy.”
About Venture Capital Trusts (VCTs)
Why VCTs are worth investing in
Most investors are initially attracted to VCTS for the tax breaks, and they are generous. Investors can get up to 30% back in income tax relief up front, any dividends paid by the VCT are tax free and growth is free of capital gains tax too.
However, VCTs are more than just a tax planning tool. They’re probably the best way for UK investors to access fast growing smaller companies. Revenue growth from VCT investees far outstrips what you see in main market listed companies, and the result has been some attractive returns for investors over the longer term.
Exposure to high growth, smaller companies also has the potential to diversify a conventional portfolio. Long-term performance is often only loosely correlated with the wider economy. Highly disruptive businesses grow by taking market share from incumbents rather than relying on market growth.
The rules governing VCTs mean they’re also an excellent way to back smaller businesses. It’s their role providing support to the next generation of UK start-ups, driving innovation and creating jobs, that earns them the tax relief from the government - and many investors feel that this is something they wish to support too.
Who should consider them?
VCTs are higher risk, and while they’re listed on the stock market, in order to qualify for tax relief investors must hold the shares of at least five years before selling - making them inherently long-term investments. Unlike most conventional funds and shares the minimum among you can invest is comparatively high - often £3,000 or more. All of this means they are best suited to wealthier or more sophisticated investors.
VCTs are popular with two groups in particular.
The first is higher earners or wealthier investors who are limited in what they can put into more mainstream tax wrappers. Those who already use full £20,000 ISA allowance or whose pension contributions are tapered due to the amount they earn. The £200,000 a year annual VCT allowance is generous and can save higher earners up to £60,000 in upfront income tax.
The second group is those in, or near, retirement who use VCTs’ tax free dividends to supplement income from other sources. Because they’re higher risk, VCTs shouldn’t be considered a replacement for a pension, but they can help to top-up income from more conventional sources.
Some other tips?
1. Seek diversification, VCTs are high risk so spread your investments over multiple managers -Fortunately there’s lots of choice in the market, from sector specialists like Foresight WAE to broad generalist funds like Octopus Titan.
2. Get an additional 30% initial income tax relief by reinvesting those tax-free dividends!
3. Be aware of discounts - VCT shares trade on the stock market, but often at a discount to the underlying value of the fund’s investments. That shouldn’t be a problem for long term investors, who will receive the majority of their return through tax free dividends as well as underlying growth. However, it’s something to be aware of and is another reason these should be treated as long term investments.
4. If you see something you like, act quickly. VCTs have limited capacity each year and can reach capacity and close to new investors quickly. Act quickly or risk missing out.