Shareholders in Britain’s biggest venture capital trust are protesting about £162 million in past fees received from the trust by its underperforming manager.
Investors in Octopus Titan have complained about the “outrageous fees” charged by Octopus Investments and accused the Titan board of failing to take any responsibility for a period of disastrous performance.
The charges include “performance fees” of £82.3 million triggered when Titan’s claimed net asset value per share rose to 105.7p in December 2021 and it paid a large dividend. The NAV figure today is just 50.5p.
One shareholder said the whole VCT industry was being tarnished by Titan, which last year raised £107 million from investors, more than any other VCT. The row comes as the industry seeks fresh inflows from investors ahead of the end of the tax year on April 5.
Matt Russell, an entrepreneur and experienced VCT investor who has backed more than 16 VCTs over the years, told The Times he was furious with the lack of accountability of the Titan board, and felt fobbed off by its chairman, Tom Leader.
His written complaint to Leader about the alleged failings of Octopus Investments and what he sees as its egregious fees was not answered, but handed to the Octopus complaints department to respond to.
Russell said he belonged to a club of investors whose verdict on Titan was: “Our kids could pick better investment opportunities than the Octopus team.”
He also questioned the valuation approach of Titan, which led to the performance fees bonanza. It had been, he said, at the “extreme end of the spectrum” and not conservative enough.
The criticism comes just weeks after the Financial Conduct Authority issued a warning to firms to exercise more rigour in valuing private assets when there were conflicts of interest.
Octopus Investments has charged shareholders in Titan £161.9 million in fees between 2020 and 2023, including £82.3 million in “performance fees”, based on its own valuations of the Titan portfolio in 2021.
However, performance has nosedived after a string of write-downs. The share price has sunk to as low as 28p and is now trading at 37.5p. Titan, which boasts 20,000 individual investors, has launched a strategic review, promised for late April.
Unlike conventional private equity firms, which only take performance fees or “carried interest” when portfolio investments are actually exited and the profits crystallised, most VCTs take them based on their own estimates of NAV, though a minority base them on net realised gains.
Recent portfolio disappointments at Titan include Pelago, a firm providing remote treatments for drug and alcohol addicts, and Orbex, a space company with plans to launch a rocket from Northern Scotland.
In a letter to Leader, Russell wrote: “Where is the responsibility for awful investment decisions made? Where are the widespread and sweeping changes to the board and the management team? Where is the owning up to your investors that poor investment decisions were made and that this isn’t just market volatility — and perhaps, Octopus got too big and too arrogant?”
Titan is by far the biggest VCT, weighing in at £847 million of assets, while its total shareholder return performance is the worst of all but the tiniest VCTs over one year at minus 35 per cent, according to the latest rankings compiled by the Association of Investment Companies.
Octopus Investments also runs the second biggest VCT, Octopus Apollo, which has done better. The investment house specialises in running tax products for the wealthy and also offers specialist funds to help people reduce inheritance tax.
Privately owned Octopus group operates under a complex structure. A sister company is Octopus Energy, the large energy supplier. The chairman and founder of Octopus Investments is Simon Rogerson, who says he is a cheerleader for “honest capitalism” and aims to build a business “where people instinctively do the right thing, even when no one is watching”.
Investors in VCTs receive tax relief of 30 per cent on the way in, and receive dividends tax-free on the way out. The government offers the generous tax relief on the grounds that VCTs provide high-risk start-up capital to potential British business giants of tomorrow.
Some Titan investors have told The Times that they have now incurred heavy losses even after taking account of the tax breaks.
Dan Farrow, an independent financial adviser with SBN Wealth Management, who has previously criticised Octopus over the size of fees taken from its inheritance tax funds, said he never recommended VCTs to clients. “They are the epitome of the tax tail wagging the dog.”
He said there needed to be pressure brought to bear on the VCT industry to provide greater transparency on how valuations are conducted.
Titan said its valuations are based on industry guidelines, go through an arm’s-length valuation committee within Octopus and are subject to approval by the Titan board audit committee.
Leader said: “The board fully shares the shareholders’ concerns about performance and to that end initiated a review of strategy back in September 2024. As part of that exercise the board commissioned a shareholder survey to seek direct insights on the issues of concern to shareholders and received several thousand responses. The review of strategy is ongoing and a further update will be given to shareholders towards the end of April.”
Octopus continues to take 2 per cent of net assets each year from Titan in investment management fees, which has amounted to about £22 million in recent years. Brokers who introduce investors to the trust also take substantial fees.
Octopus Investments said: “The performance fee was a result of Titan’s excellent performance in 2021, when a total of £141 million was paid out to shareholders in tax-free dividends. Titan’s valuations are signed off by a valuations committee and independent VCT Board, prior to being subject to external statutory audit. This rigorous process ensures valuations represent the fair market value price for those assets at any point in the market cycle.
“We’re clearly disappointed with recent performance, which has been mainly driven by market conditions and some portfolio companies growing less than expected when they last raised funding. We remain incredibly excited by the portfolio’s potential — the businesses we invest in are growing fast, and the majority of the portfolio is either profitable or well-capitalised.”
Fern agrees to £150m writedown on broadband asset
A lossmaking private company at the centre of a scheme to avoid inheritance tax has been told to write down the value of assets on which the investment manager last year pocketed £103 million of fees.
Fern Trading, which is managed by Octopus Investments, has agreed to cut the value of its broadband fibre wing by just over £150 million after a quarterly meeting with its external valuation accountants.
That has had the effect of reducing the internal valuation of Fern’s equity by 5 per cent to £3.38 billion. It is based on this valuation, which has typically gone up, that Octopus has managed to extract almost £790 million in fees since Fern’s inception in 2010. Its main charges are a 2.5 per cent management fee on the first £3 billion of equity, with a 0.25 percentage point reduction for every £500 million after that.
Fern, which is owned by about 15,000 Octopus investment clients, spans almost 320 companies in the solar energy, wind farm, housebuilding and fibre sectors that qualify for “business relief”: shelter from inheritance tax, which is levied at 40 per cent of the value of a person’s estate over the “nil rate band”, presently standing at £325,000.
Clients hold shares in Fern, which has an internal share price. The writedown comes as the Financial Conduct Authority increases scrutiny of the valuations of private company assets. In a “Dear CEO” letter at the end of February, the regulator warned that there was “a risk that firms could value private assets inappropriately, for example through poorly managed conflicts of interest”.
The FCA spelt out: “Where firms use valuations to calculate fees, there is a risk of firms inappropriately charging investors.”
Fern has laid more than 370 miles of broadband fibre but warned in its latest annual report that the division “will continue to generate operating losses for the next three to four years”. It was a key factor in the group incurring a pre-tax loss of £185 million in the year to June 2024 on revenues of £634 million.
Fern is valued by external third parties on a quarterly basis, typically using large accountancy firms, before valuations are signed off by its board. At the latest one, the accountants told Fern it should write down its fibre assets given that the cost of capital in the sector had risen over the past six months.
Octopus said: “While trading conditions in the fibre sector remain challenging, we’re confident in the long-term outlook for Fern’s fibre businesses.”
Octopus Investments is part of the Octopus Group, co-founded in 2000 by Simon Rogerson, Christopher Hulatt and Guy Myles.
