Type: Venture capital trusts
Aim: Income and growth by investing in unquoted companies mainly in the UK solar energy sector
Minimum investment: Lump sum £3,000
Charges: Initial 5.5%, annual 1.75%
Special offer: 1% in extra shares
Offer period: Until November 18, 2011
Closing date: April 5, 2012
Commission: Initial 2.5%, renewal 0.5% for up to nine years
Tel: 0800 316 2298
Octopus Investments is raising up to £40m for a dual venture capital trust share offer, Octopus VCT 3&4. The company is aiming this offer at investors who are looking for VCT tax relief through a product that is focused on capital preservation and liquidity. The VCTs will invest mainly in unquoted UK companies in the solar energy sector, focusing on projects below 50kW that benefit from Government feed-in tariffs. These offer 25-year inflation-linked subsidies for electricity generated by qualifying solar power installations, enabling Octopus to provides investors with stable and attractive revenue streams.
The dual VCT offer targets annual dividends of 5p for each share from 2013 and Octopus intends to provide liquidity for investors through a zero discount buyback policy for the life of the VCT. Octopus says some VCTs have a buyback facility with a significant discount to net asset value, but a facility with no discount was felt to be more attractive and useful to investors who may want to exit the investment after five-years. Five years is the holding period that is required to retain the upfront income tax relief and Octopus is targeting a return of 110p a share at that point.
LIFT-Financial Chartered Financial Planner Ross Glanfield says: “Octopus has launched its 2011/12 VCT which is seeking to raise £40m across two identical VCTs investing in a portfolio of unquoted companies with a focus primarily in the solar sector.
“VCTs enjoy relief from both income tax and capital gains tax in the form of 30 per cent relief on the initial gross investment and exemption from tax on the payment of dividends or disposal. Relief from income tax is given irrespective of the rate of tax paid but it is limited to the amount of tax paid by the individual. However, the relief can be reclaimed by HMRC if the investment is encashed or sold within the first five years.”
Glanfield regards Octopus as one of the UK’s foremost providers of VCTs and points out that it currently manages 17 VCTs. “Octopus has been at the cutting edge of VCT development since the start of last decade and its innovative approach has done much to aid the development of this sector especially in the limited life market and the development of twin VCTs..” says Glanfield.
He adds that these latest VCTs are a product of this innovation. He says: “Having raised significant sums in 2009/10 into a limited life VCT, the decision was taken by Octopus to invest these funds in the solar sector. This led to some very successful fund raising in 2010/11 when a further £52m was raised into VCT 2 and it is likely that the bandwagon will continue to roll with this latest twin offering.”
Glanfield notes that the solar sector has received significant press since the launch of the Government’s Clean Energy Cash-back Scheme, which pays a subsidy or feed-in tariff for ‘clean’ energy produced. The FiT gives 25-year Retail Price Index-linked subsidies for electricity generated by qualifying solar power installations. “However, to benefit from the subsidies, the schemes need to be connected to the National Grid before March 2012. In addition, from April 2012, solar companies will no longer be classed as qualifying investments into VCTs.
“The target return for this VCT is 110p after five years and Octopus also aims to pay a dividend of 5p per annum from 2013,” says Glanfield.
Glanfield adds that to manage the deal-flow, Octopus has teamed up with investment partner, Lightsource Renewable Energy, which claims to havedelivered more large scale solar installations than any other investment company in the country. Glanfield says that since the start of 2011 Lightsource has invested over £90m in solar installations.
Discussing the issue of liquidity, Glanfield says: “One of the main problems with VCTs is the lack of a second-hand market. To try to solve this problem, Octopus has offered to buy back any shares at the end of the five year term without a discount to the Net Asset Value. However, investors not wishing to sell can continue to enjoy the benefits of the tax-free dividend stream.”
Assessing the charges, Glanfield says: “The VCT has an initial charge of 5.5 per cent which is fairly standard and from this a commission of 2.5 per cent is payable to IFAs. Provided the VCTs are fully subscribed, the annual running costs are estimated at 2.6 per cent and this includes a trail commission of 0.5 per cent.” He feels this level of charge is also not unusual for a VCT.
“On the face of it, Octopus has produced a product that can be easily sold, as it has dealt with the main objections raised by those who would generally shy away from such schemes. The underlying investment strategy and the potential return have been clearly identified and there is a clear exit strategy for those looking to capitalise on the tax relief.”
However, there are some potential negatives for Glanfield. “My concern with this VCT is that there is a level of political risk in that although the feed-in tariffs have supposedly been set for 25 years, future governments could use spiralling energy costs as an excuse to renegotiate the guarantees. There is also a risk that technological advances could render these installations white elephants,” he says.
Discussing the main competition the VCT could face, Glanfield says: “The only serious competitor in the solar space last tax year was Foresight who raised £38.5m out of a £40m target and it is looking to make up the difference this year. No other solar VCTs have been announced, so this scheme is likely to be heavily marketed by advisers.”
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Average