This VCT will generate income over the first five years by investing in unquoted companies. The intention is to convert it to an investment trust after this period, subject to a shareholder vote, with the objective giving to growth. The Directors believe that this will make the trust more appealing to a broader range of investors, which should also greatly improve liquidity. Octopus also thinks the change will give it greater flexibility in how the trust is managed.
While it is structured as a VCT, investors will benefit from 30 per cent upfront income tax relief. The emphasis will be on a low-risk approach to the generation of income, which will begin even before suitable qualifying investments are found. Goldman Sachs International will initially invest the money in a range of cash or cash equivalent assets with a targeted return of at least 5 per cent a year.
A large proportion of the qualifying investments will be into companies known to the team at Octopus where the fund managers are confident that there is a high level of capital security. Investment decisions will not be constrained by any specific sectors.
The portfolio will favour sectors where there is a high degree of predictability, ideally with contracted revenues from quality clients. These investments will be structured mostly as loans with a targeted return of at least 7 per cent a year.
The Octopus protected VCT will benefit from the ability to co-invest with the eight existing Octopus VCTs. This will allow the VCT to invest in larger and lower-risk companies than a single VCT.
Unquoted companies generally lack liquidity, which can be a problem for VCTs when the directors plan an exit route for investors. A share buyback policy is one solution but these are not guaranteed.
The Octopus proposed conversion to an investment trust is an interesting way to increase liquidity but this will inevitable mean loss of the VCT income tax relief. This makes the VCT unsuitable for retired people, or those nearing retirement that have previously used VCTs as a source of tax-free income.
In addition the reduction in the maximum size of companies able to raise money under a VCT to £7m, which also affects EISs, increases the risk of capital loss on a product, which already has higher than average risks.