Inside the fall of Titan
VCT group pulls the plug on new investment after its valuation plunges
“Titan’s mission is to invest in the people, ideas and industries that will change the world,” declared the giant of the UK venture capital trust (VCT) sector, in its 2021 annual report.
Back then, Octopus Titan was at its peak, with net assets of nearly £1.4bn. Just over four years later, the bravado is gone and nearly £600mn of that valuation has evaporated.
“We absolutely acknowledge that the performance here has been unacceptable,” admitted Octopus Ventures chief executive Erin Platts in an interview. She was speaking shortly after Titan’s board released the results of a year-long strategic review into the plunging value of its portfolio, comprising around 145 early-stage companies. The VCT also announced a further 5.5 per cent writedown of its net asset value (NAV).
Platts’ apology on behalf of Titan’s manager, Octopus Investments, came alongside news that the VCT would raise no new money, back no new companies and pay no dividends for the foreseeable future. Octopus’s annual management fee was also cut by 17 per cent and no performance fee will be payable until 2034.
“If I was a shareholder, I’d be fuming that it’s got to this stage,” said Ben Yearsley, co-founder of consultancy Fairview Investing. “Why do you buy a VCT? To get dividends — simple as that.”
VCTs are tax-advantaged vehicles that enable private investors to claim 30 per cent of the amount they put in as relief against their income tax bill. Dividends (yields are typically around 5 per cent) and capital gains are also tax-free if shares are held for five years. But to earn those benefits, shareholders in VCTs must back early-stage companies, some of which will inevitably fail.
Even allowing for that risk, Titan’s fall from grace has been spectacular. Its NAV per share has dropped by 55 per cent from its peak in December 2021. But the VCT’s 20,000 private investors have fared far worse. Titan’s shares now sell for about 23p, less than half the latest NAV per share of 47.7p.
Of the 20 biggest VCTs by assets that invest in private companies, only Titan has delivered a negative share price total return over five years (-56.9 per cent), according to the Association of Investment Companies (AIC) database.
Established in 2007, Octopus Titan was seen as a successful investor in tech-led disrupters targeting sectors such as consumer, fintech, business software and healthcare. Among its early winners was Zoopla, the online property company that it first backed in 2009 and went on to become one of the UK’s first unicorns — a start-up valued at more than $1bn.
But from around 2016, Titan hugely expanded its fundraising, setting a string of records for the VCT sector and in 2018-19 it accounted for nearly a third of all VCT funds raised that tax year. This surge was partly driven by wealthy savers unable to put more money into their pensions due to successive cuts in the lifetime allowance. But under VCT rules, Titan had a limited period to deploy the money it raised each year and so was forced to continue investing, even as tech company valuations peaked.
Sourcing enough high-quality investments to soak up the cash quickly enough proved a challenge, as the Titan board’s strategic review acknowledges. “The board believes that increased levels of fundraising by Titan may also have negatively impacted average investment quality.”
However, the fundraising surge benefited Octopus by boosting the assets on which it charged management fees, while soaring valuations, until the market peaked in 2021, produced jumbo performance fees on top.
In the five years from 2020, Titan raised £665mn, while Octopus received £225mn in management and performance fees and “other running costs”. The VCT also paid out almost £361mn of dividends in cash or shares and returned £134mn to shareholders through share buybacks.
The growing cash pile also appears to have led Titan to widen its focus to areas where it had less experience and where the potential was less certain. In its 2021 annual report, Titan highlighted five investment “themes” — fintech, health, “deep tech”, consumer and B2B software. Twelve months later, two more had been added, biosciences and climate. Its proposed new investment policy narrows Titan’s future focus to two sectors, fintech and healthcare.
Jonathan Moyes, head of research at broker Wealth Club, suggests that as Titan’s firepower grew, it diluted its original strategy of backing “passionate entrepreneurs disrupting existing markets” by investing in “brand new business models in sectors that don’t exist yet”.
Richard Court, head of EIS and VCT funds at Octopus, disputes this. “Titan was clearly marketed as investing in a range of sectors so I don’t think it said it would do one thing and then drifted in a different direction.”
Even before its list of target sectors expanded, however, Titan’s record of realising profits on its investments was poor. “Of 100 fully realised investments from the Titan portfolio since inception in 2007, 15 achieved a multiple of invested capital greater than 2x and only one of these was greater than 10x,” the review reveals.
“Actually, 10x is rare,” says Yearsley. “But if you look at lots of VCTs, they’re making three or four times regularly on their disposals.”
A shortage of successful exits has left the trust continually unable to cover its running costs, dividends and share buybacks from its investment gains — hence the halt to fundraising and new deals while it tries to extract value from its current portfolio. Not surprisingly, a key element of the turnaround plan for Titan is to recruit experts in realising investments, through full or partial exits or secondary stake sales.
They will have plenty of raw material to work with. Even now, after its NAV has halved, Titan remains by far the UK’s biggest VCT by total assets — just shy of £800mn versus around £532mn for the next largest, Octopus Apollo, according to AIC data. But measured by market capitalisation, Titan is now second to Apollo, due to its collapsing share price.
The key question for bruised shareholders, who will vote next month on the board’s turnaround plans, is: should they trust the NAV per share figure as the foundation for a recovery, or is Titan’s beleaguered share price painting a more realistic picture of its prospects?