Octopus Apollo VCT Launches Ambitious £75 Million Fundraise to Bolster Mature UK Businesses

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The Octopus Apollo Venture Capital Trust (VCT) has launched a significant £75 million fundraise to support its ongoing investment strategy focused on established, profitable companies. Offering £50 million initially, with a £25 million overallotment, Apollo seeks to strengthen its portfolio of 45 companies, valued at £439 million. This fundraise represents a pivotal opportunity for Apollo to sustain its mission of investing in software and tech companies targeting corporate clients—a sector it believes offers resilience amid volatile market conditions.

A Proven Track Record with Steady Returns

Octopus Apollo’s commitment to “capital-light” businesses with predictable, corporate-focused revenue streams has proven advantageous. Over the five years to June 2024, the trust delivered an impressive net asset value (NAV) total return of 49.4%, an achievement that reflects both the strategic focus and the stability of its portfolio. Unlike many VCTs, which heavily invest in high-risk start-ups dependent on frequent capital injections, Apollo’s conservative approach focuses on mature businesses that demonstrate profitability and sustainability.

Nicholas Hyett, Investment Manager at Wealth Club, commented on Apollo’s steady investment philosophy: “Apollo’s focus has served it well in recent years.” He explained that Apollo’s emphasis on capital-light software firms means its companies can “survive and even thrive” without requiring constant financing, a necessity for many younger start-ups. He also highlighted the reliability of Apollo’s corporate customers, noting, “once software is integrated into a business’s day-to-day processes, it doesn’t get ripped out on a whim.”

Why Invest in Venture Capital Trusts?

VCTs like Octopus Apollo are popular among investors primarily due to their generous tax benefits. Up to 30% of the initial investment is eligible for income tax relief, and dividends are tax-free, which provides investors with significant upfront savings and long-term financial advantages. Additionally, capital gains tax exemptions add to the allure, making VCTs an appealing tax-planning tool for wealthier investors who already maximise their ISA or pension allowances.

Beyond tax benefits, VCTs offer investors access to a diversified portfolio of high-growth, smaller businesses—a sector not easily accessible through traditional public markets. These companies are often highly innovative and have growth trajectories not directly tied to broader economic cycles, providing a layer of diversification for investors in conventional portfolios.

However, Hyett noted that VCTs are more than mere tax-saving vehicles. “They’re probably the best way for UK investors to access fast-growing smaller companies,” he said, underscoring how many VCT investees significantly outperform large-cap listed companies in revenue growth. VCTs thus play an essential role in supporting the next generation of British businesses, driving both innovation and job creation—elements that earn them government-backed tax reliefs.

Who Are VCTs Best Suited For?

Given the higher risk associated with smaller, unlisted companies, VCTs are typically aimed at more sophisticated investors. Those with substantial investment portfolios or individuals close to retirement often see VCTs as a strategic supplement to existing income sources, given their tax-free dividend structure. Importantly, VCT shares must be held for a minimum of five years to qualify for tax relief, adding to their appeal as a long-term commitment rather than a short-term strategy.

Higher earners who have reached their ISA or pension limits benefit most from the £200,000 annual VCT allowance, which can yield up to £60,000 in income tax relief alone. Similarly, retirees often utilise VCT dividends to supplement pension income, though these are not designed to replace conventional retirement plans due to their inherent risks.

The Role of Automation and Diversification in VCT Success

Successful VCT investors often diversify their investments across different sectors and managers, an approach that helps mitigate risks in this high-stakes space. Fortunately, the UK market offers a variety of VCT options, from industry-specific funds to broader, more diversified options such as Octopus Titan. Investors are also advised to reinvest tax-free dividends to gain additional income tax relief, amplifying their returns.

Moreover, investors should consider the “discount” effect. Although VCT shares are traded publicly, they frequently sell at a discount to the actual value of the trust’s underlying assets. This is not necessarily a negative for long-term investors who benefit primarily from tax-free dividends rather than resale value, yet it’s an aspect worth considering. In light of limited capacity, investors keen on specific VCT offerings should act promptly to avoid missing out on high-demand funds, which can quickly reach capacity.

Octopus Apollo’s Strategic Vision

Octopus Apollo VCT exemplifies the modern VCT’s dual mission of generating returns and fostering UK innovation. By focusing on capital-light, mature software firms that are less dependent on cash infusions and market swings, Apollo positions itself as a stable option within the high-risk venture capital landscape. Its ability to weather economic volatility and still deliver strong returns speaks to the resilience of its investment strategy.

This year’s £75 million fundraise offers Apollo a chance to expand its portfolio of profitable software companies, enhancing its stability and potential return on investment. With a targeted dividend yield of 5% based on NAV, Apollo remains attractive to investors prioritising both income generation and capital appreciation. By targeting software solutions with entrenched corporate customers, Apollo not only minimises risk but also increases long-term client retention, particularly relevant in economic downturns.

The Future of VCTs and the Octopus Apollo Approach

As economic conditions shift, the role of VCTs in promoting innovation and supporting growth-stage companies will only grow more significant. Venture capital-backed businesses in sectors like technology, clean energy, and healthcare are increasingly vital to the UK’s economy, creating job opportunities and advancing technological development. Government incentives and tax breaks aim to boost the appeal of VCTs to investors, encouraging a steady flow of capital to support emerging businesses.

For Apollo, this latest fundraising initiative will allow it to support UK companies that align with its ethos of maturity and profitability, rather than high-risk, high-growth bets. As Hyett remarks, “in boom years, these steady eddy businesses can look rather boring, but when boom turns to bust, boring turns to beautiful.” This cautious approach, he suggests, provides a safer alternative for investors wary of high-risk start-ups, without sacrificing potential returns.

How to Get Involved

For investors considering Octopus Apollo VCT or similar VCTs, the timing of investment is essential. High demand and limited annual capacity mean VCT funds can fill up quickly, leaving some investors shut out of popular offerings. Investors are urged to consult with financial advisors to determine suitability, particularly as VCTs require a five-year holding period to benefit from tax relief.

Moreover, as VCTs are better suited to experienced investors, due diligence is key to assessing the appropriate level of exposure. By diversifying across managers and sectors, investors can benefit from the array of growth opportunities while managing potential risks effectively.

Conclusion

The Octopus Apollo VCT’s £75 million fundraise underscores its commitment to supporting mature, stable companies in the UK’s software sector. In an industry often characterised by high-risk, high-reward start-ups, Apollo’s cautious approach appeals to those seeking steady growth. With a portfolio valued at £439 million, Apollo demonstrates how VCTs can offer both substantial tax benefits and access to a diversified range of high-growth businesses.

For high-net-worth investors, Apollo offers a compelling opportunity to participate in the growth of smaller UK businesses while mitigating risks through its carefully selected portfolio. As government incentives continue to promote VCTs, they remain an essential tool for diversifying portfolios and contributing to the broader economic landscape. The upcoming fundraising provides investors a unique chance to align with Apollo’s vision, investing in an approach that prioritises longevity, stability, and resilient growth.