Our portfolio companies are planning for all likely scenarios
We have been working closely with all of our portfolio companies to better understand the immediate and medium term impacts of Covid-19 on their businesses, and to understand what actions to take, including taking advantage of the government initiatives, cost cutting and accelerating funding where needed and appropriate.
We have been very impressed with the management teams of the portfolio companies, who have acted swiftly and decisively, without panicking. The reality is that no-one yet knows what the full impact of Covid-19 will be, so our companies are planning for an 18-24 month impact whilst remaining in position to take advantage of opportunities along the way, or an earlier recovery.
Octopus Titan VCT is well positioned despite uncertainty
The size and scale of Octopus Titan VCT can be very beneficial. The VCT holds around 80 companies in its portfolio which have been selected for their long-term growth prospects and are spread across a range of different sectors. This means that it is not heavily exposed to any single sector.
We selected these companies for their long-term growth potential. Many of them have recently raised, or are in the process of raising, significant capital which will help fund them through the uncertain period and enable them to take advantage of opportunities as they arise. For example, one of our portfolio companies, Cazoo (an online car retailer), announced the raising of £100m of funding this week.
Very importantly, the VCT currently has more than £300 million of cash and cash equivalents, which accounts for over 30% of the fund’s net assets. This capital is available to invest into existing portfolio companies to help them through the current period, and also to make new investments at a time when many other investors may have limited means or appetite to do so.
We invest in great teams that can adapt to and optimise all macro conditions, regardless of the sector that they operate in. Entrepreneurs are typically at their best when conditions are most challenging and others are slow to move and adapt, which is why many of the most successful tech companies have been born out of the periods of maximum macro uncertainty and bear markets.
We have identified opportunities and challenges within the portfolio
The sudden changes resulting from Covid-19 have already had a negative impact on some sectors, such travel and hospitality, whilst presenting opportunities in others, such as online, food delivery and capital markets companies.
The portfolio companies’ priorities in the immediate term include their teams, business continuity, appropriate risk adjusted financial planning and ensuring that they have sufficient funding to weather a potentially prolonged downturn.
Beyond this, and as greater visibility emerges, we expect entrepreneurs to live up to their name: to be the quickest to adapt to new conditions and to seek to exploit new opportunities as they arise. We expect many of our portfolio companies to come out of this period much stronger than they entered it.
Our approach to valuing Octopus Titan VCT remains the same
The VCT is a quoted company. The listing rules prescribe that the latest published Net Asset Value (NAV) has to be a Fair Value as defined by the FCA and the International Private Equity and Venture Capital Guidelines. It is the responsibility of Octopus as the fund manager, and the independent Board of Octopus Titan VCT, to ensure that this requirement is met.
The NAV is therefore reviewed on a regular basis and must comply with this requirement when any share allotments and buybacks take place. This is always the case and is no different in these circumstances.
We revalued the portfolio on 10 March ahead of an allotment of shares on 11 March. On this date, the Titan Board reviewed the portfolio, and approved an unaudited NAV of 93.8 pence per share. This reflected a 25% discount to the 31 December 2019 equity valuation of the travel companies in the portfolio based on the impact of Covid-19 at that date.
As is always the case, the NAV will be reviewed ahead of the next allotment of shares, and any share buybacks, to ensure that a Fair Value is applied at that date.
Whilst prices in public markets are concerning, they may not be reflective of the underlying fundamentals of businesses and are at least partially driven by a re-allocation of risk to very low risk investments and cash, meaning that there are many more sellers than buyers at present, exacerbated by short selling. As such, public equity market pricing can be largely uncorrelated with early stage private company valuations at times like these, which is one of the benefits of investing in a long-term asset class such as Venture Capital.