Apollo Annual General Meeting (AGM) Q&A

We were sorry not to have been able to invite you to attend the AGM due to Coronavirus and the Government’s stay at home measures. However, the AGM was held on 09 July 2020 at 4pm and all resolutions have been passed. 

The Board plan to offer an alternative format and date to receive a presentation from the Investment Manager together with an opportunity to put questions to the Board when there is better visibility on what will be permissible and practical due to the Coronavirus measures.

In the meantime, we thought it would be helpful to publish a summary of the key themes and most frequently asked questions which were received from shareholders.

We thank all those who have taken the time to engage with the board of Octopus Apollo VCT plc and the Investment Managers.  Murray Steele, Chairman, has replied to each shareholder directly, but if you have not received a response, please contact ApolloAGM@octopusinvestments.com.  

If you have any questions about your investments, please contact us on 0800 316 2295 or email investorsupport@octopusinvestments.com and we’ll help in any way we can.

Coronavirus:

Has Coronavirus provided some new opportunities and ideas?

Whilst not being able to know what the long-term effects of Coronavirus will be to the portfolio, there will certainly be winners as well as inevitably some companies that suffer. The portfolio has performed in line with the strategy and has been resilient, particularly throughout March. The Apollo team remains optimistic about the future of the portfolio, as they continue their deal origination activities. We expect to be able to continue with further new investment activity in 2020.  We will be doing regular updates on the Apollo webpage which can be found here.

In view of the devastating effect that Coronavirus has had on many companies, do the Apollo Board believe that the Trust’s portfolio of companies will generate sufficient dividends, for total annual dividends of 3% plus in the future?

Apollo dividend policy is to target a 5% annual dividend. We aim to pay through an interim and final dividend should we have cash reserves to do so. The Board regularly reviews the dividend policy and will communicate any changes that are made. 

Due to the age and stage of the companies in the portfolio, many of which are pre-profit, it is unlikely that dividends from the portfolio companies alone will be able to generate our target returns and instead we will also be targeting realised profits from exits of companies.

Performance:

Why has the value of my initial investment gone down by so much (even before Coronavirus)?

Apollo VCT was originally set up with a lower risk – lower return mandate, thus, in the early years it made a lot of debt-led deals.  Although these deals performed well, as they came to maturity and we saw the cash come back into the portfolio, rule changes in 2015 and 2017 focused VCT investment on more growth orientated investments and as such VCTs could no longer invest in the same way through debt. Rather than rush to deploy the money into deals, we took the prudent step to pay that cash back as a special dividend (most shareholders were very pleased about this as it meant they got invested capital back before 5 years). Because dividends form part of the VCT’s liabilities, the NAV was reduced when these were paid out. This is shown in performance tables on page 58 of the annual report which shows that the total value is on an upward trend, see chart below.  

We now have an established investment management mandate and are again making exciting new deals which we hope will deliver increased performance compliant with the new VCT rules and regulations going forward.  In the year to 31 January 2020, we saw a net gain of £4.9 million as a result of a number of successful exits from this “new” investment mandate including Coupra, Synnovia, Zynstra, and City Pantry which was a record return for Apollo. 

With respect to the below graph (Pg 6 of Annual Report).  How does the Board explain the circa 70% shortfall to the FTSE indices?

Please see the answer from the previous question for performance calculation methodology.

Apollo VCT was originally set up with a more defensive investment mandate.  As such, Apollo invested in a different type of company to those found on the FTSE indices. The success of this investment mandate can be seen in periods of high market volatility, for example portfolio’s resilience during the Global Financial Crisis in 2008. This is in part why Apollo has been a popular VCT and has grown to be one of the largest in the market  Despite the differences between Apollo and the FTSE, the Small Cap Equity Fund index is considered to be the most appropriate broad equity market index for comparative purposes. It is important to note that VCTs are not able to make investments in companies quoted on the main market of the London Stock Exchange in their observance of the VCT rules.

Dividend:

In view of the much higher profit for the year 31/1/20, why was the dividend reduced? Surely a higher dividend is warranted. 

The Board’s dividend policy is to target a 5% annual dividend. In recent times we have been paying out a considerably higher dividend, in part, since the Board felt it was in the interest of investors at the time to return capital instead of rushing investment into new companies that may not have fit the mandate. This year the Board took the decision to maintain the yield and to preserve some of the cash to deploy in new opportunities and to support the existing portfolio with future growth.  We continue to monitor the situation and attempt to balance the higher profitability with the cash requirements of the Company.  

The Board has proposed a final dividend of 1.1p per share in respect of the year ended 31 January 2020.  This is in addition to the 1.5p interim dividend paid on the 9 January 2020, will bring the total dividends declared to 2.6p for the year.  Although the dividend per share value (in pence) has dropped, a 2.6p dividend for the year represents a 5.5% yield.

It is important to note that while we target these dividends, they cannot be guaranteed.

How sustainable are dividends going forward will they be roughly the same as they have been?

It is the board’s policy to maintain a regular dividend flow where possible in order to take advantage of the tax-free distributions a VCT is able to provide and continue to work towards the targeted 5% annual dividend yield policy. 

This 5% has been achieved to date, although dividends are at the discretion of the board and are not guaranteed. The board may also review dividend targets when necessary.

Corporate Governance 

For each director please could you state how many years they have held directorships on the board of VCTs run by Octopus.  If this exceeds 9 years for any director I wish to ask the following supplementary question:

I am deeply uncomfortable with the AIC code of governance and in particular the provisions which permit directors to regularly serve more than 9 years.  Shareholders in the VCT sector rely on their board to monitor the performance of the investment manager.  In the event of prolonged poor performance, or a loss of faith in the manager’s ability to provide satisfactory future performance, the board should be able to take the difficult decision to replace the managers.  I believe that this is less likely to happen, and directors are less able to take an objective view, when they have been working closely with the managers for many years, and even worse when the manager’s CEO sits on the board.  

Moreover, a lack of turnover in the board is a barrier to greater diversity of thought and challenge.  I have been a member of various boards and committees over the last 15 years and have always found that the appointment of new board members brings a valuable new perspective and a new energy to boards.  Setting maximum terms of office of 9 years helps to ensure that new board members are regularly brought in.

Please could you explain why you believe your current policies around board reappointments is really in the interests of your shareholders?

The Company is committed to maintaining high standards in Corporate Governance.  As you have requested, the below table shows the date of appointment to the Apollo Board and previous Octopus VCT Boards.