From tonic to tech...Octopus mixes it up to find success
OCTOPUS Group has its tentacles in numerous activities – energy supply, financial technology and healthcare. But at its heart is investing in start-ups, something it has been doing with aplomb since being formed 17 years ago.
As well as running venture capital funds and portfolios of firms listed on the junior AIM market, it manages Octopus UK Micro Cap Growth, a fund that targets growth businesses.
Though the fund’s performance is more than satisfactory – with investor returns over three years at 46 per cent – it is still a minnow with assets of just £25million.
Longstanding manager Richard Power is keen to raise the fund’s profile. Its disproportionately high ongoing charge of 1.79 per cent a year is a drag on performance, and the bigger the fund’s assets, the lower this charge will be.
Despite investing in embryonic firms, there are also some familiar names in its 62-strong portfolio. It includes tonic maker Fever-Tree – flavour of the month for many investors – and aggregates producer Breedon. Until recently Power also held retailer Hotel Chocolat.
Other key holdings are online retailer Gear4Music and fashion brand Joules. The likes of FeverTree and Breedon remain in the portfolio because Power is happy to run with successful stocks.
He says: ‘Fever-Tree is now valued at £2.5billion. We’ve been invested from the start. In late 2014, when the shares were listed, they were trading at 165p. They are now at nearly 2,500p.
‘We have taken profits on the way but it remains a top 20 holding and we see further potential as profit forecasts continue to be upgraded.
‘Similarly, Breedon is now valued at £1.5billion. Although we have known the company since 2010, and held it initially in some of our venture capital funds, we only invested the fund in its shares last year, when it was raising money to acquire Hope Construction. It remains a top 30 holding in the fund.’
Of the holdings, 58 are listed on AIM. It is a market Power knows ‘intimately’. As a group, Octopus has holdings worth £1.5 billion in some 150 of the 920 companies listed on the market.
‘The quality of the index is higher than ever,’ he maintains. Octopus’s team of nine, including Power, constantly scour the market for potential investments.
Yet there are risks associated with investing in young growth businesses. A number of the fund’s holdings, including energy supplier Flowgroup and electronic components designer APC Technology, have proved poor investments.
Power maintains that failures are inevitable given the earlystage nature of many of the businesses he targets.
To mitigate some of the risk, Power has been increasing the size of company held. Originally, in accordance with its ‘micro’ label, the fund invested in firms with market capitalisations of less than £100million. Today, the average market cap of the fund’s holdings is £230million. On management fees, Power says the ongoing charge will drop shortly to between 1.5 and 1.6 per cent a year. It will fall further if his wish of expanding the fund’s assets to £100million is achieved.
Octopus Group is a business success story. It now manages assets in excess of £7billion and its energy supply arm, Octopus Energy, has attracted more than 100,000 customers, primarily off the Big Six energy suppliers. It has even taken to the television to promote its brand.
It remains a private business, owned primarily by its staff, including Power.