In the next instalment in our series of exclusive interviews with industry experts, Jess Franks, Head of Investment Products at Octopus Investments, provides her insight on the biggest growth opportunities and most common risks for investors, as well as discussing her company’s approach to investing.
1.) What tax-efficient schemes does your company work with, and how do you offer a unique/compelling approach for advisers?
Octopus Investments is a leading specialist investment business with over two decades of experience, dedicated to delivering innovative investment solutions, that marry up smart tax planning with access to interesting asset classes, to financial advisers and investors across the UK.
We are the largest provider of Venture Capital Trusts (VCTs) and provide Enterprise Investment Schemes (EIS) and Business Relief-qualifying investments. At Octopus, we champion the value of financial advice and passionately believe that more people and their families could benefit from financial planning. We want to change the world of investments by offering a straight-talking approach, exceptional customer service and products that aim to do what they say they will.
2.) How active are you in providing education to advisers on the types of clients that are suitable for these types of investments, as well as any changes in regulation or nuances in the existing rules?’
Our business is centred on providing engaging and relevant examples of client scenarios, to assist advisers in identifying client situations where a tax efficient investment could provide a valuable solution. We have in house experts dedicated to understanding the latest opportunities based on the tax landscape, as well as broader financial services considerations such as Consumer Duty, and making business writing as straightforward as possible for advisers and their clients.
We use a variety of different mediums to make it easy for advisers to engage in ways that suit them: we host webinars, live Q&A sessions, create guides from simple retail facing content to technical white papers and we host live events, giving advisers the chance to meet our technical and investment professionals on a regular basis. We love hearing from advisers to understand what they need and develop our content and events around their feedback. This is one of the reasons we’ve won an industry award for ten years in a row for outstanding customer service.
3.) Where and in which types of companies are you seeing the biggest growth opportunities?
The startup ecosystem in the UK is particularly strong, due in no small part to the support it has received from retail investors via the EIS and VCT schemes. This has fostered a rich pool of experienced entrepreneurs armed with the necessary capital and guidance to turn their ideas into reality. This is a particularly strong opportunity in the current economic environment, as small businesses are very well positioned to take advantage of the slowdown, driven by improvements in talent availability and reduced competition.
We see these growth opportunities happening particularly in transformative sectors like generative AI, digital health, and financial technology. We explore these opportunities via our Octopus Ventures team, who invest across this space through both our Titan VCT and EIS Knowledge Intensive fund, both of which are currently open.
Generative AI is revolutionising creativity and productivity, empowering businesses to create new products, services, and experiences. Early-stage companies harnessing AI to automate tasks, generate creative content, and enhance decision-making are poised for significant growth.
The digital health sector is experiencing rapid expansion, with innovative companies developing technologies to improve patient care, enhance accessibility, and reduce healthcare costs. Early-stage ventures using cutting edge tools to personalise treatments, optimise clinical workflows, and empower patients are attracting substantial investor interest.
Financial technology is shaping the future of finance, transforming the way individuals and businesses manage their finances. Early-stage companies disrupting traditional financial services with solutions for payments, lending, and investing, among other areas are poised to capture a significant share of this growing market.
4.) What do you see as the biggest risks for investors?
Tax relief exists to compensate investors for some of the risk that they are taking by investing in high growth businesses. It recognises that the shares of smaller, less established companies can and do drop in value with more volatility than those of larger, more established companies where tax relief is not available. They are also likely to be harder to sell, meaning that investors may not always be able to access their capital as quickly as they would like. Understanding that there are a range of ways to access smaller company investing that target different outcomes can help here.
For example, a VCT is a listed company that invests in the shares of a large number of small, early-stage companies, creating a level of diversity, albeit within the same asset class. VCT investments must be held for a minimum of five years but then can typically be sold back to the VCT for a small discount to Net Asset Value, although this cannot be guaranteed. They also target paying tax-free dividends of around 5% a year and therefore can be appropriate for those seeking an income stream who are comfortable with a medium-term investment.
In contrast an EIS portfolio is likely to be invested for longer term growth, as investors hold shares directly in a smaller number of very early-stage businesses. Incremental tax reliefs offset some the risk of single company failure here, with any growth (which could be significant) free from Capital Gains Tax.
It is important to keep in mind that tax reliefs can change. However, the Government has recently extended both EIS and VCT schemes for a further 10 years. There is always the risk that an investment itself may cease to qualify, however this can be mitigated through investing with a trusted manager, or with EIS, investment across multiple different underlying investment companies.
5.) Should advisers be worried about a lack of diversification, and why?
I don’t think advisers need to be worried about a lack of diversification when it comes to tax efficient investments. Tax efficient investments typically form a small and exciting part of a well-diversified portfolio at client level. VCTs themselves are typically invested across a large number of underlying small companies, and EIS portfolios are usually built across a number of underlying businesses.
As part of a diversified portfolio, smaller companies can provide a degree of differentiation from how other asset classes might perform at different points in the cycle.
