Tax Efficient Review. Venture Capital Trust. Early Stage Generalist VCT with track record. Octopus Titan VCT. Editor Martin Churchill BSc (Econ) FCA

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1 September 2016 Tax Efficient Review Editor Martin Churchill BSc (Econ) FCA Venture Capital Trust Early Stage Generalist VCT with track record Octopus Titan VCT Reprinted for the use of Octopus Investments Limited Tax Efficient Review reviews are completely independent and providers do not pay for inclusion in Tax Efficient Review Providers who wish to distribute their review as part of their marketing can do so for a standard fee This communication is provided for informational purposes only. This information does not constitute advice on investments within the meaning of Article 53 of the Financial Services and Markets Act (Regulated Activities) Order Should investment advice be required this should be sought from a FCA authorised person

2 RISK WARNINGS AND DISCLAIMERS VCT RISK WARNINGS This communication is provided for informational purposes only. This information does not constitute advice on investments within the meaning of Article 53 of the Financial Services and Markets Act (Regulated Activities) Order Should investment advice be required this should be sought from a FCA authorised person Tax Efficient Review (the Review ) is issued by Tax Efficient Review Limited ( TER ). The Review is provided for information purposes only and should not be construed as an offer of, or as solicitation of an offer to purchase, investments or investment advisory services. The investments or investment services provided by TER may not be suitable for all readers. If you have any doubts as to suitability, you should seek advice from TER. No investment or investment service mentioned in the Review amounts to a personal recommendation to any one investor. GENERAL RISK WARNINGS Your attention is drawn to the following risk warnings which identify some of the risks associated with the investments which are mentioned in the Review: Fluctuations in Value of-investments The value of investments and the income from them can go down as well as up and you may not get back the amount invested. Suitability Past performance Legislation Taxation The investments may not be suitable for all investors and you should only invest if you understand the nature of and risks inherent in such investments and, if in doubt, you should seek professional advice before effecting any such investment. Past performance is not a guide to future performance. Changes in legislation may adversely affect the value of the investments. The levels and the bases of the reliefs from taxation may change in the future. You should seek your own professional advice on the taxation consequences of any investment. 2 ADDITIONAL RISK WARNINGS Tax Efficient Review is published by Tax Efficient Review Ltd 35 The Park London NW11 7ST Tel: +44 (0) Venture Capital Trusts 1. An investment in a VCT carries a higher risk than many other forms of investment. 2. A VCT s shares, although listed, are likely to be difficult to realise. 3. You should regard an investment in a VCT as a long term investment, particularly as regards a VCT s investment objectives and policy and the five year period for which shareholders must hold their ordinary shares to retain their initial income tax reliefs. 4. The investments made by VCTs will normally be in companies whose securities are not publicly traded or freely marketable and may therefore be difficult to realise and investments in such companies are substantially riskier than those in larger companies. 5. If a VCT loses its Inland Revenue approval tax reliefs previously obtained may be lost. 6. No investment can made by the VCT in a company whose first commercial sale was more than 7 years prior to date of investment, except where previous State Aid Risk Finance was received by the company within 7 years (10 years for a knowledge intensive company) or where a turnover test is satisfied; and 7. No funds received from an investment by the VCT into a company can be used to acquire another existing business or trade. Copyright 2016 Tax Efficient Review Ltd. All Rights Reserved. The information, data and opinions ( Information ) expressed and contained herein: (1) are proprietary to Tax Efficient Review Ltd and/or its content providers and are not intended to represent investment advice or recommendation to buy or sell any security; (2) may not normally be copied or distributed without express license to do so; and (3) are not warranted to be accurate, complete or timely. Tax Efficient Review Ltd reserves its rights to charge for access to these reports. Tax Efficient Review Ltd is not responsible for any damages or losses arising from any use of the reports or the Information contained therein. The copyright in this publication belongs to Martin Churchill, all rights reserved, and for a fee the author has granted Octopus Investments Limited an unlimited non-exclusive and royalty free licence to use the publication

3 Octopus Titan VCT Disclaimer Change of TER classification Introduction Review of Early Stage Generalist VCT with track record Type Early Stage Generalist VCT with track record Size 70m (with an over allotment facility of a further 50m) Manager Octopus Investments Limited Focus Unquoted companies Minimum investment 3,000 Closing dates 5 April 2017 / 22 August 2017 unless closed earlier Adviser Charges: Up to 2.5% upfront plus ongoing adviser charges of up to 0.5% per annum or up to 4.5% upfront with no ongoing adviser charge Tax Efficient Review summary of offering Pros and Cos PROS CONS An early stage companies strategy that is in line with the latest changes to VCT investment rules. Good track record to date although not outperforming the Generalist VCTs investing in MBOs which launched in same year as Titan VCT originally launched Board has embraced more openness in providing detail of cost of all holdings (but still not current valuation) Monthly contribution by Direct Debit The question as to whether a very large VCT can provide the same level of growth going forward is still to be tested Fees expressed as a percentage of NAV are high for such a large VCT The Performance Fee of 20% of all returns above the issue price has a hurdle that has already been met This communication is provided for informational purposes only. This information does not constitute advice on investments within the meaning of Article 53 of the Financial Services and Markets Act (Regulated Activities) Order Should investment advice be required this should be sought from a FCA authorised person During the review of Titans 2015/16 fundraise, we were informed by Octopus that we would no longer be given the full list of holdings with their cost and current valuation. We were critical of this position and classified Titan VCT as "Early Stage Generalist VCT without full disclosure of investment portfolio". Since our last review, the VCT has amended its position: on 30 March 2016 it issued a regulatory news item providing a full list of investments but without either cost or valuation. during the preparation of this review a further regulatory news item was issued with the cost of each investment and a statement that this will also be provided in future in the VCTs interim and final accounts. We very much welcome this change (even though it does not include a valuation for each holding, it does show the size of the investment in each investee company) and we now classify Titan as being an "Early Stage Generalist VCT with track record". The Octopus Titan VCT has become the largest VCT in the market with net assets of over 303m before this current fund raising and potentially rising to over 420m at full subscription and with the over allotment facility utilised. TABLE 1: OCTOPUS VCTs managed by same team Source Octopus Net assets Annual Cash on hand Management (as at) Charge m m m Still to be invested (i.e. to reach 70%) m Octopus Titan VCT * (30 April 2016) - Octopus Eclipse VCT ** (31 March 2016) - TOTAL 341.7m 5.6m 119.8m - *Net assets as at 31 July Annual Management charge is twice the actual 6 months to 30 April **Net assets as at 31 March Annual Management charge is twice the actual 6 months to 31 March

4 This in our view is based on a number of factors: Significant gains from a number of high profile exits in 2016: SwiftKey being sold to Microsoft, Vision Direct being sold to Essilor, and Magic Pony Technology being sold to Twitter. These follow several exits, including from Zoopla, Evi and Graze.com, in previous years. A total return of the fund over the last five years (change in net asset value per share plus cumulative dividends, net of all fees) of 65% and cumulative dividends paid of 61p since launch of the VCT, including a regular dividend of 4p per share and special dividend of 5p per share, paid in the last year. Octopus has continued to innovate in the VCT space. It is the first VCT to be structured to accept monthly contributions. Octopus see this is a major advance as increasing pension restrictions could make monthly contributions to a VCT attractive. A large sales force giving Octopus wide market presence. An early stage companies strategy that is in line with the latest changes to VCT investment rules. With a fund raising target of 70m ( 120m with over allotment), Titan will form a significant portion of the total fund raising market this tax year which we estimate could reach 350m- 400m. Its size though raises a few questions in our view: 1. Can a nearly half a billion pound VCT deliver results for investors. The Titan VCT Annual Report & Accounts for the year ended 31 October 2015 says "Cognisant of the VCT regulations, we expect the portfolio to grow in size but our investment companies require considerable input from our Investment Manager and so we would not expect the overall number of portfolio companies to increase significantly in the future". This implies that the current size of portfolio (51 companies) will remain around that number but that the amount invested in each will increase markedly. 2. With cash on hand of over 113m as at 30 April 2016, the question has to be asked why raise even more cash which could result in a reduction in returns as it awaits investment. We cover below why we are comfortable with this fund raise given the investment rate to date, running costs, dividend cost, historic rate share buy backs and a 10% cash buffer. 3. Fund performance as measured by Internal Rate of Return since launch basis shows good performance, but not an increased return compared to what we perceive to be less risky generalist VCTs. Albeit that the generalist VCTs are likely to have to change their investment strategy and risk profile in light of the latest VCT rules. 4. Are costs expressed as a percentage still relevant for such a large VCT. For example on a full fund raising of 120m, Octopus will receive nearly 9m per annum from their 2% management fee, 0.3% administration fee, 20,000 secretarial fee plus unspecified arrangement fees and a performance fee. In the year to 31 October 2015, Octopus was entitled to a management fee of 3,651,000, a performance fee of 3,369,000, admin and accounting fees of 551,000, a company secretary fee of 20,000 and arrangement fees of 477,000. A total of 8,068, Is it correct to call a "Performance Fee" one that pays out 20% of returns over the invested amount without any meaningful hurdle for new investors? We raise these questions as the Titan accounts for the half year to 30 April 2016 on page 1 says "As the largest provider of VCTs in the market, Octopus continues to work closely with the UK Government to help achieve the best possible outcome for the VCT industry and for the UK s smaller companies". Our point is that we think that the largest VCT should be doing more to show industry leadership by introducing a new hurdle for performance fees and by leading the way with lower running costs by reducing the fees paid to the manager. 4

5 Major changes since last review Review of Early Stage Generalist VCT with track record Major changes since our last review in Issue 227 in September 2015 are: Three exits as per above Payment of further dividends regular and special Opening of a US Office Titan is nearing the threshold for AIFMD (Alternative Investment Fund Managers Directive 2011/61/EU law on the financial regulation of hedge funds, private equity, real estate funds, and other "Alternative Investment Fund Managers") so the manager may at some stage have to address the stricter rules Changes to the investment strategy driven by, the prospectus says, the continuing evolution of early stage investment environment and recent changes in VCT legislation, the Company feels it is appropriate to refresh the investment policy - changes to the terminology it applies to the investment sectors. Instead of defining separately: Technology, Media, Telecoms, Consumer Lifestyle and Well-being, and Environment, the Company has simplified this to "a range of technology sectors" which it believes is simpler to communicate and more reflective of the way the Company thinks about its investments, both historic and future. The underlying portfolio has not changed and the type of companies the Company will invest in will not change. - The Company has also made changes to the types of non-qualifying Investments it will make to align with recent VCT legislative changes. The Company has also increased the top range of the % of Qualifying Investments that it will aim to hold from 85% to 90%. This, again, is reflective of changes in legislation restricting non-qualifying Investments, meaning that the balance may shift slightly towards holding more Qualifying Investments. - The most significant change is the removal of the passage restricting the use of borrowing to make investments. The Company now has the power in its articles of association to borrow up to 50% of its net assets. The prospectus says that the Company has no intention to make use of borrowing for this purpose in the immediate future; however it would like to align the investment policy with the Articles and remove any constraints placed upon it by this clause to provide more flexibility into the future should any such need or desire arise. A reduction in the minimum investment amount that an investor can invest from 5,000 to 3,000 For the first time, investors can now purchase the Company's shares by monthly contribution. Investors simply need to complete the direct debit section in the application form. Octopus will collect this amount from an investors bank account via direct debit on or around day 14 of every month. At roughly three-monthly intervals, this money will be used to purchase New Shares. Share and tax certificates will be sent shortly after the regular share allotment dates which are currently scheduled for: December, March, June and August Summary This is the tenth year that Octopus has offered a fund raising into Octopus Titan VCT, or at least one of the five Titan VCT funds that merged to form the single Titan VCT in November In recognition that it offers a unique early stage high risk / potential high return approach to investing, it remains in a sub-category of Generalist called "Early Stage Generalist VCT with track record ". At present, the Octopus Titan VCT is the only fund in this group, which Octopus believes is an advantage in that it is fully aligned with both the UK Government s and The European Union's intentions for the VCT industry to support young UK businesses and help kick-start the economy. This new share offer provides investors with an opportunity to invest in what is now the biggest VCT in the UK with assets of 303m as at 31 August 2016 and nearly twice the size of the second largest (Baronsmead Venture Trust at 174m at 31 March 2016). Octopus Titan VCT has a portfolio which includes investee companies at varying stages of maturity which should help provide diversity. Octopus say that there is continued evidence that many of the investee companies are making demonstrable progress, shown by the increase in Total Return (NAV plus cumulative dividends paid, currently 154.7p per share) and most tangibly by the cumulative dividends paid to date by Octopus Titan VCT (formerly Octopus Titan VCT 2), which now totals 61p per share. However, as we explore 5

6 Table 2: Concentration of top 10 stocks in Titan VCT portfolio as at 31 August 2016 Source: Octopus Investments Sector Investment Unrealised Carrying value at Carrying cost at 31 profit/(loss) 31 August 2016 value as % August 2016 ( '000) ( '000) of portfolio ( 000) Zenith Holding Company Limited (comprising Zoopla Property Other 24,843 8,638 33,481 17% Group, Nature Delivered, Calastone & Secret Escapes Secret Escapes Limited Travel 15,636 3,973 19,609 10% Sourceable Limited (Swoon) Ecommerce 7,550 4,347 11,897 6% Uniplaces Limited Property 5,847 4,781 10,628 5% Amplience Limited Technology 9, ,923 5% Sofar Sounds Limited Music 7,819 1,108 8,927 4% London House Exchange Limited (Property Partner) Property 5,175 2,922 8,097 4% Zynstra Limited Technology 6, ,977 3% Miracl Limited Technology 8,341 (1,404) 6,937 3% Conversocial Limited Technology 4,157 2,381 6,538 3% Other (39 holdings) N/A 91,211 (12,113) 79,098 39% Total 186,674 15, , % Note that all unrealised profit/(loss) figures are based on cost to Titan VCT (formerly Titan 2) as at the date of the Titan VCT merger, that being 27 November This may include a number of follow on investments in which Titan typically invests larger amounts, and may have been valued up prior to the merger. As a result, profit from original cost may vary significantly from these figures. Table 3: Performance of top 10 stocks in Titan VCT portfolio as at 31 August 2016 Source: Octopus Company Profit/Loss as % of cost Zenith Holding Company Limited 228% Secret Escapes Limited 461% Sourceable Limited (Swoon Editions) 171% Uniplaces Limited 228% Amplience Limited 166% Sofar Sounds Limited 116% London House Exchange Limited (Property Partner) 156% Zynstra Limited 119% Miracl Limited 95% Conversocial Limited 157% Other portfolio companies 92% Note that the profit/loss calculations are based on the actual cost of the investments (compared to Table 2 in which the cost figure is based on the cost to Titan VCT (formerly Titan 2) as at the date of the Titan merger, being 27 November 2014 (and which will have included revaluations of holdings up to that date). 6 Table 4: VCT Performance of Octopus Titan VCT 2007/08 fund raising Source TER Launch Net Asset Value/ year Date Total Dividends to date Total return (dividends plus latest Annual IRR post initial tax relief/ net asset value) Position in peer group Octopus Titan VCT (2007/08 investors in Octopus Titan VCT 2 raised 15m at 100p, four other Titan VCTs merged into this VCT and name changed to Octopus Titan VCT November 2014) TIDM OTV2 TER Ref / p 30/04/ p p 11% 5th out of 25 Table 5: Performance of top Generalist VCTs launched in 2007/08 Source: Data - Published Accounts; Calculation - Tax Efficient Review Cumulative Fund Net Asset Value Net Asset Value dividends (paid Total Return Annual IRR post (p) date and announced) (p) (p) initial tax relief British Smaller Companies VCT /06/ % Income & Growth VCT /03/ % Baronsmead Second VCT /02/ % Baronsmead Venture Trust /02/ % Octopus Titan VCT /04/ % Northern 2 VCT /03/ % ProVen Growth & Income VCT /05/ % Method of calculation: The Microsoft Excel function XIRR is used to calculate the Internal Rate of Return that equates the outgoing cash flows (the cost net of tax relief) and the incoming cash flows (the dividends and the net asset value) Data sources: Cost - VCT fund raising closing date; Dividends: VCT's website; Net asset Value: VCT's website

7 Strategy Review of Early Stage Generalist VCT with track record later in this review, this does not put them in top position in Generalist VCT returns in their first year of launch. The key question for investors of course is given the continued expansion of the portfolio, funded both by further very large fundraises such as this current offer and realisations from the older companies in the portfolio, can the VCT provide strong performance going forward or will its giant size prove to be a limiting factor. This fundraise aims to ensure the VCT is able to continue increasing exposure to those portfolio companies that are developing "well" (as categorised by the investment team) and also selectively making investments into new companies where the investment team believes there is an exciting opportunity. This follows the team s investment model of continuing to fund the winners within their portfolio whilst minimising additional funding to the poorer performing companies. Octopus claim that this should mean that investors are getting in at a stage when the fund is a) de-risked to the extent that it is already partially invested, b) has built a diverse portfolio operating in a variety of sectors, and c) has already reflected earlier losses in the NAV of the fund. Octopus Titan VCT is a generalist fund managed by the Ventures Team within Octopus. The team has been together for over a decade, has significant investment and business experience between them and includes a number of former entrepreneurs. The team is bolstered by their Venture Partners (including those formerly known as Entrepreneurs in Residence and Strategic Advisers). The Ventures Team invests into early stage unquoted companies, with follow on investments providing development and growth capital. The team looks to invest in high growth businesses that can scale explosively to create, transform or dominate an industry. They will not invest into a company unless they think the company has the potential to deliver a 5-10X return from the initial investment. The fund is targeting an annual regular dividend of 5p per share with the potential for special dividends to be paid in addition to this, typically following a significant realisation from one or more of the underlying portfolio companies. In our view, there are two aspects of Octopus Titan VCTs offering that differentiate it from the rest of the generalist VCTs currently available: The Octopus Venture Partners approach to investing and The focus on early stage, expansion and development investments. The Octopus Venture Partners are an exclusive group of around 90 leading entrepreneurs and business angels who can introduce investment opportunities, assist with due diligence, and offer support to and co-investment into the companies in Octopus Titan VCT. The members pay an annual fee of 3,000 to be shown investment opportunities in which they can co-invest if they so wish. The Octopus Venture Partners are able to invest on the same terms as Octopus Titan VCT and Octopus will not typically invest if members of the Venture Partners are not also prepared to invest their own money alongside the VCT. This provides added comfort that each investment opportunity is strong enough on its own merit for trusted industry experts to put their money where their mouth is. Octopus has commented as follows about its relationship with the Octopus Venture Partners and the additional resource that this provides them. Often early-stage companies need more than just access to funding. After we ve made an investment, we help by: Offering a range of comprehensive services such as a network of professional contacts, assisting with key staff recruitment as well as any necessary consulting, coaching and mentoring support. Providing access to the Octopus Venture Partners a valuable resource of entrepreneurs and business experts. Usually one of the Ventures team sits on the Board of the companies Octopus Titan VCT invests in. This allows them to play a prominent role in the company s ongoing development. The Octopus Venture Partners are a network of around 90 entrepreneurs and business people who typically have the opportunity to invest alongside Octopus Titan VCT. Some even work 7

8 Table 6: Octopus Titan VCTs: Realisations To Date as at 31 August 2016 Source Octopus Successful Investee Company Evi Technologies Limited Which funds invested/exited? Titan 1, 2, 3, 4 & 5 Initial Investment Date Jul-08 Realisation Date Oct-12 Aggregate Cost of Investment Aggregate Realised Proceeds Nature Delivered Limited (Graze) Titan 1, 2 & 3 Jul-09 Jun-13 Zoopla Property Group Titan 1, 2 & 3 Jan-09 Jun-13 Calastone Limited Titan 1, 2 & 3 Oct-08 Oct-13 Secret Escapes Titan 3 (Titan 4 remains invested) Apr-11 Jun-13 Rangespan Titan 4 & 5 Nov-11 May-14 32,827,456 95,168,045 Executive Channel Europe Titan 1, 2, 3 & 4 Sep-10 Jun-14 Vega Chi Ltd Titan 3 & 4 Jan-11 Aug-14 Magic Pony Technology limited Titan Jul-15 Jun-16 Touchtype limited (SwiftKey) Titan Aug-10 Mar-16 Vision Direct Group limited Titan Sep-09 Feb-16 Notes: Aggregate Realised Proceeds includes cash and ongoing interests; Vega Chi will also generate future revenue share proceeds which are not included in the realised proceeds figures above 100% Loss Realisations Investee Company Which funds invested/exited? Initial Investment Date Realisation Date AFrame Media Titan Mar-12 Apr-16 Applied Superconductor Titan 3 & 4 Jun-11 Dec-13 AQS Group Titan 1, 2 & 3 Feb-10 Aug-12 Diverse Energy Titan 1, 2, 3 & 4 Dec-10 Oct-12 Elonics Titan 1, 2, 3 & 4 Sep-10 May-12 GB Environmental Titan 1 & 2 May-08 Mar-09 SkillsMarket (iprofile) Titan 1, 2 & 3 Aug-09 May-11 LifeBook Titan 4 & 5 Sep-12 Nov-13 Money Workout Titan 1, 2 & 3 Mar-10 Apr-11 Phase Vision Titan 1, 2 & 3 May-09 Mar-13 PrismaStar Titan 1, 2, 3 & 4 Sep-10 Mar-13 Shopa The Key Revolution Titan 1, 2, 3, 4 & 5 Titan 1 & 2 May-13 Jul-08 Sep-15 Dec-09 Aggregate Cost of Investment Aggregate Realised Proceeds 23,861,091 0 with the Ventures team at Octopus to help provide hands-on support, practical advice and professional connections to the companies we invest in. Our Venture Partners include past and present senior management from companies such as Google, Innocent Drinks, Betfair, Orange, PayPal UK, Virgin, Vodafone, IBM, and Paddy Power. In summary, the Octopus Venture Partners contribute to the investment process in a number of ways: Some Venture Partners bring high quality deal flow to Octopus, typically on a proprietary basis. Discrete Venture Partners may help in the due diligence carried out by the Ventures Team. Octopus tells us that the Venture Partners have deep industry knowledge and expertise having developed their own businesses in their industry sectors, which enables the Fund Managers, who may not have the same depth of specialised industry experience, to leverage this knowledge. Venture Partners who have experience in the relevant sector, can be invited in to help with due diligence. This enables the Octopus team to consider a far wider range of sectors for the portfolios. Prior to Octopus investing into a company, the Venture Partners usually endorse the investment decision made by the Octopus team in an investment process which may include the potential investee company presenting directly to a group of the Venture Partners, followed by the Venture Partners investing, typically 5-20% of the total Octopus investment. Post-investment, Octopus works actively with its portfolio companies in order to maximise the value from each investment. The Venture Partners can provide a valuable resource in this process. A Venture Partner may in some cases sit on the Board of an investee company or act as an observer/monitor for Octopus within that company alongside a member of the investment team. 8

9 Track record Review of Early Stage Generalist VCT with track record The Venture Partner co-investment model also works along with Octopus own team skills, its diverse portfolio approach and the active portfolio management style to mitigate the risk associated with early stage investing wherever possible. Tax Efficient Review Strategy rating: 29 out of 30 The other aspect of Octopus Titan VCT which is different from other VCTs on the market is the focus on venture capital investing in early stage unquoted companies, with follow on investments funding development and growth capital. Early stage investments had been mainly avoided by other VCTs until the Octopus Titan VCTs launched as they were deemed too risky. VCTs generally moved up into Management Buy Out (MBO) and Management Buy In (MBI) deals although these have recently been restricted by recent changes to VCT legislation. This puts Octopus Titan VCT in a unique position in the market as it doesn t have to adapt its strategy to fit new legislation unlike many other VCTs. Octopus claims it has some strong risk mitigation approaches in place that have enabled it to perform very well in this sector over the last five years. As well as having a diverse portfolio of around 50 companies they cite the Venture Partner investment model as being a significant factor in mitigating risk, alongside its philosophy of investing a small amount initially before providing further funding where a business proves its investment case. The Ventures Team at Octopus claim to have realised circa 20% of the businesses (by number of companies) invested into by Titan at a loss (equivalent to less than 14% of capital invested by the fund) against an industry average of 50% or more (source: RSA Growing Pains report, October 2014). Additionally, because of the increased maturity of the offer compared to a new fund launch, Octopus say that a significant proportion of the portfolio investors will be accessing are already delivering significant capital growth. This has resulted in Octopus Titan VCT having paid 61p of dividends since launch, resulting in a Total Return (NAV plus cumulative dividends paid) of 154.7p per share as at 15 August The circa 50 companies in the portfolio (as at 31 August 2015, and including those which the Titan VCT still has an interest in through the Zenith transaction) employed over 800 additional people in the year to April 2016 and have grown revenues by nearly 150m in calendar year A third of the portfolio is grew revenues at more than 50% in the year. Octopus Titan VCT is invested in a diversified portfolio of investments in early stage unquoted companies with a focus on technology-enabled businesses which operate in almost any sector. Now that the Company is through its initial Qualifying Investment period and has been invested above the 70% qualifying holdings threshold for a number of years, the investment profile is expected to be approximately 75% to 90% in Qualifying Companies, and 10% to 25% in cash, money market securities and other funds managed by Octopus Investments. Prior to investment of the funds raised in this offer, the funds are held in cash or cash equivalents, or other funds managed by Octopus Investments. The directors provide a share buyback scheme to provide a degree of liquidity for investors, at a price no less than 95% of the prevailing net asset value. The Octopus Titan VCTs have invested into 71 businesses since inception, of which: 24 have been realised, in whole or in part, consisting of: - ten with positive realisations (of which four are part realisations) - fourteen have been realised at a loss (all of which is reflected in the current NAV) As at 31 August 2016, there were 51 companies in the Octopus Titan VCT portfolio (including the companies which Titan still has an interest in through the Zenith transaction), of these: Twenty six are currently being held at a value which is higher than the investment cost (typically due to follow on funding rounds taking place at a higher value) Ten are currently valued at the investment cost The remaining fifteen are currently being held at a value which is less than the investment cost, including one that has been written off entirely (yet to be realised but already accounted for in the current NAV). Interestingly this is the same size portfolio (51 companies) as at our last review date in September

10 As mentioned at the beginning of this review, Octopus have not provided valuation details on any individual holdings outside the top ten. The total portfolio of the VCT is diversified with the top investment, Zenith (a Cayman Islands registered company which holds stakes in 4 companies) representing 10.83% and the top ten investments (including Zenith) representing 37.40% of the portfolio by carrying value (not cost) as at 30 April In total, these Top 10 holdings represent twelve underlying companies, given that Zenith holds stakes in 4 companies, including Secret Escapes which is also held directly by Octopus Titan VCT. The performance as at 30 April 2016 for the earliest Titan offer (2007/08) is detailed in Table 4. We think the two key questions for potential investors are: Does the return compensate for the higher risk involved in investing in early stage companies as evidenced by the large number of complete write-offs. Taking the launch year 2007/08, the top ten VCT launches returns are in Table 5 and show that to date, in our view, whilst performing well, the Titan offer has not produced a return that compensates for what we perceive to be the higher risk involved, in comparison to Generalist VCTs focussing on Growth funding and/or Management Buy-Outs. Although we do acknowledge that government restrictions on VCTs doing management buy outs may mean that others have no choice but to move into Titan s space and take more risk. Is there growth potential left in the circa 50 holdings (including the established holdings within Zenith Holding Company (which holds stakes in four companies)) as well as the newer companies still held at cost, in order to compensate for any future potential write-offs from amongst the large number of stocks held at cost. It is worth noting that two of the previous top ten holdings at the time of this report being published in 2015, have since been realised at significant profit for Titan (SwiftKey (aka TouchType Ltd) being sold to Microsoft and Vision Direct being sold to Essilor. There has also been a third profitable exit with Magic Pony Technology being sold to Twitter, all in 2016). Octopus was unable to disclose details of all of the various exits that have occurred due to commercial confidentiality terms agreed with the acquirers. However, it has provided some details where possible (see Table 6) and included some background on the Zenith transaction that provided partial exits for four of the holdings. This is covered in our previous analysis of this transaction (published May 2013) which is reproduced at the end of this review. A number of full or partial exits have now been achieved from unquoted companies in the portfolio to date. These exits include Evi Technologies (acquired by Amazon), Nature Delivered Limited (graze.com, which the Octopus Titan VCT continues to have a holding in via Zenith Holding Company), Rangespan (reported in the press as being acquired by Google), Zoopla Property Group (which again continues to be held via Zenith Holding Company),Vega Chi (acquired by Liquidnet, the global institutional trading network) and ECNlive (the digital display network providing live content and connecting brands with executive audiences in the corporate environment). The most recent exits include SwiftKey (aka TouchType Ltd, acquired by Microsoft for a reported $250m), Vision Direct (sold to Essilor International), and Magic Pony Technology (acquired by Twitter, for a reported $150m), all of which have completed in Focusing on just one of these, Octopus first made a seed investment from Titan VCT into Swift- Key (TouchType Ltd) in 2010 prior to the launch of the company s first product. SwiftKey s flagship mobile app adapts to the way you type, so you spend less time correcting typos the more you use it and more time saying what you really mean. SwiftKey s launch was a success, and the management team impressive in its ambition and ability to execute its plans well. The app went on to be available in multiple languages and was Google s most successful paid for app for two years running before it was launched on Apple s operating system in 2014, where it rapidly became Apple s number-one free app. By 2016, SwiftKey users across 300 million mobile devices had saved an estimated 10 trillion keystrokes across 100 different languages, while the company had grown to employ around 160 people. This expansion was supported by additional funding at key stages of its growth, including from Titan VCT. In February 2016, SwiftKey announced it was acquired by Microsoft, at a later 10

11 reported valuation of $250m. The realisation resulted in strong returns for Titan VCT and a special dividend of 5p per share was subsequently paid to Titan shareholders in April Octopus values its portfolio companies in accordance with International Private Equity and Venture Capital Guidelines. The valuation of the investments is typically at the price of the most recent funding round unless it has failed to successfully meet its business plan since the last funding round in which case a provision is taken against the valuation, usually by increments of 25%. For any investee company which is more than 12 months from the latest funding round, several triangulated valuation methodologies will be used to inform the valuation and may adjust up or down accordingly. This new fundraise provides an opportunity for new and existing investors to invest into Octopus Titan VCT. This report and Octopus have previously described the J curve a number of times in the past, a trend typically seen by venture funds in which those businesses that fail do so prior to the successful businesses delivering their returns, meaning the value of a portfolio will fall before it rises again. Overall, Octopus tell us that a significant part of the Titan portfolio can probably now be said to be through this dip in the curve. The fact that the new offer invests into a fund, part of which has progressed along the J curve could mean that investors can benefit from existing developing businesses as they exit through the payment of dividends. This is evidenced by the dividends announced to date, and the fact that Octopus Titan VCT is targeting an annual regular dividend of 5p per share. In addition, the VCT continues to aim to pay special dividends when there are significant gains from the sale of portfolio holdings. Investors will also be buying into the VCT at a price based on its current net asset value which takes into account both the losses realised to date and also any write downs in the valuations of any under-performing assets in the current portfolio. The Titan offering sits within the pack, but not at the top, of top performing VCTs from a returns perspective as shown in Table 5, which considers IRR since launch. However, whilst performance is inline with the best performing VCTs, we are not convinced on results to date that what we perceive to be the extra risk involved in the Titan offering is compensated for by any extra return. As noted above though most other VCTs will have to take more risk than they have previously because of the changed VCT rules. Tax Efficient Review Track Record rating: 32 out of 40 Manager Octopus Investments is a specialist fund management company, with over 5.8 billion of funds under management across its range of products. It manages more than 600 million of VCT money on behalf of over 25,000 investors, more money than any other VCT manager, providing finance across the small and medium size enterprise spectrum. It has been voted VCT Provider of the Year at the Professional Adviser awards on a number of occasions in recent years. The Titan VCT won VCT of the Year at the Investor AllStar awards 2014 and Best VCT at the 2015 Which Investment awards, and is managed by the Ventures Team at Octopus. The team has an excellent track record of investing in early stage companies such as Zoopla Property Group, Graze, Secret Escapes and SwiftKey (TouchType Ltd). Since its formation, the Ventures team has invested 400 million into companies like these. The Ventures investment team is in Table 7. The ventures investment team which manages Octopus Titan VCT, alongside Octopus Eureka EIS Portfolio Service and Octopus Eclipse VCT is currently 17 strong, featuring investment professionals, investor relations specialists and investment support, plus five Operating Venture Partners spending the equivalent of 6.9 man years per annum on investing the funds (5.9 man years from "Deal origination" and "New deal doing" rows in Table 7 plus some Venture Partner time). The average deal size to date is around 2,000,000 and in our view unquoted deals take around four months on average to complete. As part of our VCT reviews we try to gauge how the size of a team relates to the amount of deal 11

12 doing capacity that is needed to invest funds raised. We do this by asking providers to complete a time breakdown for team members to quantify the time spent initiating and transacting new deals in order to arrive at a man-year equivalent for executives seeking out and executing new deals. This together with a TER assumption on maximum deals per executive per year (three based on industry input) and the average deal size (from past investments) helps to give an estimate of deal doing capability within the team. We then compare this to funds still to invest from past fund raisings, funds being raised in current fund raising and an estimate of cash proceeds from future realisations that also needs reinvesting. Titan has made 26 investments totalling 39.6m in the ten months to end August 2016 of which all but five were follow-on investments. With Titan accounting for 60% of the overall investments made by the venture team (with Eureka, Eclipse VCT and the Venture Partners accounting for the balance) over the period, this implies an annual investment rate capability of over nearly 80m per annum for the team (ie not just for Titan). In addition, the Manager has provided TER with detailed pipeline of future investments which supports that it has visibility on over 75m of deal flow over the next 12 months, with approximately 75% of this in to existing portfolio companies and 25% in to new investments. How does this relate to the amount of investing needed to satisfy Titan VCT investors who will not wish to see cash-drag from too much fund-raising. Table 1 shows that there was still roughly around 113.5m of cash in Titan VCT as at April 2016, which had reduced to circa 90m as at August 2016, including investments by Titan of 19m in the period. Based on earmarked Titan investments of nearly 50m in the period to April 2017, 12.5m of dividends and share buybacks, 4.5m deferred disposal proceeds and costs of 6.6m, the cash balance is expected to be approximately 27m as at the end of April 2017, excluding any inflows from the current fundraising. This 27m is an appropriate cash buffer given the size of Titan, being less than 10% of the total net asset value. The funds raised in the current funding round are for deployment in the following period. If this fund raising achieves its stretch target of 120m, the cash balance at the end of April 2017 would be approximately 140m (net of fundraising fees). Assuming running costs of mainly annual management fee and performance fee (which Octopus tell us will be around 15m, the bulk of which is paid to Octopus), the regular dividend (around 20m), historic rate share buy backs (around 12m) and a cash buffer of 10% of net asset value of the fund (equivalent to 40m for a 400m fund), only around 55m needs investing. Based on the investment rate year to date, the pipeline of the investments and the deal doing capacity of the team, this will be invested in less than a year, assuming that there are no realisations in the same period producing funds needing reinvesting. The changes in legislation announced in 2015 generally do not seem to present a problem for Octopus Titan VCTs investment mandate which does not include MBOs and will not do so in the future. The average age of a company when Titan first invests is under three years (source: Octopus) versus the cap of 7 years (or 10 years for knowledge intensive companies). The lifetime cap restricting investment of more than 12m in State Aid (which includes VCT & EIS funding) into a company over its lifetime (increasing to 20m in the case of knowledge intensive companies) is the most relevant change to Octopus Titan VCT. Many of the companies in the portfolio will require a number of follow on investments prior to exit, which could see investment levels near the cap. However, Octopus believes many should also qualify as a knowledge intensive company under the current guidance from HMRC meaning that the cap is significantly higher. Any follow on investments will be subject to careful monitoring by Octopus and Titan s advisers to ensure these limits are not breached. Finally, we were also interested to note that the Octopus Ventures team has recently opened an office in New York with the view to giving Titan s portfolio companies a spring board into the US. Many of the portfolio companies see this as an attractive market to expand into so we are interested to see what the impact might be on future performance. Tax Efficient Review Team and Deal flow rating: 18 out of 20 12

13 Fees/Costs Review of Early Stage Generalist VCT with track record TABLE 7 (1 of 2): Matrix of individual responsibilities Ventures team at Octopus - Data source: Octopus August 2016 NAMES Alex Macpherson Jo Oliver Alliott Cole Luke Hakes Frederic Lardieg Simon Andrews Jane Vinson Simon King VCT/EIS RELATED WORK (RELATES TO TITAN VCTS AND CO-INVESTING EIS INVESTORS ONLY) Deal origination % 10% 10% 15% 20% 20% 10% 10% 20% General enquiries % 5% 10% 5% 5% 5% 5% 5% 5% New deal doing % 10% 10% 10% 15% 15% 10% 10% 25% Investee board seats No Sitting on Boards/Monitoring % 20% 25% 30% 30% 30% 35% 35% 30% Fund raising % 10% 15% 5% 5% 5% 5% 5% 5% Internal issues % 15% 10% 10% 10% 10% 10% 10% 5% Exits % 10% 10% 10% 10% 10% 20% 20% 5% NON VCT/EIS WORK (INCLUDES CAPITAL FOR ENTERPRISE FUND, PRIVATE INVESTORS) Non EIS/VCT work 20% 10% 15% 5% 5% 5% 5% TOTAL 100% 100% 100% 100% 100% 100% 100% Years in venture capital Years involved with venture capital Years with current team TABLE 7 (2 of 2): Matrix of individual responsibilities Ventures team at Octopus - Data source: Octopus August 2016 NAMES Rebecca Hunt Malcolm Ferguson Will Gibbs Eyal Rabinovich Zihao Xu Oliver Birch Samantha George Ling Whitehead Alan Wallace VCT/EIS RELATED WORK (RELATES TO TITAN VCTS AND CO-INVESTING EIS INVESTORS ONLY) Deal origination % 20% 20% 25% 35% 35% 35% 5% 5% 0% General enquiries % 5% 5% 10% 5% 5% 5% 30% 30% 0% New deal doing % 25% 25% 25% 30% 30% 30% 20% 5% 0% Investee board seats No Sitting on Boards/Monitoring % 30% 30% 20% 10% 10% 10% 0% 0% 5% Fund raising % 5% 5% 5% 5% 5% 5% 5% 10% 70% Internal issues % 5% 5% 5% 5% 5% 5% 20% 20% 5% Exits % 5% 5% 5% 5% 5% 5% 5% 0% 0% NON VCT/EIS WORK (INCLUDES CAPITAL FOR ENTERPRISE FUND, PRIVATE INVESTORS) Non EIS/VCT work 5% 5% 5% 5% 5% 5% 15% 30% 20% TOTAL 100% 100% 100% 100% 100% 100% 100% 100% 100% Years in venture capital Years involved with venture capital Years with current team Shares will be allocated at the current net asset value divided by This is to cover the initial fees that are paid from the VCT to avoid cross subsidisation from existing investors. Initial fees of 3% of the investment amount are payable to Octopus. There is also a 2% (no VAT) annual management charge. Octopus has launched the fundraise with an Early Bird offer, whereby it will give a 1% discount on the Octopus initial fee for applications it receives on or before 13 December Octopus will fund this 33% reduction in its initial fees on behalf of those investors. In addition, Octopus has a loyalty discount of 1% for any investors who already hold shares in any of the Octopus VCTs if they wish to invest into the Octopus Titan VCT share offer. This is valid throughout the fund raise. The loyalty and early bird discounts can be combined to provide a 67% discount on Octopus initial fees. For applications where advice is received the VCT can facilitate payments of initial adviser charges of up to 2.5% of the investment amount and ongoing adviser charges of up to 0.5% of that application's net asset value each year for up to nine years. As an option a client and adviser are able to choose an alternative charging structure of up to 4.5% initial but in doing so would forgo the right to on-going charges. For applications made via a financial intermediary who does not provide advice, the VCT can pay commission to the intermediary of up to 2.5% initial and 0.5% ongoing. 13

14 Conclusion For direct applications the Octopus initial fee will be 5.5% (or 3.5% for existing shareholders under the Early Bird offer) and annual charges of 2.5%. Annual running costs are capped at 3.2% of NAV (excluding VAT and trail commissions), and within that amount the annual Management Fee is 2% p.a. of NAV. Also within the 3.2% is an Administration Fee of 0.3%. There is a performance fee structure for Octopus Titan VCT. The original VCT was launched in 2007, and in the years since, it has invested and subsequently sold stakes in a number of companies. Because of this, it has already met or exceeded various performance hurdles required to charge this fee. Octopus will take a performance fee up to a maximum of 20% on all future gains in performance, subject to a high watermark (which is currently 154.7p per share). The combination of an industry standard annual 2% management fee (questionable given potential economies of scale on a 280m VCT) and a Performance fee with no new hurdles beyond those already achieved, have reduced the score in this area. Tax Efficient Review Costs rating: 7 out of 10 For VCT investors seeking potentially higher returns for taking on a higher level of risk, this is an opportunity to invest into the full portfolio built by what was originally five Titan VCTs. Some of the oldest companies in the portfolio are so far performing very well, as demonstrated by the dividends paid by the VCT to date and its ability to meet the target of regular dividends, despite the difficult economic period over which it has been investing and in which the underlying companies have been trading. Octopus also says that many of the companies added to the portfolio more recently are also making excellent progress. The NAV has remained close to the creation price of 94.5p, and the latest dividends paid announced by Titan increased the cumulative dividends paid to 61p. Octopus claims that the progress of the Star performers within the portfolio further vindicates the Venture Team s investment model of continuing to fund the winners within their portfolios whilst not providing additional funding to the poorer performing companies. Octopus Titan VCT says it has a strong pipeline of both new investment opportunities, and opportunities to invest further into existing portfolio companies. It is therefore seeking to raise 70m (with an over-allotment facility of a further 50m, to a total of 120m) in new funds to ensure the VCT is well positioned to capitalise at what Octopus say is a good time to invest, because of the lack of finance for smaller companies and the wealth of investment opportunities available. The companies within Octopus Titan VCT portfolio are at varying different stage of development although Octopus say that the fund could not be deemed to have peaked as yet, with realisations only starting to come through (with three in the past twelve months), even from the earliest investments. The new share offer provides an opportunity to buy into a fund with proven performance, a portfolio of companies which has already made significant progress, and which is valued at a price which factors in losses and write downs that have been incurred thus far. Octopus Titan VCT is managed by a very well resourced and experienced team and offer, in our view, two unique features that set it apart from the rest of the offerings: the Venture Partner approach to investing and the focus on venture capital investing in early stage, expansion and development investments. As a new fund raise opportunity into an existing diversified fund, this represents a unique chance for investors to access the star companies within an early stage portfolio that have demonstrated both growth and resilience in a tough economic climate. With three exits from the portfolio in the last twelve months, cash or cash equivalents still to invest as at 30 April 2016 total 113m. On the performance to date we are not yet convinced that the returns compensate for what we perceive to be the extra risk involved in the Titan offering. Our position is that we see the Titan investments as individually higher risk than later stage ones pursued by other Generalists, although we do acknowledge that a) the efficient portfolio management strategies employed should help 14