Apollo VCT
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Coronavirus and Octopus Apollo VCT

4:48pm 18 Mar 2020 - Written by Richard Court, Head of Octopus Development Capital
The portfolio is well positioned defensively

The following outlines our latest view of the impact of the coronavirus outbreak on the Octopus Apollo VCT portfolio. It also provides an update on any implications for our investment approach. I hope this offers some reassurance.

The portfolio is well positioned defensively

Octopus Apollo VCT is a well-diversified portfolio of around 50 smaller UK companies. Our core focus over the past few years has been on making growth capital investments into highly commercialised and growing UK private businesses, which now make up the highest proportion within the portfolio.

With regard to these investments, given the scale of the coronavirus situation, there will inevitably be some challenges, both currently known but also unforeseen. However, we’re confident that due to the highly selective nature of our investments, and owing to some of the attractive attributes of our portfolio companies, that these factors will help alleviate the concerns that such a major economic and human shock could otherwise have on the fund overall.

Most of the Apollo portfolio companies are ‘B2B’ businesses (i.e. they sell their product or service to other businesses, rather than to individual customers), with contracted recurring revenues and a well-diversified customer base. This reflects our investment approach, where we consciously target businesses that we believe can deliver stable and growing revenues throughout economic downturns or other uncertain times. We have very limited exposure to travel, retail or leisure, which are sectors currently feeling the immediate impact of the economic lockdown.

In our experience, companies that provide a mission critical product or service, and enter into long term contracts with their customers, tend to be more insulated from economic shocks due to the stickiness and embedded nature of what they offer their customers.

Lastly, our portfolio is invested in a diverse range of sectors, from cyber-security to clinical trials software, with such diversification a strong benefit in these challenging times.

Therefore, even in these unprecedented times, we believe this approach stands the VCT in good stead.

The impact felt by portfolio companies

The impact felt by portfolio companies

The companies we invest in are typically technology companies and, as set out by rules governing VCTs, they are young, agile and growing. This means they are familiar with technology and can adapt quickly to the challenges that have been presented over the past few weeks.

For these companies, working remotely and using technology to problem solve is unlikely to be as great of a challenge as it will be for many established firms. Across the portfolio we are working with our CEOs to ensure that strategically, operationally and culturally, the overall disruption can be minimised during this period.

One of our portfolio companies, Natterbox, is in fact a provider of cloud telephony services, which remove the need for physical phone infrastructure. It will no doubt be supporting its global customers over the coming weeks to keep their businesses running while many offices remain closed.

We do anticipate that some portfolio companies will see a slow-down in new sales while customers put decisions on hold. However, we do not expect sales to fall dramatically. This is in part due to the recurring nature of revenues generated by B2B businesses.

A short-term slowdown in new sales is unlikely to be felt evenly across the portfolio. Indeed, some businesses in the portfolio are even seeing an uptick in demand. Natterbox, mentioned above, and Countrywide Healthcare, who are a supplier to care homes across the UK, are two examples that come to mind.

It’s also worth reiterating that the vast majority (>95%) of the Apollo portfolio is made up of unquoted companies. That means the VCT is largely uncorrelated to the wider market and is not subject to the same volatility as the public markets.

The implications for deployment

We are firmly open for business and expect deal opportunities to increase, not decrease.

The coming months will undoubtedly be difficult for many businesses. Young businesses, both in the portfolio and new to us, will have pressing needs for capital. We expect that the current environment means that opportunities will come about more quickly and more often.

We don’t expect any change to our investment approach. But we do anticipate increased deal flow, both for existing portfolio companies and new opportunities.

We are well positioned to support with follow on investment, and to make the most of any new opportunities that arise.

Get in touch

If you have any further questions, please don’t hesitate to call us on 0800 316 2067.