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2018-02-05 14:34 CET
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Octopus Titan VCT plc : Annual Financial Report

Octopus Titan VCT plc ("Titan" and "the Company")

Annual Report and Accounts for the year ended 31 October 2017

Company number: 06397765

Titan today announces the final results for the year to 31 October 2017 as below.

These results were approved by the Board of Directors on 5 February 2018.

You may view the Annual Report in full at www.octopusinvestments.com shortly. All other statutory information will also be found there.

As detailed in the Financial Summary below, the Net Asset Value per share ("NAV") was 96.4p as at 31 October 2017, and therefore the NAV of 97.3p announced on 29 January 2018 represents an increase of 0.9% since the year end.

Financial Summary

  As at 31 October 2017 As at 31 October 2016
Net assets (£'000s) 432,703 315,976
Profit after tax (£'000s) 16,181 14,227
Net asset value per share ('NAV') 96.4p 97.9p
Cumulative dividends paid since launch 66.0p 61.0p
NAV plus cumulative dividends paid ('Total Value') 162.4p 158.9p
Total Return* 3.5p 4.2p
Total Return %** 3.6% 4.1%
Dividends paid in the year 5.0p 9.0p
Final dividend proposed 3.0p 3.0p

*Calculated as the change in NAV in the year plus dividends paid in the year.

**Calculated as total return/opening NAV.

Key Dates
Final dividend payment date*                                    27 April 2018

Annual General Meeting                                            9 March 2018
                                                                                   (11.00 a.m. at 33 Holborn, London EC1N 2HT)

Half-yearly results to 30 April 2018 published           June 2018

Annual results to 31 October 2018 announced         January 2019

Annual Report and accounts published                     February 2019

*Payable on 27 April 2018 to those shareholders on the share register on 13 April 2018.

Titan is a venture capital trust ('VCT') which aims to provide shareholders with attractive tax-free dividends and long-term capital growth by investing in a diverse portfolio of predominantly unquoted companies. The Company is managed by Octopus Investments Limited ('Octopus' or 'Portfolio Manager') and Octopus AIF Management Limited (the 'Manager').

Chairman's Statement

I am pleased to present the annual results for Octopus Titan VCT plc for the year ended 31 October 2017, which has been another good year for Titan in terms of the quality of deal flow, investments made, the underlying portfolio health, Company performance and fundraising.

I am delighted to say that the notable success of Octopus, our Portfolio Manager, in choosing and helping to develop some of the UK's leading young technology companies is recognised by several awards, most notably 'VCT of the year' at the Investor Allstars 2017 and 'Hottest VC Investor' at the 2017 European Tech Startup Awards and I would like to thank them on behalf of shareholders.  I also believe that Titan leads the way for VCTs through its innovative approach to investment, such as monthly Direct Debits and the use of ISAs, which has brought in new groups of VCT investors. 

In summary, at the year end the Titan portfolio numbered 54 companies (52 at 31 October 2016), with a total portfolio value of £302 million (£226 million at 31 October 2016) and a total net asset value for Titan of £433 million (£316 million at 31 October 2016). In the year to 31 October 2017, £39 million was invested into existing portfolio companies to support their continued growth and a further £23 million was invested into eight new portfolio companies, giving a total of £62 million invested in the year.  Additionally, £22 million in dividends was paid to shareholders, £3 million was spent on share buybacks and approximately £14 million was spent on the running costs of the Company. We also exited from three investments, proceeds from which amounted to £9 million (in addition to £4 million received from the earnout following the sale of Swiftkey in 2016). Our net cash outflow (excluding working capital movements) was therefore £88 million prior to the proceeds from fundraising which amounted to £124 million (before expenses). Notwithstanding the fact that this was, by some way, the largest fundraising by a VCT, we closed early in March 2017.

In order to ensure that we continue to have sufficient cash to continue to invest further in existing portfolio companies, as well as adding new investments to the portfolio, the Board announced a further fundraise of up to £200 million (including the over-allotment facility) in September 2017.  £93 million (before expenses) of this fundraise was allotted in November 2017 and additional unallocated applications received to 26 January 2018 amount to over £24 million. Given investor demand to date, your Board is confident that we will achieve our extended fundraising target of £200 million. I would like to thank all shareholders who have supported the fundraisings and welcome new shareholders.

The magnitude of the recent fundraisings and, in particular the targeted £200 million current fundraise, reflect the very exciting current investment opportunity that exists in early stage investing, with the UK technology market continuing to thrive.  British companies are continuing to be successful at developing technology that gives them a competitive edge on a global basis. In the past decade, the UK has become the most active technology market in Europe. Back in 2010, there was only one European technology company founded since 2003 valued at $1 billion or more. There are now close to 60 such companies with billion-dollar valuations, and 22 of these are UK-based. We believe that our portfolio contains a number of companies that could join this group and we are delighted to have invested in ZPG (Zoopla) which is the first (and to date only) VCT backed member of this group. Titan's main aim is to find companies with this potential, invest at an early stage and follow on until VCT rules prohibit us from further investment.

Given this investment environment and Octopus' excellent quality deal flow (thousands of opportunities each year and an estimated 70% of all the Titan-appropriate deals in the UK), the Board decided that there is the opportunity to accelerate Titan's new investment rate from the 6-10 new investments per annum over the past few years to over 20 a year in the next year or two. This requires further capital to make additional new investments and also subsequent follow on investments, which is being achieved through the increased size of the fundraises and additional resource to make and manage these new investments. Accordingly, Octopus has increased the size of the team in anticipation of this accelerated new investment rate and the anticipated resultant increased future size of the portfolio. As I have previously reported, the original Venture Partner programme has been changed so that the Venture Partners no longer invest alongside Titan but are now exclusively devoted to helping companies reach their potential and achieve their global ambitions. The number of Venture Partners increased from 5 to 9 in the year, and had increased by a further three by the end of calendar 2017.

Octopus now has one of the largest Venture Capital teams in Europe. Most of the team is based in London, since the majority of Titan investments are headquartered in the UK; however Octopus now has an office in New York, together with presences in San Francisco, Singapore and Shanghai, reflecting and serving the global ambitions and needs of many of the Titan investments.

Performance
The Net Asset Value ('NAV') per share at 31 October 2017 was 96.4p (2016: 97.9 p) representing a total return for the year of 3.5p per share after taking account of dividends paid of 5.0p per share in the year. We believe that this total return of 3.6%, which brings the total return to 67.4p since the first reporting period end on 30 April 2008, represents a good investment performance. The underlying performance of the portfolio, calculated as the profit in the year attributable to revaluations and disposal gains, divided by the value of the portfolio at the start of the year, was 10.8%.

Portfolio
During the year, there have been many notable successes within the portfolio of 54 companies. These range from companies entering new geographical markets, launching new products, acquisitions, and even IPOs. Overall the Titan portfolio grew revenues by over 45% in the 2016 calendar year, with 12 companies more than tripling their revenues in that period. Over the same period, the portfolio created 700 new jobs, ending calendar 2016 with an aggregate of 2,700 employees.

Within the portfolio, Secret Escapes, the online travel company which Titan first invested into in 2011 before the business had its first customer, raised an additional $111 million in funding and completed the acquisition of Prague-based Slevomat in October 2017. Following this acquisition the company has over 800 employees and hundreds of £millions of bookings per annum. Amplience, which powers digital content for some of the largest e-commerce platforms, saw some spectacular activity in November 2017. Driven by Black Friday, its traffic during November was 94% higher than in October with a peak delivery of 154,000 pieces of content per second to over 2.3 million online shoppers an hour. Calastone is now the largest global fund transaction network and recently announced that 2019 will see the technology underpinning the core of its network moving to a private and permissioned-based blockchain infrastructure (the technology that cryptocurrencies like Bitcoin are based on). After a period of sustained growth (both in the UK and overseas), Eve Sleep also undertook a successful IPO on the AIM market, raising £35 million at a market capitalisation of over £100 million, which at the end of 2017 had increased to over £170 million. Surrey NanoSystems has been flooded with inquiries from designers, architects and aerospace engineers for its unique new substance, Vantablack, which absorbs 99.96% of the light that hits its surface and is the darkest material in the Universe. Tails.com is now feeding over 70,000 dogs with bespoke food optimised to each dog's nutritional needs. Other Titan portfolio companies such as Sofarsounds, graze and Swoon Editions are also fast becoming household names.

In terms of disposals in the year, Titan completed the realisation of its investment in ZPG (Zoopla) through Zenith LP, generating proceeds of over £3 million. This was combined with previous years' ZPG disposals proceeds to give rise to one distribution of £9 million to Titan in the year. ZPG has been a fantastic investment for Titan. It originally invested in 2009 when Zoopla had revenues of approximately £100k, which compares to over £200 million now. In total Titan invested £2.8 million and has realised proceeds of over £17 million in Zoopla, with a 33x return on the original investment amount.

Of the eight new investments in the year, examples include Fluidly, a business focused on improving cash flow forecasting for SMEs using artificial intelligence; Medisafe, a company helping patients understand and track what medication they should be taking, which helps increase drug adherence levels and medical outcomes; and Digital Shadows, a cyber-security technology business enabling corporations to better understand where their digital vulnerabilities are and how to address them.

Unfortunately, but not unexpectedly when investing in early stage technology companies, there are a few investments that have fallen short of expectations and where we have therefore taken valuation write downs in the year.  Hubbub Deliveries and Mailcloud were unfortunately placed into liquidation in May 2017, and Adbrain was placed into administration in October 2017. Octopus is working hard alongside the companies that are underperforming to assist them. Whilst failures are unfortunately very much part of early stage investing, we believe our failure record is low compared to the industry average.

Performance Incentive fees
Titan's performance in the year has meant that Octopus has earned a performance fee of £3.9 million, of which £3.6 million will be paid in February 2018 and the balance of £0.3 million will be accrued, payable subject to the achievement of performance hurdles in the future. The performance fee payable in February is calculated as 20% on all gains above the High Water Mark of 158.9p as at 31 October 2016 on all shares in the Company, except those that relate to Titan 5. The accrued performance fee relates to Titan 5 shares.

Dividend and Dividend Policy
It remains your Board's policy to strive to maintain a regular dividend, whilst retaining the appropriate level of liquidity in Titan. Titan is targeting regular tax-free annual dividends of 5.0p per share, plus the potential for special dividends as and when realisations allow.  In the 2017 financial year, Titan paid an interim dividend of 2.0p for the 6 months to April 2017 (on 25 August 2017) in addition to a final dividend of 3.0p in respect of the 2016 financial year (paid on 28 April 2017). This takes the total dividends paid in the year to 5.0p per share (2016: 9.0p per share, which included a 5.0p special dividend). A final dividend of 3.0p per share is proposed in respect of the 2017 financial year, payable on 27 April 2018 to those shareholders on the share register on 13 April 2018.

Fundraise and Buybacks
Titan successfully raised £124 million (£120 million net of up-front fees) during the year, excluding funds raised through the dividend re-investment scheme (DRIS).

The Board announced a further opportunity to invest in Titan to raise up to £120 million (with an over-allotment facility to raise a further £80 million, which has subsequently been utilised) on 5 September 2017. On 17 November and 21 November, £93 million in total (£91 million net of costs) was allotted. Given subsequent inflows, the Board is quietly confident that the extended fundraise target of £200 million will be achieved.

During the year, Titan repurchased three million shares. The Board continues to buy back shares from shareholders at no greater than a 5% discount to NAV. The Board will continue to monitor the volume of shares bought back and at present intends to maintain the existing limit of the share capital that it buys back and cancels each year at 5%. I am pleased to see that the current demand from shareholders to buy back shares is well below this level. This policy will, of course, continue to operate at the Board's discretion. However, it is the Board's intention that shareholders should be able to sell their shares back to Titan in the absence of an active secondary market, since we believe that this share buyback policy enhances Titan's attractiveness as an investment for both existing and new shareholders.

VCT Qualifying Status
PricewaterhouseCoopers LLP provides both the Board and Octopus with advice concerning ongoing compliance with HMRC rules and regulations concerning VCTs. The Board has been advised that Titan is compliant with the conditions laid down by HMRC for maintaining approval as a VCT. A key requirement is for 70% of the HMRC value of Titan to remain continually invested in qualifying investments. As at 31 October 2017, over 90% of Titan (as measured by HMRC rules) was invested in VCT qualifying investments.

The Chancellor's Budget in November 2017 reaffirmed the Government's commitment to supporting the next generation of UK businesses, recognising the important role VCTs can play in providing start-up companies with the funding they need to reach their growth potential.

There were a few technical changes introduced, for example from 6 April 2018 VCTs will have to invest at least 30% of funds raised into qualifying holdings within 12 months. Additionally from 6 April 2019, the proportion of funds that VCTs must hold in qualifying investments will rise from 70% to 80%. Given Titan's current qualifying proportion of over 90% and its current and intended investment rate the Board does not believe that these changes will have a material impact on the Company.

The Budget also announced that, with effect from 6 April 2018, "knowledge intensive" companies, which are those that have high Research & Development or innovation spending, will now be able to raise up to £10 million each year from VCTs and EIS, up from £5 million at present. Titan typically invests in knowledge intensive companies and so this is a positive and welcomed change.

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. It is interesting to note that Octopus was instrumental in the founding of the VCTA (Venture Capital Trust Association) which played a crucial role in negotiations with HMRC and the UK Government ahead of the Budget, making clear the vital role VCTs play in the UK's continued European leadership of entrepreneurial success. This will continue in the future.

Annual General Meeting ('AGM')
The Annual General Meeting will take place on 9 March 2018 at 11 a.m. and will be held at the offices of Octopus Investments Limited, 33 Holborn, London, EC1N 2HT. I hope to meet as many shareholders as possible at this event, which provides an opportunity for them to meet the Board and our Manager and to hear an update on Titan's activities and future plans. In order that we cover any questions that you might want answering by the Manager or Titan VCT Board, we have set up a dedicated email so that you can send us questions (TitanAGM@Octopusinvestments.com) and we will do our best to address as many as we can in the meeting.

Outlook
2018 promises to be an exciting year and perhaps one characterised by change. It is often during periods of change that entrepreneurial businesses are best placed to thrive. Despite the uncertainties the current state of the Brexit negotiations brings, Titan has a well-diversified portfolio of exciting young and emerging technology businesses. These are run by energetic and intelligent entrepreneurs who view the opportunities with relish and have the ambition and ability to create businesses that can be world class in both size and impact.

Our current fundraise, having already achieved more than half of the overall total Offer, looks set to take Titan's total assets to over £600 million. The funds raised will be available to ensure that we can continue to support our portfolio of 54 companies where appropriate as well as increasing the rate of investment into new portfolio companies. The Octopus team is one of the most experienced European early stage technology investing teams and we are confident that they will continue to see the best opportunities in this field which will maintain the momentum of the portfolio.

We believe that our strategy will allow us to achieve significant capital growth over the medium term and, as already mentioned, it is our aim to distribute this by way of an annual dividend supplemented by special distributions as and when realisations allow.

If you are unable to attend the AGM on 9 March 2018, I would urge you to complete and return the enclosed proxy form or to submit your proxy vote via the Computershare web portal. If you have any questions regarding the Company, please do not hesitate to write to me or Octopus, Titan's Manager.

Finally, I would just add a note of personal endorsement: at the last count I realise my family are regular users of at least six of our portfolio companies, namely Bought by Many, Chronext, Amplience, CurrencyFair, Eve Sleep, and graze. It is easy to feel that investments in early stage technology companies do not affect our daily lives and so I encourage you to review the portfolio and see if you can experience some of the companies your investment is helping to build at first hand.

John Hustler
Chairman
5 February 2018

Portfolio Manager's Review

Personal Service
At Octopus, we focus on both managing your investments and keeping you informed throughout the investment process. We are committed to providing our investors with regular and open communication. Our updates are designed to keep you informed about the progress of your investment.

Octopus was established in 2000 and has a strong commitment to both smaller companies and to VCTs. At the time of writing we manage six VCTs, including Titan, and manage over £850 million in the VCT sector.

Investment Strategy
Titan invests in companies we believe have the potential to create new markets or radically improve traditional industries. Our excellent quality deal flow means that we are in a position to typically select the most talented entrepreneurs addressing some of the highest profile challenges to society and economies. Given the strong precedent for building global businesses from the UK, with over 20 of the 60 technology companies founded since 2003 and valued at over one billion dollars in Europe based in the UK, we are proud of our approach to identifying, investing and supporting companies that could go on to become category leaders. For example, we first invested in Zoopla (ZPG) - now generating over £200m revenue a year and valued at approximately £1.5 billion - when annual revenues were only £100k. Likewise, we invested in Secret Escapes, an online travel company and which now has hundreds of £millions of annual bookings, before the business had its first customer. Based on a strategy of investing in unusually talented entrepreneurs addressing the largest markets and industries ripe for disruption, we have created a diverse portfolio spanning multiple industries and business sectors.

Within the VCT rules of a maximum annual investment of £5 million per company and a lifetime limit of £20 million for Knowledge Intensive companies (most of which Titan portfolio companies qualify as), we typically look to invest in significant minority equity stakes in these qualifying companies, first investing a relatively small amount whilst there may remain questions about the business, and then investing further as the portfolio companies achieve the milestones we agree with management teams. Our investment provides the capital for businesses to build and grow their operations with the eventual objective being either to float or be acquired by a larger technology company such as Amazon, Google or Microsoft, all recent acquirers of Titan portfolio companies. Our view is that if we identify, support and exit category leading businesses, which the UK is very well placed to incubate, then the returns we can generate for Titan shareholders can be significant.

Many portfolio companies meet and exceed the expectations initially set. In these situations we actively seek to increase our investment exposure as the company demonstrates their ability to create a significant and valuable businesses. Recent examples here include Swoon, Secret Escapes, Tails.com and Amplience, where we have proactively looked to invest further and have participated in subsequent rounds of funding with the intent that by building a significant ownership stake, the impact of a positive realisation on Titan returns is maximized.

Whilst many of our investments go on to become very successful companies and sometimes household names, it is inevitable that some companies will not perform. We look to take a Board seat on virtually every investment we make which enables us to closely monitor progress and also bring in the appropriate support from within our team or wider network to help each portfolio company reach its potential.  In situations where the pre-agreed milestones are not achieved there should be no expectation from any portfolio company that we would look to invest further. Some recent disposals demonstrate this approach of not investing "good money after bad" where we did not feel that a given portfolio company could achieve the level of returns we expect.

Performance
The Total Value has seen a significant increase since Titan's first year end (31 October 2008), from 89.9p to 162.4p at 31 October 2017. This represents an increase of 81% in value since the first full year of Titan, and dividends paid since inception of 66.0p.  Since launch, a total of over £65m has been distributed back to Titan shareholders as tax free dividends.

As at 31 October 2017 the NAV was 96.4p per share, compared to 97.9p per share as at 31 October 2016 which represents an increase in NAV of 3.5p per share after adding back dividends paid during the year of 5.0p (2016: 9.0p) per share. This represents an increase of 3.6% (2016: 4.1%). The performance of the portfolio continued to be strong this year with uplifts in fair value which totalled over £46 million. Downward revaluations in the period totalled £22 million. In aggregate the value of the portfolio, excluding new and follow-on investments and disposals in the year, increased by 10.5%.

Subsequent to the year end and due to positive performance in the underlying portfolio, a NAV of 97.3p was announced on 29 January 2018, representing an uplift of 0.9p on the NAV as at 31 October 2017.

The performance over the five years to 31 October 2017 is shown below:

  31/10/2013 31/10/2014 31/10/2015 31/10/2016 31/10/2017
NAV, p 95.2 101.4 102.7 97.9 96.4
Dividends paid, p 42.5 47.5 52.0 61.0 66.0
Total value, p 137.7 148.9 154.7 158.9 162.4
Total return %* 8.0% 11.8% 5.7% 4.1% 3.6%
Dividend yield 29.9% 5.3% 4.4% 8.8% 5.1%
Equivalent dividend yield for a higher rate tax payer 44.4% 7.8% 6.6% 13.0% 7.6%

As a result of the management of Titan's cash and cash equivalent investments, there has been an uplift in valuation of these investments of almost £7 million in the year to 31 October 2017. Titan manages its cash balance through a range of money market instruments and fund-of-funds products managed by Octopus. The allocation across these products is reviewed regularly by the Titan Board.

Portfolio Review
The current portfolio encompasses investments in 54 companies (50 unquoted and four quoted, excluding five companies in liquidation and two in administration, but including the three underlying companies in Zenith).

Portfolio Active Inactive
31/10/2016 52 4
Additions 8 -
Disposals (3) -
Liquidations and administrations (3) 3
31/10/2017 54 7

The progress made by many of the portfolio companies in the last 12 months has been impressive. The range of achievements stretch from some companies which may have achieved a milestone such as their first £1m, £10m or £100m in revenue, some which may have established an international presence and others that have secured partnerships which could change the profile of the business entirely.

Within the portfolio, particular highlights include;

·      After a period of sustained growth and internationalisation, Eve Sleep (which sells mattresses online) undertook a successful IPO on the AIM market, raising £35m at a market capitalization of over £100m, which at the end of 2017 had increased to over £170m. Eve is a business that was launched as recently as October 2014, with Titan's first investment in April 2015, demonstrating how rapidly businesses can grow and value can be created;

·      Secret Escapes (which Titan first invested in to in 2011 before the business had its first customer) raised an additional $111 million in funding and completed the acquisition of Prague-based Slevomat in October 2017. Post-acquisition the company has over 800 employees and hundreds of £millions of bookings per annum;

·      Amplience, which manages digital content for some of the largest online retailers, saw some spectacular activity in November 2017. Driven by Black Friday, its traffic during November was 94% higher than in October with a peak delivery of 154,000 pieces of content per second to over 2.3 million online shoppers an hour;

·      Surrey NanoSystems has been flooded with inquiries from designers, architects and aerospace engineers for its unique new substance, Vantablack, which absorbs 99.96% of the light that hits its surface and is the darkest material in the universe;

·      Calastone is now the largest global fund transaction network and recently announced that 2019 will see the technology underpinning the core of its network moving to a private and permissioned-based blockchain infrastructure (the technology that cryptocurrencies such as Bitcoin are based). The move to blockchain will create a global marketplace for the trading and settlement of mutual funds, cutting overheads and inefficiencies which currently dwarf the benefits already offered by Calastone's trading and settlement solutions; and

·      Tails.com is now feeding over 70,000 dogs with bespoke food optimised to each dog's nutritional needs.

Disposals
Titan made two full disposals in the year (Seedcamp and Kabbee).

We have also been gradually selling down our stake in ZPG (previously Zoopla) since the business listed on the London Stock Exchange and this year sold the final shares held by Octopus Zenith LP ("Zenith"). Titan indirectly owns a stake in Zenith through Zenith Holding Company, and benefitted from a £9m distribution from Zenith to Titan as a result of this and previous ZPG sales.  In total Titan invested £2.8 million and has realised proceeds of over £17 million in Zoopla, with a 33x return on the original investment amount.

Titan also received £4m deferred proceeds in the year relating to the sale of SwiftKey in the prior year.

New and follow-on investments
Titan completed 23 follow-on investments in the year into existing portfolio companies and made eight new investments (£39m and £23m invested in total respectively), together totalling £62 million. This takes the total number of portfolio companies to 54 as at 31 October 2017 (50 unquoted and four quoted, excluding five companies in liquidation and two in administration but including the three underlying companies in Zenith). This compares to FY 2016 when Titan made six new investments and 24 follow-on investments, totalling £46 million.

We have proactively increased the size of the Octopus investment team from 5 to 14 over the last 5 years to enable us to increase the rate of new investments from eight a year today to over twenty in the coming years. This is also only possible given the quality of the deal flow we see and the health of the UK entrepreneurial ecosystem.  Having visibility over the best available deals in the market is largely due to the increasing prominence of Octopus in supporting many of the fastest growth technology businesses in Europe (e.g. Swiftkey, Zoopla and Secret Escapes) which in turn makes Octopus an increasingly attractive investment partner for technology entrepreneurs looking to build global businesses. The combined impact of the increase in investment team resource and the strengthening brand of Octopus means that we see approximately 60-70% of the best deals in the UK. The investment team receives thousands of investment opportunities a year and is in the privileged position of being able to diligence these in order to identify the small number of deals that will actually be taken to Investment Committee ahead of making an investment.

Given the health of the underlying portfolio and the cash requirement to scale these businesses, we have good visibility on the opportunity to invest further into companies we already know and understand. It is for this reason that approximately 70% of funds raised will be invested in follow-on deals. We were very successful in our previous fundraise, exceeding our target and closing the fundraise a month earlier than expected. The £120 million that was raised in the year and the £91 million raised subsequent to the year end (both net of fees) have given us the capability to increase our new investment rate to match the quality of the opportunity we are seeing in the market, and we are on target to deploy the capital raised in line with our budget.

The recent revision of the attributes which constitute a VCT-qualifying investment outlined in The Chancellor's Budget should have a minimal, or even positive, impact on our approach to making investments. A few technical changes were introduced, for example from 6 April 2018 VCTs will have to invest at least 30% of funds raised into qualifying holdings within 12 months. Additionally from 6 April 2019, the proportion of funds that VCTs must hold in qualifying investments will rise from 70% to 80%. Given Titan's current qualifying proportion of over 95% and its current and intended investment rate, we do not believe that these changes will have a material impact on Titan. The Budget also announced that, with effect from 6 April 2018, "knowledge intensive" companies, which are those that have high Research & Development or innovation spending, will now be able to raise up to £10 million each year from VCTs and EIS, up from £5 million at present. Titan typically invests in knowledge intensive companies and so this is a positive and welcomed change.

The eight new investments in FY 2017 are comprised of:

Appear Here Limited (Investment cost - £3,814,000)
Appear Here is an online market place for short-term retail lettings, connecting landlords' vacant spaces with brands looking for retail locations. The company started trading in 2013 and is based in London, Paris and New York. 

Digital Shadows Inc. (Investment cost - £4,225,000)
Digital Shadows monitors and manages an organisation's digital risk, providing relevant threat intelligence across the widest range of data sources within the open, deep, and dark web to protect their brand, and reputation. The company has been trading over 5 years and has an established client base.

Token, Inc (Investment cost - £4,398,000)
Token.io's has created the world's first bank-hosted payment system specifically designed for the digital era. Its software enables banks to provide their customers with fast payment and cross-border foreign exchange services, with easy-to-use payments and end-to-end security.

Chiaro Technology Limited (Investment cost - £2,770,000)
Chiaro is a female-focused, connected consumer device (or 'wearables') business. The core proposition of the Company is to build a recognisable consumer brand that takes neglected female-focused medical or wellness devices and makes them useful and beautiful. 

Medisafe Project Limited (Investment cost - £2,713,000)
Medisafe is a digital health platform that leverages real-world data to monitor, understand and improve patient drug adherence globally. Medisafe aims to replace manual solutions, such as reminder emails, text messages and phone calls.

MyTomorrows (Impatients N.V.) (Investment cost - £2,090,000)
MyTomorrows is an online drug distribution platform. It is bringing online and automating the process of applying for and gaining access to development stage drugs through Early Access Programs (EAPs).

WeGotPop (Pop Global Limited) (Investment cost - £1,500,000)
Pop Global provides technology that makes the management of actors and actresses for film and television productions more efficient, transparent and secure.

Fluidly Limited (Investment cost - £1,400,000)
Fluidly combine artificial, financial and human intelligence to predict and protect business cash flows.

 

Subsequent to the year end one new investment completed which was committed at 31 October and six separate new investments and three follow-on investments were made, totalling £26 million.

Supporting our portfolio companies
In order to attract the best entrepreneurs in Europe and to then maximize their full potential, we have invested significant resources in building one of the most sophisticated platforms to help our companies succeed. Our teams based in the US and Asia offer dedicated resource for companies looking to expand into these markets.  Another key element to how we look to attract and support the most promising investments is through our group of Venture Partners, who no longer co-invest alongside Titan, as they did previously, but are now exclusively devoted to helping companies reach their potential and achieve their global ambitions. This group increased from five to eight individuals in the year and has grown further with an additional three Venture Partners joining at the end of calendar 2017. Examples of Venture Partners that we have recruited recently during the year include Stephen Morana, previously Chief Financial Officer at Zoopla and Betfair, Howard Bell, previously Head of Product for PayPal Europe and John Hamm, a management coach that has worked with many executives that have been successful in building global billion-dollar companies. Each of these individuals represent best-in-class expertise within their specific domain and together are working to support a large number of portfolio companies.

The Venture Partners are a key part of how we look to support our companies but when placed in conjunction with the overseas offices and our wider network of corporates, consultants and advisors, we look to have a meaningful impact on how quickly our portfolio companies can scale whilst also limiting the risks in their journey. Our approach to being operationally involved in our portfolio companies is also a very useful tool for winning the most competitive deals and proving our value beyond simply investment.

ClearlySo
We don't think that financial success and environmental or social impact are mutually exclusive. We also believe that shareholders have an increasing awareness of environmental and social considerations and consider these increasingly important. With this in mind, Octopus is working with leading impact consultants ClearlySo to review the Titan portfolio against the UN's Sustainable Development Goals. These 17 goals capture a broad range of meaningful areas including health and well-being, education, gender equality, climate action and clean energy.

ClearlySo has reviewed every Titan portfolio company and scored them against a range of indicators, in addition to providing recommendations on how portfolio companies could improve their levels of impact. In the evaluation of all Titan portfolio companies, a range of scores out of 100 were achieved: 

ClearlySo's overall summary of the Titan portfolio stated that "the assessment demonstrates that Titan has a promising exposure to sustainability themes and there is evidence of the creation of positive impact through the companies invested in". This is the first time we have measured the non-financial impacts of the Titan portfolio and will seek to build on this review in the future. We look forward to keeping Titan investors updated on our progress on this topic.

Outlook
The entrepreneurial ecosystem in the UK and across Europe continues to evolve quickly. The endless power of technology to disrupt, replace and reinvent whole industries makes the next decade extremely exciting for our investee companies and the UK remains one of the most vibrant markets to start, scale and exit a technology business. 

The proactive investment in infrastructure to help support portfolio companies build high performance teams and scale internationally increasingly helps position Octopus as one of the most trusted and valued partners for any entrepreneur intent on building a global business, and enables Titan to win the most competitive deals. We are fortunate enough to work alongside some of the most successful European entrepreneurs, many of which are intent on building businesses that will be valued in the £billions. Whilst there are many portfolio companies which have become household names, we are confident that we have many portfolio companies which can be at least equally successful.

Unrivalled demand from investors enabled Titan to successfully raise £124 million (before expenses) during the year, closing the fund raise early in March 2017. The current fund raise of up to £200 million (including the over-allotment facility) which launched in September 2017 has already seen £93 million (before expenses) allotted in November 2017, which had increased to £118m at 26 January 2018 including additional unallocated total investor commitments to the fundraise. Given the continued progress of the underlying portfolio, the opportunity to increase our investment rate for new deals, and the continued support for the valuable role VCTs perform as set out in The Budget, we are confident that these factors should enable Titan to achieve its full fundraising target again this year.

Valuation Methodology
The NAV of the Titan fund is comprised of the aggregate valuations of all of the Titan investments, cash and cash equivalents. We go through the process of valuing all investments every six months, or more frequently if there are any material changes, with valuations in accordance with the IPEVC guidelines. The process for initial valuations and subsequent valuations is slightly different.

For an initial valuation of a new investment, the best estimate of fair value is the transaction price (i.e. cost). Investments made within twelve months are usually kept at cost unless performance indicates that fair value has changed.

For investments which have had further funding rounds, the share price paid at these rounds are a good indicator of fair value for the following twelve months.

Subsequent adjustments to the fair value of unquoted investments are typically made using sector multiples. 

Quoted investments are valued at market bid price. No discounts are applied.

In the event that a portfolio company is not performing to plan we look to value at a discount to cost or the last round valuation, normally in increments of 25%. The intention behind this is to minimize any potential volatility in the NAV of Titan given that it is possible that some companies might go from cost value to zero in the worst case scenario, and we would rather this was a gradual movement.

The overall impact of these combined processes is that our valuations are intended to be consistent and fair, albeit conservative, and we rely on external valuation points to validate our valuations of individual portfolio companies wherever possible.

If you would like to find out more regarding the IPEVC valuation guidelines, please visit their website at: www.privateequityvaluation.com.

The valuations and detailed descriptions of the 10 largest investments in Titan are detailed in the Review of Investments section later in this Report.

The investment costs and amounts invested in the year for each portfolio company are tabulated below.

Investment Portfolio

Fixed asset investments Sector Investment cost as at 31 October 2017
(£'000)*
Amount invested in
the year ending
31 October 2017
(£'000)
MIRACL Limited Security  12,179  4,859
Amplience Limited Business Software  10,986  5,000
Zenith Holding Company Limited** Other  8,963  - 
UltraSoC Technologies Limited Hardware  8,361  606
Zynstra Limited Business Software  8,317  2,476
Oxcis Aviation Limited Travel & Leisure  7,817  2,203
Sofar Sounds Limited Travel & Leisure  7,705  - 
Uniplaces Limited Property  7,621  2,964
Sourceable Limited (Swoon Editions) Ecommerce  6,957  - 
London House Exchange Limited (Property Partner) Property  6,909  1,734
CurrencyFair Limited Financial Services  6,746  1,198
Adbrain Limited (administration) Advertising  6,212  1,548
Artesian Solutions Limited Business Software  5,481  642
Michelson Diagnostics Limited Health and Medicinal  4,542  - 
Token, Inc Financial Services  4,398  4,398
Secret Escapes Limited *** Travel & Leisure  4,256  - 
Digital Shadows Inc. Security  4,225  4,225
Conversocial Limited Business Software  4,165  - 
Appear Here Limited Financial Services  3,814  3,814
Wave Optics Limited Hardware  3,774  3,411
Smartkem Limited Hardware  3,714  1,000
Semafone Limited Business Software  3,594  - 
Big Health Limited Health and Medicinal  3,276  - 
Iovox Limited Business Software  3,272  384
Chronext AG Ecommerce  3,164  2,367
Mi-Pay Group plc Business Software  3,011  - 
Antidote Technologies Ltd Health and Medicinal  2,989  1,526
The Faction Collective SA Travel & Leisure  2,968  538
BridgeU Inc. Business Software  2,935  1,956
Ecrebo Limited Business Software  2,857  706
Bought By Many Limited Financial Services  2,780  - 
Chiaro Technology Limited Health and Medicinal  2,770  2,770
Medisafe Project Limited Health and Medicinal  2,713  2,713
Metrasens Limited Hardware  2,688  - 
Affectv Limited Advertising  2,627  - 
e-Therapeutics plc Health and Medicinal  2,415  - 
Eve Sleep Plc Ecommerce  2,394  - 
Bowman Power Limited Hardware  2,305  - 
Trafi Limited Travel & Leisure  2,288  1,488
Impatients N.V. (myTomorrows) Health and Medicinal  2,090  2,090
Origami Energy Limited Hardware  2,033  - 
Surrey NanoSystems Limited Hardware  1,993  - 
Streethub Limited Ecommerce  1,980  1,130
Elliptic Enterprises Limited Business Software  1,662  - 
Tailsco Limited (Tails.com) Food  1,506  - 
Pop Global Limited (We Got Pop) Business Services  1,500  1,500
Segura Systems Limited Business Software  1,470  385
Fluidly Limited Business Software  1,400  1,400
Streetbees.com Limited Business Software  890  750
Behaviometrics AB (Behaviosec) Security  602  99
Time Out Group plc Travel & Leisure  555  - 
Permutive Inc. Business Software  391  - 
Phasor Inc. Hardware  250  - 
Excession Technologies Limited Business Software  208  - 
Total fixed asset investments    206,718  61,880

*Investment cost reflects the amount invested into each investee company from Titan's 1 - 5 before the 2014 merger and from Titan after the merger. This is different to the book cost which includes the holding gains/(losses) on assets which transferred from Titan's 1, 3, 4 & 5 to Titan 2 (now Titan) during the 2014 merger, as Titan purchased these assets at fair value.

**Owns stakes in Nature Delivered Limited (trades as graze), Secret Escapes Limited and Calastone Limited.

*** The figures for Secret Escapes relate to Titan's direct investment only

The table above excludes five companies in liquidation (Shopa Limited, Phase Vision Limited, Mailcloud Limited, Hubbub Deliveries Limited and Applied Superconductor Limited) and one in administration (Aframe Media Group Limited). Adbrain limited, which is in administration, has been included above as £0.4 million is expected back from the administrators.

Review of Investments
Listed below are details of Titan's ten largest investments by value.

Zenith Holding Company Limited
Zenith Holding Company has a holding in Octopus Zenith LP, an Octopus managed fund, which holds stakes in Secret Escapes, Nature Delivered (Graze) and Calastone, which were formerly held by Titan 1-3 prior to the merger of the five Titan VCTs in November 2014. Following the merger, Zenith Holding Company became a 100% owned investment of Titan.

Founded in April 2007, graze was the UK's first company to deliver healthy and nutritionally balanced food by post, straight to the home or office. Graze promotes a varied and balanced diet through facilitating the intake of a wide variety of smaller portions of natural, high energy foods throughout the day, allowing for a healthier approach to eating delicious foods. Customers can select graze boxes created by the company's team of nutrition specialists to place orders for personalised assortments of foods to match their specific tastes and needs including health, diet and indulgent treats. Graze launched in the US in 2013 and in UK retail in 2015, and has offices in the UK and the US.

Calastone is a financial technology company. Its mission is to make markets friction-free by connecting trading partners through its global fund transaction network. More than 1400 customers in 34 countries of domiciles are now processing domestic and cross border transactions via Calastone, benefitting from the cost and risk reduction opportunities transaction automation can offer. Its purpose is to use smart technology solutions and industry collaboration to enable global distribution, reduce operational risk, and enhance client profitability. Calastone is part of Fintech50, ranked in The Sunday Times Hiscox Tech Track 100 and is one of the UK Government Tech City's Future Fifty companies, recognised for high growth and transforming industries. Calastone has offices in London, Luxembourg, Hong Kong, Sydney, Taiwan and Singapore.

Launched in 2011, Secret Escapes is an online travel club. Members of Secret Escapes may purchase luxury holidays at significant discounts. Members have the opportunity to purchase for a limited period of time (less than seven days) but can choose when to stay at a particular hotel over an extended period of time. The business has offices in London, Sweden, Spain, Poland, Germany, Singapore and the US, has over 1.3 million customers globally and operates in 21 countries.

Following the sale of Zenith's remaining shares in ZPG in February 2017, Titan no longer has an investment in ZPG. 
Country of incorporation:
Initial investment date:
Investment cost:
Valuation:
Last submitted accounts:
Loss before tax:
Net assets:
The Cayman Islands
June 2013
£8,963,000
£48,223,000*
31 October 2017
£(3,514,000)

£27,000

Secret Escapes Limited
Titan also holds a direct stake in Secret Escapes.
Initial investment date:
Investment cost:

Valuation: 
Last submitted group accounts: 
Consolidated turnover: 
Consolidated loss before tax: 
Consolidated net liabilities:
April 2011
£4,256,000
£26,034,000
31 December 2016
£48,749,000
£(20,274,000)
£(7,771,000)

Amplience Limited
Amplience helps retailers deliver profitable growth through improved online shopping experiences across desktop computers, tablets and smartphones. The Amplience Media Platform (AMP) enables non-technical marketing, brand and sales teams to create campaign and product media that increases customer engagement, drives conversions and Average Order Values (AOVs) across all channels and devices, thereby increasing sales for Amplience's customers.
Initial investment date:
Investment cost: 
Valuation: 
Last submitted accounts: 
Consolidated turnover:
Consolidated loss before tax:
Consolidated net liabilties:
December 2010
£10,986,000
£19,846,000
30 June 2016

£5,106,000
£(5,855,000)
£(2,870,000)

Sourceable Limited (trades as Swoon Editions)
Swoon Editions (Sourceable) sells high-quality furniture at a significantly discounted price for the consumer. Sourcing direct from factories in India, China and Vietnam, it buys in container quantities and sells direct to consumers and through media partnerships. The volume purchasing and direct sales allow Swoon Editions to sell more efficiently than other retailers and to sell at approximately 50 per cent off retail prices, while maintaining a 40 to 50 per cent gross margin. 
Initial investment date:
Investment cost:
Valuation:
Last submitted accounts:
Turnover:
Profit before tax:
Net assets:
March 2013
£6,957,000
£18,018,000
31 July 2016 (abbreviated)
not disclosed
not disclosed
£2,135,000

Uniplaces Limited
Uniplaces is the international online marketplace for student accommodation and operates in 15 cities worldwide. Uniplaces solves a problem for both the demand (students looking for accommodation) and supply side (landlords) of the market. Uniplaces brings both sides of the market together to create an interactive marketplace, which allows the parties to transact online in a far more efficient and streamlined manner. The verification and production of quality listings is what sets Uniplaces apart from its competitors.
Initial investment date: 
Investment cost: 
Valuation: 
Last submitted group accounts: 
Consolidated turnover: 
Profit before tax: 
Net assets:
October 2013
£7,621,000
£13,592,000
31 December 2016
£1,841,000

not disclosed
£2,108,000

Semafone Limited
Semafone allows consumers to give their credit card details to call centre operators securely via the telephone keypad while still engaged in a conversation with the agent. The core value proposition is based on the prevention of card-not-present fraud, together with the avoidance of any associated loss of reputation. Their product enables the call centres to become 'PCI DSS compliant' as no card data is seen, heard or recorded anywhere in the call centre.
Initial investment date:
Investment cost: 

Valuation: 
Last submitted group accounts: 
Consolidated turnover: 
Consolidated profit before tax: 
Consolidated net assets:
June 2010
£3,594,000
£9,220,000
31 December 2016
£8,313,000
£30,000
£2,947,000

Sofar Sounds Limited
Sofar Sounds organises small, intimate music performances in unique spaces across the globe and operates in more than 380 cities worldwide. Each event is filmed and can be watched free online via their dedicated YouTube multi-channel network. This broadcasting capability has created a community of music lovers from across the world, online and in person. The business is supported by a volunteer network of scouts and event producers, helping Sofar recruit hand-picked artists to play at the gigs.
Initial investment date: 
Investment cost: 
Valuation: 
Last submitted accounts: 
Turnover: 
Profit before tax: 
Net assets:
March 2014
£7,705,000
£8,927,000
31 December 2016 (abbreviated)
not disclosed
not disclosed
£7,127,000

MIRACL Limited
MIRACL (formerly CertiVox) is an Internet cyber-security company that provides open source encryption libraries, strong two-factor authentication and key management Infrastructure-As-A-Service (IaaS) solutions for the Internet of Things.
Initial investment date: 
Investment cost: 
Valuation: 
Last submitted accounts: 
Turnover: 
Profit before tax: 
Net assets:
March 2011
£12,179,000
£9,213,000
30 June 2017 (abbreviated)
not disclosed
not disclosed
£12,988,000

Eve Sleep plc
Eve Sleep is a UK-based e-commerce business that sells its mattress online. Eve Sleep manufactures one single type of mattress with a three-layer technology incorporating memory foam. Eve Sleep successfully listed on the AIM market in May 2017.
Initial investment date: 
Investment cost: 
Valuation: 
Last submitted group accounts: 
Consolidated turnover: 
Consolidated loss before tax: 
Consolidated net assets:
May 2015
£2,394,000
£8,894,000
31 December 2016
£11,967,000
£(11,338,000)
£3,287,000

London House Exchange Limited (trades as Property Partner)
Property Partner uniquely combines residential crowdfunding with a secondary exchange upon which investors can trade their holdings. The company allows anyone to invest in an individual property of their choice, with as little or as much as they wish, so they can own a share of the property, receive rental income and access capital growth.
Initial investment date:
Investment cost: 
Valuation: 
Last submitted accounts: 
Turnover: 
Loss before tax: 
Net assets:
September 2014
£6,909,000
£9,832,000
31 December 2016
£991,000
£(7,248,000)
£5,630,000

The top 10 investments detailed above represent 57% by value of the investment portfolio and account for an uplift in valuation of over £30 million for the year.

If you have any questions on any aspect of your investment, please call one of the Octopus team on 0800 316 2295.

Octopus Ventures Team
Octopus Investments Limited
5 February 2018

Income Statement

  Year to 31 October 2017 Year to 31 October 2016
  Revenue
£'000
Capital
£'000
Total
£'000
Revenue
£'000
Capital
£'000
Total
£'000
Gains/(Losses) on disposal of portfolio investments - 581 581 - (3,122) (3,122)
Portfolio investment holding gains - 23,669 23,669 - 25,245 25,245
OEIC investment holding gains - 6,688 6,688 - 2,896 2,896
Investment income 212 - 212 (299) - (299)
Investment management fees (1,933) (5,798) (7,731) (1,383) (4,149) (5,532)
Performance fee - (3,852) (3,852) - (3,388) (3,388)
Other expenses (2,767) - (2,767) (2,310) - (2,310)
FX translation - (619) (619) - 737 737
Profit/(Loss) before tax (4,488) 20,669 16,181 (3,992) 18,219 14,227
Taxation - - - - - -
Profit/(Loss) after tax (4,488) 20,669 16,181 (3,992) 18,219 14,227
Earnings per share - basic and diluted (1.1)p 5.0p 3.9p (1.4)p 6.3p 4.9p

·      The 'Total' column of this statement is the profit and loss account of the Company; the supplementary revenue return and capital return columns have been prepared under guidance published by the Association of Investment Companies.

·      All revenue and capital items in the above statement derive from continuing operations.

·      The Company has only one class of business and derives its income from investments made in shares and securities and from bank and money market funds.

Titan has no other comprehensive income for the period.

Balance Sheet

  Year to 31 October 2017 Year to 31 October 2016
  £'000 £'000 £'000 £'000
Fixed asset investments   301,791   225,536
Current assets:        
OEICs 104,484   62,795  
Cash at bank 23,290   12,395  
Applications cash * 39,272   17,960  
Debtors 5,821   12,637  
Money market funds 2,453   7,494  
  175,320   113,281  
Current liabilities (44,408)   (22,841)  
Net current assets   130,912   90,440
         
Net assets   432,703    315,976
         
Called up share capital   44,899   32,262
Share premium   114,404   1,619
Special distributable reserve **   211,122   240,172
Capital redemption reserve   1,071   749
Capital reserve - gains/(losses) on disposals **   2,284   1,777
Capital reserve - holding gains   70,668   46,035
Revenue reserve **   (11,863)   (7,375)
Translation reserve   118   737
Total equity shareholders' funds   432,703   315,976
Net asset value per share   96.4p   97.9p

*   Cash held but not yet allotted.

** Reserves available for distribution

The statements were approved by the Directors and authorised for issue on 5 February 2018 and are signed on their behalf by:

John Hustler
Chairman

Company No: 6397765

Statement of Changes in Equity

  Year ended
31 October 2017
£'000
Year ended
31 October 2016
£'000
Shareholders' funds at start of year 315,976 228,461
Profit after tax 16,181 14,227
Issue of equity (net of expenses) 125,744 105,947
Purchase of own shares (2,926) (3,922)
Dividends paid (22,272) (28,737)
Shareholders' funds at end of year 432,703 315,976

Cash Flow Statement

  Year to 31 October 2017
£'000
Year to 31 October 2016
£'000
Reconciliation of profit to cash flows from operating activities    
Profit before tax 16,181 14,227
Decrease/(Increase) in debtors 6,816 (10,847)
Increase in creditors 21,567 10,940
(Gains)/Losses on disposal of fixed assets (581) 3,122
Gains on valuation of fixed asset investments (23,669) (25,245)
Surplus funds received from fixed asset investments 513 (25)
Inflow/(Outflow) from operating activities (a) 20,827 (7,828)
     
Cash flows from investing activities    
Purchase of fixed asset investments (61,880) (45,926)
Sale of fixed asset investments 180 54,119
Zenith Distribution 9,182 -
(Outflow)/Inflow from investing activities (b) (52,518) 8,193
     
Cash flows from financing activities    
Dividends paid (22,272) (28,737)
Purchase of own shares (2,926) (3,922)
Net proceeds from share issues 125,744 105,947
Inflow from financing activities (c) 100,546 73,288
     
Increase in cash and cash equivalents (a + b + c) 68,855 73,653
Opening cash and cash equivalents  100,644   26,991
Closing cash and cash equivalents 169,499 100,644
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