Making easy money out of inheritance tax is ostensibly the job of the chancellor. Not if you’re Octopus Investments. It’s found a way to coin it on the back of a loss-making private company, Fern Trading, that it claims is worth £3.55 billion.
The latest proof? In a year to June 2024 when the business ran up a pre-tax loss of £185 million, Octopus took out £103 million in fees. The year before? £90.5 million of fees, despite £149 million of losses. Indeed, since Fern’s inception in 2010, Octopus has milked it for around £790 million in fees.
How it has managed to do it is instructive — and not least when the Financial Conduct Authority is issuing “Dear CEO” letters warning about valuation issues and conflicts of interest in private markets, plus the need for a “strong governance framework”. Last month’s missive could arguably have been written for Octopus’s management of Fern. The regulator spoke of the “risk that firms could value private assets inappropriately, for example through poorly managed conflicts of interest”; and that “where firms use valuations to calculate fees, there is a risk of firms inappropriately charging investors”.
• Octopus faces questions over ‘high fees and low returns’
Octopus Investments, which is part of the Octopus Group, co-founded by Simon Rogerson, Christopher Hulatt and Guy Myles in 2000, styles itself as “the largest manager of venture capital trusts and investments that qualify for relief from inheritance tax”. It has £10 billion under management, about a third of which is accounted for by Fern: the employer of 1,900 people that’s made up of almost 320 companies. Spanning solar energy, wind farms, broadband fibre and housebuilding, they qualify for “business relief”: shelter from inheritance tax, which is levied at 40 per cent of the value of a person’s estate over the so-called “nil rate band”, presently at £325,000.
Fern is owned by around 15,000 Octopus Investment clients. And, maybe, they don’t care about the fees as long as the business provides a tax shelter. But they should: Octopus’s main income from Fern comes via an annual management fee of 2.5 per cent of the company’s value. And it’s based entirely on an internal share price that, despite the losses, invariably goes up — by 71 per cent since Fern was launched, even if the group says it was “broadly flat” over the past year.
Indeed, not only is Fern’s “market cap” of £3.55 billion an Octopus construct, it’s a big premium to its net asset value (NAV) of £2.45 billion. Where else would a loss-making business with Fern’s assets and £842 million net debt trade at such a premium to NAV?
Naturally, Octopus denies Fern’s share price is simply made up. It says it is calculated according to “international private equity and venture capital valuation guidelines”. Ed Fellows, the head of Octopus’s inheritance tax service, also says that because assets are held at “amortised costs”, you should add back Fern’s £462 million goodwill to NAV. Even allowing for that, though, the “market cap” is still at a big premium. In fact, the main reason Fern’s NAV went up, and debt down, by about £200 million last year is because it raised £217 million from existing investors: new funds on which to tot up fees.
Fellows says the fees are not typical because Octopus is running Fern on a day-to-day basis, with input from more than 200 staff; that Fern has an “independent board”; and that it’s just “renegotiated” the management fee, so 2.5 per cent is charged on only the first £3 billion of assets, with a 0.25 percentage point cut per every £500 million after that. Yet, that is a tiny cut. And questions must be asked about Fern’s cosy governance. Its chairman, Keith Willey, has held that role since shortly after its launch, while its sole executive director, Sarah Grant, has worked at Octopus Investments since 2013 and chairs its investment committee.
Asked about the management fee, Fellows says: “I don’t think it’s egregious. It’s something that’s negotiated with the board.” He also says his last meeting with the FCA was “at the end of August last year and they were happy”. Yet, it’s not too taxing to spot whose inheritance is being best protected here.
Brilliantly done
So many “brilliant people”, doing so much “brilliant retail” — but still not brilliant enough for a bonus. The new chairman of the John Lewis Partnership, the former Tesco exec, Jason Tarry, didn’t stint on one B-word as he unveiled his first full-year figures since taking charge in September last year. It just wasn’t the one that the 69,000 partners wanted to hear. The bonus has been parked for the third year running, with the retailer instead raising pay by a total £114 million — before £40 million of costs from the budget national insurance increase.
Still, now that the Waitrose-to-department store outfit is being run by a retailer, at least there were signs of progress: pre-tax profits up 73 per cent to £97 million, with Tarry right to spot scope for “self-help”. He’s earmarked £600 million for “catch-up investment” in stores, supply chains and tech. But he’s also done simple retail stuff, such as matching Waitrose shop workers to demand, while the return of the “never knowingly undersold” pledge is paying off at John Lewis. The mutual’s still aiming for £400 million profits by 2027-28. Do that and the other B-word may even be back.
Stand and Deliveroo
Forget the chicken jalfrezi. No one does takeaways like Goldman Sachs. First, take away a slice of the £49 million fees when you’re one of two lead banks floating a business at 390p. Then, take away another chunk when you’re a joint-broker buying back £100 million shares at around 120p. Goldman probably knows more about takeaways than Deliveroo.
