Concerns have emerged over Octopus Investments’ £3.2 billion inheritance tax investment scheme, drawing scrutiny from investors and regulatory observers amid questions about corporate governance, asset valuations, and fee structures. Octopus Investments manages Fern Trading, the holding company through which the scheme operates, and oversees a portfolio spanning renewable energy, property, and telecommunications.

At the center of the controversy is the Octopus Inheritance Tax Service (OITS), a product marketed to more than 18,000 retail investors, primarily advised by financial professionals, as a way to reduce inheritance tax liabilities by investing in private businesses eligible for UK business relief. Unlike some publicly traded funds, OITS holdings are not listed on stock markets, and investors face difficulties selling shares except through private transactions or occasional buybacks by Octopus Investments.

Recent developments have heightened apprehension following a temporary suspension on trading of OITS shares, prompted by an impending portfolio transaction anticipated to materially affect valuations. Investors were informed of challenges primarily affecting Fern’s telecoms assets, especially in its fibre broadband division, which has faced significant impairments and operational difficulties. In its latest accounts, Fern Trading recorded a £100 million writedown in fibre assets, citing overbuilding risks that jeopardize recoverable network costs. Despite these setbacks, the fibre portfolio’s implied valuation has surged to approximately £1.2 billion, a sharp rise from just £40 million in 2020, raising concerns over valuation accuracy amid modest revenue growth.

The valuation approach employed by Octopus Investments has become a focal point of criticism. Fern’s management values the group at £3.2 billion, a figure substantially higher than the audited net asset value of £2.1 billion reported by Ernst & Young, which applies standard accounting adjustments including asset depreciation. The premium implicit in Octopus’s valuation bears directly on management fees, which have exceeded £900 million since Fern’s inception. Notably, fees were reduced earlier this year from 2.5% to 1.85% of value but still amounted to £103 million last year despite Fern’s 12% net asset value decline and a pre-tax loss of £420 million.

Industry experts and former executives have voiced concerns about the governance structures within Fern’s portfolio companies. While the Fern Trading board is described as independent, some subsidiary companies are overseen by boards with significant Octopus Investments representation, including instances where staff members hold a substantial proportion of directorships. Company insiders have suggested that key decisions may be made by a limited number of individuals rather than through formal board processes, potentially undermining oversight.

One notable case underscoring broader governance worries is the collapse of Vitrifi, a fibre broadband firm owned by Fern. Staff were informed of redundancies abruptly and without consultation, sparking criticism of Octopus’s communication and handling of employee relations. Octopus Investments later issued an apology and compensated affected employees with full notice pay and voluntary settlements.

Regulators in the UK, including the Financial Conduct Authority and the Bank of England, have increasingly focused on the risks associated with private market fund valuations, highlighting concerns about inflated asset prices and liquidity mismatches that could pose systemic risks. Consumer advocacy groups argue that schemes like OITS warrant heightened regulatory scrutiny due to their reliance on illiquid and self-valued assets, which are often held by retail investors less equipped to assess risk.

Octopus Investments maintains that it operates with transparency and fiduciary responsibility, regularly communicating with investors and advisers. The firm emphasizes its use of independent valuation teams following international guidelines and points to actions taken to reduce fees and strengthen portfolio management amid volatile market conditions. The firm also underscores the complexity of Fern Trading as a trading group rather than a conventional fund, which it says explains differences in accounting and valuation methods.

Founded in 2000 by Simon Rogerson and colleagues from Mercury Asset Management, Octopus Group has evolved into a significant investment manager with £14.6 billion in assets under management across thousands of investors. Its success includes a 32% stake in Octopus Energy, a prominent renewable energy supplier. Nonetheless, the challenges facing Fern Trading show the difficulties inherent in managing a sprawling private portfolio amidst economic and sectoral headwinds.

As scrutiny intensifies, the outcome of ongoing investor and regulatory reviews will be closely watched for implications on valuation transparency, governance standards, and the sustainability of tax-efficient investment products marketed to retail savers.