InvestmentsAug 3 2015

‘You don’t know what it’s like to build your own business’

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Simon Rogerson is vocal over his frustration at the way financial services companies treat their customers. This goes some way to explaining why he set up Octopus Investments in March 2000 with Guy Myles and chief financial officer Chris Hulatt.

The chief executive says they believed there was “a different way of doing things” when they established the business, which specialises in UK smaller companies and tax-efficient investments. “It was frustrating to be a customer of a financial services company and I didn’t think they were doing things the right way,” he explains.

“They’re typically quite ‘short-termist’ on how they think about business, and the underlying way they communicate with clients was confusing and remains so. I think people find it difficult to interact and necessarily do the right thing, and I thought it was a chance to change that.

“People will change their husband or wife more often than they change their bank accounts,” Mr Rogerson adds. “Not because they like their banks, but because they really don’t like their banks – they like their banks as much as they like their energy suppliers.”

He says of financial services firms: “I think they have a different mindset. Most of these businesses are quoted companies or they’re owned by private equity firms, which forces a time horizon on them that is not compatible with building a truly customer-centric organisation.”

All three of Octopus’s founding members were in their 20s when they established the company. Mr Rogerson had gone straight from university into a role at Mercury Asset Management, where he worked on the US equity team, then in the UK small-cap team and finally in the global equity department covering the pharmaceuticals sector.

He notes: “Mercury was a fantastic place to work because you had access to almost any management team. But after two-and-a-half years, three of us left to set up Octopus.”

He acknowledges it was quite a leap to go from working in a renowned asset management firm to setting up their own business and insists it was not that they were frustrated with Mercury at all.

“In hindsight, there was an element of naivety in it,” he admits. “You don’t know what it’s like to build your own business; it’s really quite scary. You have to get regulated, you don’t have any capital, you need to find that capital, you need to launch products, you need to find customers – all this stuff that we didn’t really understand.

“We were going to find businesses that were undervalued and invest our clients’ money in them, but that didn’t mean we could run a business. There was lots to learn in that transition.”

It’s all very well pledging to restore trust among customers in the financial services sector, but how did they put that into practice?

Mr Rogerson was determined to address the issue of communication. “I like the power of language if you get it right and that’s the frustration in financial services, which is so full of jargon and small print that the ability for a client or customer to get under the bonnet and really understand it is almost impossible to do,” he says.

“Fundamentally, if I can’t understand what you’re telling me or writing to me, then I can’t trust you.”

So at Octopus they use the “Granny and grandad test”. He explains: “Before any communication leaves the business, it should be understood by a man or woman of 75 years old who has never worked in financial services. If it doesn’t pass that test, it shouldn’t leave the building.”

The ‘does what it says on the tin’ Ronseal slogan is another test used by the firm on its products. “That’s what you want from fund management companies and the products they deliver,” he states. “They must do what they say they’re going to do. The customer has a certain expectation going in and you need to deliver on that.”

Turning to the business, Mr Rogerson explains it has three areas of focus: UK smaller companies, energy – particularly renewable energy – and healthcare, following an acquisition last year.

He believes that to make money from small-cap equities, “you need to know something the market doesn’t know”.

“Smaller companies grow their earnings much faster. If you are really ambitious and you work hard, you will find something out that the market doesn’t know,” he notes.

“Our small-cap team is focused entirely on the Aim [Alternative Investment Market], and we have the ventures business that looks to back disruptive, industry-changing companies. We’ve backed Secret Escapes, Zoopla and SwiftKey, as well as businesses that have done some phenomenal things from start-up.

“We have about £1.5bn across those two platforms. I think we were the most active ventures investor in the UK last year – probably the most active Aim investor as well. That’s a part of the market we’re really committed to and we like the impact it has on the broader economy in terms of job creation and innovation.”

He continues: “We’re motivated by trying to make a difference, and some of these start-up firms have turned these industries almost on their heads and that’s exciting.”

Mr Rogerson’s preference for small-cap investing developed at Mercury after he realised that managers tended to invest their own personal money in smaller companies. He says, about when he was researching pharmaceuticals: “I could have spent three months just looking at AstraZeneca and I’m not sure I could have told you anything the market didn’t already know.

“And neither could the guy who ran AstraZeneca. He could not tell you with confidence that shares were going to go up or down because it would depend on how [investors] thought. That kind of macro way of calling the markets just didn’t have any interest for me.”

Its acquisition of MedicX in 2014 has helped Octopus scale its healthcare property business and marked a significant moment for the company, which until then had only made small acquisitions. MedicX was a business of 35 people when Octopus bought it.

Mr Rogerson recalls: “The bit that got us excited – and the reason we wanted to do it – was because it was in the healthcare and infrastructure space, and that was an area we were already in but wanted to be larger. When we sat down with [chief executive] Mike Adams, who ran the business, both his personal values for what got him out of bed in the morning and his vision for what he wanted to build was the same as ours.

“It also brought a different distribution channel for us,” he explains, as the business was backed by institutional money.

He adds: “We have been entirely retail focused through financial advisers, and we do business with around 4,000 of them every year. We are super committed to that channel because we think it makes sense for people to get financial advice in terms of what they’re doing.

“We have a distribution team that’s probably 70 people strong. We do everything we possibly can to help advisers put the right solution to the right client.”

But Mr Rogerson insists that acquisitions will be few and far between, on the basis that any deals will be down to the “cultural fit” of the team.

Recalling the early days of the business, when he and the other founders were working from a bedroom and relying on the Yellow Pages to generate interest among advisers, he admits that starting a business “does toughen you up”.

He says: “Looking back on it, it’s nice when you get the recognition both around the culture and around the services side of things.

“It makes me feel good when financial advisers rate us as highly as anyone in the industry for what we’re doing, and how we serve and work with them. That makes a big difference because I think it flows through to the right people getting the right products.”

CV

Simon Rogerson

2000 – present

Co-founder and chief executive, Octopus Investments

1997 – 2000

Joined graduate scheme at Mercury Asset Management, working on US and UK equity teams, latterly head of pharmaceutical and biotechnology on the global equity team