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The UK’s top regional investor

Mercia Asset Management 2 March 2021 Outlook
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Mercia Asset Management

The UK’s top regional investor

Company outlook

Investment companies

2 March 2021

Price

27.00p

Market cap

£119m

Forecast net cash (£m) at 31 March 2021

c 49.0

Shares in issue

440.1m

Free float

69.1%

Code

MERC

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

10.7

2.5

20.0

Rel (local)

8.1

(1.6)

18.3

52-week high/low

27.35p

13.8p

Business description

Mercia Asset Management is a regionally focused specialist asset manager. Its stated intent is to become the leading regional provider of supportive balance sheet, venture, private equity and debt capital in transaction sizes typically below £10m.

Next event

FY21 results

July 2021

Analysts

Richard Williamson

+44 (0)20 3077 5700

Rob Murphy

+44 (0)20 3077 5700

Mercia Asset Management is a research client of Edison Investment Research Limited

The £30.7m cash exit from Oxgene underlines management’s success in building a sustainably profitable specialist asset manager, delivering high levels of contracted revenue and providing a filtered pipeline of opportunities for Mercia’s direct investment portfolio. Based on progress to date, we believe Mercia will achieve its three-year strategic plan ahead of time (grow operating profitability, expand assets under management (AUM) to £1bn and ‘evergreen’ the balance sheet by end FY22). By the end of H121, AUM had risen to £872m (15% from FY22 target), with fee-earning funds under management (FUM) of £722m. Despite progress, Mercia’s shares continue to trade at a material 21% discount to net assets (0.79x) or a 30–35% discount when we include the third-party funds business (worth 4.9p at 3% of FUM). This is a substantial discount to its peers.

Period end

Net cash* (£m)

Direct
investments (£m)

FUM
(£m)

NAV
(£m)

NAV per share (p)

P/NAV
(x)

03/18

49.4

66.1

400.0

123.5

40.7

0.66

03/19

29.8

87.7

381.0

126.1

41.6

0.65

03/20

30.2

87.5

658.0

141.5

32.1

0.84

09/20

24.9

101.6

722.0

149.9

34.1

0.79

Note: *Includes liquid securities but not funds held on behalf of fund investors.

Fund management: Now structurally profitable

AUM has increased to £872m up 78% from H119, with third-party, fee-earning FUM of £722m in H121, a rise of 100% y-o-y. The group delivered a 51% increase in revenue to £8.4m (H120: £5.5m), of which 87% is annual recurring revenue from fund management and monitoring fees. Adjusted operating profit (ex-realisations, fair value gains, etc) was £1.1m (H120: £0.6m loss), with H121 EPS of 1.87p (H120: 0.69p). As a structurally profitable business, with £2.0m of operating cash flow in H121, management initiated a progressive dividend policy, declaring a maiden interim dividend of 0.1p per share.

Outlook: The end of the beginning

Mercia has done the majority of the work of building and scaling a regional investment franchise. Management has built a sustainably profitable, cash-generative, specialist asset manager that, as well as delivering high levels of contracted recurring revenue, seeds the market to provide a filtered pipeline of opportunities for Mercia’s direct investment portfolio. With seven cash exits to date since its IPO in 2014, we believe Mercia is almost at the point that the portfolio is sufficiently mature to start to generate more frequent, attractive exits. The market has yet to appreciate this transition from a sub-scale portfolio dependent on periodic capital injections to a cash-generative business, with increasing upside from portfolio realisations.

Valuation: 31–36% discount to our hybrid valuation

Although profitable and dividend paying, with a mature, evergreen balance sheet, and scaling AUM, Mercia still trades at a 21% discount to its H121 NAV (34.1p per share) and a significant discount to its peers. Together with its fund management arm (5–8p per share), the overall valuation rises to 39–42p per share, implying a discount of closer to 31–36%. Catalysts for a re-rating include further scaling of the business, continuing revenue/earnings growth, commercialisation of the direct investment portfolio and/or successful exits.

Investment summary

Mercia is a provider of growth capital to private companies in the UK’s regions. It offers a blended investment model, with net fee income from its third-party managed funds (valued at a percentage of FUM) allowing it to commit to a progressive dividend policy in FY20, while its portfolio of direct balance sheet investments (valued relative to net asset value (NAV)) continues to grow and mature, moving towards an evergreen balance sheet where future investments are covered by net portfolio realisations.

We do not believe the market adequately recognises the value of Mercia’s risk-balanced strategy.

A scaling, structurally profitable specialist asset manager

Mercia is a specialist asset manager with a stated intent to become the leading regional provider of supportive balance sheet, venture, private equity and debt capital in transaction sizes typically below £10m. Given its financial resources, Mercia invests in businesses with relatively modest capital needs, typically up to c £20m in total across multiple funding rounds. The upside of targeting regional markets is that competition for investments is lower and these markets tend to be less exposed to the extreme valuation swings seen in mainstream markets through the economic cycle.

Strategy: On track to deliver its FY22 strategic plan early

In its H121 results presentation, Mercia stated its strategic goals for FY21–22 as follows:

Continued growth in profitability: achieved. In H121, Mercia delivered adjusted operating profit of £1.1m through fee income from its fund management arm, with 87% of revenues recurring, more than covering the group’s central costs. In its March trading update, management estimated that FY21 PAT (including disposal gains) would be above £23m.

Grow AUM to £1bn+: outstanding. With AUM of £872m at 30 September 2020, annualised growth of c 10% would achieve this target by FY22.

‘Evergreen’ the balance sheet: achieved in all likelihood. Including the proceeds from Mercia’s latest cash exit from Oxgene (£30.7m), management expects to have c £49m of unrestricted cash at 31 March 2021. This, together with organic growth and anticipated portfolio realisations, is expected to be sufficient to achieve an evergreen balance sheet.

Follow a progressive dividend policy: achieved. In H121, management implemented a progressive dividend policy, declaring a maiden interim dividend of 0.1p per share and offering a potential 1% dividend yield for FY21.

Become the number one provider of capital in its target markets: achieved. Beauhurst research shows that Mercia was the most active venture capital (VC) investor nationally in 2020 and the most active investor across the Midlands and the North of England, its core regions of focus.

Financials: Cash generative, profitable and scaling

Mercia reported a 9% rise in AUM to £872m in H121 (FY20: £798m), a resilient performance over the first six months of the COVID-19 pandemic. Third-party FUM rose by 10% to £722m in H121 (FY20: £658m). Growth of AUM and FUM over the last 12 months has been 78% and 100%, respectively, reflecting the contribution from the acquisition of the Northern VCT fund management business completed in December 2019.

H121 reported net assets were £149.9m (FY20: £141.5m), with unrestricted cash of £24.9m (FY20: £30.2m) and NAV per share growing by 6% over the period to 34.1p (FY20: 32.1p). Hard NAV (portfolio fair value plus net cash) rose by 7.5% to £126.5m for H121 (28.7p per share) from £117.7m (26.7p per share) for FY20.

Sensitivities

Mercia has successfully built a broad-based resilient business, deploying capital into private companies based on a UK regional footprint. As a people-based business, the company remains reliant on its senior investment team, their network and the team’s market reputation to attract the best businesses in which to invest. The direct investment portfolio relies on Mercia’s managed funds as an effective sourcing network. As the direct portfolio builds in scale and maturity, the company will need to ensure efficient recycling of capital to deliver its evergreen funding model. Realisations depend critically on the state of the market, the valuations of quoted peers and investor appetite to continue to fund high-growth companies.

Outlook: The end of the beginning is in sight

We believe Mercia has done the majority of the work of building and scaling a regional investment franchise, accelerated by the acquisition of the NVM VCT business in December 2019. As with all early-stage investors, there can be a long wait until the portfolio is sufficiently mature to start to generate more frequent, attractive exits. With seven cash exits to date, we believe Mercia is almost at that point. In addition, management has built a sustainably profitable, cash-generative specialist asset manager that, as well as delivering high levels of contracted recurring revenue, seeds the market to provide a filtered pipeline of opportunities for Mercia’s direct investment portfolio. We believe Mercia offers investors an attractive balance of risk and reward, but the market has yet to appreciate the transition it has made from a sub-scale portfolio dependent on periodic capital injections to a cash-generative business, with increasing upside from portfolio realisations.

Valuation: The market has yet to appreciate Mercia’s value

Currently, Mercia trades at a 21% discount to its H121 NAV (34.1p per share), while a number of its immediate peers trade at a premium to NAV, having delivered consistent, strong NAV growth and reflecting the latent value of their portfolio. Mercia offers exposure to an attractive portfolio of high-growth, COVID-19 resilient businesses and the inclusion of the fund management business (we value at between 5–8p per share) takes the overall valuation to between 39–42p per share, implying a discount of closer to 31–36% to Mercia’s true value.

Given the breadth of Mercia’s business, the group’s growing profitability combined with a progressive dividend policy, the performance of its portfolio and its underlying operating model, we believe Mercia remains undervalued at these levels and investors could further reassess the group’s prospects over the course of 2021.

Company description: Specialist asset manager

Mercia Fund Management was co-founded by Dr Mark Payton (the current CEO) as a venture capital fund manager in 2010, after a buyout of WM Enterprise. The group then listed on AIM as Mercia Technologies PLC in December 2014, before being renamed as Mercia Asset Management in July 2019, to better reflect its business mix. Today, Mercia is a specialist asset manager with a stated intent to become the leading regional provider of supportive balance sheet, venture, private equity and debt capital in transaction sizes typically below £10m. Given its financial resources, Mercia targets businesses in its regional markets (in England, the North, Northeast, Northwest, Midlands and Scotland) with relatively modest capital needs, typically up to c £20m in total, across multiple rounds.

‘Complete Connected Capital’

Mercia’s ‘Complete Connected Capital’ solution ensures it can offer the right type of capital for high-growth businesses at different stages of maturity at the right time. It also offers investment options, whether for private investors interested in tax-efficient investing via Mercia’s EIS or Northern VCT funds, or institutional investors seeking investment into long-term debt, private equity or VC funds. All investors can also become shareholders in Mercia Asset Management plc.

Mercia invests from four pools of owned or managed capital:

plc balance sheet (H121: £102m portfolio fair value, £25m unrestricted cash)

Venture (including NVM) (H121: FUM £552m)

Private equity (H121: £56m)

Debt (H121: £114m)

At the end of H121, Mercia reported AUM of £872m (FY20: £798m), with 9% growth over the six months from 31 March 2020. Third-party FUM rose by 10% over six months to £722m in H121 (FY20: £658m). Growth of AUM and FUM over the 12 months to 30 September 2020 was 78% (H120: £489m) and 100% (H120: £361m), respectively, with the heightened growth reflecting the contribution from the acquisition of the Northern VCT fund management business acquired in 2019.

Exhibit 1: H121 AUM breakdown

Exhibit 2: H121 FUM breakdown

Source: Mercia

Source: Mercia

Exhibit 1: H121 AUM breakdown

Source: Mercia

Exhibit 2: H121 FUM breakdown

Source: Mercia

Venture, including the NVM VCT fund management business, EIS and IP commercialisation, represents the majority (H121: 76%) of the group’s FUM (Exhibit 2), with private equity (8%) and debt (16%) together representing the remainder. In terms of AUM, the proportion of Venture funds falls to 63%, as set out in Exhibit 1, or reflects 78%, after including both the direct investment (later-stage venture) portfolio and cash intended to invest in direct investments.

Strategy: A scaling specialist asset manager

Management’s three-year strategic plan, set out in FY20, is to achieve growing profitability, based on adjusted operating profits, to increase assets under management to at least £1bn and to ‘evergreen’ the group’s balance sheet. To achieve these strategic goals, in its H121 results presentation, management stated the following five targets for FY21 and FY22:

Growing profitability. The acquisition of the NVM VCT fund management business in December 2019 has been transformational for the group, with its additional fee income (of which 87% is recurring) meaning that the group delivered an adjusted operating profit (ex-realisations, fair value gains, etc) of £1.1m in H121. Growth in adjusted operating profit helps to put Mercia on a sustainable footing, starting to deliver the scale that management believes is necessary for Mercia to deliver an evergreen model by FY22. In its trading update on 1 March 2021, management estimated that FY21 PAT (including disposal gains) would be above £23m.

AUM >£1bn. Mercia's total AUM was £872m at 30 September 2020, still c 15% below management’s target. The £1bn AUM target delivers the scale management believes is necessary to operate a fully sustainable, evergreen business model.

An evergreen balance sheet by FY22. Management has potentially achieved this target in FY21. Including the proceeds from Mercia’s latest cash exit from Oxgene (£30.7m), management expects to have c £49m of unrestricted cash at 31 March 2021. This, together with organic growth and anticipated portfolio realisations, is thought to be sufficient to achieve an evergreen balance sheet, where anticipated annual portfolio realisations cover net investment, with management fees meeting other operational costs.

Progressive dividend policy. As a profitable business, with £2.0m of operating cash flow in H121, management implemented a progressive dividend policy, declaring a maiden interim dividend of 0.1p per share, implying a potential 1% dividend yield for FY21, assuming a typical one-third/two-thirds split between interim and final dividends.

Number one in its target markets: ‘in the regions, from the regions, to the regions’. Mercia intends to become the leading regional provider of supportive balance sheet, VC, private equity and debt capital in transaction sizes typically below £10m. To achieve this, management expects to take a market share of 20%+ of its targeted regional markets (in England, the North, Northeast, Northwest, Midlands and Scotland). Latest research from Beauhurst shows Mercia was the most active VC investor nationally in 2020 as well as the most active investor across the Midlands and the North of England, its core regions of focus.

Deal sourcing: Direct investing and fund deal flow

Mercia’s third-party fund business is critical to the group’s overall success as its direct balance sheet investments are all sourced through its third-party fund investments. Mercia’s strategy allows management to identify the best opportunities from the regions to bring to its balance sheet.

Exhibit 3: ‘Complete Connected Capital’

Source: Mercia

Historically, Mercia has been closely associated with IP commercialisation, using its university links and partnerships to attract and qualify deal flow. Through its 19 ongoing university partnerships, IP commercialisation remains an integral element of Mercia’s overall investment proposition; however, this categorisation no longer reflects the growth of the business, nor the diversity of its deal sourcing. Today the IP commercialisation channel represents only one of five principal sources of deal flow; the others being direct sourcing from Mercia’s own network, client referrals, adviser referrals and investee company cross-referrals.

Regional deal-sourcing model

‘In the regions, from the regions, to the regions’

To be integral to its regional markets and ensure it sees the best deal flow, management is looking to establish a market share of 20%+ of its targeted regional markets (in England, the North, Northeast, Northwest, Midlands and Scotland), with calculated market share based on data from Beauhurst, the British Business Bank and the British Venture Capital Association. Latest research from Beauhurst shows Mercia was the most active VC investor nationally in 2020 as well as the most active investor across the Midlands and the North of England, its core regions of focus.

The North-South divide

According to Beauhurst data, of the c 26,000 high-growth English companies on its platform, 19% are based in the North of England (North East, North West, Yorkshire and the Humber), 11% are in the Midlands, 32% are headquartered in the South (South East, South West and the East of England) and 38% are in London.

Exhibit 4: Mercia’s regional footprint

Exhibit 5: Equity deals by region in 2020

Source: Mercia Asset Management

Source: Beauhurst

Exhibit 4: Mercia’s regional footprint

Source: Mercia Asset Management

Exhibit 5: Equity deals by region in 2020

Source: Beauhurst

In 2020, the North was most affected by the drop in deal numbers related to COVID-19, with 194 equity investments recorded up to November 2020, a 20% decline on the 241 reported in the full year 2019. In total, high-growth companies in the North secured 14% of English equity deals, with 5% in the Midlands. The vast majority of completed equity deals by number were in the South (81% of the total, 15% y-o-y decline in deal numbers), with London representing 58% of English deal flow (a 12% y-o-y decline). This reflects a re-concentration of capital in London and the South, with the North and the Midlands seeing a disproportionate decline in equity funding in 2020 due to COVID-19. Mercia sees this as a clear opportunity, which it is well-placed to address.

Funds: ‘Complete Connected Capital’

Funds overview

Mercia’s investment model is to target appropriately priced regional businesses seeking modest capital, in part, to protect Mercia from major cyclical price corrections. The group offers a spectrum of capital including, SEIS, EIS, VCT, VC, private equity and debt funding.

Mercia invests through four pools of managed capital:

plc balance sheet (H121: £102m portfolio fair value, £25m unrestricted cash)

Venture (including NVM) (H121: FUM £552m)

Private equity (H121: £56m)

Debt (H121: £114m)

Exhibit 6: Investing through a broad spectrum of funds

H121

Venture

PE

Debt

plc

Group

Total portfolio size

243

9

124

22

398

AUM

£552m

£56m

£114m

£150m*

£872m

Liquidity

£131m

£24m

£75m

£25m

£255m

Source: Mercia Asset Management, Edison Investment Research. Note: *NAV used for plc FUM.

In aggregate, the company held AUM of £872m at the end of H121, spread over almost 400 investee companies, of which c £722m (83% of AUM) represented fee-earning third-party FUM.

Venture: Mercia benefits from a diversified venture portfolio of 243 businesses across different sectors and stages of development.

Private equity: Mercia’s private equity funds invest from £1m up to £10m, providing capital for early-stage growth, as well as mature businesses. A key differentiator for Mercia’s private equity funds is that they only take minority stakes, leaving the majority of the incentive with the management team and founders.

Debt: Mercia’s debt funds were active throughout 2020, with Mercia’s Coronavirus Business Interruption Loan Scheme accreditation enabling Mercia to support regional businesses through a challenging year.

PLC balance sheet: the average holding period of Mercia’s direct investments is around four years, with an expectation that investments will be realised over a three- to seven-year timeframe from initial investment. The group has realised c £20m of capital to date, through six cash exits. The fair value of Mercia’s direct investments at H121 was £101.6m (FY20: £87.5m), an increase of 16% over the six-month period.

Venture, including the NVM VCT fund management business, EIS and IP commercialisation, represents the substantial majority (H121: 63%) of group AUM. The direct investment portfolio (later-stage venture), together with balance sheet cash (hard NAV) makes up 15% of assets, taking the total venture allocation to 78% of AUM. This leaves private equity (6%) and debt (13%) to represent approximately a fifth of assets, with goodwill the majority of the remainder.

Exhibit 7: H121 investment activity

Venture

PE

Debt

plc

Aggregate

Total portfolio size

243

9

124

22

398

Portfolio investments in H121

52

0

15

14

81

New to portfolio in H121

16

0

10

1*

26

Source: Mercia Asset Management, Edison Investment Research. Note: *The only new plc investment was from an underlying managed fund and therefore is not a new group investment.

In H121, the most active funds (by deal number) were the Venture funds, with 52 investments made including 16 new investments, followed by the debt funds with 15 loans made, including 10 new loans. In its direct investment portfolio, Mercia made 14 investments, with only one new investment emerging from the managed fund portfolio during the period. Of these 14 investments, 11 (65% by value of Mercia’s direct portfolio) were supported with matched funding (in the form of a convertible loan) from the UK government’s Future Fund. Subsequently, Sensible Soccer was the 12th member of Mercia’s direct portfolio to receive matched funding from the Future Fund as part of a £3m funding round announced in February 2021.

‘Complete Connected Capital’

Mercia manages a network of funds, with a variety of mandates, targeting businesses of different sizes and stage of maturity across multiple regions. These funds attract different types of investors, offering commercial returns commensurate with their mandate and their level of risk. Through the cycle, management targets a 15% internal rate of return (IRR) across Mercia’s underlying equity funds. This level of return recognises that Mercia needs to deliver market-beating returns to remain an attractive proposition for future institutional fund allocations, thereby allowing the group to continue to scale its business.

We set out below a summary of Mercia’s principal managed funds.

Exhibit 8: Mercia’s principal managed funds

Fund name

Purposes

Northern Powerhouse Investment Fund (NPIF) - Equity

Early- or late-stage equity funding from £0.1–2.0m

Northern Powerhouse Investment Fund (NPIF) - Debt

Business loans from £0.1–0.75m

Northern VCTs (1, 2 and 3)

Series A venture finance from £2.0–5.0m

Mercia EIS Funds

Early-stage technology fund providing £0.05–2.0m

The North West Fund 4 Venture Capital

Start-up equity funding from £0.05–2.0m

The North West Fund 4 Mezzanine

Finance from £0.75–2.0m to support extension plans

Rising Stars Growth Fund

Funding for early-stage high-growth technology companies

Finance Yorkshire Seedcorn Finance

Funding from £0.05–0.78m for innovative or technology-based Yorkshire and Humberside businesses

Finance Yorkshire Business Loans

Loans from £0.15–0.25m for Yorkshire and Humberside businesses

Mercia fund 1

From £0.1–0.5m for university spinouts in the West Midlands.

Midlands Engine Investment Fund (MEIF) – Mercia Proof-of-Concept

Early-stage equity finance up to £0.75m

North East Venture Fund

Any stage venture funding up to £1.0m

Mercia SME loans

Loans between £0.1–1.0m for established and growing UK SMEs

EV Growth II

Equity and equity-related funding of up to £10.0m for growing businesses

Fund name

Northern Powerhouse Investment Fund (NPIF) - Equity

Northern Powerhouse Investment Fund (NPIF) - Debt

Northern VCTs (1, 2 and 3)

Mercia EIS Funds

The North West Fund 4 Venture Capital

The North West Fund 4 Mezzanine

Rising Stars Growth Fund

Finance Yorkshire Seedcorn Finance

Finance Yorkshire Business Loans

Mercia fund 1

Midlands Engine Investment Fund (MEIF) – Mercia Proof-of-Concept

North East Venture Fund

Mercia SME loans

EV Growth II

Purposes

Early- or late-stage equity funding from £0.1–2.0m

Business loans from £0.1–0.75m

Series A venture finance from £2.0–5.0m

Early-stage technology fund providing £0.05–2.0m

Start-up equity funding from £0.05–2.0m

Finance from £0.75–2.0m to support extension plans

Funding for early-stage high-growth technology companies

Funding from £0.05–0.78m for innovative or technology-based Yorkshire and Humberside businesses

Loans from £0.15–0.25m for Yorkshire and Humberside businesses

From £0.1–0.5m for university spinouts in the West Midlands.

Early-stage equity finance up to £0.75m

Any stage venture funding up to £1.0m

Loans between £0.1–1.0m for established and growing UK SMEs

Equity and equity-related funding of up to £10.0m for growing businesses

Source: Mercia Asset Management

ESG: Making a difference

Management is committed to evolving its responsible investment agenda, guided by the UN’s Principles for Responsible Investment, recognising that environmental, social and governance (ESG) awareness is associated with better business performance. Mercia’s history of making a positive impact in the regions (both in terms of investment and employment) reflects its core corporate values and its motivation to enhance financial returns.

Environmental management is high on Mercia’s agenda. Mercia considers both the environmental impact of its own activities and those of its investment portfolio. As a group, Mercia has undertaken a digital transformation to improve efficiencies and lessen travel, paper consumption and energy costs. In addition, the group’s investment in, for example, clean technology has led to portfolio investments including Faradion, which is developing a sodium-ion battery technology resulting in cheaper, cleaner energy, and Aceleron, which is developing a lithium battery with a longer lifetime and turning waste battery components into second-hand batteries.

Social awareness drives Mercia’s culture and is a factor in both recruitment and investment. The group has a diverse team (40% of the team is female and nearly 30% of the investment team) and is proud of its regional presence, having created 426 regional jobs in FY20 alone.

As an AIM-listed business, good governance is critical to Mercia. The group is diligent in both internal governance and for its investee companies, where it actively ensures good stewardship. Mercia’s procedures incorporate anti-bribery and corruption policies for all employees. The group also requires its portfolio companies to have policies in place around equal opportunities, health and safety, and a range of other regulatory matters.

Mercia’s direct portfolio

The value of Mercia’s direct investment portfolio at H121 period-end rose to £101.6m, an increase of 16.2% over FY20 (£87.5m), with Mercia investing £10.9m (net) into 14 portfolio companies, together with net fair value gains during the period of £6.7m (H120: zero). Mercia delivered a profitable exit during the period (Native Antigen Company: £1.7m gain, 8x return, 65% IRR) and another after the period end (Clear Review: £1.0m in cash, 2x return, 72% IRR).

Mercia’s H121 performance highlights the resilience of the business, with the group benefiting from its long-term contracted fund management fees, diversified portfolios and good liquidity. Investors also favoured sectors seen to benefit from lockdown where Mercia is active, such as software, digital entertainment, medtech, digital healthcare, diagnostics and biotech.

15 of Mercia’s top 20 holdings are funded through FY21 and beyond

In response to COVID-19, management took proactive steps to ensure that Mercia’s portfolio companies were well supported over the pandemic, with 75% of the top 20 portfolio companies funded through to FY22. Financial support was also forthcoming from the UK government, with 11 of Mercia’s top 20 portfolio companies (c 65% by value) benefiting from Future Fund support. In total, as stated above, Mercia invested £10.9m (net) into its balance sheet portfolio in H121 (H120: £11.1m), with an additional £11.5m committed by the Future Fund and £10.5m from other investors, including £3.6m from Mercia-managed funds.

In line with previous reporting periods, Mercia’s top 20 direct investments (Exhibit 9) represented 98.6% of total portfolio value at 30 September 2020, with the top 10 representing over 80% of total portfolio value. Mercia weights its efforts accordingly.

Mercia’s top 10 investments

The value of Mercia’s top 10 holdings rose by 23% over the six months to 30 September 2020, by 6% over the 12 months since 30 September 2019 and by 51% since 31 March 2019.

Of the top 10 portfolio companies within the direct investment portfolio, nDreams (a virtual reality game developer) saw a small rise in valuation (£0.6m) after the release of its VR game Phantom: Covert Ops; OXGENE (gene therapy) rose 29% (£3.4m), driven by continuing strong revenue growth, the launch of a new product and a funding round (subsequently exited in H221); Intechnica (SaaS technical services, £1.6m) and Voxpopme (video analytics, £1m) both saw strong revenue growth; and Intelligent Positioning (SEO platform) was the only business in the direct investment portfolio to see a reduced valuation of c 5% (a drop of £0.2m) due to high churn, which has since stabilised.

The valuations of the other five businesses in the top 10 holdings were largely unchanged, although Warwick Acoustics completed a syndicated funding round shortly after period end (see below) and, as has been discussed previously, Mercia achieved profitable exits from of the Native Antigen Company (£1.7m gain) during H121 and Clear Review (£0.5m gain, see below) post period end.

Further details on Mercia’s top 10 direct holdings can be found in the Appendix.

Exhibit 9: Direct investment portfolio (£’000s)

Holding

Net value
1/4/20

Net cash invested H121

Realisations

Fair value change
H121

Net value
30/9/20

% held at
30/9/20

Holding as % of total portfolio

Cumulative % of total portfolio

1

nDreams

16,120

1,000

-

606

17,726

36.4

17

17

2

Oxford Genetics (OXGENE)*

11,743

1,000

-

3,351

16,094

30.2

16

33

3

Intechnica

7,177

1,250

-

1,568

9,995

27.5

10

43

4

Medherant

6,705

1,400

-

-

8,105

30.1

8

51

5

Voxpopme

6,030

-

-

1,012

7,042

17.1

7

58

6

Impression Technologies

4,294

1,750

-

-

6,044

25.9

6

64

7

Ton UK (Intelligent Positioning)

4,354

750

-

(203)

4,901

29.9

5

69

8

Faradion

4,025

500

-

(2)

4,523

15.6

4

73

9

Warwick Acoustics

3,656

500

-

-

4,156

48.3

4

77

10

Locate Bio

2,250

750

-

6

3,006

16.7

3

80

11

VirtTrade (Avid Games)

2,200

615

-

(3)

2,812

20.3

3

83

12

Soccer Manager

2,534

-

-

-

2,534

34.8

2

86

13

Edge Case Games

2,300

-

-

-

2,300

21.2

2

88

14

W2 Global Data Solutions

2,000

300

-

-

2,300

16.3

2

90

15

Eyoto Group

1,752

500

-

-

2,252

15.7

2

92

16

PsiOxus Therapeutics

2,193

-

-

(4)

2,189

1.4

2

94

17

sureCore

2,167

-

-

-

2,167

22.0

2

97

18

Clear Review*

500

-

-

530

1,030

4.0

1

98

19

Concepta

475

200

-

-

675

14.6

1

98

20

MIP Diagnostics

-

300

-

2

302

3.3

0

99

The Native Antigen Company**

3,493

-

(3,493)

-

-

-

-

99

Other direct investments

1,503

95

-

(133)

1,465

N/A

1

100

Total

87,471

10,910

(3,493)

6,730

101,618

 

100

 

Source: Mercia. Note: *Exited after period end. **Exited during H121.

Sector focus

The group focuses on some of the highest growth sectors in the UK, leveraging deep expertise across a number of areas:

Software and the internet: artificial intelligence, cybersecurity, SaaS, analytical tools, adtech

Digital and digital entertainment: VR, augmented reality, gaming/content, serious games

Electronics, materials, manufacturing/engineering: energy, communications, high value electronics, manufacturing applications

Life sciences and biosciences: diagnostics, digital health, medical devices, synthetic biology

Impact of COVID-19

The COVID-19 pandemic has accelerated structural changes across industry in general, but especially across the sectors in which Mercia invests. Areas of particular challenge included deal origination, employee engagement and stakeholder communications, but the group adjusted its approach effectively with minimal disruption. In its key sectors of life sciences, software and digital entertainment, representing c 82% of its direct investment portfolio by value, the group saw a marked acceleration in growth trends, positioning the group well for the future. Other sectors, principally electronics, materials, manufacturing/ engineering, have been more affected by COVID-19, resulting in the value of investments held at impaired cost (Exhibit 11) increasing from 6% at end H120, to 19% in H121.

Life sciences portfolio

Life sciences is one of Mercia’s areas of focus and investment expertise. Seven of Mercia’s top 20 holdings at 30 September 2020 were in life sciences, valued at £33m in aggregate or 32% of total portfolio value, with another c 40 earlier-stage life sciences investments across its third-party managed funds. COVID-19 accelerated the opportunity for a new generation of novel and recombinant vaccines, which require diagnostics and bio-manufacturing support to scale supply. These are areas where Mercia has invested. The sale of Oxgene in March 2021 (51% IRR) highlights the growing strength of Mercia’s life sciences portfolio.

Software and ecommerce portfolio

At 30 September 2020, software and ecommerce investments accounted for five out of the group's top 20 direct investments, valued at £25m in aggregate and representing c 25% of the total direct portfolio by value. Within its managed funds, software and ecommerce investments accounted for c 30% by number of total investments. The sale of Clear Review in October 2020 (72% IRR as stated below) and the growing strength of software and ecommerce portfolio are indicators of Mercia's ability to identify and nurture early-stage businesses to create shareholder value.

Growing track record of realisations and exits

Mercia has a growing track record of successful exits, having returned approximately £51m to date from seven full cash exits since its 2014 IPO, three of which were from its software and ecommerce portfolio. Mercia’s latest profitable exits have included Oxgene (March 2021, £14.6m gain, 5x return, 51% IRR), Native Antigen Company (July 2020, £1.7m gain, 8x return, 65% IRR) and Clear Review (October 2020, £1.0m in cash, 2x return, 72% IRR).

Valuation methodology: DCF versus last funding round

Mercia follows the International Private Equity and Venture Capital Valuation (IPEV) Guidelines, as well as the IPEV Board’s Special Valuation Guidance issued in response to COVID-19, which together set out best practice where private investments are reported at ‘fair value’.

Exhibit 10: H120 direct portfolio valuation methodology (% by value)

Exhibit 11: H121 direct portfolio valuation methodology (% by value)

Source: Mercia Asset Management

Source: Mercia Asset Management

Exhibit 10: H120 direct portfolio valuation methodology (% by value)

Source: Mercia Asset Management

Exhibit 11: H121 direct portfolio valuation methodology (% by value)

Source: Mercia Asset Management

Where a funding round has been completed recently, management uses it as the carrying value. However, the updated guidelines necessitate valuations to be updated where there has been a material change in fair value since the last funding round, with Mercia tending to use a DCF valuation approach in these circumstances. Given the early stage of its investments, a valuation based on peer multiples is not always appropriate. Since March 2020, Mercia has updated its company valuations using revised forecasts to reflect the anticipated impact of COVID-19. Updating the valuation from the basis of historical funding rounds arguably offers a better view of fair value, but still leaves group NAV as a significantly trailing indicator for a high-growth portfolio.

As of H121, 42% of Mercia’s direct portfolio were valued on the basis of recent funding rounds, with an additional 2% held at investment cost, while 36% are valued based on a DCF and 1% are based on peer multiples. 19% of holdings had been impaired, principally due to COVID-19.

Financials

H121: Reaping the benefits of increasing scale

Mercia reported a 9% rise in AUM to £872m in H121 (FY20: £798m), a resilient performance over the first six months of the COVID-19 pandemic. Third-party FUM rose by 10% to £722m in H121 (FY20: £658m), with year-on-year growth in AUM and FUM of 78% and 100%, respectively, reflecting the contribution of the Northern VCT fund management business acquired in December 2019.

With a proportion of Mercia’s revenues directly linked to asset prices, at the start of the lockdown in March 2020 management anticipated some contraction of its revenue base. However, this did not occur as the group performed better than management initially expected during the COVID-19 pandemic. The portfolio’s strong performance was achieved without any government-backed financial support, furloughing or redundancies.

H121 group revenues increased by 51% y-o-y to £8.4m (H120: £5.5m), reflecting a full six-month contribution from the Northern VCT fund management business acquired in December 2019, of which 87% is annual recurring revenue from fund management and monitoring fees. Revenues comprised £6.2m from fund management fees, £0.7m from initial management fees and £1.4m from portfolio director fees, as well as £0.1m in other consultancy revenues. Despite the large increase in revenues, staff and administrative expenses increased by a lower 16.5% to £7.3m (H120: £6.3m), despite an increase in headcount from 93 staff at FY20 to 100 at H121. Cost growth was restrained as the pandemic slowed recruitment and through savings in travel-related costs.

Exhibit 12: Sustained revenue growth

Exhibit 13: Fee income, AUM and FUM

Source: Mercia. Note: *H121 figure is annualised.

Source: Mercia. Note: *H121 figure is annualised.

Exhibit 12: Sustained revenue growth

Source: Mercia. Note: *H121 figure is annualised.

Exhibit 13: Fee income, AUM and FUM

Source: Mercia. Note: *H121 figure is annualised.

Adjusted operating profit (before fair value adjustments, realisation gains, amortisation and share-based payment charges) was £1.1m (H120: £0.6m loss). Together with the sale of The Native Antigen Company (£1.7m realised gain, H120: zero) and net fair value gains (£6.7m, H120: £3.2m), this led to PAT of £8.2m (H120: £2.1m) and EPS of 1.87p (H120: 0.69p).

NAV: 6% rise to £149.9m over the six-month period

H121 reported net assets were £149.9m (FY20: £141.5m), with unrestricted cash of £24.9m (FY20: £30.2m) and NAV per share growing by 6% over the period to 34.1p from 32.1p. Hard NAV (portfolio fair value plus net cash) rose by 7.5% to £126.5m for H121 (28.7p per share), from £117.7m (26.7p per share) for FY20.

Implementation of a progressive dividend policy

As a profitable business with £2.0m of operating cash flow, management implemented a progressive dividend policy in H121, declaring a maiden interim dividend of 0.1p per share.

H221: March trading update

In a trading update released on 1 March 2021, Mercia confirmed it traded robustly in H221, with continuing revenue growth and lower than anticipated staff-related costs, in part due to lockdown restrictions. As a result, management expects FY21 adjusted operating profit to be materially ahead of current consensus forecasts. Together with the £30.7m (7.0p per share), cash proceeds from the sale of Oxgene (a gain of £14.6m, 3.3p per share, over the direct investment holding value as of 30 September 2020), management expects FY21 PAT to be above £23m, with unrestricted cash of c £49m as at 31 March 2021.

Valuation: The hybrid approach, FM + NAV

As an investment company with an illiquid portfolio of high-growth, early-stage private businesses, Mercia has historically been valued based on its balance sheet, the growth in fair value of its investment portfolio and the resultant growth in NAV per share. Growth in portfolio fair value is irregular and the timing of realisations and exits can be hard to predict. Given this variability, there is no easily defined revenue and profitability trend, so the business is typically valued at a premium or discount to NAV rather than on a profit multiple.

Mercia provides formal NAV valuations twice a year, representing a trailing indicator to the ‘true’ value of the portfolio. This gap to ‘true’ value is widened further by a substantial proportion of assets being held at the value of the last funding round, in itself a historical yardstick.

Fund management: Material to overall valuation

As Mercia has successfully built its third-party fee-earning funds business, charging on average c 2% of AUM (Exhibit 13), it has now reached the stage where it generates positive underlying profitability from fee income, allowing investors to attribute additional value to this earnings stream. Management has signalled the sustainability of this income stream (with 87% of fee income recurring in H121), by declaring a maiden interim dividend as part of the H121 results.

As FUM continues to grow as a proportion of the group’s business, generating incrementally larger revenues, we believe an NAV-based valuation alone no longer adequately reflects the additional value of the fund management business within Mercia.

We continue to estimate the value of Mercia’s embedded fee-earning funds business at 3% of FUM (which we consider a conservative valuation considering Mercia’s attractive blended fee margins of 2%+) in addition to the NAV-based valuation of its direct investment business. Below we also provide a sensitivity analysis reflecting a higher valuation for the funds business at 5% of FUM (Exhibit 14).

Exhibit 14: Valuation sensitivities

Base case

High case

H121 FUM

£722m

£722m

Valuation of FM arm (as % of FUM)

3%

5%

Implied value of FM arm

£21.7m

£36.1m

Value per share

4.9p

8.2p

H121 NAV per share

34.1p

34.1p

Implied hybrid valuation per share

39.0p

42.3p

Current share price

27.0p

27.0p

Current share price / Hybrid valuation

69%

64%

Discount to hybrid valuation

31%

36%

Source: Edison Investment Research

With last reported FUM of £722m, this implies a valuation for the funds business of £22–36m, or c 5–8p per share. With the addition of the H121 NAV of 34.1p per share, this implies a hybrid valuation of c 39–42p per share. Based on our hybrid approach, the current share price trades at a 31–36% discount to this valuation.

Market waking up to private technology investment

Valuations of many of Mercia’s peers have risen over the last 12 months, with portfolios based around technology and life sciences investments benefiting from rising valuations following the initial impact of COVID-19.

We believe investors prefer direct investment companies with a well-diversified, high-growth portfolio, a history of value realisation and exits, a consistent long-term track record and strong corporate governance. A premium is often applied where the company owns an income-generating asset management arm (eg 3i, Gresham House, ICG, Mercia), whereas for many other direct investors, either the management vehicle is held separately from the investment vehicle (eg HgCapital, Oakley) or fee generation has yet to offset costs (eg Draper Esprit, IP Group).

Currently, Mercia trades at a 21% discount to the H121 NAV (34.1p), while a number of its immediate peers trade at a premium to NAV, reflecting consistent, strong NAV growth and the latent value of their portfolios. However, as we have set out above, we believe Mercia’s hybrid valuation, including the fund management business, lies between 39–42p per share, implying a discount of closer to 31–36% to this value.

Given the group’s growing profitability following the acquisition of the NVM VCT fund management business in H220, combined with a progressive dividend policy declared in H121, the performance of its portfolio and its underlying operating model, we believe Mercia remains undervalued at these levels and investors could further reassess the group’s future prospects.

Exhibit 15: Peer group analysis

 

Price

Currency

Market cap (£m)

NAV (£m) (last reported)

Net cash / (debt) (m)

NAV per share (p)

NAV premium/ discount

Mercia Asset Management

27.0

GBp

119

150

25

34.1

0.79

 

 

 

 

 

 

 

 

Specialist asset managers

 

 

 

 

 

 

 

Gresham House

812.5

GBp

262

97

22

320.7

2.71

Intermediate Capital Group

1,731.0

GBp

5,029

1,394

603

488.0

3.61

 Mean

 

 

 

 

 

3.16

Direct investors

 

 

 

 

 

 

 

3i

1,107.0

GBp

10,773

9,109

(559)

936.0

1.21

Augmentum FinTech

143.5

GBp

202

167

36

118.9

1.22

Draper Esprit

848.0

GBp

1,179

715

62

599.6

1.58

HgCapital

332.5

GBp

1,383

1,220

220

299.5

1.09

IP Group

115.6

GBp

1,228

1,156

171

108.8

1.07

Oakley Capital

290.5

GBp

528

728

223

403.0

0.70

TMT Investments

6.80

USD

198

146

33

353.6

1.31

Mean

1.19

Median

1.18

Source: Refinitiv. Note: Priced at 1 March 2021.

Risk factors

A summary of the principal risk factors relating to Mercia is set out below:

Early-stage business risk: the early-stage nature of Mercia’s portfolio businesses carries a high degree of risk, with Mercia also exposed to risks related to non-controlling investments. Not all of the fund investments will achieve their hoped-for potential.

Portfolio concentration: Mercia holds a relatively concentrated portfolio of investments. Realisations and investor returns may be dominated by a small number of investee companies.

Reputation and deal flow: Mercia is reliant on the reputation of its senior investment team, its strategic contacts and ecosystem to source appropriate deal flow and deliver the quality of investment opportunity to drive attractive investment returns.

Sector risk: the company is subject to risks associated with developments in the life sciences sector (33% by value), software and services (25% by value) and digital entertainment (25% by value) and engineering and materials (17% by value), including the cyclicality of sector valuations, as well as other unforeseen future developments.

Valuation risk: Mercia’s investments are difficult to value accurately, with valuation methodologies subject to significant subjectivity. There can be no assurance that the reported values of the company’s investments will be realised.

Liquidity events: exits are uncertain and difficult to predict and proceeds from trade sales/IPOs are likely to vary substantially from year to year, with the potential for liquidity events to slow if valuations fall.

COVID-19: although Mercia’s portfolio has weathered the impact of COVID-19 to date, a prolonged pandemic may have a further negative effect, particularly on business development, recruitment and investee company cash flows.

Exhibit 16: Financial summary

£'000

2015

2016

2017

2018

2019

2020

Year end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

Revenue

 

 

508

1,755

6,660

10,197

10,675

12,747

Cost of Sales

(10)

(79)

(92)

0

0

0

Gross Profit

498

1,676

6,568

10,197

10,675

12,747

Operating costs

(1,495)

(4,011)

(9,051)

(10,633)

(12,115)

(12,661)

Fair value changes

3,934

896

4,268

2,823

3,916

(15,844)

Realised gains

0

0

839

871

0

0

Normalised operating profit

 

 

2,937

(1,439)

2,624

3,258

2,476

(15,758)

Amortisation of acquired intangibles

0

(17)

(301)

(301)

(301)

(852)

Exceptionals

(1,018)

(372)

(1,125)

(1,125)

0

(695)

Share-based payments

(44)

(230)

(395)

(497)

(171)

(528)

Reported operating profit

1,875

(2,058)

803

1,335

2,004

(17,833)

Net Interest

93

361

186

274

562

220

Joint ventures & associates (post tax)

0

0

0

0

0

0

Profit Before Tax (norm)

 

 

3,030

(1,078)

2,810

3,532

3,038

(15,538)

Profit Before Tax (reported)

 

 

1,968

(1,697)

989

1,609

2,566

(17,613)

Reported tax

0

0

54

54

54

159

Profit After Tax (norm)

3,030

(1,078)

2,810

3,532

3,038

(15,538)

Profit After Tax (reported)

1,968

(1,697)

1,043

1,663

2,620

(17,454)

Minority interests

0

0

0

0

0

0

Discontinued operations

0

0

0

0

0

0

Net income (normalised)

3,030

(1,078)

2,810

3,532

3,038

(15,538)

Net income (reported)

1,968

(1,697)

1,043

1,663

2,620

(17,454)

Basic average number of shares outstanding (m)

212

212

224

302

303

341

EPS – basic normalised (p)

 

 

1.43

(0.51)

1.26

1.17

1.00

(4.55)

EPS – diluted normalised (p)

 

 

1.43

(0.51)

1.21

1.13

1.00

(4.55)

EPS – basic reported (p)

 

 

0.93

(0.80)

0.47

0.55

0.86

(5.11)

Dividend (p)

0.00

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

(29.7)

245.5

279.5

53.1

4.7

19.4

Gross Margin (%)

98.0

95.5

98.6

100.0

100.0

100.0

Normalised Operating Margin

578.1

-82.0

39.4

32.0

23.2

-123.6

BALANCE SHEET

Fixed Assets

 

 

27,121

50,103

63,693

77,428

98,724

124,899

Intangible Assets

2,455

11,815

11,514

11,213

10,912

36,705

Tangible Assets

49

145

151

145

153

125

Right of use assets

0

0

0

0

0

598

Investments & other

24,617

38,143

52,028

66,070

87,659

87,471

Current Assets

 

 

54,349

31,730

64,576

53,965

31,180

31,951

Stocks

0

0

0

0

0

0

Debtors

716

798

747

1,057

782

1,298

Cash & cash equivalents

23,633

20,932

28,829

42,908

25,210

24,438

Short term liquidity investments

30,000

10,000

35,000

10,000

5,188

6,215

Current Liabilities

 

 

(631)

(1,521)

(6,698)

(7,760)

(3,730)

(6,659)

Creditors

(631)

(1,521)

(6,698)

(7,760)

(3,730)

(4,805)

Tax and social security

0

0

0

0

0

0

Lease liabilities

0

0

0

0

0

(118)

Short term borrowings

0

0

0

0

0

0

Other (incl deferred consideration)

0

0

0

0

0

(1,736)

Long Term Liabilities

 

 

0

(271)

(217)

(163)

(109)

(8,731)

Long term borrowings

0

0

0

0

0

0

Lease liabilities

0

0

0

0

0

(473)

Other long-term liabilities

0

(271)

(217)

(163)

(109)

(8,258)

Net Assets

 

 

80,839

80,041

121,354

123,470

126,065

141,460

Minority interests

0

0

0

0

0

0

Shareholders' equity

 

 

80,839

80,041

121,354

123,470

126,065

141,460

CASH FLOW

Op Cash Flow before WC and tax

2,943

(1,406)

2,700

3,339

2,560

(15,685)

Working capital

(20)

650

5,250

(87)

(3,724)

533

Exceptional & other

(4,952)

(1,268)

(5,107)

(3,694)

(3,916)

15,149

Depreciation of right-of-use assets

0

0

0

0

0

139

Tax

0

0

0

0

0

0

Net operating cash flow

 

 

(2,029)

(2,024)

2,843

(442)

(5,080)

136

Capex

(27)

(113)

(82)

(75)

(92)

(45)

Acquisitions/disposals

(11,563)

(20,939)

(8,779)

(10,664)

(17,673)

(28,056)

Net interest

22

397

165

260

531

245

Equity financing

67,230

(22)

38,750

0

(196)

30,000

Dividends

0

0

0

0

0

0

Other

(30,000)

20,000

(25,000)

25,000

4,812

(3,052)

Net Cash Flow

23,633

(2,701)

7,897

14,079

(17,698)

(772)

Opening net debt/(cash)

 

 

(39)

(23,633)

(20,932)

(28,829)

(42,908)

(25,210)

FX

0

0

0

0

0

0

Other non-cash movements

(39)

0

0

0

0

0

Closing net debt/(cash)

 

 

(23,633)

(20,932)

(28,829)

(42,908)

(25,210)

(24,438)

Closing net debt/ (cash) inc short-term liquidity investments (not EIS)

(53,633)

(30,932)

(59,601)

(49,435)

(29,769)

(30,186)

Source: Mercia Asset Management accounts

Contact details

H121 revenue by geography

Mercia Asset Management
Forward House
17 High Street
Henley-in-Arden
B95 5AA. UK
0330 223 1430
www.mercia.co.uk

Contact details

Mercia Asset Management
Forward House
17 High Street
Henley-in-Arden
B95 5AA. UK
0330 223 1430
www.mercia.co.uk

H121 revenue by geography

Management team

CEO: Dr Mark Payton

CFO: Martin Glanfield

Mark has extensive private investment and scale-up experience. Since co-founding Mercia he has led the sales of Hybrid Systems (to Myotec) to create PsiOxus Therapeutics Ltd, Warwick Effect Polymers Ltd (to Polytherics Ltd) to create Abzena plc and led the founding investment in Allinea Software Ltd (sold to ARM).Prior to Mercia, Mark played a leading role within Oxford University Innovation (OUI, the technology transfer operation of the University of Oxford), spinning out BioAnalab (sold to Millipore), Oxford Immunotec (listed on NASDAQ), Oxitec (sold to Intrexon) and Natural Motion (sold to Zynga). Following his time at OUI Mark was the vice president corporate development at Oxxon Therapeutics Inc, prior to its sale to Oxford BioMedica. He gained his PhD jointly between the University of Oxford and the University of London (King’s College). Mark also has an MBA from the University of Warwick, is a Sainsbury Management Fellow for Life Sciences and was awarded the 2015 EY Entrepreneur of the Year (regional and national).

Martin has significant public markets and business experience. He is a KPMG qualified chartered accountant with more than 20 years’ experience as chief financial officer of listed, private equity-backed and privately owned technology-led businesses. Martin joined Forward Group PLC in 1993 and was group financial director from 1995 until its sale for £129m in 1997. In 1999, as deputy chief executive of Symonds plc, Martin led the public to private of this main market listed technology group, backed by NatWest Equity Partners. The group was successfully restructured and sold within 12 months to a NASDAQ listed US electronics group. He was chief executive of the private equity business Forward Group plc from 2003 to 2005 and since then has been group finance and IT director of the large international food processing group Boparan Holdings Ltd and a private equity backed building services business. Martin has an honours degree in business from Aston University.

CIO: Julian Viggars

Non-exec Chair: Ian Metcalfe

Julian joined Mercia through the 2016 acquisition of Enterprise Ventures, where he was head of technology investments. He has been Mercia’s CIO since April 2018 and has over 20 years of VC experience, including the successful listings of companies such as Blue Prism Group plc and OptiBiotix Health. Julian leads the equity investment team as well as managing the pipeline of Mercia’s direct investments. Alongside his wide investment experience, Julian played a leading role in securing the managed funds contracts awarded by the British Business Bank and North East Fund Ltd. Julian has a geology with chemistry degree from the University of Southampton and qualified as a chartered accountant with accountants Smith & Williamson.

Ian has over 25 years’ experience advising businesses on their growth activities, as well as deep corporate governance experience. He was appointed senior independent director in January 2017, before becoming non-executive chair in July 2019. Ian is a qualified solicitor who retired as managing partner of international law firm Wragge & Co in 2014, after 14 years as a corporate partner, acting for public and private companies and private equity houses on a wide range of transactions. Ian is currently a director and chair of Commonwealth Games England, a director of the Board of the Organising Committee of the Birmingham 2022 Commonwealth Games and the Host city representative on the Commonwealth Games Federation Executive Board. He is also a non-executive director of the global waste management group TRRG Holdings Ltd and a non-executive director of the AIM listed Arena Events Group plc. Ian has an MA in law from Cambridge University.

Management team

CEO: Dr Mark Payton

Mark has extensive private investment and scale-up experience. Since co-founding Mercia he has led the sales of Hybrid Systems (to Myotec) to create PsiOxus Therapeutics Ltd, Warwick Effect Polymers Ltd (to Polytherics Ltd) to create Abzena plc and led the founding investment in Allinea Software Ltd (sold to ARM).Prior to Mercia, Mark played a leading role within Oxford University Innovation (OUI, the technology transfer operation of the University of Oxford), spinning out BioAnalab (sold to Millipore), Oxford Immunotec (listed on NASDAQ), Oxitec (sold to Intrexon) and Natural Motion (sold to Zynga). Following his time at OUI Mark was the vice president corporate development at Oxxon Therapeutics Inc, prior to its sale to Oxford BioMedica. He gained his PhD jointly between the University of Oxford and the University of London (King’s College). Mark also has an MBA from the University of Warwick, is a Sainsbury Management Fellow for Life Sciences and was awarded the 2015 EY Entrepreneur of the Year (regional and national).

CFO: Martin Glanfield

Martin has significant public markets and business experience. He is a KPMG qualified chartered accountant with more than 20 years’ experience as chief financial officer of listed, private equity-backed and privately owned technology-led businesses. Martin joined Forward Group PLC in 1993 and was group financial director from 1995 until its sale for £129m in 1997. In 1999, as deputy chief executive of Symonds plc, Martin led the public to private of this main market listed technology group, backed by NatWest Equity Partners. The group was successfully restructured and sold within 12 months to a NASDAQ listed US electronics group. He was chief executive of the private equity business Forward Group plc from 2003 to 2005 and since then has been group finance and IT director of the large international food processing group Boparan Holdings Ltd and a private equity backed building services business. Martin has an honours degree in business from Aston University.

CIO: Julian Viggars

Julian joined Mercia through the 2016 acquisition of Enterprise Ventures, where he was head of technology investments. He has been Mercia’s CIO since April 2018 and has over 20 years of VC experience, including the successful listings of companies such as Blue Prism Group plc and OptiBiotix Health. Julian leads the equity investment team as well as managing the pipeline of Mercia’s direct investments. Alongside his wide investment experience, Julian played a leading role in securing the managed funds contracts awarded by the British Business Bank and North East Fund Ltd. Julian has a geology with chemistry degree from the University of Southampton and qualified as a chartered accountant with accountants Smith & Williamson.

Non-exec Chair: Ian Metcalfe

Ian has over 25 years’ experience advising businesses on their growth activities, as well as deep corporate governance experience. He was appointed senior independent director in January 2017, before becoming non-executive chair in July 2019. Ian is a qualified solicitor who retired as managing partner of international law firm Wragge & Co in 2014, after 14 years as a corporate partner, acting for public and private companies and private equity houses on a wide range of transactions. Ian is currently a director and chair of Commonwealth Games England, a director of the Board of the Organising Committee of the Birmingham 2022 Commonwealth Games and the Host city representative on the Commonwealth Games Federation Executive Board. He is also a non-executive director of the global waste management group TRRG Holdings Ltd and a non-executive director of the AIM listed Arena Events Group plc. Ian has an MA in law from Cambridge University.

Principal shareholders

(%)

Invesco

14.3

Forward Innovation Fund

8.9

Librae Holdings

6.4

Forward Nominees

5.1

Ruffer

5.9

Ninety One

4.0

NVM Private Equity LLP UK

3.8

Chelverton Asset Management

3.4

The Hargreaves No 11 Settlement

3.2

NFU

3.0


Appendix

Exhibit 17: Mercia’s top 10 holdings (one to five)

Source: Mercia Asset Management

Exhibit 18: Mercia’s top 10 holdings (six to 10)

Source: Mercia Asset Management

General disclaimer and copyright

This report has been commissioned by Mercia Asset Management and prepared and issued by Edison, in consideration of a fee payable by Mercia Asset Management. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. Mercia Asset Management never take payment in stock, options or warrants for any of Mercia Asset Management’s services. The research analyst primarily responsible for the preparation of this report personally holds an equity position in the company of less than 1%.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however Mercia Asset Management do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that Mercia Asset Management provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If Mercia Asset Management’s advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Mercia Asset Management and prepared and issued by Edison, in consideration of a fee payable by Mercia Asset Management. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. Mercia Asset Management never take payment in stock, options or warrants for any of Mercia Asset Management’s services. The research analyst primarily responsible for the preparation of this report personally holds an equity position in the company of less than 1%.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however Mercia Asset Management do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that Mercia Asset Management provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If Mercia Asset Management’s advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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