Direct Investments

A point of view – Dr Mark Payton

21st October, 2021

We will prosper or falter off the back of how we deliver for our four key stakeholder groups: our shareholders, fund investors, our existing and prospective investee companies and our employees. This is why we have a robust vision statement – ‘to be the first choice for investors, investees and employees’.

As we emerge from the global pandemic, I see this unique time in history (January 2020 until today) having three discrete phases. Phase one: ‘The uncertainty’ – I recall face-to-face meetings across the UK in the first few months of 2020 with elbow bumping and foot tapping, bottles of anti-bacterial gels at the ready and a nervousness that spoke of the expectation of change. Phase two: ‘The lock down’ – at Mercia this was an immediate call to action; conversations with investors, deep dives into every portfolio company and an immediate acceleration in the engagement across our team. In parallel, we started to reap the benefits of a digitalised operation as we switched to remote working and digital deal origination, taking the opposite approach to many as we turned up our volume of new investment activity (as well as supporting the existing portfolio). Phase three: ‘The COVID tide’ – as this gradually recedes, so does that feeling that you need to take a giant sideways step every time you walk past someone in the street. Although, as the world very slowly heads toward a new normal, behaviours have yet to return to what they were pre-COVID. I believe it is this last phase that will define us as a society and as businesses, and will be the most challenging of the three phases.

Innovation and growth are inextricably linked and a business is either growing or shrinking; there is no standing still. Systems and efficiencies have been optimised during phase two, although innovation (without face-to-face contact etc.) in my opinion, has slowed. As companies start to re-engage in this new environment, I expect innovation to accelerate at a pace not seen before, with societal changes being reflected in this business growth. Many companies are committing to go beyond traditional dimensions of gender, race and ethnicity to diversify their talent pools by building teams that are far removed from those defined by education, social economic backgrounds or heritage. Diversity of thought and cognitive approaches that mirror those of the entrepreneurs creating and growing businesses seeking investment will emerge. Increasingly, asset managers are looking to create more differentiated services and products to deliver added value and improved customer experience centred around a sense of community, impact and purpose.

And why wouldn’t they? Mercia has always sought to deliver on its ambitious brand promise borne out of its core values. We are providing access to the capital and expertise that the UK’s thriving regional SMEs need for sustainable growth and, at the same time, leveraging our fund-first hybrid business model.

With Environmental, Social and Governance (“ESG”) at the heart of our operations and thanks to the seeds sown well before the pandemic, we have remained robust yet agile in our approach. We have maximised growth opportunities presented by record-breaking technology and rapid shifts of perspectives, yet still successfully navigated the uncertainties that remain across the global economy. We are proud of our achievements in the last financial. It felt like a watershed moment to share our record year-end results, driven by the successful nexus of our fund management, direct investments and ability to identify the right regional businesses as well as deliver multiple investment realisations. These results were not a one off.

This success has shaped our next stage of growth, Mercia’s Vison 20:20 – an ambitious strategy to deliver significant long-term growth for shareholders, investees and employees alike. Over the next three years we aim to grow total assets under management (“AuM”) by 20% per annum and deliver £20.0million profit before tax per annum on average. With Mercia’s investment model having now gained critical mass as synergies deliver both growth in underlying profit from our fund management operations and the returns from our proprietary investment activity, we can continue to accelerate value creation. We remain focused on the ongoing development of our digital transformation and optimising the value we derive from our extensive networks afforded by an active portfolio of over 400 companies. We continue to attract great talent, reflective of the investment communities that we serve and of course, deal activity which is a critical element – both sourcing and winning the best companies in sectors that will transform local, national and global economies.

Our new financial year continues with strong momentum. Our syndicated investment into Nottingham-based Locate Bio demonstrated the power of our Complete Connected Capital solution to accelerate growth. The speed of progress will no doubt be hastened in nDreams by the appointment of Frank Sagnier, former CEO of Codemasters, as non-executive chair. Our PE team backed UK Digital Mail’s MBO with an early rush of exits that included musicMagpie, Oddbox, Hello Soda and Mojo out of our Northern VCT portfolio, were all harbingers of the new pace or rhythm of businesses.

Speed is the new business imperative – and to gain a swift advantage, business leaders are overseeing and adapting to a seismic shift that will affect all areas of an organisation. Technology and innovation are spearheading these changes, not just in businesses like Mercia. Sectors such as Healthcare, for example, will no longer be satisfied with project rollouts that were planned over years, when during the pandemic these were achieved in a matter of weeks.

Faster businesses also tend to be smaller and more agile ones, many of which are to be found in the UK regions and many that can be described as enabling technology businesses. Although typically with modest capital needs, these businesses are no less innovative than their capital-hungry counterparts, especially when combined with existing infrastructure. Exciting times.

Mark Payton

CEO, Mercia Asset Management PLC

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