The latest reviews for Allebridge and Martin Churchill’s Tax Efficient Review have been published for Mercia‘s EIS Funds.

 Score 86/100 | Quote from Allenbridge EIS Review December 2019

The Manager distinguishes itself from others in several ways: a UK-wide geographic presence, primarily focused on the Midlands, Northern England, and Scotland; a “Complete Capital Solution”, whereby investments made by the Manager can potentially benefit from the PLC providing later-stage follow-on funding; and an online “Investor Centre” portal which provides individuals with a useful range of downloadable fund-related information and documentation”.

CTA Investment review

Score 87/100 | Quote from Tax Efficient Review issue 395 May 2020 

“Over the years, Mercia has developed a number of government-backed regional funds such as the Rising Stars Growth Fund and the Coalfields

Growth fund, which, when taken together, give Mercia a large regional presence. They also give Mercia a large amount of additional deal flow and co-investment opportunities as well. The real change for Mercia, however, was the acquisition of the Northern VCTs in late 2019. This has given Mercia a seat at the largest VCT managers table, and allows for a demonstrable route of
follow-on funding from successful companies arising out of the Mercia EIS Fund and their regional early-stage funds”.

CTA Investment review

Mercia EIS Funds:

•Mercia group has c.£300m and over £5m EIS to invest
•Diverse portfolios reduce single company risk
•Already focused on sectors which are doing well
•Valuations are becoming keener, especially in the regions
•We continue to invest in portfolio companies and some new deals
•Failures are expected within our strategy, and so are big returns
•Investing well at the bottom of the cycle can increase returns
•Fully digital EIS application process.

Find out more about Mercia EIS Funds and the investment team

Are you a resident non-domiciled investor?

Firstly, allow me to explain the term; a ‘resident non-domiciled investor’ is typically a foreign national who is working in the UK, and therefore paying tax in the UK. According to recent published statistics there are almost 80,000 people who fit this description and who collectively paid £7.5billion in UK tax during 2018/2019 (see note 1).

Using offshore capital, these individuals can now invest into Mercia’s Enterprise Investment Scheme (EIS) Fund which is then wrapped into a newly launched Business Investment Relief (BIR) product.

The result? Access to a leading venture capital fund, inside a tax-wrapper, inside ANOTHER tax-wrapper. The potential tax savings for what we believe is a highly innovative approach of this kind are shown in the example below.

Mercia’s early-stage venture capital fund aims to increase the value of investment by 250% (see note 2 ); the EIS adds 50% tax relief from income tax relief and loss relief; and now BIR can also save resident non-dom investors paying 45% when bringing capital into the UK.

In its own right, these tax reliefs rapidly compound to create a very tax-efficient product, and, if the venture capital investment is successful (which Mercia believes it can be), it can provide exceptional returns, with no capital gains tax payable.

To illustrate the concept, we have provided a worked example below:

  • London based mid-career investment banker who relocated from Europe, earning £200,000.
  • From his previous career in Europe he has £0.5m offshore which he would like to bring into the UK, but he will not do this if it is taxed at 45%.
  • He has a large listed equity portfolio that creates a £20,000 CGT (in the UK) on an annual basis.
  • Over a five-year period, he transfers the £0.5m (£100,000 per year) into the UK and invests into Mercia’s BIR-EIS scheme
  • Mercia’s BIR scheme is structured so that capital is deployed within 45 days of the money coming into the UK
  • By doing this, the investor has the following tax benefits, totaling £525,000 against a cost of £0.5m
  • Avoids paying £225,000 income tax to on-shore capital
    • £150,000 income tax relief
    • Approx. £50,000 loss relief
    • Deferral of £100,000 CGT

On the investment, when it has been fully exited, excluding the above tax reliefs, we would expect to return £1.3million.

Within a decade, using this investment schedule and reinvesting the proceeds, we would expect the investor to not pay tax (or substantially reduce the amount paid), and create a long-term, high-growth investment portfolio which is not liable for CGT.

Would you like to know more?

Why not join our BIR focused webinar on 3 March 2020 book your place by emailing

Alternatively, if you would like to talk to one of the Mercia team about this newly positioned EIS and BIR product, then a member of the team would be delighted to explain the potential benefits. Please get in touch with us today to start the conversation – #seriousaboutmakingyoumoney

Paul Mattick – Director – Mercia EIS Funds, Email –
Call +44 (0) 330 223 1430

Mercia Fund Management Limited is the manager of the Mercia EIS Fund and is authorised and regulated by the FCA.  Mercia Fund Management is a member of the British Venture Capital Association. Registered in England & Wales: 06973399. Registered address: Forward House, 17 High Street, Henley-In-Arden, Warwickshire B95 5AA.

Note 1 –  (*

Note 2 – An investment return of 250% is not guaranteed.  As of December 2019, EIS fund older than 5th April 2014, have a net asset value of 282% of cost (mix of realized and unrealized). Past performance does not guarantee future returns


The Enterprise Investment Scheme (EIS) industry is a fast-moving one.

As fund managers, if you fail to keep the pace and can no longer demonstrate a decent track record, then there is no place to hide.

And rightly so; for when it comes to investing other people’s capital, investing it in the right way is just as important as if you were investing your own funds.

It is therefore with great pride that at a time when independent reviewers are being far more critical of the EIS industry, which has been particularly challenging for the sector, we can share some excellent news with our networks.

Following a recent review by Allenbridge Mercia’s EIS Funds score, which was already above average at 85, has been increased to 86 – now one of the highest scores for any EIS fund manager.

The report summarised Mercia’s EIS Funds as follows –

The Manager’s increased growth in assets and balance sheet, its considerable advantages as an entrenched incumbent in the spin-out space with line of sight pipeline, and co-investment with other Mercia funds, as well as its admirable track record of returns to investors, makes Mercia a strong consideration for investors with existing exposure to tax advantaged investments wanting exposure to higher-risk, early-stage technology-focused EIS opportunities in their portfolio.”

Dr Paul Mattick, Head of Mercia’s EIS Investor Relations said “We are thrilled to be able to share this news with our networks and encourage you to take time to review the full report yourselves. Our Investment Teams continue to work exceptionally hard to build the great businesses of the future and generate attractive returns for our shareholders. This report contains a full and independent assessment of our EIS Funds which we believe will help both IFAs and private investors when considering Mercia as partner for tax-efficient investment”.

Download a copy of the report here.

Dr Paul Mattick, Head of Sales and Investor Relations at Mercia, took time to explain to GBI Magazine how Mercia’s EIS Funds provide a solution to building a well-validated early-stage businesses investment portfolio.

In the article, he explains what benefits investors get with EIS funds:

  • Mercia EIS Funds invest in companies with commercial protections, which may be first mover advantage, significant sector experience and of course intellectual property.
  • The EIS Funds enjoys strong deal flow; across the Group we received almost 3,000 applications in 2018.
  • Mercia EIS Funds aim to invest before any other institutional money is secured, with an opportunity for Mercia Technologies PLC to provide follow on capital.
  • Each investor receives a diverse portfolio of 12-15 investments covering early stage to pre-IPO opportunities across differing technology sectors, including life sciences and biosciences, software and internet, digital and digital entertainment, electronics, materials and manufacturing/engineering.

You can read the full article here –

UK universities are world renowned and Mercia, which was has a network of 19 university partners, was recently identified as one of the most active investors in UK university spinouts* having completed 23 investments in 2017. Our network of partners receives £1.8billion in R&D funding which is actually larger than OxBridge at £1.3billion.

The University of Edinburgh, which alone has £0.5billion R&D funding per annum, is in the top 25 worldwide and is producing some ground-breaking technology. Mercia’s first EIS investment into an Edinburgh spinout was identified as Best Innovative Medtech at last month’s OBN Awards, narrowly beating another of Mercia’s university spinout, Medherant from the University of Warwick.

What is in a spinout?

A university spinout is a company that has been developed, often around IP, from the research undertaken at that university. The founders are likely to be academics, but if the company grows to scale, experienced business builders are often introduced to strengthen the board, with the academics often retaining a technical role. The university, its technology transfer office (TTO) or an investment group such as Mercia, will provide the company with start-up capital and in Mercia’s case, if the company hits the critical milestones there may be the opportunity for significant follow on funding.

The spinout process from OxBridge universities has been developed over a number of years, with some successes as shown in the table below. However, the UK regions have historically been underserved by the VC community with insufficient capital to support spinouts based outside the Golden Triangle of Oxford, Cambridge and London. For these regional Universities, world class research has generated innovative IP which is often failing to be commercialised. Mercia aims to invest wisely in the best of these regional opportunities, including the use of our EIS funds to realise latent commercial potential so often overlooked in the past. This strategy gives access to world class opportunities and good value investment for our investors.

In the UK market there have been a large number of university spinouts that have delivered significant commercial traction, and provided returns for investors. Within the Mercia EIS funds, we have invested in 22 spinout companies of which nine have received follow on funding from Mercia Technologies PLC. Most of these companies are still at an early-stage, with unrealised value (see below), but they have the potential to provide high multiple return on investment.

Table 1. Commercialisation of university intellectual property (IP), including recent large UK exits, and examples of Mercia’s portfolio.



Exit price (year) or net asset value





£623m (2018)




$1b (2011)


Forbion Capital Partners



$886m (2013)

Oxford Nanopore




Woodford, Touchstone





Mercia Fund Managers, Invesco, Woodford





Mercia EIS Funds, Mercia Technologies




Mercia EIS Funds

Mercia’s University team, headed up by Dr Nicola Broughton, works extensively with university partners and their respective TTOs and academics, but also sees a number of opportunities from other Universities in our regions; 169 opportunities from 31 Universities were reviewed during the last year. The Mercia group made 23 investments into current and new investee spinout companies during the last financial year; £15million from Mercia (EIS fund and Mercia Technologies) and £13million co-investment was brought into those businesses from a wide variety of sources, such as angels, other institutional investors and corporate investors.

Case study – Invizius

As an example of a young university spinout in the Mercia EIS Fund portfolio, Invizius, incorporated in 2017, provides a priming solution that aims to enable hemodialysis patients to live longer, feel better, and suffer fewer cardiovascular complications. It is the first spinout that we have invested in from the University of Edinburgh, and has already been recognised as one of the country’s leading medical innovations. Academic innovation is one thing, but having the skills to commercialise this opportunity is where Mercia’s help is so valuable. Over the next 6-12 months, if the company continues to progress, it is likely that future investors in Mercia EIS Funds will gain exposure to Invizius. In due course, Invizius may be considered as an investment from Mercia Technologies PLC, to support its long-term growth.

What is next?

Mercia expects to further expand its network of university partners and will continue to raise early stage capital to support the commercialisation of the IP generated from these spinouts. In this manner, there is a significant opportunity for EIS investors to help grow UK gross domestic product over the next few years.



*** data in the table from various resources, including, and

To give context to this universities blog, approximately a third of Mercia’s investment opportunities are sourced through our university partnerships, with the majority of the remaining opportunities being introduced directly to our 80-strong network of investment professionals, across our nine regional offices in the UK.

To continue the updates that we are providing over the summer on some of our most successful companies in our portfolio, this blog is focused on OXGENE™ (the trading name of Oxford Genetics LTD), which is part of our Life Sciences and Biosciences sector.

OXGENE™ is a synthetic biology company focused on developing innovative and scalable manufacturing solutions in the gene, cell, and antibody therapeutics markets, which represent the company’s three core business divisions. By using the company’s underlying genomics Lego-like DNA construction platform each business unit provides a range of catalogue products, licensable technologies and custom service solutions. These are primarily delivered via automated high-throughput robotic work flows to maximise profitability. OXGENE™ aims to dominate the market place for CRISPR gene editing and gene therapy manufacturing systems worldwide.

The company commenced regular trading from January 2013 as an e-commerce DNA catalogue business. In October 2014, a strategic alliance was forged with an international leader in the provision of research biologics, for global distribution of these products under a joint-label. Following a strategic review in 2015 and a follow-on investment round, the business re-purposed its expertise in DNA engineering to develop technologies and production platforms to target the rapidly expanding markets for CRISPR and gene therapy. Since this transition, the business has signed a number of licensing agreements and been awarded multiple grants totalling over £2million to expediate its research.

Over the period from 2013-2015, the business received investment from five EIS funds, and the company minimised how much funding was required, by continuing to expand sales revenue. In recent years, the business has expanded its executive team and board with the addition of David Hames (founder of Science Warehouse) as chairman and Matt Baker (founder of Antitope and previously CSO of Abzena plc) as NED. Following the EIS funds investment, Mercia Asset Management PLC has invested on a number of occasions, and in August 2017 it invested an additional £2.0million alongside Invesco Asset Management, as part of a £7.5million investment. Overall, sales revenues are doubling year-on-year, and this growth rate is expected to accelerate in the next 12-18 months. The shares are valued at up to 6.8x the cost of investment.

Within the last few weeks, OXGENE™ has announced a multi-million pound contract with a very large global ecommerce provider of reagents, and there are various other large contracts in negotiation, so the future for OXGENE™, and therefore many of Mercia’s EIS investors, looks very promising.

OXGENE™ is one of our leading companies in both the EIS portfolio, and Mercia’s promising direct investment portfolio. As our CEO, Dr Mark Payton, states:

“OXGENE™ is a good example of our promising direct investment portfolio of companies, many of which are now in revenue growth. The company has an extensive intellectual property estate coupled tightly with its global access to CRISPR technology. The growing quality and number of its clients is testament to the fact that the team is at the leading edge of synthetic biology innovation. I expect more positive developments from OXGENE™ and a number of our other direct investments in the near to medium term.”

Following a fundraising in March 2018, FriendlyScore became the company in the EIS portfolio with the biggest uplift in valuation, with a multiple of up to 7x the cost of investment for investors in MGF3, MDF and MGF4, who invested in 2015.

FriendlyScore is a credit scoring platform for credit service providers. The platform utilises data from multiple sources to build the profile of an individual. The breadth of these data sources is beyond what is used by traditional credit agencies, with sources including LinkedIn and email. The technology used to analyse these data sets is based on natural language processing, a sub-sector of artificial intelligence (AI) algorithms.

FriendlyScore has made positive progress in signing agreements for pilot implementations of its technology with a number of large financial services businesses in multiple countries. Most notably, its innovative solution was introduced to Carphone Warehouse in the UK and agreements were also established with two Indian financial services providers. The upcoming activity pipeline also looks strong with several significant opportunities across multiple countries.

At present, the biggest challenge for the company is to persuade customers that have signed agreements to pilot the solution and implement it to a meaningful extent in their businesses. There has been limited progress in this area so there is a risk of these pilot projects not turning into production deployments at a later stage, when they could potentially generate meaningful revenues for the company. This also means that revenues to date, which are in large part generated from credit scores being generated through the system, have been low. The low uptake of usage of the system in these pilot projects is partly due to the fact that the company has been resource-constrained and has been focusing a large part of its efforts on signing new contracts rather than ensuring effective rollout with customers once the agreements have been signed. Following the completion of the funding round, the company will be recruiting additional staff with the aim of addressing this issue.

With regards to future prospects, if the company can crack the issue of converting pilot projects into production deployments then they could do very well. The acquisition appetite and valuations in the software sector are also high so the potential for success is huge.

The Mercia EIS Fund aims to capture three or more companies per fund in the 5x-10x range, which will support the overall fund return of tripling invested capital in five to seven years. FriendlyScore is valued at 7x the cost and is currently one of the companies that supports the performance of a number of funds, with strong prospects for future growth and an exit at a very high multiple.

Although we do not guarantee it, due to the way in which Mercia invests, it is our expectation that repeat investors will benefit from enhanced portfolio performance.

As you may know, it is the Mercia Model to initially invest small amounts of capital into a new portfolio company, limiting risk, and then drip feeds money into successful companies over time from multiple EIS Funds, and potentially the Mercia Technologies PLC balance sheet. This results in repeat investors gaining higher exposure to companies which Mercia believes are going to be successful. Mercia does not invest in companies which are not achieving pre-agreed milestones and operates a fail fast policy.

In addition to this, returning EIS investors may obtain exposure to the same company from multiple funds, increasing their exposure to our emerging stars. We expect that repeat investors significantly increase exposure to these star companies, which we hope will deliver high multiple exits.

Interestingly, EIS investors who make repeat investments with the Mercia EIS Fund will also limit their exposure to the failures in our portfolio, as they are unlikely to obtain subsequent investments; we expect that returning investors will get significantly lower overall exposure to any single unsuccessful company (although they may be exposed to other unsuccessful companies).

The Mercia EIS Fund creates one of the most diversified EIS funds in the market, which many investors see as a significant positive when investing in early-stage technology companies. There is an argument that repeat investors, by being exposed to the same company across multiple EIS funds, are concentrating their risk and losing the benefit of diversification. However, we would suggest investors consider that they are still getting the benefits of diversification on the downside, by only getting a (hopefully) single exposure to a non-successful company. At the same time, investors concentrate their exposure on companies which we believe will be successful, while obtaining exposure to new investments made by Mercia.

When these two factors are taken together, we expect a significant positive effect on the investment performance of repeat investors, providing a superior overall return.

What is evergreening?

Evergreening is a term to describe when old investments perform well enough to fund new investments. Einstein described compounding as the eighth wonder of the world, and compounding is almost equivalent to evergreening, where interest is gained on previous interest. The cumulative effect of compounding and evergreening on long-term capital is significant, with growth applicable on both the initial investment and accumulated growth from preceding periods. Significant growth is the aim of most investment portfolios unless they are looking to take cash, and is well-aligned with the long-term value creation in early-stage investing.

Upon exits from our EIS portfolios, there will be the choice to reinvest sale proceeds, creating a new portfolio of companies and a new set of tax reliefs. For reinvestments, Mercia will reduce its minimum investment, and investors are welcome to add additional capital. Mercia aims to “evergreen” returning investors’ portfolios, with new investments being funded by prior investments, creating a self-funded, rapidly expanding investment portfolio.

Mercia aims to return 3x invested capital in five to seven years, and in some funds we are exceeding this target on a net asset value basis, and upcoming exits will further enhance our cash distributions ahead of the start of the exit timescale. We aim to find at least one company in each portfolio that returns 5x-10x, but in some funds there will be two to four companies (as is the case with MGF1 and MGF2); in some funds there may be more – perhaps we will find a 100x in your EIS portfolio. In some cases, investors will receive enough cash distributions in a year from their portfolio to fund a new investment the size of the original investment; this would be an annually evergreening portfolio, and the value of these portfolios compounds very quickly.

For more information on why repeat investment enhances performance, or the evergreening effect, please join our webinar on 26 June (register by emailing, or speak to one of the Mercia team.

If you are making an EIS investment, you need to pick an investment manager who you can trust. Mercia is an institutional technology investor, trusted by the government, pension funds and universities, which also runs an EIS fund. We are a technology investor who has seeded unicorns, delivered 100x exits, and returned 3x-5x cash in some funds. Our EIS funds are still quite young, but some are well ahead of target, with funds over three years old having a net asset value of 2.6x including tax, cash returns of 20% of the original capital. If you are looking for a long-term investment partner, we believe that Mercia is a good choice.

The EIS market is in a period of unprecedented change. Earlier this March, the ability to invest into EIS capital preservation strategies were withdrawn. Historically, over half of all EIS investments were made into these capital preservation strategies (circa £0.75billion per annum), but at the same time the government is expanding the scope of Growth EIS and is aiming to positively impact the UK economy.

The UK government is taking a carrot and stick approach and while it has disqualified EIS capital preservation strategies, it has made it very clear that it wants to encourage EIS capital to be deployed into what it terms “knowledge intensive companies,” abbreviated to KICs. The support for this style of investing is broad ranging, including the extension of the £1.0million personal EIS cap to £2.0million per annum, and increasing the amount that can be invested in a company from £5.0million to £10.0million. These are significant changes that will expand the EIS market and drive capital to be invested in innovative companies, which are often defined as KICs.

The definition of a KIC is related to the amount it spends on R&D, the amount of IP that it produces and the number of highly skilled employees. Therefore, KICs are often highly innovative, high growth companies, which are building intellectual value.

As many of you will know, Mercia has always focused on early-stage, innovative technologies, which often originate from universities. Unsurprisingly, a very high proportion of Mercia’s previous EIS investments have been in KICs and that is not expected to change in the future; in a retrospective review of the 12-month period prior to August 2017, 35 of the 37 investments were into KICS (95%).

Over a number of years, the Mercia Group has been in close consultation with the government, HMT and HMRC on these matters, and it has always been clear that we invest in the manner that the UK government believes can build long term value in our start-up ecosystem. This point is further validated by the fact that Mercia has seeded a unicorn (a $billion company); £900,000 was invested in the automation company BluePrism which brought circa 15% of the equity, and over a number of years it grew well, it was listed on AIM in 2016 and is currently valued at over £1.0billion. It should be noted that BluePrism wasn’t an EIS investment, but the investment team that led that transaction also manage the EIS fund.

The government is now consulting the industry on setting up an “Approved” EIS fund for KICs. This may not sound as exciting as the increased limits for EIS investment, but in our opinion, this could really change the EIS market, and enable it to become more mature and professional. Historically, EIS has been a niche investment strategy, reserved only for the very wealthy and very sophisticated, and was certainly not a mainstream sector. VCT are somewhat more mainstream, as their listed nature means that they are more accessible. There are various options raised in this EIS consultation, but I would like to see the Upfront Tax Reliefs, and then as a secondary choice, Dividend Tax Exemption. If an approved EIS fund for KICs is launched, Mercia would consider launching a product, as we already meet most of the criteria, including using closed-end funds, focusing on KICs and deploying 90% of the cash in under 12 months (or 24 months as the consultation suggests).

The benefits of an Approved KIC EIS fund for investors are considerable, as however many companies are in the fund you will receive just one tax certificate, which is available as soon as the fund is closed. This will facilitate the creation of a diversified portfolio of early-stage technology companies, with each company in isolation being high-risk, the creation of a diversified portfolio with 15-20 investments will mean that the investor will not be overexposed to any one company (portfolio effect). This level of diversification is standard practice in more mature markets, such as mutual funds, however filing 15-20 individual EIS3s is a high administrative burden on the investor, and/or accountant/advisor. The benefit of an Approved Fund with Upfront Tax Reliefs is that all the tax reliefs for the 15-20 investments, could be claimed immediately upon the fund closing, by the submission of one EIS5. The Upfront Tax Reliefs would make EIS very similar to VCTs, which are a more mainstream investment and may even enable EIS funds to be listed on the major fund platforms. There are a number of risks with Approved Funds – if one company becomes non-qualifying then the entire fund is affected, and before we develop a product we will need to see the details behind what the government has proposed in the consultation. However, it is our belief that at this point, subject to the investors being suitable, EIS can enter the mainstream market and this is when KICs can really benefit and drive the UK economy. This is the type of initiative that could drive UK GDP through the troubled water of Brexit.

We will be contributing our views to the consultation, and encourage you to as well.

However, for now Mercia EIS Funds provide a diversified technology EIS fund (unapproved), which aims to triple invested capital in five to seven years. We have an industry-leading investor reporting platform that simplifies the management of EIS3s and we offer to collate them for our investors, so that they can be submitted in a bundle.

For more information, please download our IM.

Yesterday’s Autumn Budget was always one which the Mercia Team was going to watch with interest. With patient capital – something which sits at the heart of our business – the hot topic of the summer, our Teams had been counting the days until the Chancellor finally sets out his position on the Enterprise Investment Scheme (EIS) as he did yesterday.

In this article Dr Paul Mattick, Head of Sales and Investor Relations at Mercia Fund Managers explores what the changes in the budget mean and why he is pleased that the government is seeking to direct EIS capital into what it would term ‘knowledge-intensive companies’.

What makes Mercia well placed to comment on such a matter?

Well the answer to that is track record. As an Investment Group which is focused on sourcing and scaling innovative opportunities into businesses with global potential, the themes from the Patient Capital Review weave into nearly every area of our business. From raising and investing our own EIS Funds, to raising and investing institutional and public funds and investing the Group’s own balance sheet capital, our Investment Teams have track records that sit proudly within our peer groups. The Group has more than £330.0million under management as well as its own cash resources to provide scale up capital.

Take for example Mercia’s Funds

Mercia’s EIS Funds aims to triple invested capital within five to seven years, including tax reliefs, by investing in a well-diversified, multi-sector technology fund. The past performance is highly encouraging, with one fund having reached this target in three and a half years.

Our clients substantially benefit from the scale of Mercia as an institutional technology investor, who manages an EIS fund. Mercia offers hands on support and industry wisdom to entrepreneurial technology companies, and the potential of scale up investment from the PLC balance sheet. This support is part of the reason that, despite being less than four years old, the EIS funds already have three companies in the portfolio which are held at more than five times original cost. There are another five companies that may join this group shortly, and a few others that we expect to be valued at more than ten times original costs – this is real venture capital, with additional EIS tax benefits.

Allinea Software illustrates this point well. Based in the Midlands and a University of Warwick spinout (a partner university to Mercia), Allinea was an idea from two academics to provide a tool kit to optimise the performance of High Performance Computing. It was originally supported via proof of concept and grant funding. It received its first equity seed investment in early 2009 (including EIS) from one of Mercia’s managed funds and latterly scale-up capital from Mercia Technologies PLC. It was sold for a full cash return in December 2016 to ARM providing the equivalent of a 26x return on original investment cost to the managed fund (Mercia Fund 1 a University Challenge Seed Fund) and circa 21x return on original investment cost for the scale-up capital. Mercia Fund 1 is specifically targeted to university spinouts from the Midlands region and after fifteen years it has now started to evergreen itself.

You can also see our exemplars from within our regionally managed funds too

Mercia is a national investment Group, with more than 70 investment professionals and support staff based across our eight regional offices. But you will rarely find our teams in London, instead we prefer to source our deals in the UK regions; from places which don’t often make the financial news headlines, from Doncaster to Newton Le Willows and from Rossendale to Farnborough.

The RisingStars Growth Funds is one such fund. Its remit was to invest in the North West of England with backing from the North West Development Agency. The Funds invested in 53 companies in total, of which six have gone onto listings in the Public Markets. Perhaps the most successful of these has been Blue Prism which today has a market cap of over £900m and from which the RisingStars funds has made more than 55 x return and the fund still retains a 4.9% holding which is valued at more than £30.0million. Had the RisingStars Growth Funds been unwound once it had reached 10 years, which is typical with vehicles of this type, then the Fund’s investors would not have recouped their original investment cost.

For Mercia it is not just about picking the best opportunities and sitting back. In every case our Investment Team is side by side with the company’s own management teams; helping to shape strategy, introduce networks beyond the company’s own reach and perhaps most importantly helping to make the difficult decisions needed to ensure that the company’s performance stays on track and provides returns for shareholders.

Risk versus reward

It’s not just about the upside but of balancing the equation of risk and reward, in which failure rates vary between 30-50%. With this in mind our Investment Teams are continually seeking opportunities which have high cash multiples, in excess of five times cost, to offset the failure rates which we expect within our EIS Funds. We model the net effect of the early-stage failures, and high multiple cash exits, to be a tripling of invested capital (including tax reliefs) in five to seven years. For more information, please visit this page.

What does “patient” capital really mean?

The term patient capital is more widely recognised today than ever before and the government has played an important role in helping to raise awareness of this through its Patient Capital Review. As most venture funds are ten year limited partnerships, the traditional venture timescales do not work and this is one of the single largest challenges confronted by UK tech companies which often take longer to prove their technology and really gain commercial traction. However Mercia (and its investors) accept that from start up or seed investment through to liquid investment return you have to be patient, it can take between seven and fifteen years to realise value to shareholders. This approach is something which differentiates Mercia as both an investment partner and manager of capital and is illustrated by both Allinea (ten years) and Blue Prism (thirteen years) which fit neatly within our seven to fifteen year range.

What is the potential impact of the EIS changes proposed today?

The changes today will change the EIS market, and for businesses with high growth aspirations, for the better.

As of 1st December 2017 “capital preservation” EIS schemes, which take low risk and target low returns, cannot obtain Advanced Assurance that they qualify for EIS, and they will be totally excluded from EIS qualification on 6th April 2018. The intention of the tax reliefs introduced by the government was not to enable affluent investors to avoid tax, but to facilitate tax-efficient investment in innovative companies typically less than seven years old. Mercia has always invested EIS capital “in the spirit of the legislation,” and is recognised as one of the leading managers in this space, having been recently awarded Best EIS Manager at the Growth Investor Awards.

In 2015/2016, the EIS market raised over £1.6billion, and over half of this went into capital preservation EIS schemes (MICAP funds data, provided by EISA). In this circumstance, we would expect substantially more EIS capital to be directed towards leading technology focused EIS managers, such as Mercia. It should be noted that there is limited investment capacity in this market, and the demand to invest with leading fund managers will substantially increase.

From a Mercia Group perspective, the changes to EIS and the support for regional funds is pleasing, and it is clear that the government plans to continue to support the expansion of innovation and encourages the growth of SMEs in the UK.