Introduction
In these challenging times, it is pleasing to report continued, steady momentum at Mercia. We are in the strong position of being able to build from a solid base, providing support for founders and managers of many of the UK’s leading SMEs, to enable them to focus on long-term growth. Key metrics that demonstrate the resilience of Mercia’s hybrid investment model during these times include:
• Like-for-like revenue increase of 8% to £12.2million
• Adjusted operating profit increase of c.50% to £3.6million
• Interim dividend up c.10% to 0.33 pence per share
• Nets assets per share increased by c.3% to 46.8 pence
• AuM of c.£979million, with a c.10% increase in the fair value of the direct investment portfolio from 31 March 2022.
Our vision remains to become the first choice for investees, investors and employees. At this midpoint in our current three-year Mercia ‘20:20’ strategic plan, we remain confident that we will achieve our goals of £60.0million in cumulative pre-tax profits and c.£600million cumulative growth in AuM by 31 March 2024. With the acquisition of FDC alongside organic growth in FuM, AuM is now c.£1.4billion. The positive progress being made against these twin goals continues to underpin our progressive dividend policy.
Distribution, in terms of both organic FuM growth and deal origination, is critical to Mercia’s continued success and scale and is underpinned by our nine offices across the regions. Furthermore, all the capital that we manage is in closed-end or evergreen structures, providing a stable source of long-term third-party capital which is not subject to redemptions. This allows the team to progressively spot and build value without the vulnerability of capital withdrawal from our managed funds. The pools of capital we manage are split into (i) ‘retail’ ie individual investors (via Mercia’s EIS and Northern VCTs), (ii) government agencies (both national and regional) and (iii) institutional capital (typically regional pension funds).
Strength in numbers: A reputation for delivery
Mercia’s hybrid model of combining interlinked, risk-adjusted third-party FuM with scale-up capital via Mercia’s balance sheet, ensures the supply of the right capital to the right business at the right time. This hybrid investment model originated in 2010 ahead of Mercia’s IPO in 2014, and now delivers a critical mass and maturity that is helping deliver returns to our fund investors and shareholders as well as, crucially, to the founders and managers of our investees whom we have the great privilege of supporting. In addition, Mercia’s management of our EIS funds and Northern VCTs consistently scores highly with external reviewers who have recognised the strengths of our ‘Complete Connected Capital’ model, investees, exit track record and the excellence of the team we have built at Mercia.
Our performance, which has seen us return c.£280million to investors across our collective asset classes since April 2020, will underpin our continuing efforts to further grow AuM organically over the near-to-medium term.
The exits we have achieved from Mercia’s direct investment portfolio have yielded an average premium to holding value of c.53%. The table below shows our performance since IPO, in terms of fully-realised exits. To date, every full-cash exit has been above carrying value.
| Financial year exit/investee | Holding value
£’000 |
Realised value
£’000 |
Premium
% |
||||||
| 2017 | |||||||||
| Abzena plc | 150 | 170 | 13.3 | ||||||
| Allinea Software Limited | 1,900 | 2,700 | 42.1 | ||||||
| 2018 | |||||||||
| Science Warehouse Limited | 9,900 | 10,500 | 6.1 | ||||||
| 2021 | |||||||||
| The Native Antigen Company Limited | 3,500 | 5,200 | 48.6 | ||||||
| Clear Review Limited | 1,030 | 1,040 | 1.0 | ||||||
| Oxford Genetics Limited | 16,100 | 30,700 | 90.7 | ||||||
| 2022 | |||||||||
| Faradion Limited | 12,900 | 19,400 | 50.4 | ||||||
| Total/average premium | 45,480 | 69,710 | 53.3 | ||||||
The table above demonstrates the value Mercia has created through its balance sheet exits over time. This performance not only validates Mercia’s disciplined approach to valuation, but also points to the potential of future net asset value increases from realisations over time.
With over a quarter of Mercia’s AuM in unrestricted cash available for investment, our reputation as a truly regional investor aligned with our investees’ growth aspirations, is aiding our deal sourcing and continues to be a key competitive advantage. During this six-month period, we received 1,165 requests for investment and invested c.£56million into 80 businesses. This investment cadence is critical to meeting our capital deployment targets across both our debt and equity teams as we look to build out our portfolios with new investments, during a period where value for a patient investor with capital to deploy will become evident.
With the recent opening of our Bristol office and the acquisition of FDC providing a central Birmingham location, we now have nine fully-staffed offices across the UK plus two further satellite offices in Nottingham and Hull. These offices provide us with reach across the entirety of England, Scotland and Wales for deal origination and portfolio support. Following the FDC acquisition, Mercia now has 144 employees and we continue to invest in our talented team as we work together to deliver Mercia’s ‘20:20’ strategy. I am proud of the diverse and inclusive culture at Mercia as we continue to operate within our core values of trust, growth, knowledge and responsiveness, coupled closely with our dedication to the UN Principles of Responsible Investment.
Outlook
Many businesses are facing national and global headwinds as we approach 2023. This is arguably most acute in the technology sector and, specifically, within capital-intensive, loss-making business-to-consumer companies. These headwinds are particularly visible in the public markets. Against this backdrop Mercia is well placed, especially given the significant liquidity we have to deploy into what is a buyers’ market.
With our focus on SMEs within the UK, predominantly businesses in sectors with relatively modest capital needs, we and the funds we manage, are able to continue to support these businesses with additional capital as and when needed during these turbulent times. As almost all businesses in our portfolios are private businesses, our exposure to the public markets is limited. In addition, as a debt-free, cash-rich business, Mercia is well placed to capitalise on both corporate (as evidenced by our recent acquisition) and direct investment opportunities as we invest through the cycle. A majority of the Group’s investment realisations are through trade sale exits (just two exits in the last two years were via IPOs), and this part of the market remains relatively resilient.
I am sincerely grateful to all our employees, portfolio companies, managed fund investors, our many other valued stakeholders and, of course, our shareholders, for their continued commitment and belief in Mercia.
At this mid-point in our current three-year strategic plan, we remain confident that we will deliver Mercia ‘20:20’ by 31 March 2024.
Though the public markets may be stressed, Mercia is not.