Overall financial performance
From a fund management profitability perspective, Mercia was able to maintain its first-half momentum in the second half of the financial year, which was supplemented by the first four months’ profitable contribution from FDC, which was acquired on 5 December 2022.
Whilst the Group’s direct investment portfolio performance against a challenging market backdrop was satisfactory overall, one material full-cash exit was achieved and the Group finished the year in a strong liquidity position, with no debt.
Acquisition of Frontier Development Capital Limited
Mercia acquired the entire issued share capital of the central-Birmingham headquartered FDC on 5 December 2022, for a total consideration of up to £9.5million plus net cash of £1.5million.
This strategic acquisition was for an initial consideration of £5.5million, satisfied in cash and funded from Mercia’s own liquid resources. In addition, deferred consideration of up to £4.0million in cash will be payable, contingent upon the achievement of future revenue and net new institutional third-party fundraising targets, for the two years to 30 November 2024.
The acquisition is earnings enhancing and in the post-acquisition trading period to 31 March 2023, FDC has performed in line with the Group’s expectations. Further details of the transaction are shown in note 12.
Proposed final dividend
The Board adopted Mercia’s progressive dividend policy in December 2020, and since then has announced interim dividends of 0.10 pence per share in December 2020 and 0.30 pence per share in December 2021. Shareholders also approved a maiden final dividend of 0.30 pence per share in September 2021 and 0.50 pence per share in September 2022.
Given the Group’s twin sources of profitability and cash inflow, being regionally focused, proactive specialist asset management, plus direct investment and periodic cash realisations, the Group’s dividend policy does not need to be anchored to one or other source of liquidity, hence the Board’s intention to grow the total dividend year-on-year.
The continuing positive overall Group performance, coupled with its future prospects, enables Mercia’s Board to recommend a proposed final dividend of 0.53 pence per share. If approved by shareholders at the Annual General Meeting in September 2023, the total dividend for the year will be 0.86 pence per share (2022: 0.80 pence per share), a 7.5% total year-on-year increase.
If approved by shareholders, the final dividend will be paid on 27 October 2023 to shareholders on the register at close of business on 29 September 2023, with the total dividend payable being £2,367,000 (2022: £2,201,000).
Adjusted operating profit
The Directors believe that the reporting of adjusted operating profit assists in providing a consistent measure of operating performance for businesses such as Mercia and is an important alternative performance measure (“APM”) of interest to shareholders.
Adjusted operating profit is defined as operating profit before net exceptional performance fees, depreciation, realised gains/(losses) on the sale of direct investments, fair value movements in direct investments, share-based payments charge, amortisation of intangible assets, movement in fair value of deferred consideration and exceptional items. It includes net finance income.
Results reported on an APM basis are denoted by1 throughout this review.
|Net finance income||2,397||4,437|
|Adjusted operating profit||7,586||8,395|
|Net exceptional performance fees||–||1,592|
|Net finance income||(2,397)||(4,437)|
|Realised (loss)/gains on sale of direct investments||(849)||9,878|
|Fair value movements in direct investments||1,201||11,385|
|Share-based payments charge||(1,049)||(1,109)|
|Amortisation of intangible assets||(2,337)||(2,033)|
|Movement in fair value of deferred consideration||(1,462)||(522)|
|Operating profit before exceptional item||384||22,925|
|Net finance income||2,397||4,437|
|Profit before taxation||2,409||27,362|
|Profit and total comprehensive income for the year||2,836||26,100|
A reconciliation of these results prepared in accordance with International Financial Reporting Standards (“IFRS”) to those presented on an APM basis are as follows:
|Year ended 31 March 2023|
|IFRS as reported
|Year ended 31 March 2022|
|IFRS as reported||Performance fees||Depreciation||APM basis1|
Total revenue increased 11.6% to £25,881,000 (2022: £23,183,000) and comprised fund management related fees, initial management and arrangement fees from investment rounds, investment director monitoring fees, sundry business services income and VCT share offer fees. Excluding the four-month revenue contribution from FDC, the VCT share offer fees received in the year and the exceptional performance fee revenue received in the prior year, the like-for-like increase was 11.1%.
Total administrative expenses increased 17.6% to £21,001,000 (2022: £17,857,000) and comprised predominantly staff-related, office, marketing, cyber security and professional adviser costs. Excluding the impact of FDC’s staff and administrative expenses, VCT share offer-related costs incurred in the year and the staff bonuses paid in the prior year in respect of the exceptional performance fee revenue, the like-for-like increase was 10.0%.
Net finance income
Total gross finance income of £2,428,000 (2022: £4,452,000) arose primarily from crystallised loan interest and redemption premiums received on convertible loans within the direct investment portfolio. Gross finance income also includes £449,000 (2022: £14,000) of interest received on cash deposits, following Bank of England base rate rises during the year.
Finance costs of £31,000 (2022: £15,000) comprised interest payable on office leases and the Groupʼs staff electric car scheme.
Realised gains/(loss) on sale of direct investments
During the year, a realised gain of £1,793,000 (2022: £9,878,000) arose on the disposal of Mercia’s direct investment in Intechnica Holdings. Total cash proceeds of £3,731,000 were received upon completion, with a further £269,000 released from escrow held by a third party in May 2023, following finalisation of the completion accounts. A gain of £2,000 also arose on the disposal of the Group’s equity holding in Ventive.
In January 2023, the Group realised a loss of £2,644,000 on the disposal of its direct investment in Sense Biodetection, further details of which are given in Julian Viggars’ CIO review.
Fair value movements in direct investments
|Investment movements excluding cash invested and realisations:|
|Unrealised gains on the revaluation of direct investments*||11,324||15,122|
|Unrealised losses on the revaluation of direct investments*||(10,123)||(3,737)|
|Net fair value movements||1,201||11,385|
* Excluding the demerger of Netacea Group Limited from Intechnica Holdings Limited during the year.
Net fair value movements during the year totalled £1,201,000 (2022: £11,385,000) and as at 31 March 2023, the fair value of the Group’s direct investment portfolio was £136,550,000 (2022: £119,558,000).
For the year as a whole, and excluding the impact of the Netacea and Intechnica demerger, unrealised fair value gains arose in five (2022: 10) of the Group’s direct investments. The largest fair value gain was in respect of VirtTrade, which accounted for £4,145,000 of the total (2022: £6,734,000 fair value gain in respect of nDreams).
There were six (2022: three) fair value decreases, the largest being £3,511,000 which arose in respect of Netacea Group (2022: £2,856,000 fair value decrease in MyHealthChecked PLC).
Share-based payments charge
The £1,049,000 non-cash charge (2022: £1,109,000) arises from the issued share options held by all employees throughout the Group, ranging from 28 January 2020 to 31 March 2023.
Amortisation of intangible assets
The amortisation charge for the year of £2,337,000 (2022: £2,033,000) represents amortisation of the intangible assets recognised on both the recent acquisition of FDC, and the VCT fund management contracts in 2019.
Movement in fair value of deferred consideration
FDC’s total purchase price includes £4,000,000 of contingent deferred consideration, which is subject to a number of targets being met in the two-year period to 30 November 2024. Movement in the fair value of contingent consideration from 5 December 2022 to 31 March 2023 has resulted in a charge to the income statement of £131,000.
The VCT fund management contracts’ total purchase price included a number of contingent deferred consideration elements payable over a three-year period. The total deferred consideration was fair valued at the date of acquisition in December 2019. A charge to the income statement of £1,331,000 (2022: £522,000) represents the unwinding of the discount on the final deferred consideration payment settled in cash in December 2022, and new Mercia Asset Management PLC Ordinary shares issued in January 2023.
The exceptional item for the year ended 31 March 2023 relates to professional fees incurred in respect of the acquisition of FDC in December 2022.
The components of the Group’s tax charge are shown in note 9 of the summary financial information.
Profit and total comprehensive income for the year
The adjusted operating profit, net realised loss on the sale of direct investments and net fair value increase, all contributed to a consolidated total profit and comprehensive income of £2,836,000 (2022: £26,100,000). This has resulted in basic earnings per Ordinary share of 0.64 pence (2022: 5.93 pence).
Summarised statement of financial position
|Goodwill and intangible assets||39,051||32,355|
|Direct investment portfolio||136,550||119,558|
|Other non-current assets, trade and other receivables||4,751||1,604|
|Cash and short-term liquidity investments||37,834||61,284|
|Trade, other payables and lease liabilities||(7,720)||(7,415)|
|Net assets per share (pence) **||45.4p||45.6p|
** In settlement of the final deferred consideration liability in respect of the VCT fund management business acquired in 2019, 6,471,495 Mercia Asset Management PLC Ordinary shares were admitted to trading on the AIM Market of the London Stock Exchange on 31 January 2023. Subsequent to this, 446,581,202 Ordinary shares were in issue and therefore used as the denominator for calculating net assets per share as at 31 March 2023. 440,109,707 Ordinary shares were in issue as at 31 March 2022.
Details of the Group’s intangible assets, including the intangible asset recognised following the acquisition of FDC, are shown in notes 13 and 14.
Direct investment portfolio
During the year under review, Mercia’s direct investment portfolio grew from £119,558,000 as at 1 April 2022 (2022: £96,220,000 as at 1 April 2021) to £136,550,000 as at 31 March 2023 (2022: £119,558,000), a c.14% increase notwithstanding the sale of Intechnica Holdings during the year (2022: c.24% increase).
The Group invested £20,653,000 net (2022: £18,384,000) into 10 existing and three new direct investments (2022: 14 and two respectively), with the top 20 direct investments representing 98.4% of the total direct investment portfolio by value (2022: 98.6%).
Further detail on the fair value movements of individual direct portfolio companies are included within Julian Viggars’ CIO review.
Cash and short-term liquidity investments
At the year end, Mercia had cash and short-term liquidity investments (which is cash on deposit with maturities of between 32 days and three months) totalling £37,834,000 (2022: £61,284,000), comprising cash of £37,555,000 (2022: £56,049,000) and short-term liquidity investments of £279,000 (2022: £5,235,000).
The Group continues to have limited working capital needs due to the nature of its business and generated operating cash inflow of £3,019,000 (2022: £9,150,000 inflow).
The overriding priorities of the Group’s treasury policy remains firstly the preservation of its shareholders’ cash for investment, corporate and working capital purposes, secondly timely availability and finally yield. As at 31 March 2023, the Group’s cash and short-term liquidity investments were spread across four leading United Kingdom banks.
Notwithstanding the Group’s overarching treasury priority, namely preservation, the Board has recently approved a measured focus on yield in the current year.
The summarised movements in the Group’s cash and short-term liquidity investments position during the year are shown below.
|Opening cash and short-term liquidity investments||61,284||54,725|
|Cash generated from operating activities||3,019||9,150|
|Corporation tax paid||(1,819)||–|
|Net cash (used in)/generated from direct investment activities||(14,930)||2,363|
|Acquisition of Frontier Development Capital Limited||(6,951)||–|
|Cash acquired with Frontier Development Capital Limited||2,882||–|
|Purchase of VCT fund management contracts (deferred consideration)||(2,100)||(2,100)|
|Cash inflow/(outflow) from other investing activities||371||(62)|
|Net cash used in financing activities||(3,922)||(2,792)|
|Closing cash and short-term liquidity investments||37,834||61,284|
Despite a challenging year for the specialist asset management sector, and venture capital in particular, Mercia has remained profitable, operating cash flow generative and debt free, and as a result is able to continue to support and maximise value from its direct investment portfolio uninhibited by any liquidity constraints.
Mercia’s third acquisition since its IPO in December 2014, FDC, has been integrated into the Group and is performing well, having already secured £30.1million of additional funds to manage, in the short post-acquisition period to 31 March 2023.
Overall therefore, these results demonstrate Mercia’s robust business fundamentals, during a year of significant market and economic instability. In financial terms, Mercia’s focus for the current financial year is centred on organic growth in its funds under management and continued disciplined support for its direct investment portfolio.
Chief Financial Officer