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 firstname.lastname@example.org), 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.