b'Principal risks and uncertainties continuedRisk Possible consequences MitigationThe Group now has c.658millionThe loss of one or more of the contracts due toDedicated investment teams operate in respect of each asset class and in many of funds under management andpoor performance or other irreconcilable LP/ cases, each fund mandate. Senior managers oversee both fund performance and derives the majority of its revenuesGP differences could have a material impactclient relationships. Detailed quarterly reports are issued for most funds.under fund management contractson the trading performance of the Group andInvestment committees provide robust review of all proposed investments.linked to each specific fund. reputationally, its future ability to successfully tender for new contracts.The Groups compliance function monitors adherence to investment procedures.The Board oversees the Groups fund management operations, performance and client relations.The majority of the directEarly-stage technology companies may not beAll of the Groups direct investments are companies which have emerged from investment portfolio comprisesable to attract and retain appropriately skilled andthe funds managed by the Groups fund management operations. The funds have businesses at a relatively earlyexperienced staff; they may not be able to attracta fail fast policy, which means that early-stage businesses which do not achieve stage in their development andsufficient funding to achieve their commercialcommercial traction within a reasonable time frame are not further supported.as a result carry inherent risks,objectives; their technology niche may be overtakenIn addition, the real-time due diligence being undertaken by the Groups including technical and commercialby competing technologies or may not achieveinvestment teams during an investee companys early stage of development means risks. Typically such companiescommercial traction; take-up of their product orthat Mercia is already familiar with the business, its commercial prospects and are developing new or disruptingservice offering in their chosen markets may notits management team before it is presented to the Groups Board (which acts as existing technologies and breakingoccur at levels sufficient to generate positive cashMercias investment committee) with a recommendation for direct investment.new ground commercially. flows and create shareholder value.Portfolio companies risks haveThe length of time taken for these companies toThis process of review reduces, although does not eliminate, the risk of direct been affected both positivelyarrive at success or failure may be protracted, placinginvestment failure, particularly in the current pandemic-induced economic climate.and negatively by the COVID-19them under severe pressure to maintain the financialFor all of Mercias direct investment portfolio companies, the Group continues to pandemic, with some companiessupport required over a sustained period of time. assess their near-term funding and other requirements and will continue to provide actively engaged in the developmentrelevant support where needed and appropriate. of testing solutions. The value of the Groups directA large proportion of the overall value of the directThe Group seeks to balance the total portfolio by quantum and value, as the total investment portfolio may beinvestment portfolio may at any time be accountednumber of direct investments and their values grow over time. The current portfolio dominated by a single or limitedfor by one or very few companies. There is a riskcontinues to be well balanced. However, it is the Groups expectation that from number of companies. that one or more of the portfolio businesses willtime to time, depending on economic conditions, the speed of development of Portfolio company fair valuesexperience financial difficulties, become insolventportfolio companies and the attractiveness of certain technology sectors, there may have been affected bothor suffer from poor market conditions (including thebe investments, and therefore specific sectors, eg Life Sciences & Biosciences, that positively and negatively by thecurrent pandemic) and if, as a result, their valuesdominate the total portfolio by value.COVID-19 pandemic, with somewere to be adversely affected, this would have aThe specific direct investment areas on which Mercia focuses are kept under review companies actively engaged in thematerially detrimental effect on the overall value ofand it is possible that the Groups areas of investment focus and expertise may development of testing solutions,the Groups investment portfolio and skew fair valueevolve over time. Details of the mitigating actions taken by the Group in respect of whilst others have seen their end- concentration into a smaller number of companies.the impact of the COVID-19 pandemic on its portfolio companies are included in the user markets significantly curtailedCurrently, the top five direct investments representChief Investment Officers review on pages 24 to 29. in the near to medium term. 54.6% of the total portfolio by value.Proceeds from the trade sale orLarge possible cash flow variations could have aMercia raised further funds, partly for direct investment, in December 2019 and is IPO of direct investments may varymaterially adverse effect on the financial conditionwell capitalised.substantially from year to year. and prospects of the Group. A number of Mercias direct investments could be sold to maintain sufficient As a result, the Group may notA shortage of available capital for direct investmentliquidity.be able to meet future financialand operating purposes would necessitate a changeThe Group is also now profitable in its day-to-day operating activities and is obligations or future growth mayin strategy to one of capital conservation. generating operating cash inflow. It is therefore no longer having to make use of its not occur because of an inabilitycash balances to fund its day-to-day operating activities.to raise additional balance sheet capital if required.The Group and its portfolioThe Group operates a direct investment model andThe Group focuses its investment activities predominantly on the historically companies are subject tomay find itself in competition when new investmentunderserved regions of the United Kingdom, where competition for investing in competition risk. opportunities arise. In addition, the directnew technology companies is less fierce. Companies in which the Group invests investment portfolio businesses are predominantlyare chosen because they are in large growth markets, have developed disruptive focused on the technology sector, which is intenselytechnologies and have already achieved commercial traction.competitive on a global scale. Many of the portfolio businesses competitors have greater financial, technical and other resources. Competition in the technology sector could materially adversely affect the prospects, financial condition and results of operations of direct investment portfolio companies.The Group may not be able toThe Group depends on the experience, skill andThe Group seeks to reduce this risk by maintaining an entrepreneurial and inclusive continue to retain or attractjudgement of key staff in, amongst other things,working environment, referred to internally as #OneMercia, and by offering experienced, skilled andselecting possible future successful businessesbalanced and competitive remuneration packages to all its staff. The Remuneration successful Board Directors,in which to invest. The Group also depends on itsCommittee monitors the remuneration and incentive structures of all senior staff Investment Directors and supportnetwork of deal flow introducers to the managedacross the Group, in conjunction with seeking advice, when appropriate, from staff. fund business. The Groups future success dependsspecialist remuneration consultants. The use of Goalspan, an online performance in part on the continued service of these individualsmanagement and personal development system, has enhanced Mercias ability to as well as the Groups ability to recruit, retain andmanage performance and career progression.motivate additional talented personnel.54 Mercia Asset Management PLCAnnual Report and Accounts 2020'