b'56 Mercia asset Management PLc Annual Report and Accounts 2021Principal risks and uncertainties continuedrisk Possible consequences Mitigationthe group, including its fundThe Group operates both a direct investmentThe Group focuses its investment activities predominantly on the management subsidiaries andand a fund management portfolio model andhistorically under-served regions of the United Kingdom, where Mercias portfolio companiesboth may find themselves in competitioncompetition for investing in new technology companies is less fierce. are subject to competition risk. when new investment or lendingCompanies in which the Group invests are chosen because they are in opportunities arise. In addition, all portfoliolarge growth markets, have developed disruptive technologies and businesses are predominantly focused onhave already achieved commercial traction.the technology sector, which is intenselyThe Group conducts all of its investment activities in a fair and competitive on a global scale. transparent manner and is increasingly recognised as a trusted Portfolio companies competitors may investment partner for entrepreneurially minded, ambitious have greater financial, technical and othermanagement teams. resources. Competition in the technologyThe Groups fund management entities have maintained a strong sector could materially adversely affect theperformance against their institutional mandates, including with prospects, financial condition and results British Business Bank. Portfolio company competitiveness is of operations of all portfolio companies,monitored and additional support and expertise is providedwith a potential knock-on effect on fundwhen required.management and director monitoringfees as well as impacts on directinvestment performance.the risk that conflicts ofThe presence of conflicts of interest isA comprehensive conflicts policy has been developed to deal with interest are not properlyinherent in our business model, derivingconflicts that arise, particularly in investment mandates or follow-on identified and managed,from the range of different fund managementinvestment in an existing investee company. leading to reputationalmandates and direct investment activitiesIn addition, the Group always carefully considers the conflicts that may damage, loss of mandates undertaken. There is potential forarise where Mercia holds investments in more than one portfolio and loss of investment. reputational risk arising from a failure tocompany with a similar product or service business model.appropriately manage conflicts. Reputational damage could lead to anThe separate fund and balance sheet investment committees consider inability to attract new mandates, and/orany potential conflicts highlighted with individual investments on a portfolio companies for investment, leadingcase by case basis.to a drop in deal flow and revenues. The policy also deals with potential conflict situations arising withstaff, for example, working for investee companies or holding shares.A register of conflicts is maintained and overseen by the Groups Compliance Director.the majority of the directEarly-stage technology companies may notThe Groups current direct investments have all originated frominvestment portfoliobe able to attract and retain appropriatelythe Groups fund management operations. Those funds have a failcomprises businesses at askilled and experienced staff; they may notfast policy, which means that early-stage businesses, which do not relatively early stage in theirbe able to attract sufficient funding toachieve commercial traction within a reasonable time frame, are not development, and as a result,achieve their commercial objectives; theirsupported further.carry inherent risks includingtechnology niche may be overtaken byIn addition, the real-time due diligence is being undertaken by the technical and commercialcompeting technologies or may not achieveGroups investment teams during an investee companys early stage of risks. typically, suchcommercial traction; take-up of theirdevelopment within the Groups funds. This means that Mercia is companies are developing newproduct or service offering in their chosenalready familiar with the business, its commercial prospects and its or disrupting existingmarkets may not occur at levels sufficient tomanagement team before it becomes a direct investment.technologies and breakinggenerate positive cash flows and create new ground commercially. shareholder value. This process of review reduces, although does not eliminate, the risk of Portfolio companies risksThe length of time taken for these companiesdirect investment failure, particularly in the current pandemic-induced have been affected bothto arrive at success or failure may beeconomic climate.positively and negatively byprotracted, placing them under severeThe strength of the Groups financial position means that we have been the coVid-19 pandemic, withpressure to maintain the financial supportable to give greater funding runway to companies, where this is some companies activelyrequired over a sustained period of time. appropriate, and to offer support during the pandemic. In addition, our engaged in the development ofability to source high-quality non-executive directors to assist company testing solutions. growthboards increases their resilience and helps in protecting long term value.rates in the digital gaming industry have accelerated due to the greater proportion of time being spent at home.'