b'50 Mercia Asset Management PLC Annual Report & Accounts 2022Principal risks and uncertainties continuedRisk Possible consequences MitigationThe risk that conflicts ofThe presence of conflicts of interestA comprehensive conflicts policy has been developed to interest are not properlyis inherent in our business model,deal with conflicts that arise, particularly in connection identified and managed,deriving from the range of differentwith investment mandate priorities or follow-on leading to reputationalfund management mandatesinvestments in an existing investee company by more damage, loss of mandatesand direct investment activitiesthan one Mercia fund. and loss of investment. undertaken. There is potential forIn addition, the Group always carefully considers the reputational risk arising from aconflicts that may arise where Mercia holds investments failure to appropriately managein more than one portfolio company with a similar conflicts. Reputational damageproduct or service business model.could lead to an inability to attract new mandates, and/or portfolioThe separate fund and balance sheet investment companies for investment, leadingcommittees consider any potential conflicts highlighted to a drop in deal flow and revenues. in respect of individual investments on a case-by-case basis.The policy also deals with potential conflict situations arising with staff, for example, being closely involved in developing home grown investee companies or holding shares. A register of conflicts is maintained and overseen by the Groups Compliance Director.We have the ability to convene a Conflicts Committee in order to ensure that any particularly complex conflicts are appropriately managed. During the year, one such meeting was held, led by the Chair of the Audit Committee, to provide independent oversight of a proposed investment decision affecting more thanone fund.The majority of the directEarly-stage technology companiesAll bar one (Forensic Analytics) of the Groups current investment portfoliomay not be able to attract anddirect investment portfolio have originated from the comprises businesses atretain appropriately skilled andGroups fund management operations. Those funds a relatively early stageexperienced staff; they may not behave a fail-fast policy, which means that early-stage in their development,able to attract sufficient fundingbusinesses, which do not achieve commercial traction and as a result, carriesto achieve their commercialwithin a reasonable period, are not supported further.inherent risks includingobjectives; their technology nicheIn addition, real-time due diligence is being undertaken technical and commercialmay be overtaken by competingby the Groups investment teams during an investee risks. Typically, suchtechnologies or they may notcompanys early stage of development within the Groups companies are developingachieve commercial traction;funds. This means that Mercia is already familiar with the new or disrupting existingtake-up of their product or servicebusiness, its commercial prospects and its management technologies and breakingoffering in their chosen marketsteam before it becomes a direct investment.new ground commercially. may not occur at levels sufficient to Portfolio companies weregenerate positive cash flows and toThis process of review reduces, although does not initially affected bothcreate shareholder value. eliminate, the risk of direct investment failure, positively and negativelyThe length of time taken for theseparticularly in the current volatile economic and by the COVID-19companies to arrive at success orgeopolitical climate.pandemic, eg growthfailure may be protracted, placingThe strength of the Groups financial position means rates in the Digital Gamingthem under severe pressure tothat we have been able to give greater funding runway to industry accelerated duemaintain the financial supportcompanies, where this is appropriate, and to offer other to the greater proportionrequired over a sustained period support. In addition, our ability to source high-quality of time being spent atof time. non-executive directors via Mercia Nucleus to assist home.company boards, increases their resilience and helps in protecting long-term value.'