Navigating challenges with strength
FY22 was a remarkable year for Mercia’s portfolio companies, with record-breaking fair value movements. But as we ventured into the spring of 2022, the landscape shifted. Geo-political conflicts, inflation and rising interest rates ushered in uncertainty, casting a shadow over the public markets. Technology and high-growth companies bore the brunt, witnessing significant value decreases.
Against this backdrop, I am pleased to confirm that Mercia’s portfolio companies have risen above the storm in this reporting period.
Our equity funds have realised an impressive c.£71million from 39 companies, delivering an average return of 2x. This is another excellent performance, to add to the c.£250million of realisations over the previous two years on behalf of individual and Limited Partner (“LP”) investors, alongside our own balance sheet.
Investor confidence
The confidence placed in us is further evidenced by the inflow of an additional c.£134million (including £30.1million inflow to FDC) of capital to our FuM. Such inflows are only achieved when investors are pleased with our performance, and we are delighted to see their commitments extended in this manner.
Direct investments: Solid progress driven by advancing gaming portfolio
The table below lists Mercia’s top 20 investments by fair value as at 31 March 2023, including the net cash invested, realisation proceeds, realised gains/(loss), fair value movements and the fully diluted equity percentage held.
| Year of fifirst direct investment | Net investment value as at 1 April 2022£’000 |
Net cash invested year to 31 March 2023
£’000 |
Investment realisations year to 31 March 2023
£’000 |
Realised gains/(loss) year to 31 March 2023
£’000 |
Fair value movement year to 31 March 2023
£’000 |
Net investment value as at 31 March 2023
£’000 |
Percentage held as at 31 March 2023 % |
|
| nDreams Ltd | 2014 | 25,761 | – | – | – | – | 25,761 | 33.2 |
| Impression Technologies Ltd | 2015 | 10,372 | 4,888 | – | – | – | 15,260 | 65.1 |
| Netacea Group Ltd | 2022 | – | 3,000 | – | – | 8,693 | 11,693 | 24.1 |
| Voxpopme Ltd | 2018 | 10,511 | 625 | – | – | (121) | 11,015 | 16.6 |
| Medherant Ltd | 2016 | 8,989 | 1,709 | – | – | 236 | 10,934 | 38.4 |
| VirtTrade Ltd * | 2015 | 5,387 | 550 | – | – | 4,145 | 10,082 | 40.6 |
| Warwick Acoustics Ltd | 2014 | 6,306 | 1,450 | – | – | 1,939 | 9,695 | 40.3 |
| Invincibles Studio Ltd | 2015 | 4,600 | 626 | – | – | 3,471 | 8,697 | 35.5 |
| Eyoto Group Ltd | 2017 | 2,960 | 1,514 | – | – | 1,013 | 5,487 | 24.7 |
| Ton UK Ltd ** | 2015 | 6,074 | – | – | – | (692) | 5,382 | 29.9 |
| Locate Bio Ltd | 2018 | 4,858 | – | – | – | – | 4,858 | 18.1 |
| Axis Spine Technologies Ltd | 2022 | – | 3,000 | – | – | – | 3,000 | 9.4 |
| sureCore Ltd | 2016 | 2,417 | – | – | – | – | 2,417 | 22.0 |
| Nova Pangaea (Holdings) Ltd | 2022 | – | 2,250 | – | – | – | 2,250 | – |
| Akamis Bio Ltd *** | 2015 | 1,780 | – | – | – | – | 1,780 | 1.4 |
| Forensic Analytics Ltd | 2021 | 1,750 | – | – | – | – | 1,750 | 8.2 |
| MIP Discovery Ltd | 2020 | 1,449 | – | – | – | – | 1,449 | 10.2 |
| Pimberly Ltd | 2021 | 1,375 | – | – | – | – | 1,375 | 5.7 |
| MyHealthChecked PLC | 2016 | 1,632 | – | – | – | (663) | 969 | 13.1 |
| Uniphy Ltd | 2022 | – | 550 | – | – | – | 550 | – |
| Other direct investments | n/a | 8,926 | 491 | (13) | (2,642) | (4,616) | 2,146 | n/a |
| Intechnica Holdings Ltd | 2017 | 14,411 | – | (4,000) | 1,793 | (12,204) | – | – |
| Total | 119,558 | 20,653 | (4,013) | (849) | 1,201 | 136,550 | n/a |
* Trading as Avid Games.
** Trading as Intelligent Positioning.
*** Formerly PsiOxus Therapeutics Limited, prior to a change in registered name to Akamis Bio Limited in January 2023.
As at 31 March 2023, the value of our direct investment portfolio was £136.6million (2022: £119.6million). This reflects a net £20.7million invested during the year, and a £1.2million fair value increase resulting principally from the continued growth of our mobile and digital gaming companies.
Amid the software sector’s downward movement we had one successful realisation in January 2023, the sale of Intechnica Holdings, a software and technology consultancy business. Mercia’s 25.5% direct holding generated £3.7million in cash proceeds, achieving an internal rate of return (“IRR”) of 27% and a 1.7x multiple on its holding value.
We continue to provide support to our top 10 direct investments, with £14.4million invested during the year. Our focus on evaluating new opportunities has resulted in three new direct investments which exhibit growth potential in exciting markets.
Whilst the fair value movements overall for the year appear modest, our core companies continue to expand revenues and forge valuable partnerships, with five of our direct investments seeing fair value uplifts.
Market challenges have inevitably impacted businesses across our direct portfolio. Netacea experienced lower growth than forecast and, coupled with market revenue multiples falling, has led to a £3.5million fair value decrease (excluding the impact of the demerger from Intechnica). Intelligent Positioning and W2 Global Data Solutions both experienced similar pressures during the year. Furthermore, Edge Case Games was informed that Wargaming.net Limited has ceased work on its original game that was subject to royalty receipts, resulting in a downward fair value movement.
The caution from potential acquirers in purchasing relatively early-stage and often loss-making assets has made them increasingly risk-averse. This approach had noticeable effects throughout the financial year, particularly in the last quarter when exit processes stalled and later-stage investors focused on their existing portfolios. As a result, co-investors and acquirers scaled back or withdrew from assets struggling for growth or exhibiting high cash-burn rates. One such example was the exit process for Sense Biodetection, which was ultimately sold through an accelerated process for a fraction of the initially indicated amounts, when buyers and their US funders pulled back. This disappointing outcome amounted to a £2.6million realised loss, as later-stage investors were compelled to accept a minimal stake in the ultimate acquirer, Sherlock Biosciences Inc., through a share-based deal.
Our equity performance
| IRR | 31 March 2023 | 31 March 2022 | ||
| Proprietary capital | 13% | 16% | ||
| TVPI* | Venture | Private Equity | Venture | Private Equity |
| Institutional Funds | ||||
| Legacy | 188% | 149% | 193% | 132% |
| Current | 113% | 119% | 111% | 109% |
| Retail EIS Funds | ||||
| Legacy | 108% | n/a | 139% | n/a |
| Current | 92% | n/a | 96% | n/a |
| VCTs (pence per Ordinary share) | NAV ** | Total return ** | NAV | TOTAL return |
| Northern Venture Trust | 62.1 | 250.6 | 68.4 | 252.9 |
| Northern 2 VCT | 59.0 | 195.0 | 64.4 | 196.8 |
| Northern 3 VCT | 91.6 | 205.0 | 97.9 | 206.3 |
* TVPI % defined as; distributions + total value + cash/capital paid in.
** VCT total return growth over 12 months, based on 31 March 2023 cumulative total return, of -0.6% to -0.9%.
We use different performance measures across our asset classes. For our direct portfolio, IRR is adopted because our proprietary capital is also used for other activities. As at 31 March 2023, the direct portfolio IRR had decreased to c.13%, with slower growth in fair values.
We measure ‘Total Value to Paid In’ (“TVPI”) across our regional and private equity (“PE”) funds as it shows total value returned and accruing to investors after fees; this naturally increases over time as more capital is returned and the portfolio values grow. Our legacy venture funds, at a TVPI of 188%, are largely flat year-on-year as several assets were marked down during FY23. Our newest PE fund saw a recovery in asset values as the impact of the pandemic on its portfolio businesses receded.
For our VCTs, ‘total return’ includes cumulative dividends paid alongside current net asset value to give a true total performance measure. It has been principally flat year-on-year.
Our continuing strong overall investment performance enables us to raise additional inflows, with a further £30.3million allocated from additional contributions to the Northern Powerhouse Investment Fund Equity and our Midlands Engine Investment Fund Proof of Concept mandate by British Business Bank. Alongside this, our EIS team raised new funds totalling £31.0million, in addition to our Northern VCTs raising £40.0million, with investors re-investing £2.9million of dividends paid during the year. Since year end, a further £18.0million has been successfully raised by our Northern VCTs, together with a £5.0million additional contribution to the North East Venture Capital fund.
At the year end, we had c.£378million of liquidity across all our funds and balance sheet, c.£128million of which sits within FDC’s debt funds.
| AuM
1 April 2022 |
Acquired | Investor
Inflows |
Performance | Distributions | AuM
31 March 2023 |
Post
year-end inflows |
|
| Asset class | £’m | £’m | £’m | £’m | £’m | £’m | £’m |
| Venture | 592 | – | 104 | (32) | (34) | 630 | 23 |
| Private Equity | 48 | – | – | 1 | (1) | 48 | – |
| Debt | 118 | 415 | 30 | (4) | (3) | 556 | – |
| Total FuM | 758 | 415 | 134 | (35) | (38) | 1,234 | 23 |
| Proprietary Capital | 201 | – | – | 6 | (4) | 203 | – |
| Total AuM | 959 | 415 | 134 | (29) | (42) | 1,437 | 23 |
Our managed funds as at 31 March 2023 totalled £1.2billion. During the year, we invested c.£165million into 176 businesses, including 85 new companies.
Venture
UK retail investor-focused VCT and EIS managers raised record amounts of capital in FY23 for disruptive businesses, supporting high-quality management teams. This has provided a solid foundation for entry valuations in the pre-series A space where we operate. Our EIS, regional and VCT equity funds’ successful track records, supported by consistently high deployment rates and profitable exits, has resulted in c.£104million of capital inflows. During the year, EIS fundraising totalled c.£31million, with a further c.£30million allocated from our LP partners to our regional funds and c.£43million in new VCT subscriptions.
Notable realisations include robust returns from our investments in Ideagen (9.8x return) and Lineup Systems (7.5x return) from the Northern VCT portfolio, plus C7 (14.2x return) from the EIS portfolio.
The Group’s overarching strategy is to make a positive impact through investment in purpose-led companies. We have an investment track record in the Life Sciences, Digital and Deep Tech sectors, aiming for a sustainable, healthier and tech-enabled future. These innovative companies are largely located in the regions outside of London.
Private equity
Tough economic times have presented a challenging terrain for lower mid-market, regional PE investors. This has impacted deal volumes and raised entry valuations as mid-market PE firms have been bidding on substantially smaller deals. We have focused on improving performance within our portfolio, yielding significant results with the portfolio fair value growing by 33%, alongside the exit of D&P Group from one of our legacy funds, giving an overall 3x return on the portfolio.
Debt
Leveraging a variety of government-backed schemes and privately raised funds, we are a go-to lender in the regional SME debt market. Our recent acquisition of FDC in the Midlands has extended our services to enable us to offer higher loan values of up to £10million, which were previously capped at £1million.
With a strong performance, Mercia’s Debt funds completed 82 deals, resulting in a c.154% increase in the total amount invested to £34.1million (2022: £13.4million). As a highly agile and flexible lender, our expansion has further demonstrated our ability to meet the evolving needs of SMEs.
Post period events
Post year end, £4.2million has been invested into Voxpopme, Eyoto, Netacea, Impression Technologies and TON UK t/a Intelligent Positioning.
Summary and look forward
In the current year, I have encouraged our investment staff to be bold and unwavering in their support of teams and assets we believe in. We have leveraged the expertise of our Mercia Nucleus network to provide experienced advice to these entrepreneurial teams. At the same time, we have made conscious decisions to allocate capital only to those whose models remain differentiated and aligned with our investment strategy.
Over the past three extraordinary years, we have generated significant realisations, surpassing £320million. This accomplishment not only solidifies our business model and investment expertise, but also enhances our resilience as a proactive specialist asset manager. By carefully selecting assets across sectors, we have avoided overreliance on those specific tech sectors that faced challenges during this period.
While our path to achieving Mercia 20:20 may not be a straight line across the three years, our portfolios are well-run and contain incredibly promising assets. I am confident that we are excellently positioned to deliver significant value over the medium term.
I would like to thank all the team members of #OneMercia who have shown unwavering dedication throughout another challenging year. They are the driving force behind our achievements, and I am very grateful for their continued commitment to our shared vision.
Mercia’s journey is marked by strength, resilience and a commitment to excellence. Despite the challenges faced, we have emerged with solid performance, robust investments and an optimistic outlook. We stand ready to navigate the ever-changing landscape, guided by our expertise and supported by our exceptional team. Together, we will continue to unlock value for our shareholders, investors and investees.
Julian Viggars
Chief Investment Officer
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