Mercia Asset Management : Annual Report and Accounts 2022

is...
Mercia	Annual Report & Accounts 2022

Mercia Asset Management PLC	Annual Report & Accounts 2022

ambitious		diverse
experts		friendly
trusted	great people
generous		innovative
challenging	collaborative
open creative			respectful
				supportive
				flexible
				momentum
			honest
professional		growing
together			family	caring
		collaborative	Mercia is...
exciting		knowledgeable	inclusive
	ambitious, as defined by
experienced				that best describe us, some
			successful	the team who makes up
			#OneMercia. But this is within
					a multilayered context that
					also speaks to our values,
					ethos and purpose. When
					asked to define Mercia, our
		fun	team curated these words
regional		of which we will bring to life
	in this year's Annual Report.

welcoming

Cover imagine: virtual reality headset courtesy of nDreams Ltd.

	Annual Report & Accounts 2022Mercia Asset Management PLC1
Mercia by numbers
£200.6m	45.6 pence
Net assets	Net assets per share
2021: £176.0m	2021: 40.0 pence
£20.6m	£8.4m
Revenue*	Adjusted operating profit*
2021: £19.2m	2021: £3.3m

report Strategic

£27.4m

Profit before taxation

2021: £34.0m

£61.3m

Cash**

2021: £54.7m

• Excluding performance fees
• Including short-term liquidity investments

2022 highlights

0.5 pence/share

Proposed final dividend

2021: 0.3 pence/share

c.£959m

Assets under Management ("AuM")

2021: c.£940m

Contents

• Sale of Faradion Ltd with total proceeds of £19.4million
• £11.4million fair value movements ("FvM") in the direct investment portfolio, following continued commercial progress, including significant third-party investment into nDreams

Operational highlights

• £31.4million awarded by the British Business Bank ("BBB") to Mercia's equity and debt funds
• c.£87million of cash returned to fund investors from successful realisations (2021: c.£27million)
• Office opened in Bristol to strengthen our presence in the South West of England
• Launch of 'Mercia Nucleus'

Strategic report

01 Mercia by numbers

1. Non-executiveChair's statement

1. Section 172 - Engaging with our stakeholders

1. Strategy - investors

1. Chief Executive Officer's review

1. Strategy - investees

1. Chief Investment Officer's review

1. Our portfolio - National Venture
2. Our portfolio - Regional Venture
3. Our portfolio - Private Equity
4. Our portfolio - Debt
5. Our portfolio - Proprietary Capital

1. Responsible business - employees

1. Chief Financial Officer's review

1. Principal risks and uncertainties

Governance

1. Board of Directors

1. Directors' report

1. Statement of Directors' responsibilities
2. Corporate governance report

1. Remuneration report

Financial statements

1. Independent auditor's report

1. Financial statements and notes

Other information

1. Directors, secretary and advisers
2. Notice of Annual General Meeting

2	Mercia Asset Management PLC	Annual Report & Accounts 2022

Non-executive Chair's statement

Responsible investing with purpose

In the midst of the greatest social, economic and geopolitical uncertainty in a generation, Mercia has delivered a second consecutive year of outstanding financial results, thanks to our continuing focus on being the first choice for our investors, investees and employees.

shareholders and fund investors across all of our asset categories. Our ever- growing portfolio of investee companies and their leadership teams are also critical to our continuing future success. On behalf of our Board, I pay tribute and thank all connected with Mercia for their outstanding collective efforts during the last two years, helping us to reach this very strong juncture of over £200million in net assets, whilst still relatively young in our journey.

trusted

#OneMercia

The last two years have been a period of immense challenge for everyone. Navigating our way through the pandemic, whilst continuing to grow Mercia and execute on our strategic priorities, has required a cohesive Board, experienced and resilient Executive leadership and unwavering commitment from all of our valued staff. Right across the Group, our people continue to define us. Our #OneMercia culture is the glue which binds together all of our collective and individual aspirations. Equally important is the encouraging support we continue to receive from our

Ian R. Metcalfe

Non-executive Chair

Responsible investing with purpose

Mercia does not apply a scatter-gun approach to investing. We invest with purpose to make a return for our investors. As we deploy our investment skills, our mindset is that of a responsible investor, as we share the investeeʼs journey with them. This mindset is not just outward looking however, we also look at ourselves to see how we can increase our own contribution to the fundamentally important areas of diversity and

the environment.

Annual Report & Accounts 2022

Mercia Asset Management PLC

3

report Strategic

There is always more that can be done, but it was encouraging to see that at our recent senior leadership strategy day, half of the 14 attendees were women. Equally encouraging is that despite it not yet being mandatory for Mercia, we have taken the proactive decision to measure and report on our carbon footprint - for the first time Mercia has been measured and offset its carbon footprint to become a carbon-neutral company. As part of our mantra of 'responsible investing with purpose', we believe in practising what we ask of our investee companies, in terms of both good governance and being good citizens. Carbon offsetting is just the beginning, and we will seek to reduce our carbon footprint over time.

Strategic progress - 'Mercia 20:20'

In 2021, Mercia largely achieved its previous three-year strategic plan one year early. At the time of announcing last year's financial results, the Group launched a new three-year strategic plan: 'Mercia 20:20'. The Group's new objectives are to:

• deliver average pre-tax profits of £20million per annum over the next three years; and
• grow its AuM by an average of 20% per annum over the same three-year period.

The achievement of these two new strategic objectives will deliver substantial total shareholder returns during the three years, as well as facilitating a growing dividend. In the specialist asset management sector in which Mercia operates, year-on-year financial results are rarely uniform. The Group's focus is therefore on delivering these twin annual strategic objectives 'on average' during the three-year period. The Board is pleased with progress thus far and is currently on target to deliver against these objectives.

Dividend

In conjunction with the announcement of its interim results in December 2020, Mercia declared its maiden interim dividend of 0.1 pence per share, as the beginning of a progressive dividend policy. In October 2021, this was followed by a maiden final dividend of 0.3 pence per share and an interim dividend last December of 0.3 pence per share. If approved by shareholders at this Septemberʼs Annual General Meeting ("AGM"), the Board is recommending a final dividend of 0.5 pence per share, making 0.8 pence per share for the full year (2021: 0.4 pence per share). If approved, the dividend will be paid on 11 October 2022 to shareholders on the register at close of business on 23 September 2022.

Given the strength of Mercia's business model and its excellent cash position, the Board's objective remains to maintain this progressive policy.

Governance and engagement

As part of our continuing commitment to the governance principles of the Quoted Companies Alliance Corporate Governance Code, we commissioned our third independent external Board effectiveness review since our admission to the Alternative Investment Market ("AIM") in December 2014. The review findings and recommendations are summarised on page 58 of this Annual Report, but it is reassuring to note that the external review concluded that "overall, the Board appears to be performing very well" and that "the Board has clearly made progress since its last effectiveness review".

It is critical to our future success that we continue to meet the investment objectives agreed with our different asset class fund investors. This includes our institutional investors, individual investors and the independent boards of the three Northern Venture Capital Trusts ("VCT").

In respect of the latter, we remain fully committed to investing in and supporting the VCT investment team, as we help them to successfully manage and expand their VCT portfolios.

Proactive engagement with all of our stakeholder groups remains particularly important to our Board. Whilst the intermittent lockdowns and remote working directives of the last two years have curtailed face-to-face discussions, I look forward to re-engaging with

our stakeholders during the current financial year.

Opportunity

These financial results successfully build on last year's breakthrough achievements. They also point to the calibre of our people and the accelerating maturity of our business model. This is demonstrated by the recurring profits now being derived from our investment activities in both our fund management business and from the balance sheet portfolio. With continuing heightened interest in several of the sectors into which Mercia invests, the opportunities for further growth, and hence the potential for sustained incremental shareholder value creation, is now firmly established.

As Chair, I remain immensely proud to be part of #OneMercia, which remains a community of outstanding people who care about responsibly investing the funds we manage, the companies in which we invest or to which we lend, and, most importantly of all, continue to care about each other.

Ian R. Metcalfe

Non-executive Chair