MERCIA ASSET MANAGEMENT PLC Mercia Asset Management PLC (AIM: MERC), the proactive, regionally focused specialist asset manager with c.£940million of assets under management ('AuM') is pleased to announce its preliminary results for the year ended 31 March 2021.
Financial results
• Total AuM1 increased by 17.5% to c.£940million (2020: c.£800million)
• Revenue2 increased 50.5% to £19.2million (2020: £12.7million)
• Adjusted operating profit3 £3.3million (2020: £0.5million)
• Net performance fees £3.8million (2020: £nil)
• Realised gains £20.3million (2020: £nil)
• Net fair value increase of £10.1million (2020: £15.8million decrease)
• Operating profit £34.0million (2020: £17.8million loss)
• Profit after taxation £34.5million (2020: £17.5million loss)
• Earnings per share 7.83 pence (2020: loss per share 5.11 pence)
• Proposed final dividend of 0.3 pence per share (2020: nil)
• Unrestricted cash and short-term liquidity investments £54.7million (2020: £30.2million)
• Net assets £176.0million (2020: £141.5million)
• Net assets per share 40.0 pence (2020: 32.1 pence)
1 Including the Group's consolidated net assets
2 Excluding performance fees
3 Adjusted operating profit is defined as operating profit before performance fees net of variable compensation, realised gains on disposal of investments, fair value movements in investments, share-based payments charge, depreciation, amortisation of intangible assets, movement in fair value of deferred consideration and exceptional items. The reconciliation of adjusted operating profit to operating profit is included in the Chief Financial Officer's review.
Managed fund developments
• Third-party funds under management ('FuM') increased by 16.1% to c.£764million (2020: c.£658million) contributing £18.2million in revenue (2020: £11.7million)
• Venture FuM c.£600million (2020: c.£476million)
o Net performance fees totalling £3.8million receivable, following portfolio exits and significant net asset value ('NAV') increases across the EIS funds and Northern VCTs
• Private equity FuM c.£54million (2020: c.£60million)
• Debt FuM c.£110million (2020: c.£122million)
o CBILS accredited lender for the British Business Bank's Northern Powerhouse Investment Fund, with a focus on supporting regional businesses throughout Yorkshire and the Humber
Direct investment portfolio developments
• Direct investment portfolio fair value of £96.2million (2020: £87.5million), up 10% notwithstanding four investment realisations completed in the year
• £15.4million net invested into 19 portfolio companies (2020: £15.7million net invested into 18 portfolio companies), including new direct investments into Sense Biodetection and MIP Diagnostics
• Sale of The Native Antigen Company in July 2020 realised total cash receipts of £5.2million and a realised gain of £1.8million
• Sale of Clear Review in October 2020 generated total cash receipts of £1.0million and a realised gain of £0.5million
• Key strategic objective completed with the sale of Oxford Genetics in March 2021. Total cash proceeds of £30.7m 'evergreens' the Group's balance sheet whilst crystallising a realised gain of £18.0million, a 5x return on Mercia's original direct investment cost of £6.1million and a 51% internal rate of return ('IRR')
Post year end developments
• Proprietary capital invested of £0.5million in Medherant and £0.3million in Eyoto post year end
• Continuing commercial progress is being made by the majority of the direct portfolio, including each of the top five direct investments by holding value
Mark Payton, Chief Executive Officer of Mercia, commented:
'In the twelve months to 31 March 2021 Mercia performed strongly. Our venture capital activities - both managed funds and held directly - had their strongest year so far, our debt team completed a record number of transactions and our private equity portfolio has returned to growth.
The Group is now strongly cash generative with adjusted operating profits supporting our progressive dividend policy. This, coupled with the robust performance of our direct investment portfolio, has taken NAV per share to 40.0 pence and the interim and proposed final dividends for the year to 0.4 pence per share in total.
Mercia's hybrid 'funds first' regional investment model, combined with our local presence and excellent team, is now delivering in a sustainable manner. As is often the case, this success has been many years in the making and I would like to thank all those that have supported us as we have grown to become the leading provider of connected capital and support to thriving regional businesses. It's a great pleasure and privilege to work with all of them.'
Non-Executive Chair's statement
The successful execution of Mercia's strategy has materially grown shareholder value
Notwithstanding the COVID-19 pandemic backdrop, with all of the ensuing social and economic challenges, the year to 31 March 2021 has been one of positive and profitable progress for Mercia.
#OneMercia
Throughout the year, the Group's senior leadership team demonstrated its business experience, investment expertise and compassion. No staff were furloughed or made redundant, no direct Government support was utilised and no payments were delayed. The excellent reaction and commitment of all staff to the sudden switch to remote working in March 2020, which has largely continued to the present day, has spoken volumes about our #OneMercia culture. Our people define us and it has been a source of huge pride to see them all doing everything they can to support our portfolio companies, and just as importantly, each other.
Direct investment portfolio
It's has been an excellent year for our direct investment portfolio, with four cash exits generating £20.3million in realised gains (2020: £nil) and net fair value uplifts across the remaining direct portfolio totalling £10.1million. (2020: 15.8million unrealised loss).
The highlight was the exit from our second largest direct investment (by fair value), Oxford Genetics Limited, which over a five year investment period, generated cash proceeds of £30.7million against an investment cost of £6.1million.
The Group's investment experience in Life Sciences, Software and Digital Gaming-related technologies came to the fore during the year with most of the Group's investees in these sectors making accelerated commercial progress, reflected in their upward fair value movements. Whilst our advanced manufacturing businesses bore the brunt of the sudden global economic paralysis in the early days of the pandemic, they have now largely stabilised and many are now showing renewed commercial traction.
Portfolio liquidity and access to additional capital when needed, are imperative to preserve shareholder value during economic shocks. I am pleased to say that Mercia has been able to fully support its direct portfolio with additional capital, as required, during this period. In addition, the Group has provided non-executive director/executive director resource, digital marketing support and a series of webinars on subjects relevant to managing a young business through a sharp economic downturn.
The remaining portfolio is showing excellent promise and we expect to add several new companies during the new financial year. With the direct portfolio companies well-funded and in good shape overall, the investment team is fully focused on delivering another year of successful realisations and fair value progress.
This time last year valuations were falling in many of our FuM, in parallel with wider market corrections. Those falls largely stabilised during the autumn of 2020 and it is pleasing to see further material growth in our total AuM for the year as a whole. This is being driven both by new funds raised and improved fund performance.
Strategic update - new three year targets
Set in March 2019, the Group's three year strategic objectives were centred on making Mercia a self-sustaining investment group. The three principal objectives were:
- to achieve operating profitability before realised gains, fair value movements and all non-cash charges;
- to 'evergreen' its balance sheet so that the Group's direct investment activities would be fully funded by periodic cash realisations from the existing portfolio; and
- to expand the Group's AuM to at least £1.0billion.
Two years in it is very pleasing to see the first two objectives comfortably achieved and the third within touching distance. Even though the existing strategic objectives have one further year to run, Mercia's Board has recently agreed a new and ambitious three year plan: 'Mercia 20:20'. The Group will now aim to grow its AuM by an average of 20% per annum over the next three years and deliver average pre-tax profits of £20.0million per annum over the same three-year period. The achievement of these two new strategic objectives will deliver substantial total shareholder returns during the next three years.
Dividend policy
On 1 December 2020, in conjunction with the announcement of its interim results, Mercia declared its maiden interim dividend of 0.1 pence per share and the start of a progressive dividend policy. The excellent second-half performance coupled with the Group's future prospects, has enabled Mercia's Board to recommend a proposed final dividend of 0.3 pence per share.
In anticipation of continued profitable progress in both trading and investment realisations, the Board's objective is a year-on-year progressive increase in both its interim and proposed final dividends.
Governance, sustainability and engagement
Good Board governance, cohesion and a sense of common purpose are vital when navigating any company through turbulent times. In November 2020, we welcomed Diane Seymour-Williams onto our Board. Diane's asset management background, including with Venture Capital Trusts, is an excellent addition to our existing Board skill-set and investment experience. Diane settled in quickly and started making a positive contribution immediately. In recognition of her deep asset management expertise and experience, she has recently been appointed as the Board's Senior Independent Director.
Throughout the year, the Executive Directors (together with the Group's Chief Operating Officer, Peter Dines) and Non-executive Directors have worked constructively together and willingly pooled their varying talents and experiences to steer Mercia through the pandemic. These excellent financial results are testament to the collective efforts of not just the Board, but of each and every Mercia employee.
Critical to our increasing success, is continuing to meet the investment objectives agreed with our different asset class fund investors. Despite the economic shocks of the last year, we have continued to meet our commitments to all our external stakeholders. This has included continuing to hire and train new investment talent, further develop the investment skills of the existing teams whilst supporting them all with lead generation, marketing, investee recruitment resource and in-house legal investment advice. In particular, we have further developed our relationships with the three Venture Capital Trust ('VCT') boards and remain fully focused on, and committed to, investing in and supporting the VCT investment team in helping them to manage and expand the VCT portfolios.
Mercia has always been a responsible investor and many of its fund and balance sheet portfolio companies are developing technologies which help reduce carbon emissions. During the year, we asked Jill Williams, one of our private equity Investment Directors, to become our Head of ESG (Environmental, Social and Governance). Jill's passion for ESG and her wide-ranging brief, will help Mercia to play its part in minimising our carbon footprint, contributing positively to society's needs, whilst continuing to be guided by a strong governance culture in all our dealings.
Since its inception in 2014, the Group has embedded a strong corporate governance ethic in all its internal and external interactions. As a member of the Quoted Companies Alliance ('QCA') since 2015, and with its fund management operations regulated by the Financial Conduct Authority ('FCA'), Mercia always seeks to act in the best interests of its stakeholders. Proactive engagement with all stakeholder groups remains fundamentally important to our Board. Whilst the intermittent lockdowns and remote working imperatives have curtailed face-to-face engagement during the last year, I look forward to furthering those relationships for the mutual benefit of all stakeholders during the current financial year.
Outlook
These record financial results speak louder than words can about the quality of the business which we have built and the calibre of our people. We greatly appreciate the continuing support and encouragement of our shareholders and advisers and are pleased to be delivering on our potential for shareholder value creation.
With signs of economic normality returning and heightened interest in several of those sectors into which Mercia invests, the future prospects for Mercia have never been better.
Notwithstanding our excellent cash position, we will maintain our investment discipline and focus, whilst expanding our regional presence and talent pool. Our new strategic objectives speak to our growing confidence and ambition, and I look forward to updating shareholders this time next year.
Mercia has grown significantly since its IPO on AIM in December 2014, via a combination of organic initiatives and two successful acquisitions. We anticipate that this combined approach will continue during the next three years, thereby increasing total shareholder returns.
Finally, whilst the last 12 months have been challenging and difficult at times, they have exemplified what Mercia represents. As Chair, I am immensely proud to be part of #OneMercia, which continues to be a community of outstanding people who care about the funds we manage, the companies in which we invest or to which we lend, and, most importantly of all, who care about each other. The successful execution of Mercia's strategy by our people during this tumultuous year has materially grown shareholder value and proved that the Mercia Model works for all stakeholders. Long may that continue.
Ian R. Metcalfe
Non-executive Chair
Chief Executive Officer's Review
The positive momentum of our business during the last twelve months is in part a result of the swift actions taken as the COVID-19 pandemic broke, leading to an excellent year for the Group and one which demonstrates the resilience and potential of the Mercia Model which is now delivering with continued momentum.
- Increase in revenue 50.5%1 (2020: 19.4%)
- Increase in adjusted operating profit c.550% (2020: n/a)
- Increase in AuM c.18% (2020: c.58%)
- Direct investment realisations £20.3million (2020: £nil)
- Direct investment fair value increase £10.1million (2020: £15.8million decrease)
- Unrestricted cash on hand £54.7million (2020: £30.2million)
- Total group unrestricted liquidity c.£314million (2020: c.£320million)
- NAV per share 40.0 pence (2020: 32.1 pence)
- Proposed final dividend 0.3 pence per share (2020: nil)
1 Before net performance fees
I am incredibly proud of how the whole team at Mercia have pulled together in this remote working environment, creating new efficiencies in the way we work together, including digitalisation throughout the Group. Much of this positive change, such as digital deal origination, is now embedded and permanent as we move to a blended office / homeworking environment.
There are two elements to the Group's sustainable performance that interleaf in a highly synergistic manner. Our growing managed funds operations selectively deliver future direct investments, provide strong returns for our valued fund investors and Northern VCT shareholders, and underpin Mercia's progressive dividend policy. Connected tightly to this is our proprietary capital which selectively seeds new managed funds, accelerates the growth of promising businesses in our managed funds and provides ongoing growth capital to our direct investments. This has enabled us to deliver growth in NAV per share in the year of 24.4% and a blended direct portfolio IRR of c.15% since Mercia's IPO in 2014.
Resetting our strategic goals: 'Mercia 20:20'
Having largely delivered on the strategic targets set in 2019 a year ahead of plan, ie grow AuM to £1.0billion, move the Group to sustainable profitability and evergreen the balance sheet, it is now right to set new three year strategic goals. We remain ambitious to deliver significant long-term growth in shareholder value and our new strategic objectives: Mercia 20:20 are aligned with this goal. Over the next three years, on average, we will aim to grow total AuM by 20% per annum and deliver £20.0million profit before tax per annum.
First choice for investors, investees and employees
Mercia's hybrid investment model has now achieved critical mass as the synergies deliver both growth in underlying profit from the fund management operations and the returns from our proprietary investment activity. This self-financing model enables Mercia to compete domestically on a regional basis across the UK. Our focus is simple - develop a model, systems and internal expertise to source the best deals, win the deals, buy well, accelerate value creation through direct support and then exit these investments for the benefit of our fund investors, management teams and shareholders.
Mercia's competitive advantage stems from our passion of concentrating on two key connected themes: (i) responsible investor and (ii) responsible employer, which are reinforced by our core values of Growth, Knowledge, Responsive and Trust.
Responsible Investor
Our origin and focus is to invest exclusively in the UK, targeting what we term as 'Thriving Regional Businesses' that are seeking capital in the form of debt, private equity, venture capital or a combination of these. Physically located in the regions, we employ locally for Mercia and our portfolio. The high-growth companies we support are typically less than ten years old, often seeking capital of less than c.£50million in total and are frequently overlooked by most capital providers.
Our focus is the provision of finance and support for these businesses with environmental, social and governance awareness ('ESG') at the heart of our operation. Not only do we have an ESG team at Mercia capably led by Investment Director Jill Williams, but this emphasis also cascades from the Board throughout the Group. The ESG team have set 'diversity' for Mercia, and its portfolio, as their priority for this coming financial year. In addition to our investment activities, we also operate Mercia Spirit where employees give their time and raise money to support local and national causes. Our nominated charities are Cancer Research UK and The Skills Builder Partnership, the latter targeted at helping regional schools. An additional resource, which is not charged to Mercia's portfolio, is the provision of training, webinars, marketing services and executive search (for board, executive and senior management level) via our Marcomms team led by our Head of Marketing and Communications, Alison Dwyer and by our Head of Portfolio Resourcing, Lisa Ward.
Responsible employer
Fundamentally we are only as good as the people we attract, employ and retain. Our People and Talent team led by Michelle Heaselgrave are exceptional and, combined with the benefits and support we provide to our teams, we believe that Mercia is becoming a first-choice employer. Our strong focus on group-wide communications ensures aligned Group performance by a motivated team; what we term #OneMercia. In addition, we will constantly strive to develop our team further. Our 'Mercia Academy' is an important part of this, and we are recruiting to build out the People and Talent team to provide additional internal expertise to lead on talent development.
Outlook
This last year has seen venture businesses in Diagnostics, Biotech and Software sectors excel. These sectors have delivered the majority of both the Group's investment realisations this year and net asset value growth. The 10 profitable fund and direct investment exits in this reporting period are a record for Mercia and derived from our regional venture funds, Enterprise Investment Scheme ('EIS') funds and the Northern VCTs; three of the 10 also benefitted from our proprietary capital. This excellent performance puts us in a strong position for continued growth in all asset classes within our third-party FuM.
Certain businesses operating within Deep Tech and Clean Tech, including in the Automotive sector, were negatively impacted by the pandemic back in March 2020. During the year, we focused hard on supporting these businesses, however not all of the fair value decreases from last year have reversed. Our investment thesis is that these sectors that were hurt the hardest last year will in due course recover. We passionately believe in investing through the cycle and during the year we have invested £94.4million across the Group in 76 new businesses and 97 existing portfolio companies. A number of these were in Deep tech, Clean Tech, Life Sciences and purpose-led businesses; sectors we believe will be core value creators in the near to medium-term future.
Economists forecast UK domestic growth of between 5% to 8% for 2021. This is an excellent backdrop for Mercia and its portfolios as we begin the new financial year with confidence in our new Mercia 20:20 vision, whilst ensuring we remain both a responsible investor and employer as we continue to seek to be the first choice for investors, investees and employees.
Dr Mark Payton
Chief Executive Officer
Chief Investment Officer's review
Powered by people
I don't think any of us will forget the last 12 months. As I sit here in my home study, I can't help but think about the huge changes we have all been part of in our business and our way of life. I look forward to a return to normality, however, it has to be said that many of the new ways of working, interacting, purchasing and consuming, adopted during the pandemic, have made us more efficient and are here to stay as the bedrock of continued growth. We have witnessed fundamental changes to the way our healthcare is delivered and to the speed of development of medical solutions. We have become acutely aware of the rapid change towards a low-carbon environment, and within that our social responsibilities to others.
Mercia has emerged from the last 12 months in a very strong position. We have transacted 10 profitable exits across our funds and proprietary capital, returning c.£103million. Four of these companies were also held as direct investments, providing liquidity of £37.0million for the Group, and in so doing, achieving our key aim of evergreening the direct portfolio. This is down to the excellent entrepreneurs and management teams we back and I would like to thank them all for their tremendous efforts this last year.
We have continued to invest to accelerate value creation; helping to build management teams by adding experienced Chairs, Non-executive Directors, Financial Directors and Venture Partners, and by developing our network of like-minded co-investors. Our Venture Partners, funded by Mercia, provide short-term input for example, to redesign sales processes, finetune routes to market strategies or technology roadmaps.
We developed a digital engagement platform to enhance our origination efforts, including webinars and online sessions between founders and investment professionals. These will be a permanent feature of our business and a positive example of the applied learnings and structural changes arising from the pandemic. We have also undertaken comprehensive training for our investment staff.
Direct investments - four exits and value creation through operational progress
As at 31 March 2021, the value of the Group's direct investments was £96.2million (2020: £87.5million). This reflects an upward movement in fair value of £10.1million after net investment of £15.4million (2020: £15.7million), and adjusting for the four realisations: Crowd Reactive, The Native Antigen Company, Clear Review and OXGENE, which accounted for £15.9million of fair value as at 31 March 2020.
We recorded unrealised fair value gains in Voxpopme £1.6million, Impression Technologies £1.9million, Faradion £1.2million, MyHealthChecked £3.5million and Soccer Manager £0.2million, in line with our policy, which follows the International Private Equity and Venture Capital Valuations Guidelines ('IPEVCVG'). The fair value gains in Voxpopme relate to third-party investment and in Impression Technologies, to the acquisition of a co-investor's stake. Faradion's uplift results from third-party value indicators, and MyHealthChecked saw its share price increase as a result of significant commercial progress.
Automotive-related assets that saw reductions in March 2020 due to COVID-19, primarily Warwick Acoustics and Impression Technologies, are seeing renewed interest from original equipment manufacturers ('OEMs'). Eyoto has not yet seen a meaningful recovery and we have reduced its valuation by £0.4million reflecting delays in Food and Drug Administration ('FDA') approval for its slit lamp product, with a consequent impact on revenues.
Investment activity
We continued to support our largest and most promising assets with capital and resource. £10.3million of the £15.4million invested was allocated to our top 10 assets. We also made use of the Future Fund, with a further £11.8million invested. Our aim remains to build equity stakes of between 20%-40% in the majority of our direct investments.
We made two new direct investments during the year: MIP Diagnostics and Sense Biodetection, both from our EIS Funds.
MIP Diagnostics received initial investment of £0.3million as part of a £5.1million syndicated commitment resulting in a 3.3% direct stake in addition to the c.30% fully diluted stake held through our managed funds. MIP Diagnostics is a spinout from the University of Leicester, which has developed a proprietary process to provide molecular imprinted polymers to the vitro diagnostic, bioprocessing and oil and gas industries. The Company recently announced a partnership with Stream Bio to develop a rapid COVID-19 detection assay.
Sense Biodetection is focused on the development of instrument-free point-of-care molecular diagnostics. Post investment, we hold a 1.2% fully diluted direct investment in addition to a 9.1% fully diluted stake in our managed funds. In 2020, Sense Biodetection raised £10.5million, concurrently secured a grant from Innovate UK and announced an accelerated programme to launch the world's first instrument-free, point-of-care molecular diagnostic test for COVID-19, partnering with Phillips-Medisize to scale up production.
Direct investments: operational highlights
nDreams, Voxpopme, Intechnica, Soccer Manager, Virtrade, sureCore, Faradion, Medherant and W2 Global Solutions all achieved increased revenues during the year. Other measures of progress across the portfolio included new license deals at Impression Technologies, Medherant and sureCore, acquisitions at MyHealthChecked and Locate Bio, syndicated investment by Voxpopme and technical progress at Faradion, Locate Bio and Medherant. Highlights include:
- nDreams saw revenues up c.30% and continued strong partnerships with VR hardware providers. The VR market saw progression with the successful release of the Quest 2 headset from Oculus.
- Medherent, the transdermal drug-delivery company secured an additional large pharma evaluation agreement and completed a syndicated investment round of £2.8million.
- Intechnica's e-commerce consultancy business had a record year, and its Netacea bot- management business continues to attract excellent reviews, blue-chip customers and increase its recurring revenue.
- Soccer Manager, now in our top 10, benefited from new investment and focus showing c.40% revenue growth from its mobile football games and expects further growth from the launch of the 2022 season game.
Exits
We reported four exits from our direct portfolio delivering £37.0million in cash receipts, alongside a further £17.1million in proceeds from these assets to our managed funds.
- The Native Antigen Company was sold to LGC, a global leader in the life sciences tools sector, for £18.0million generating an 8.4x return on investment cost and a 65% IRR for our direct holding. Mercia first invested in The Native Antigen Company in 2011 through its third-party managed funds and from its balance sheet in December 2014. The sale generated a 12.1x return on a blended third-party managed funds investment cost and a 31% funds IRR.
- Clear Review was sold to Advanced Business Software and Solutions Limited for £26.0million representing a c.2x return on investment and a c.72% IRR. The sale also resulted in a c.8x return on Mercia's EIS managed fund investment cost and a c.122% fund IRR. Clear Review was first backed by Mercia's managed funds in 2018 before becoming a direct investment in June 2019.
- In March we announced Mercia's largest exit to date from OXGENE that was sold to international life sciences group WuXi App Tec. Mercia held a 32.1% direct holding in OXGENE and received cash proceeds of £30.7million. The sale resulted in a realised gain of £18.0million above OXGENE's £12.7million direct investment holding value at the date of sale. The sale generated a 5x return on Mercia's direct investment cost and a 50% IRR. The sale also generated returns of between 13x and 20x return on Mercia's EIS managed fund investment costs.
- We also exited Crowd Reactive through a partial repayment of our investment, realising the holding value of £0.2million as the pandemic brutally curtailed all activity in the events sector.
NAV growth across our funds led by the Northern VCTs
Our manged funds as at 31 March 2021 totalled c.£764million. In the year we invested £79.0million in 173 businesses, including 76 new companies. Our third-party managed funds have all shown a good performance in H2 with significant increases in NAV.
At the end of the period, we had c.£314million of liquidity across all our funds.
A total of seven profitable exits were completed in the year, delivering a total of £66.0million in returns to fund investors.
Debt saw a significant uplift in enquiries in the year completing 70 transactions (2020: 46) investing a total of £16.8million, of which £13.7million was provided to 48 new businesses. The Group announced an extension of its Northern Powerhouse Investment Fund ('NPIF') debt mandate, which was increased by a further £30.6million and Mercia's SME Loans Fund was launched in mid-September, providing up to a further £45.0million to lend over five years. This fund is backed by the Greater Manchester Pension Fund ('GMPF').
Our Northern VCTs showed NAV reductions of c.22% at March 2020, however this has now more than fully recovered, driven in large part by exits from Agilitas, It's all Good and the listing of musicMagpie, alongside significant growth in other assets including Oddbox, Currentbody.com and SHE Software.
Agilitas delivers managed inventory solutions and services and is based in Nottingham. Mercia's Northern VCTs initially invested £6.4million in a management buyout, and over the next six years backed the business' ambitious plans. Agilitas delivered double-digit annual growth through continued innovation and was sold to private equity investor Perwyn, providing an 8.4x return.
Gateshead-based It's All Good, which makes snacks including the Manomasa range, was acquired by Valeo Foods Group in December 2020. Mercia's Northern VCTs first invested in February 2014. It's All Good was one of Alantra's Food & Beverage Fast 50 and one of the UK's fastest-growing privately-owned food and drinks businesses.
Oddbox is a social impact business fighting food waste on farms by offering a fruit and vegetable box delivery service. Oddbox has a strong management team with significant experience from global brands. Mercia's Northern VCTs initially invested £2.0million in March 2020 to support growth outside of London.
The Northern VCTs completed 22 transactions, including investing in two new businesses: Enate and Moonshot and 15 follow-on investments. Complete Connected Capital investments included Newcells Biotech alongside the North East Venture Fund ('NEVF'), Currentbody.com alongside Mercia's Debt Funds and Voxpopme, one of Mercia's direct investments that has also received investment from Mercia's EIS Funds.
Mercia's EIS funds completed 53 transactions across 21 businesses of which four were new. This was a strong year for EIS exits and with increased deal enquiries in Medtech, AI and Software as a Service ('SaaS) businesses reinforcing the dynamics seen across the business with growth of these sectors strongly influenced by COVID -19.
The NEVF invested in 11 companies, six of which were new. Newcells Biotech and Elmtronics are two purpose-led businesses that exemplify Mercia's investment agenda to support more businesses that have a viable business model and are aligned to the sustainability agenda. The strength of Mercia's networks can be seen in the co-investment into whocanfixmycar.com, which has an impressive external syndicate including Shell Ventures and Active PE.
In keeping with Mercia's stated policy of being a responsible investor, the entire Midlands Engine Investment Fund ('MEIF') portfolio falls within our stated guiding principles of sustainable economic growth and reducing inequalities in our communities. A key strand of this is to promote diversity and inclusion and we have three female-led companies in the portfolio and two with ethnically diverse founding-management teams. MEIF has a number of purpose-led investments falling under the banner of 'health and well-being for all', encompassing not only Life Science companies, but also those with an environmental focus. MEIF made six new investments this year within 22 transactions in total.
NPIF Equity invested £23.0million into 50 companies of which 20 were new to the portfolio. Growth within the portfolio was seen in the Digital, Life Sciences and Software sectors. NPIF co-investment included Mercia's direct investments Intechnica, Faradion and Soccer Manager that all traded strongly during the pandemic. New portfolio businesses that benefited both in terms of NPIF investment and from the experience of Mercia's investment team and support structures to leverage the changing consumer and business demand were, The Logically that identifies misinformation online using AI and expert analysts, SockMonkey Studios an award-winning gaming studio that works on top titles across all major platforms and Bubo.AI, the only AI-driven solution for a customer value-based pricing strategy for wholesalers and distributors. Both SockMonkey Studios and Bubo.AI are Teesside-based and epitomise Mercia's capability of finding and investing in thriving regional businesses.
Post period events
Post year end we invested £0.5million in Medherant alongside current co-investors, including our managed funds to continue critical clinical studies and £0.3million in Eyoto as it progresses its FDA approval process.
Following initial investment through the Northern VCTs in 2015, musicMagpie launched its £208.0million IPO on AIM in April 2021. Upon IPO, our three Northern VCT holdings were valued at £52.0million, of which 50% was immediately realised in cash and the unrealised portion held in shares. The total amount invested into musicMagpie via the Northern VCTs was £4.5million. The total return was 11.6x, with an internal rate of return of 58%.
As announced on 23 June 2021, the strong funds' portfolio performance during the year have triggered net performance fees of £3.8million.
Summary and looking forward
As Chief Investment Officer it is important to step back and look at the sustainable themes, steering our investment toward the areas where we see longer-term structural changes and growth.
We believe that businesses will continue to look at their own efficiency and security and we have seen a real focus on sales, business development and supply chains, to the health and safety of staff. We have significant exposure to these areas across our portfolios.
We see continued opportunity in digital, healthcare and gaming. We expect continued moves to remote data-based healthcare, and have recently invested in Naitive Technologies, an early-stage business exposed to this trend.
Our ecommerce businesses prospered over the last year with Northern VCT assets musicMagpie, Currentbody.com and Oddbox showing rapid growth and we continue to believe that these areas will do well.
Within our Deep Tech and manufacturing assets, we are well positioned for the 'Electric Revolution' having invested in this area for the last 10 years. While Warwick Acoustics and Impression Technologies were initially impacted by the pandemic, the 2030 ban on new petrol and diesel cars has created significant opportunities. Elmtronics from our NEVF is an installer of electric charging points and progressing well, as is Midlands-based Acceleron, which enables individual battery cells to be replaced as charge efficiency drops.
This reporting year has demonstrated the resilience of our business and our people and I would like to thank all my great team members at #OneMercia for their efforts over this last extraordinary year. I am very optimistic for our portfolio companies of which we now have c.430 assets, with significant liquidity to make new fund investments and direct investments. I am confident that we will continue to grow in the new financial year.
Julian Viggars
Chief Investment Officer
Chief Financial Officer's review
Record results and accelerating momentum
Adjusted operating profit*
£3.3m
2020: £0.5m
Net assets
£176.0m
2020: £141.5m
Net assets per share
40.0 pence
2020: 32.1 pence
Unrestricted cash**
£54.7m
2020: £30.2m
* Before performance fees net of costs
** Including short-term liquidity investments
Despite the challenging health and economic backdrop, the year to 31 March 2021 was one of significant strategic and profitable progress for Mercia Asset Management PLC. Furthermore, the Group's financial performance was achieved without having to apply for any Government-backed financial support, delay any payments to HMRC or suppliers, impose any pay cuts or make any of its valued staff redundant as a result of the pandemic.
Trading performance
The financial year comprised four very distinct quarters, in terms of the impact of the pandemic on the Group's operating performance and thus both its interim and full year results.
In the first quarter to 30 June 2020 Mercia was, like the rest of the United Kingdom, in lockdown. With the three Northern VCTs having already announced net asset value write downs averaging 22% as at 31 March 2020, Mercia experienced lower asset price linked VCT fund management revenues as a direct consequence. From an investment portfolio perspective, new deal flow (and with it initial management fee revenue) largely ceased across all asset classes and Mercia's focus immediately switched to preserving value within the portfolios and supporting investee management teams. Where deemed appropriate, director monitoring fees were deferred and loan repayment holidays were granted on a case-by-case basis. With all staff working from home and no face-to-face meetings permitted, the Group's expenditure immediately reduced. The challenge of recruiting new staff remotely also had an immediate impact on both timing and cost. During this challenging quarter for the whole UK economy, the Group exited its investment in Crowd Reactive at the holding value of £0.2million.
In the second quarter to 30 September 2020, the revenue and cost dynamics of Mercia's 'new normal' stabilised. Whilst revenues continued below previously anticipated levels, Mercia's cost base also remained materially lower than budgeted. Remote working continued to impact both deal flow and recruitment timing. More broadly, portfolio sector growth trends began to emerge, funding strategies for each of Mercia's portfolio companies were determined and the fair value of the vast majority of the Group's funds and balance sheet assets showed promising signs of stability and in some cases, recovery. The Group's debt funds division became CBILS accredited, leading to a significant increase in the number of loan applications. The Group's consolidated interim results, which included a full six months' contribution from its December 2019 VCT fund management acquisition, reflected a satisfactory first-half performance with lower costs more than offsetting the relatively subdued revenues. Throughout the first six months, Mercia's staff worked tirelessly to support the Group's c.430 investees and each other. Towards the end of the second quarter, signs of recovering momentum across the Group became evident as Mercia's timely digital marketing pivot gained traction, with greater focus on social media 'Complete Connected Capital' brand awareness campaigns, alongside the increasingly popular 'Meet the Funder' virtual events. The second quarter's performance was enhanced by the Group's profitable exit from The Native Antigen Company, ultimately realising a gain in excess of holding value of £1.8million.
In the third quarter to 31 December 2020, asset price linked VCT fund management revenues recovered to their pre-pandemic levels and investment activity picked up in earnest, although the timing of the recovery in investment momentum differed asset class by asset class. Director monitoring fees from investees, which had either been deferred or provisioned against during the first half year, started to be paid with initial management fee income also increasing quarter on quarter. Whilst the Group's overhead cost base remained largely flat, recruitment efforts in earlier months began to bear fruit. Sector by sector, growth trajectories started to become clearer. For those sectors showing the fastest growth trends (in particular Life Sciences, Software and Digital Gaming), asset values and interest grew in Mercia's most exciting investees. Although held for less than two years as a direct investment, the Group accepted a full offer for Clear Review, resulting in a realised gain in excess of holding value of £0.5million.
During the final quarter of the financial year to 31 March 2021, Mercia's long-held potential emerged. Revenues fully recovered, helped in part by elevated investment activity towards the tax year end, deal flow increased further as Mercia's marketing pivot bore fruit, long-running recruitment efforts succeeded in attracting new talent into the Group and the excellent continuing work of all staff, still mainly working remotely, helped maintain its operational efficiency and leverage. A year of remarkable ups and downs culminated on 1 March 2021, when Mercia announced the sale of OXGENE for a substantial realised gain over holding value. The Group subsequently provided a positive trading update which included guidance on a much higher year end closing cash position.
The more detailed financial analysis which follows, therefore only tells part of the story of what was a breakthrough year for Mercia.
Adjusted operating profit - alternative performance measure ('APM')
The Group has always believed that the measurement and reporting of the difference between its revenues and total operating costs, excluding realised gains on disposal of investments, unrealised fair value movements, one-off items and non-cash charges, is an important APM of interest to shareholders.
On 1 April 2020, the Group adopted 'adjusted operating profit' as a more generally recognised APM for specialist asset managers, compared to its historic 'net revenues' APM. Adjusted operating profit is defined as operating profit before performance fees net of variable compensation, realised gains on disposal of investments, fair value movements in investments, share-based payments charge, depreciation, amortisation of intangible assets, movement in fair value of contingent consideration and exceptional items.
From Mercia's perspective and for comparison purposes, the difference between the historic measurement of net revenues and adjusted operating profit, is that the latter includes net finance income and excludes depreciation.
Results reported on an APM basis are denoted by ¹ throughout this review. The table below provides a bridge between the two APMs for the years ended 31 March 2021 and 2020.
|
Year ended 31 March 2021 £'000 |
Year ended
31 March 2020 £'000 | |
| Revenue1 | 19,186 | 12,747 |
| Administrative expenses1 | (15,897) | (12,449) |
| Depreciation | (212) | (212) |
| Net revenues | 3,077 | 86 |
| Depreciation | 212 | 212 |
| Net finance income | 48 | 220 |
| Adjusted operating profit | 3,337 | 518 |
The Directors believe that the reporting of adjusted operating profit assists in providing a consistent measure of operating performance, excluding distortions which can be caused by the reconciling items set out below for both the current and comparative years.
|
Year ended 31 March 2021 £'000 |
Year ended
31 March 2020 £'000 | |
| Adjusted operating profit | 3,337 | 518 |
| Performance fees (gross) | 4,224 | - |
| Variable compensation attributable to performance fees | (445) | - |
| Performance fees net of costs | 3,779 | - |
| Adjusted operating profit including performance fees net of costs | 7,116 | 518 |
| Depreciation | (212) | (212) |
| Net finance income | (48) | (220) |
| Realised gains on disposal of investments | 20,251 | - |
| Fair value movements in investments | 10,088 | (15,844) |
| Share-based payments charge | (543) | (528) |
| Amortisation of intangible assets | (2,317) | (852) |
| Movement in fair value of contingent consideration | (365) | - |
| Operating profit/(loss) before exceptional items | 33,970 | (17,138) |
| Exceptional items | - | (695) |
| Operating profit/(loss) | 33,970 | (17,833) |
A reconciliation of results reported on an APM basis to International Financial Reporting Standards ('IFRS') is as follows:
| Year ended 31 March 2021 | Year ended 31 March 2020 | ||||||
| APM basis1 | Performance fees | Depreciation | IFRS as reported |
APM
basis1 | Depreciation | IFRS as reported | |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Revenue | 19,186 | 4,224 | - | 23,410 | 12,747 | - | 12,747 |
| Administrative expenses | (15,897) | (445) | (212) | (16,554) | (12,449) | (212) | (12,661) |
| Depreciation | (212) | - | 212 | - | (212) | 212 | - |
Revenue
Revenue1 increased 50.5% to £19,186,000 (2020: £12,747,000) and comprised fund management related fees, initial management fees from investment rounds, investment director monitoring fees and sundry business services income. The majority of the increase was due to the first full year contribution from the Northern VCT fund management business, which was acquired in December 2019.
Administrative expenses
Administrative expenses, including depreciation, increased 30.7% to £16,554,000 (2020: £12,661,000) and comprised predominantly staff-related, office, marketing and professional adviser costs. The majority of the increase was also due to the first full year incremental operating costs of the acquired VCT fund management business. The increase was lower than might otherwise have been expected due to the pandemic's impact on the time taken to recruit additional budgeted staff across the Group's activities, in addition to travel-related and other cost savings arising from the prolonged working from home requirements.
As Mercia's assets under management grow and the financial benefits of operational leverage continue to be realised, the Group will ensure that an appropriate balance is kept between its investment expertise and its support functions' capacity and capability, to maintain its control environment and corporate governance culture.
Net finance income
Gross finance income of £68,000 (2020: £246,000) comprised interest earned on the Group's cash and short-term liquidity investments in addition to interest received on loans to direct portfolio companies which converted into equity instruments during the year. Finance costs of £20,000 (2020: £26,000) comprised interest payable on office leases.
Performance fees and attributable variable compensation
Performance fees and 'house' carried interest can become receivable from certain of the Group's fund management mandates, when pre-determined performance hurdles are exceeded. In the case of the Group's EIS funds, where performance hurdles are exceeded and a performance fee is receivable, a bonus scheme is in place predominantly for those staff involved in the raising, investment and administration of each EIS fund. Performance fees totalling £635,000 (2020: £nil) became receivable from four of the Group's EIS funds during the year, as the investment returns each exceeded their performance hurdle. Attributable staff bonuses (including employer's National Insurance) totalled £325,000 (2020: £nil).
During the year a performance fee totalling £284,000 (2020: £nil) was received from Northern Venture Trust PLC, based upon the growth in its net asset value per share above a hurdle for the year to 30 September 2020. As at 31 March 2021, performance fees totalling £3,305,000 (2020: £nil) became payable from Northern 2 VCT PLC and Northern 3 VCT PLC. Incremental VCT investment team bonuses (including employers National Insurance) totalling £120,000 have also been accrued (2020: £nil).
Adjusted operating profit excluding net performance fees increased by £2,819,000 to £3,337,000 (2020: £518,000) largely, although not exclusively, as a result of the overall first full year contribution of the acquired VCT fund management business.
Realised gains on disposal of investments
During the year, realised gains totalling £20,251,000 (2020: £nil) arose on the disposal of The Native Antigen Company, Clear Review and OXGENE.
On 9 July 2020, Mercia announced the profitable sale of The Native Antigen Company followed by, on 19 October 2020, the profitable sale of Clear Review. The Group recognised realised gains of £1,755,000 and £543,000 respectively.
On 1 March 2021, Mercia successfully delivered the strategic objective of 'evergreening' its balance sheet through the profitable sale of OXGENE for £30,696,000, crystallising a total realised gain for the year as a whole of £17,953,000. This realisation generated a 5x return on Mercia's direct investment cost of £6,129,000 and a 51% internal rate of return.
The Group also disposed of its investment in Crowd Reactive during the year, recovering its £150,000 holding value.
Fair value movements in investments
| Year ended 31 March 2021 £'000 |
Year ended
31 March 2020 £'000 | |
| Investment movements excluding cash invested and realisations: | ||
| Unrealised gains on the revaluation of investments | 10,773 | 3,351 |
| Unrealised losses on the revaluation of investments | (685) | (19,195) |
| Net fair value movement | 10,088 | (15,844) |
Net fair value increases during the year totalled £10,088,000 (2020: £15,844,000 decrease) and as at 31 March 2021, the fair value of the Group's direct investment portfolio was £96,220,000 (2020: £87,471,000). For the year as a whole, unrealised fair value gains arose in 11 (2020: four) out of the Group's 23 (2020: 25) direct investments. The largest fair value gain was in respect of MyHealthChecked, which accounted for £3,509,000 of the total (2020: £1,582,000 fair value gain in respect of OXGENE). There were four (2020: 10) fair value decreases, the largest being for £439,000 which arose in respect of Eyoto (2020: £5,313,000 fair value decrease for Warwick Acoustics).
Share-based payments charge
The £543,000 non-cash charge (2020: £528,000) arises from the net increase in the total number of issued share options held by employees throughout the Group, ranging from 28 August 2018 to 31 March 2021.
Amortisation of intangible assets
The amortisation charge for the period of £2,317,000 (2020: £852,000) represents the amortisation of the acquired intangible assets of both Enterprise Ventures Group Limited (''Enterprise Ventures'') and the VCT fund management business. The Enterprise Ventures intangible asset is now fully amortised.
Movement in fair value of contingent consideration
The VCT fund management total purchase price has a number of contingent consideration elements payable over a three year period. The total contingent consideration was fair valued at the date of acquisition. The charge to the income statement represents the unwinding of the discount on the first contingent consideration payment made in December 2020 (2020: £nil).
Taxation
The components of the Group's tax credit are shown in note 11 to the consolidated financial statements. The Group continues to utilise those historic trading losses which are available to set off against current year taxable profits. The overall tax credit comprises the unwinding of the deferred tax liability in respect of both the Enterprise Ventures and VCT fund management acquisitions. The Enterprise Ventures deferred tax liability was fully unwound in the year to 31 March 2021.
Total comprehensive profit for the year
The adjusted operating profit, net performance fees, realised gains made on the sale of The Native Antigen Company, Clear Review and OXGENE, together with net fair value increases for the year all contributed favourably to a record consolidated total comprehensive profit of £34,458,000 (2020: £17,454,000 loss), resulting in basic earnings per Ordinary share of 7.83 pence (2020: 5.11 pence loss per share).
Dividends
The profitable and operating cash generative first-half performance, together with its future prospects, enabled Mercia to declare and pay a maiden interim dividend of 0.1 pence per share; a landmark moment in the Group's evolution as a proactive, regionally focused, specialist asset manager. The even stronger second-half performance now enables Mercia's Board to recommend a proposed final dividend of 0.3 pence per share. If approved by shareholders at September 2021's Annual General Meeting, the total first year dividend will represent a yield of approximately 1% (2020: nil).
Balance sheet and cash flows
Net assets as at 31 March 2021 of £176,021,000 (2020: £141,460,000) were predominantly made up of goodwill, acquired VCT fund management contract related intangible assets, the direct investment portfolio and unrestricted cash. The Group continues to have limited working capital needs due to the nature of its business and generated net operating cash inflow of £5.6million (2020: £0.3million net inflow).
Intangible assets
Details of the Group's intangible assets are given in notes 15 and 16 to the consolidated financial statements, and consist of goodwill and intangible assets recognised on the acquisitions of Mercia Fund Management Limited, Enterprise Ventures and the VCT fund management business.
Direct investment portfolio
During the year under review, Mercia's direct investment portfolio grew from £87,471,000 as at 1 April 2020 (2020: 1 April 2019 £87,659,000) to £96,220,000 as at 31 March 2021 (2020: 87,471,000), a 10% increase notwithstanding the significant cash realisations achieved during the year.
The Group invested £15,397,000 net (2020: £15,656,000) into 17 existing and two new direct investments (2020: 17 and one respectively). The quantum of direct investment activity seen in the second half of the financial year was lower than the first half, as the majority of the direct portfolio are sufficiently well funded through to at least the end of 2021.
The table below lists the Group's top 20 direct investments by fair value as at 31 March 2021, including a breakdown of the net cash invested during the period, investment realisations, realised gains, net fair value movements and the fully diluted equity percentage of each company invested in at the year end. The Group's top 20 direct investments represent 98.5% of the total direct investment portfolio value (2020: 98.3%).
|
Year of
first direct investment |
Net
investment value As at 1 April 2020 £'000 | Net cash invested Year to 31 March 2021 £'000 | Investment realisations Year to 31 March 2021 £'000 |
Realised
gains Year to 31 March 2021 £'000 | Fair value movement Year to 31 March 2021 £'000 |
Net investment value As at 31 March 2021 £'000 | Percentage held As at 31 March 2021 % | |
| nDreams Ltd | 2014 | 16,120 | 1,000 | - | - | 606 | 17,726 | 35.4 |
| Intechnica Group Ltd | 2017 | 7,177 | 1,250 | - | - | 1,569 | 9,996 | 27.5 |
| Voxpopme Ltd | 2018 | 6,030 | 1,191 | - | - | 1,624 | 8,845 | 17.6 |
| Impression Technologies Ltd | 2015 | 4,294 | 2,401 | - | - | 1,927 | 8,622 | 67.3 |
| Medherant Ltd | 2016 | 6,705 | 1,400 | - | - | - | 8,105 | 29.0 |
| Faradion Ltd | 2017 | 4,025 | 500 | - | - | 1,168 | 5,693 | 15.6 |
| Ton UK Ltd t/a Intelligent Positioning | 2015 | 4,354 | 750 | - | - | (191) | 4,913 | 29.9 |
| MyHealthChecked plc | 2016 | 475 | 504 | - | - | 3,509 | 4,488 | 14.6 |
| Warwick Acoustics Ltd | 2014 | 3,656 | 500 | - | - | 99 | 4,255 | 35.8 |
| Soccer Manager Ltd | 2015 | 2,534 | 775 | - | - | 244 | 3,553 | 39.0 |
| Locate Bio Ltd | 2018 | 2,250 | 750 | - | - | 6 | 3,006 | 16.7 |
| VirtTrade Ltd t/a Avid Games | 2015 | 2,200 | 615 | - | - | (3) | 2,812 | 20.3 |
| sureCore Ltd | 2016 | 2,167 | 250 | - | - | - | 2,417 | 22.0 |
| PsiOxus Therapeutics Ltd | 2015 | 2,193 | 250 | - | - | (36) | 2,407 | 1.4 |
| Edge Case Games Ltd | 2015 | 2,300 | - | - | - | - | 2,300 | 21.2 |
| W2 Global Data Solutions Ltd | 2018 | 2,000 | 300 | - | - | - | 2,300 | 16.3 |
| Eyoto Group Ltd | 2017 | 1,752 | 500 | - | - | (439) | 1,813 | 15.7 |
| Sense Biodetection Ltd | 2020 | - | 945 | - | - | - | 945 | 1.2 |
| MIP Diagnostics Ltd | 2020 | - | 300 | - | - | 2 | 302 | 3.3 |
| LM Technologies Ltd | 2015 | 250 | - | - | - | - | 250 | 47.4 |
| Oxford Genetics Ltd t/a OXGENE | 11,743 | 1,000 | (30,696) | 17,953 | - | - | - | |
| The Native Antigen Company Ltd | 3,493 | - | (5,248) | 1,755 | - | - | - | |
| Clear Review Ltd | 500 | - | (1,043) | 543 | - | - | - | |
| Other direct investments | 1,253 | 216 | - | - | 3 | 1,472 | n/a | |
| Total | 87,471 | 15,397 | (36,987) | 20,251 | 10,088 | 96,220 | n/a |
Cash and short-term liquidity investments
At the year end, Mercia had cash and short-term liquidity investments totalling £54,725,000 (2020: £30,186,000) comprising cash of £54,491,000 (2020: £23,971,000) and short-term liquidity investments of £234,000 (2020: £6,215,000). The Group also separately held £2,484,000 (2020: £467,000) on behalf of third-party EIS investors. The overriding emphasis of the Group's treasury policy remains the preservation of its shareholders' cash for investment, corporate and working capital purposes, not yield. At the year end the Group's cash and short-term liquidity investments (which is cash on deposit with maturities between three and six months) were spread across four leading United Kingdom banks.
The summarised movement in the Group's cash position during the year is shown below.
|
Year ended 31 March 2021 £'000 |
Year ended
31 March 2020 £'000 | |
| Opening cash and short-term liquidity investments | 30,186 | 29,769 |
| Net cash generated from operating activities | 5,611 | 298 |
| Purchase of management contracts - deferred consideration | (2,100) | (12,400) |
| Net cash generated/(used) in direct and other investing activities | 21,606 | (15,456) |
| Issue of new Ordinary shares | - | 30,000 |
| Ordinary share capital issue costs | - | (1,879) |
| Dividends paid | (440) | - |
| Net cash used in financing activities | (138) | (146) |
| Cash and short-term liquidity investments at the year end | 54,725 | 30,186 |
Net assets
Net assets at the year end were £176,021,000 (2020: £141,460,000), resulting in net assets per share of 40.0 pence (being net assets of £176,021,000 divided by 440,109,707 shares in issue) (2020: 32.1 pence, being net assets of £141,460,000 divided by 440,109,707 shares in issue).
Outlook
It has been a year of many financial twists and turns for Mercia. These record results are a credit to everyone involved in the activities of the Group and just reward for our many patient and loyal shareholders. The Group's second-half momentum and profitable trading has continued into the first few months of the new financial year.
Venture investing does take time to produce positive results, but the three profitable cash exits from the direct investment portfolio during the year to 31 March 2021 demonstrate the potential for continuing incremental shareholder value creation. Taken together, the Group's growing trading profitability and positive operating net cash inflow underpin our recently established progressive dividend policy.
Notwithstanding the worrying times for everyone during the past year, these record results show that it is now an exciting period for all Mercia stakeholders.
Martin Glanfield
Chief Financial Officer
Summary Financial Information
Consolidated statement of comprehensive income
For the year ended 31 March 2021
| Year ended | Year ended | ||
| 31 March | 31 March | ||
| 2021 | 2020 | ||
| Note | £'000 | £'000 | |
| Revenue | 5 | 23,410 | 12,747 |
| Administrative expenses | (16,554) | (12,661) | |
| Realised gain on sale of direct investments | 12 | 20,251 | - |
| Fair value movements in direct investments | 12 | 10,088 | (15,844) |
| Share-based payments charge | (543) | (528) | |
| Amortisation of intangible assets | 11 | (2,317) | (852) |
| Movement in fair value of deferred consideration | (365) | - | |
| Operating profit/(loss) before exceptional items | 33,970 | (17,138) | |
| Exceptional items | - | (695) | |
| Operating profit/(loss) | 33,970 | (17,833) | |
| Finance income | 68 | 246 | |
| Finance expense | (20) | (26) | |
| Profit/(loss) before taxation | 34,018 | (17,613) | |
| Taxation | 440 | 159 | |
| Profit/(loss) and total comprehensive income/(loss) for the year | 34,458 | (17,454) | |
| Basic and diluted earnings/(loss) per Ordinary share (pence) | 8 | 7.83 | (5.11) |
All results derive from continuing operations.
Consolidated balance sheet
As at 31 March 2021
| As at | As at | ||
| 31 March | 31 March | ||
| 2021 | 2020 | ||
| Note | £'000 | £'000 | |
| Assets | |||
| Non-current assets | |||
| Goodwill | 10 | 16,642 | 16,642 |
| Intangible assets | 11 | 17,746 | 20,063 |
| Property, plant and equipment | 107 | 125 | |
| Right-of-use assets | 456 | 598 | |
| Investments | 12 | 96,220 | 87,471 |
| Total non-current assets | 131,171 | 124,899 | |
| Current assets | |||
| Trade and other receivables | 4,060 | 1,298 | |
| Restricted cash | 13 | 2,484 | 467 |
| Short-term liquidity investments | 13 | 234 | 6,215 |
| Cash and cash equivalents | 13 | 54,491 | 23,971 |
| Total current assets | 61,269 | 31,951 | |
| Total assets | 192,440 | 156,850 | |
| Current liabilities | |||
| Trade and other payables | (8,127) | (4,805) | |
| Lease liabilities | (122) | (118) | |
| Deferred consideration | 14 | (1,578) | (1,736) |
| Total current liabilities | (9,827) | (6,659) | |
| Non-current liabilities | |||
| Lease liabilities | (351) | (473) | |
| Deferred consideration | 14 | (2,869) | (4,446) |
| Deferred taxation | 15 | (3,372) | (3,812) |
| Total non-current liabilities | (6,592) | (8,731) | |
| Total liabilities | (16,419) | (15,390) | |
| Net assets | 176,021 | 141,460 | |
| Equity | |||
| Issued share capital | 16 | 4 | 4 |
| Share premium | 17 | 81,644 | 81,644 |
| Other distributable reserve | 18 | 69,560 | 70,000 |
| Retained earnings | 22,405 | (12,053) | |
| Share-based payments reserve | 2,408 | 1,865 | |
| Total equity | 176,021 | 141,460 |
Consolidated cash flow statement
For the year ended 31 March 2021
| Year ended | Year ended | ||
| 31 March | 31 March | ||
| 2021 | 2020 | ||
| Note | £'000 | £'000 | |
| Cash flows from operating activities: | |||
| Operating profit/(loss) | 33,970 | (17,833) | |
| Adjustments to reconcile operating profit/(loss) to net cash flows used in operating activities: | |||
| Depreciation of property, plant and equipment | 70 | 73 | |
| Depreciation of right-of-use assets | 142 | 139 | |
| Gain on sale of direct investments | 12 | (20,251) | - |
| Fair value movements in direct investments | 12 | (10,088) | 15,844 |
| Share-based payments charge | 543 | 528 | |
| Amortisation of intangible assets | 11 | 2,317 | 852 |
| Movement in fair value of contingent consideration | 14 | 365 | - |
| Working capital adjustments: | |||
| Increase in trade and other receivables | (2,762) | (514) | |
| Increase in trade and other payables | 1,305 | 1,209 | |
| Net cash generated from operating activities | 5,611 | 298 | |
| Cash flows from direct investment activities: | |||
| Sale of direct investments | 12 | 36,987 | - |
| Purchase of direct investments | 12 | (15,647) | (17,449) |
| Investee company loan repayments | 12 | 250 | 1,793 |
| Net cash generated from/(used in) direct investment activities | 21,590 | (15,656) | |
| Cash flows from other investing activities: | |||
| Purchase of property, plant and equipment | (52) | (45) | |
| Investee company loan redemption premiums and interest received | 68 | 245 | |
| Purchase of fund management contracts | 14 | (2,100) | (12,400) |
| Decrease/(increase) in short-term liquidity investments | 5,981 | (1,027) | |
| Net cash generated from/(used in) other investing activities | 3,897 | (13,227) | |
| Net cash generated from/(used in) total investing activities | 25,487 | (28,883) | |
| Cash flows from financing activities: | |||
| Dividends paid | 9 | (440) | - |
| Interest paid | (20) | (26) | |
| Proceeds from the issue of Ordinary shares | - | 30,000 | |
| Transaction costs relating to the issue of Ordinary shares | - | (1,879) | |
| Payment of lease liabilities | (118) | (120) | |
| Net cash (used in)/generated from financing activities | (578) | 27,975 | |
| Net increase/(decrease) in cash and cash equivalents | 30,520 | (610) | |
| Cash and cash equivalents at the beginning of the year | 13 | 23,971 | 24,581 |
| Cash and cash equivalents at the end of the year | 13 | 54,491 | 23,971 |
Consolidated statement of changes in equity
For the year ended 31 March 2021
| Issued | Other | Share-based | ||||
| share | Share | distributable | Retained | payments | ||
| capital | premium | reserve | earnings | reserve | Total | |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| As at 1 April 2019 | 3 | 49,324 | 70,000 | 5,401 | 1,337 | 126,065 |
| Loss and total comprehensive loss for the year | - | - | - | (17,454) | - | (17,454) |
| Issue of share capital | 1 | 34,199 | - | - | - | 34,200 |
| Cost of share capital issued | - | (1,879) | - | - | - | (1,879) |
| Share-based payments charge | - | - | - | - | 528 | 528 |
| As at 31 March 2020 | 4 | 81,644 | 70,000 | (12,053) | 1,865 | 141,460 |
| Profit and total comprehensive income for the year | - | - | - | 34,458 | - | 34,458 |
| Dividends paid | - | - | (440) | - | - | (440) |
| Share-based payments charge | - | - | - | - | 543 | 543 |
| As at 31 March 2021 | 4 | 81,644 | 69,560 | 22,405 | 2,408 | 176,021 |
Notes to the consolidated financial statements
For the year ended 31 March 2021
- General information
Mercia Asset Management PLC (the 'Group', 'Mercia') is a public limited company, incorporated and domiciled in England, United Kingdom, and registered in England and Wales with registered number 09223445. Its Ordinary shares are admitted to trading on the AIM market of the London Stock Exchange. The registered office address is Mercia Asset Management PLC, Forward House, 17 High Street, Henley-in-Arden, B95 5AA. Mercia Asset Management PLC's Ordinary shares were admitted to trading on AIM on 18 December 2014.
- Basis of preparation
The summary financial information included in this announcement has been extracted from the audited financial statements of the Group for the year ended 31 March 2021, which have been approved by the Board of Directors. The Group's auditor has consented to the publication of this announcement. The summary financial information does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006 (the 'Act'). The auditor's report on the financial statements for the year ended 31 March 2021 was unqualified and did not contain any statement under section 498 of the Act. The Group's Annual Report and financial statements will be delivered to the Registrar of Companies in due course.
The financial statements have been prepared on an historical cost basis, as modified by the revaluation of certain financial assets and financial liabilities in accordance with International Financial Reporting Standard ('IFRS') 9 'Financial Instruments'. The accounting policies presented in the summary financial information are consistent with those set out in the audited financial statements.
- Going concern
Based on the overall strength of the Group's balance sheet including its significant liquidity position at the year end, together with its forecast future operating and investment activities and having considered the ongoing impact of COVID-19 on the Group's operations and portfolio, the Directors have a reasonable expectation that the Group has adequate financial resources to manage business risks in the current economic environment and continue in operational existence for a period of at least twelve months from the date of this report. Accordingly, the Directors continue to adopt the going concern basis in preparing these consolidated financial statements.
- Significant accounting policies
Basis of consolidation
Subsidiaries and subsidiary undertakings are consolidated from the date of their acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. The financial statements of entities held within the Group's direct investment portfolio are not included within these consolidated financial statements as the Group accounts for these in accordance with the IFRS 10 Investment Entity exemption.
The Group accounts for business combinations using the acquisition method from the date that control is transferred to the Group. Both the identifiable net assets and the consideration transferred in the acquisition are measured at fair value and transaction costs are expensed as incurred. Goodwill arising on acquisitions is tested annually for impairment. Deferred consideration payable to the vendors is measured at fair value at acquisition and assessed annually with particular reference to the conditions upon which the consideration is contingent.
New standards, interpretations and amendments effective in the current financial year
The following new standards became effective in the current financial year:
- Amendments to References to the Conceptual Framework in IFRS Standards
- Amendments to IAS 8 'Accounting Policies, Changes in Accounting Estimates and Errors'
- Amendments to IFRS 3 'Business Combinations'
- Amendments to IFRS 16 'Covid-19 related Rent Concessions'
- Amendments to IFRS 17 'Insurance Contracts'
The adoption of these standards has had no material impact on the Group.
Critical accounting judgements and key sources of estimation uncertainty
In the application of the Group's accounting policies, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
The Directors have made the following judgements and estimates, which have had the most significant effect on the carrying amounts of the assets and liabilities in this summary financial information.
Fair value measurements and valuation processes
The judgements required to determine the appropriate valuation methodology of unquoted equity investments means there is risk of a material adjustment to the carrying amounts of assets and liabilities. These judgements include a decision whether or not to impair or uplift investment valuations.
The fair value of unlisted securities is established using the International Private Equity and Venture Capital Valuation Guidelines ('IPEVCVG'), as revised in December 2018.
Investments are measured at fair value at each measurement date. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that a hypothetical transaction to sell an asset takes place in the principal market or, in its absence, the most advantageous market for the asset. For quoted investments, available market prices will be the exclusive basis for the measurement of fair value for identical instruments. For unquoted investments, the measurement of fair value requires the valuer to assume the underlying business or instrument is realised or sold at the measurement date, appropriately allocated to the various interests, regardless of whether the underlying business is prepared for sale or whether its shareholders intend to sell in the near future.
In estimating fair value for an investment, the valuer should apply a methodology that is appropriate in light of the nature, facts and circumstances of the investment in the context of the total investment portfolio and should use reasonable current market data and inputs, combined with reasonable market participant assumptions.
The price of recent investment can be used to estimate the enterprise value, before allocating to the various interests. The Group believes that this is still the most relevant technique to measure fair value for early-stage investments. However, it has also taken into consideration time elapsed, performance since and external market events to help inform its judgements.
0-6 months post last funding round
The Group will apply the price of a recent investment for up to six months post the last funding round, subject to there being no material change to the investee company's prospects (which would include the prospects of drawing down the next tranche or raising the next round of funding).
7-18 months post last funding round
Beyond the six months point, the Group seeks assurance that the investee company is progressing against the development milestones which were set out in the initial assessment. Failing to hit milestones will not necessarily impact the valuation - this may simply be an indicator that incremental value will take longer to deliver, but the performance against milestones is assessed as an indicator of a potential change in value. The Group will be cautious about increasing the valuation of an early-stage investee company unless it is based on a new market price or maintainable revenues and/or earnings.
19+ months post last funding round
From this point onwards, the Group looks for additional support for the 'price of recent investment' by calibrating back to that using a discounted cash flow ('DCF') methodology. However, unless the investee company has become established with maintainable revenues and/or earnings and can be valued on an earnings basis, given the inherent risk in early-stage investing and the lack of reliability of using estimates of such metrics yet to be delivered a number of years into the future, the Group is unlikely to increase the fair value, even if a DCF calculation suggests a higher value. Nevertheless, the DCF calculation helps support the proposed fair value at the valuation point.
The macroeconomic uncertainty has created uncertainty in the fair value of the direct investment portfolio. The Directors believe that they have reflected this uncertainty in a balanced way through the assumptions used in the valuations of each investee company. The Directors have assessed the estimates made in relation to each individual valuation and do not believe that a reasonable possible change in estimate would result in a material change in the value of each investment.
Accounting for the acquisition of the VCT fund management business of NVM Private Equity LLP
On 23 December 2019 Mercia completed the acquisition of the VCT fund management business of NVM Private Equity LLP ('NVM'), which comprised the acquisition of three fund management contracts ('the Northern VCT contracts') and the transfer of NVM's VCT investment team. Further details are included in note 9 to this summary financial information. The fund management contracts acquired in the transaction have been fair valued at acquisition with reference to the forecast cash revenues from each contract, less the forecast costs associated with servicing those contracts, over an expected useful life of 10 years for each of the Northern VCT contracts, discounted at the rate of 15%. The discount applied is reflective, inter alia, of the risk profile of the contracts acquired and is considered a significant assumption. Should the discount rate be increased by 1%, the value of the fund management contracts would reduce by £800,000 with goodwill increasing by a corresponding amount. The expected useful life is considered a significant assumption. Should it be increased by one year, the value of the fund management contracts would increase by £1,300,000 with goodwill decreasing by a corresponding amount. Should the cash revenues from each contract less the costs associated with servicing those contracts increase by 1%, the value of the fund management contracts would increase by £200,000 with goodwill decreasing by a corresponding amount.
Goodwill has been recognised as the difference between the fair value of consideration paid and the fair value of the fund management contracts acquired.
Valuation of deferred consideration
The fair value of the deferred consideration payable to NVM in respect of the acquisition of its VCT fund management business, contingent upon certain conditions being met, has been estimated with reference to the contractual obligations as at 31 March 2021. The conditions upon which payment of the deferred consideration is contingent are outlined below and included in note 14 to these consolidated financial statements.
The first condition is that no termination notice is served by any of the three Northern VCT boards before the first, second and third anniversaries of completion. In December 2020 the first deferred consideration payment of £2,100,000 was paid in cash by the Group. There have been no indications to date that notice will be given before the second and third anniversaries.
The second condition is that the Group receives at least £16,000,000 of fees in respect of the VCT fund management contracts during the three years post completion. The third condition is that, during the same three-year period, the Northern VCTs collectively raise at least £60,000,000 in new capital. The fair value of the deferred consideration in respect of these two conditions has been based on a weighted probability of outcomes over the remaining period and discounted by 10%.
The discount applied is reflective of the risk profile of the conditions being met and is considered a significant assumption. Should the discount rate be increased by 1%, the discounted value of the deferred consideration would reduce by £200,000 with goodwill decreasing by a corresponding amount.
- Segmental reporting
For the year ended 31 March 2021, the Group's revenue and loss were derived from its principal activity within the United Kingdom.
IFRS 8 'Operating Segments' defines operating segments as those activities of an entity about which separate financial information is available and which are evaluated by the Chief Operating Decision Maker to assess performance and determine the allocation of resources. The Chief Operating Decision Maker has been identified as the Board of Directors. The Directors are of the opinion that under IFRS 8 the Group has only one operating segment, being proactive specialist asset management, because the results of the Group are monitored on a Group-wide basis. The Board of Directors assesses the performance of the operating segment using financial information which is measured and presented in a consistent manner.
An analysis of the Group's revenue is as follows:
| Year ended | Year ended | |
| 31 March | 31 March | |
| 2021 | 2020 | |
| £'000 | £'000 | |
| Fund management fees | 13,143 | 8,861 |
| Initial management fees | 1,447 | 1,286 |
| Portfolio directors' fees | 3,086 | 2,380 |
| Share offer fees | 1,318 | - |
| Performance fees | 4,224 | - |
| Other revenue | 192 | 220 |
| 23,410 | 12,747 |
- Fair value movements in investments
| Year ended | Year ended | |
| 31 March | 31 March | |
| 2021 | 2020 | |
| £'000 | £'000 | |
| Net fair value movements in investments (note 12) | 10,088 | (15,844) |
- Operating profit/(loss)
Operating profit/(loss) is stated after charging:
| Year ended | Year ended | |
| 31 March | 31 March | |
| 2021 | 2020 | |
| £'000 | £'000 | |
| Staff costs (including bonuses linked to performance fees) | 10,703 | 8,780 |
| Other administrative expenses | 5,851 | 3,881 |
| Total administrative expenses | 16,554 | 12,661 |
- Earnings per share
Basic earnings per share is calculated by dividing the profit/(loss) for the financial year by the weighted average number of Ordinary shares in issue during the year. Diluted earnings per share is calculated by dividing the profit/(loss) for the financial year by the weighted average number of Ordinary shares outstanding and, when dilutive, adjusted for the effect of all potentially dilutive shares including share options on an as-if-converted basis. The potential dilutive shares are included in diluted earnings per share calculations on a weighted average basis for the year. The profit/(loss) and weighted average number of shares used in the calculations are set out below:
| Year ended | Year ended | |
| 31 March | 31 March | |
| 2021 | 2020 | |
| Profit/(loss) for the financial year (£'000) | 34,458 | (17,454) |
| Basic weighted average number of Ordinary shares ('000) | 440,110 | 341,401 |
| Basic earnings/(loss) per Ordinary share (pence) | 7.83 | (5.11) |
| Diluted weighted average number of Ordinary shares ('000) | 440,110 | 341,627 |
| Diluted earnings/(loss) per Ordinary share (pence) | 7.83 | (5.11) |
The calculation of basic and diluted earnings/(loss) per share is based on the following weighted average number of Ordinary shares:
| Year ended | Year ended | |
| 31 March | 31 March | |
| 2021 | 2020 | |
| '000 | '000 | |
| Weighted average number of shares | ||
| Basic | 440,110 | 341,401 |
| Dilutive impact of Ordinary shares | - | 226 |
| Diluted weighted average number of Ordinary shares | 440,110 | 341,627 |
- Dividends
In December 2020 the Company paid £440,000 with respect to an interim dividend for the year ended 31 March 2021 of 0.1 pence per share. A final dividend for the year ended 31 March 2021 of 0.3 pence per share, totalling £1,320,000, is proposed by the Directors.
| Year ended 31 March 2021 | Year ended 31 March 2020 | |||
| Pence per share | £'000 | Pence per share | £'000 | |
| Equity shares | ||||
| Interim | 0.1 | 440 | - | - |
| Final proposed | 0.3 | 1,320 | - | - |
| Total | 0.4 | 1,760 | - | - |
The final dividend for the year ended 31 March 2021 is subject to shareholder approval at the Annual General Meeting in September 2021, and as such has not been included as a liability in these financial statements in accordance with IAS 10.
- Goodwill
The goodwill arising on the businesses acquired to date, being Mercia Fund Management Limited, Enterprise Ventures and the VCT fund management business of NVM, is set out in the table below.
Mercia Fund Management | Enterprise Ventures | VCT fund management contracts | Total | |
| £'000 | £'000 | £'000 | £'000 | |
| Cost | ||||
| As at 1 April 2019 | 2,455 | 7,873 | - | 10,328 |
| Additions | - | - | 6,314 | 6,314 |
| As at 31 March 2020 | 2,455 | 7,873 | 6,314 | 16,642 |
| As at 31 March 2021 | 2,455 | 7,873 | 6,314 | 16,642 |
Goodwill of £6,314,000 arose on the acquisition of the VCT fund management business in December 2019.
Goodwill for each business acquired has been assessed for impairment as at 31 March 2021. Recoverable amounts for each cash generating unit ('CGU') are based on the higher of value in use and fair value less costs of disposal ('FVLCD'). The review concluded that the value in use of each CGU exceeds its carrying value. The Directors do not consider that any reasonable possible changes to the key assumptions would reduce the recoverable amount of the CGUs to their carrying value.
- Intangible assets
Intangible assets represent contractual arrangements in respect of the acquisition of the VCT fund management business and the acquisition of Enterprise Ventures, where it is probable that the future economic benefits that are attributable to those assets will flow to the Group and the fair value of the assets can be measured reliably.
| £'000 | |
| Cost | |
| As at 1 April 2019 | 1,504 |
| Additions | 20,331 |
| As at 31 March 2020 and 31 March 2021 | 21,835 |
| Accumulated amortisation | |
| As at 1 April 2019 | 920 |
| Charge for the year | 852 |
| As at 31 March 2020 | 1,772 |
| Charge for the year | 2,317 |
| As at 31 March 2021 | 4,089 |
| Net book value | |
| As at 1 April 2019 | 584 |
| As at 31 March 2020 | 20,063 |
| As at 31 March 2021 | 17,746 |
The intangible asset recognised on acquisition of Enterprise Ventures became fully amortised in March 2021.
- Investments
The net change in the value of investments for the year is an increase of £8,749,000 (2020: £188,000 decrease). The table below reconciles the opening to closing value of investments for both the current and prior years.
| Year ended | Year ended | |
| 31 March | 31 March | |
| 2021 | 2020 | |
| £'000 | £'000 | |
| As at 1 April | 87,471 | 87,659 |
| Investments made during the year | 15,647 | 17,449 |
| Investee company loan repayments | (250) | (1,793) |
| Disposals | (16,736) | - |
| Unrealised fair value gains on investments | 10,773 | 3,351 |
| Unrealised fair value losses on investments | (685) | (19,195) |
| As at 31 March | 96,220 | 87,471 |
On 8 June 2020, Crowd Reactive Limited repaid in full a £150,000 debt investment made by the Group.
On 9 July 2020, the Group sold its investment held in The Native Antigen Company Limited for a total cash consideration of £5,248,000, recognising a realised gain of £1,755,000.
On 19 October 2020, the Group sold its investment held in Clear Review Limited for a total cash consideration of £1,043,000, recognising a realised gain of £543,000.
On 1 March 2021, the Group sold its investment held in Oxford Genetics Limited for a total cash consideration of £30,696,000, recognising a realised gain of £17,953,000.
Investments held as part of the Group's direct investment portfolio are carried in the balance sheet at fair value in accordance with the IFRS 10 Investment Entity exemption.
The measurement basis for determining the fair value of investments held at 31 March is as follows.
|
Year ended 31 March 2021 |
Year ended
31 March 2020 | |
| £'000 | £'000 | |
| Listed investment | 4,488 | 475 |
| Price of last investment round | 48,210 | 35,750 |
| Enterprise value | 26,717 | 26,437 |
| Cost | 3,245 | 9,103 |
| Impaired value | 13,560 | 15,706 |
| As at 31 March | 96,220 | 87,471 |
- Cash, restricted cash, cash equivalents and short-term liquidity investments
| As at | As at | |
| 31 March | 31 March | |
| 2021 | 2020 | |
| £'000 | £'000 | |
| Cash at bank and in hand | 54,491 | 23,971 |
| Total cash and cash equivalents | 54,491 | 23,971 |
| Total short-term liquidity investments | 234 | 6,215 |
| Total restricted cash | 2,484 | 467 |
The Group holds £2,484,000 (2020: £467,000) of cash on behalf of third-party EIS investors which is not available for use by the Group and therefore has been presented as restricted cash.
- Deferred consideration
| As at | As at | |
| 31 March | 31 March | |
| 2021 | 2020 | |
| £'000 | £'000 | |
| Payable within one year | 1,578 | 1,736 |
| Payable within two to five years | 2,869 | 4,446 |
| 4,447 | 6,182 |
On 23 December 2019 Mercia completed the acquisition of the VCT fund management business of NVM for a total maximum consideration of £25,000,000 comprising a combination of cash and new Ordinary Mercia shares. The initial consideration was £16,600,000, with deferred consideration of up to £8,400,000 also being payable, contingent upon certain conditions being met.
The deferred consideration comprises £6,300,000 in cash, payable in three equal instalments on the first, second and third anniversaries of completion, provided that no termination notice has been served by any of the Northern VCTs before each respective anniversary payment date, in addition to £2,100,000 payable in new Ordinary Mercia shares. In December 2020, the first cash instalment of £2,100,000 was paid by the Group.
Half of the deferred consideration shares will be payable if the Group has received at least £16,000,000 of fees in respect of the Northern VCT contracts in the three years post completion. The remaining 50% of the deferred consideration shares will be allotted and issued if, during the same three-year period, the Northern VCTs collectively raise at least £60,000,000 in new capital. If either or both of these conditions are met, the number of new Ordinary shares to be issued to satisfy the deferred share consideration will be calculated based on the average of the daily closing mid-market price for an Ordinary Mercia share, for each of the five days immediately preceding the date of issue.
The fair value of the deferred consideration is based on a weighted probability of outcomes over the remaining period and discounted by 10%. The fair value movement in deferred consideration during the year resulted in a charge to the consolidated statement of comprehensive income of £365,000 (2020: £nil).
- Deferred taxation
| As at | As at | |
| 31 March | 31 March | |
| 2021 | 2020 | |
| £'000 | £'000 | |
| Deferred tax liability | 3,372 | 3,812 |
Under IAS 12, 'Income Taxes', provision is made for the deferred tax liability associated with the recognition of the intangible asset arising on the acquisition of the VCT fund management business of NVM. This has been recognised at 19% of the fair value of the fund management contracts at acquisition and is reassessed at each year end, with the movement being recognised in the consolidated statement of comprehensive income.
As at 31 March 2021, a deferred tax liability of £3,372,000 (2020: £3,812,000) is recognised. Of this amount £3,372,000 (2020: £3,758,000) is in respect of the intangible asset arising on the acquisition of the VCT fund management business and £nil (2020: £54,000) is in respect of the intangible asset arising on the acquisition of Enterprise Ventures due to it being fully amortised in March 2021.
- Issued share capital
| As at 31 March 2021 | As at 31 March 2020 | |||
| Number | £'000 | Number | £'000 | |
| Allotted and fully paid | ||||
| As at the beginning of the year | 440,109,707 | 4 | 303,309,707 | 3 |
| Issue of share capital during the year | - | - | 136,800,000 | 1 |
| As at the end of the year | 440,109,707 | 4 | 440,109,707 | 4 |
Each Ordinary share is entitled to one vote and has equal rights as to dividends. The Ordinary shares are not redeemable.
- Share premium
| As at | As at | |
| 31 March | 31 March | |
| 2021 | 2020 | |
| £'000 | £'000 | |
| As at the beginning of the year | 81,644 | 49,324 |
| Premium arising on the issue of Ordinary shares | - | 34,199 |
| Cost of share capital issued | - | (1,879) |
| As at the end of the year | 81,644 | 81,644 |
- Other distributable reserve
| As at | As at | |
| 31 March | 31 March | |
| 2021 | 2020 | |
| £'000 | £'000 | |
| As at the beginning of the year | 70,000 | 70,000 |
| Dividend paid (note 9) | (440) | - |
| As at the end of the year | 69,560 | 70,000 |
- Fair value measurements
The fair values of the Group's financial assets and liabilities are considered a reasonable approximation to the carrying values shown in the consolidated balance sheet. Subsequent to their initial recognition at fair value, measurements of movements in fair values of financial instruments are grouped into Levels 1 to 3, based on the degree to which the fair value is observable.
The following table gives information about how the fair values of these financial assets and financial liabilities are determined and presents the Group's assets that are measured at fair value. There have been no movements in financial assets or financial liabilities between levels during the current or prior years. The table in note 12 sets out the movement in the Level 1 and 3 financial assets, in totality, from the start to the end of the year.
| As at | As at | |||
| 31 March | 31 March | |||
| 2021 | 2020 | |||
| £'000 | £'000 | |||
| Assets: | ||||
| Financial assets at fair value through profit or loss ('FVTPL') | ||||
| Level 1 | 4,488 | 475 | ||
| Level 2 | - | - | ||
| Level 3 | 91,732 | 86,996 | ||
| 96,220 | 87,471 |
| As at | As at | |||
| 31 March | 31 March | |||
| 2021 | 2020 | |||
| £'000 | £'000 | |||
| Liabilities: | ||||
| Financial liabilities at amortised cost - deferred consideration | ||||
| Level 1 | - | - | ||
| Level 2 | - | - | ||
| Level 3 | 4,447 | 6,182 | ||
| 4,447 | 6,182 |
The Directors consider that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in the financial statements approximate to their fair values.
Financial instruments in Level 1
The Group had one direct investment listed on AIM, MyHealthChecked plc, which is valued using the closing bid price at the 31 March.
Financial instruments in Level 3
If one or more of the significant inputs required to fair value an instrument is not based on observable market data, the instrument is included in Level 3. Apart from the one investment classified in Level 1, all other investments held in the Group's direct investment portfolio have been classified in Level 3 in the fair value hierarchy and the individual valuations for each of the companies have been arrived at using appropriate valuation techniques.
The Group adopts the International Private Equity and Venture Capital Valuation Guidelines in its valuation techniques, which specify that the price of a recent investment represents one of a number of inputs used to arrive at fair value, and uses a single classification for all Level 3 investments.
Note 4 provides further information on the Group's valuation methodology, including a detailed explanation of the valuation techniques used for Level 3 financial instruments.
- Availability of Annual Report
The Annual Report of Mercia Asset Management PLC will be posted to all shareholders on 30 July 2021. An electronic copy will also be available on Mercia Asset Management PLC's website at www.mercia.co.uk.
- Annual General Meeting
The Annual General Meeting of Mercia Asset Management PLC will be held at Forward House, 17 High Street, Henley-in-Arden, Warwickshire B95 5AA on 14 September 2021 at 10.00 am.
Coronavirus ('COVID-19') Annual General Meeting implications
The Company continues to closely monitor developments relating to COVID-19. The UK Government has introduced measures and recommendations to prevent the spread of COVID-19, including restrictions on events with large numbers of attendees. These measures and recommendations could change, including additional measures being introduced in the future.
The Company's current intention is to proceed with the Annual General Meeting at the time, date and place set out in this notice. The Company will continue to monitor UK Government and NHS advice and members will be notified in the event that the Company is required to change its plans. In order that members can exercise their rights whether or not they are able to attend the Annual General Meeting in person, and as it is important that members cast their votes at the Annual General Meeting, the Company strongly encourages all members to appoint a proxy for all votes.
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Mercia Asset Management plc published this content on 06 July 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 06 July 2021 06:35:01 UTC.
