Complete • Connected • Capital
#OneMercia
Annual Report and Accounts 2020
Welcome to
The proactive,
regionally focused
specialist asset
manager
In the regions,
from the regions,
to the regions.
Our purpose is to provide growth capital
and tailored investment solutions to
fast-growing regional businesses to
create long-term shareholder value.
Number of portfolio businesses
c.390
Available capital
c.£320m
Images on front cover:
(Left) Peter Dines, Chief Operating Officer.
(Right) Jill Williams, Investment Director, Private Equity.
Contents
Strategic report
02 Highlights
04 At a glance
06 The regional investor
08 Non-executive Chair’s statement
12 Our business model
14 Our strategy
16 Chief Executive Officer’s review
20 Strategy in action
22 Key performance indicators
24 Chief Investment Officer's review
30 Our portfolio
38 Stakeholder engagement
40 People, culture and values
44 Responsible business
46 Chief Financial Officer’s review
52 Principal risks and uncertainties
Governance
56 Board of Directors
58 Directors’ report
59 Statement of Directors’ responsibilities
60 Corporate governance report
65 Remuneration report
Financial statements
69
74 Financial statements and notes
Independent auditor's report
Other information
108 Directors, secretary and advisers
109 Notice of Annual General Meeting
What’s in this report
Responding to
market conditions
› See more on
page 11
As we emerge from one of the
most challenging market
conditions on record, Mercia is
well placed with preserved
capability and liquidity to manage
the immediate priorities and
sustain its three-year strategic
priorities.
Strategic
priorities
› See more on
page 15
We have strengthened our balance
sheet, grown our assets under
management (“AuM”), taken the
Group to net revenues and readied
the business to take full advantage
of the opportunities that will
emerge.
Managing
our risks
People have been our key priority.
We have safeguarded their health
and wellbeing and ensured that a
rigorous response has been put in
place to preserve our assets and
minimise our risk exposure.
› See more on
page 52
Mercia Asset Management PLC
Annual Report and Accounts 2020
01
Strategic reportFinancial statementsGovernance Highlights
We are on
a rewarding
journey, together
As we emerge from the current
challenging environment,
we are well placed with preserved
capability and liquidity to sustain
our highly selective investment
strategy and the flexibility to
continue to support and
manage our portfolios as
companies mature.
Assets under management (“AuM”)
c.£800m
2019: c.£507m
Funds under management (“FuM”)
c.£658m
2019: c.£381m
02
02
Mercia Asset Management PLC
Annual Report and Accounts 2020
Ryan Cawood
CEO, OXGENE.
Jocelyne Bath
COO, OXGENE.
Net assets
£141.5m
2019: £126.1m
Unrestricted cash
£30.2m
2019: £29.8m
Revenue
£12.7m
2019: £10.7m
Direct investment portfolio
£87.5m
2019: £87.7m
Net revenues
£0.1m
2019: £1.4m net expenses
Portfolio developments
› £17.5million gross invested into 18 portfolio
companies during the year including one new direct
investment, One Touch Apps, t/a Clear Review
› Net fair value decrease of £15.8million – near-term
COVID-19 impact (2019: £3.9million increase)
› Direct investment portfolio decreased to
£87.5million (2019: £87.7million)
› 12 portfolio companies received new investment
from external investment partners
› Notwithstanding COVID-19 impact, continuing
underlying commercial progress made by a number
of portfolio companies including nDreams, which
continues to be the Group’s largest direct investment
Operational highlights
› Third-party FuM increased to c.£658million (2019:
c.£381million) contributing £11.7million in revenue
› FuM increase largely reflects the acquisition of
NVM VCT fund management business that added
c.£250million in managed funds
› Venture FuM c.£476million (2019: c.£224million)
› Private equity FuM c.£60million (2019: c.£61million)
› Debt FuM c.£122million (2019: c.£96million)
Woodall Nicholson
Group
The Group completed its
highest value PE fund
exit so far, having sold a
stake in Woodall
Nicholson Group
Limited at a multiple of
9.6x the original
investment.
› See more on
page 32
Mercia Asset Management PLC
Annual Report and Accounts 2020
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Strategic reportFinancial statementsGovernance w
w
01
At a glance
Complete
Connected
Capital
Mercia’s investments across its four asset classes are powering
ambitious regional SMEs with the capital that they need to grow.
Our business model is designed specifically to support the funding
needs of companies through their journey from origin to exit.
Balance sheet
Up to £10m
We believe our approach to investing differentiates us.
Mercia’s model is to seek material influence (c.20%–40%)
in companies with modest capital needs, typically less than
£10.0million, and with realistic entry valuations. We are
active board advisers and engaged intermediaries in the
businesses in which we invest. We provide access to the
Mercia Platform of sector experts and talent network of
non-executives. We are not restricted in our ability to
provide capital investment and follow-on funding to our
portfolio assets so we can support each of these investee
companies throughout their growth journey to optimum
returns and timely realisations.
Venture
£100k–£10m
The UK’s regions are home to an abundance of early-stage
and scaling companies that Mercia has long recognised
and provided capital to. Our aim is to close the funding gap
in the regions, demonstrated by our track record of
investment into c.230 inspiring businesses in the Midlands,
the North of England and Scotland. Sourced through our
deeply embedded networks, digital deal origination and
local partnership initiatives, our capital investment and
advice have fuelled emerging industries and supported
innovative growth for ambitious companies seeking
profitability.
Total portfolio
Total invested in 2020
Liquidity
25
£17.5m
£30.2m
Total portfolio
Total invested in 2020
FuM
233
£34.4m
£475.6m
Private equity
Up to £10m
Mercia’s performance in the private equity space remains
robust. Our ability to support established businesses that
benefit from long-term growth trends and to apply disciplined,
active management to these portfolio companies has
maximised shareholder returns. Our purpose, to generate
attractive returns for our shareholders and fund investors,
is underpinned by considered origination and identifying and
leveraging the talent in our non-executive network to provide
the optimal stewardship of our portfolio businesses.
Debt
£100k–£10m
We back ambition in the regions by lending debt finance
to businesses that are established, profitable and
led by management teams that have a growth track
record. Frequently used to preserve equity or working
alongside the private equity team, debt plays a key role in
Mercia’s Complete Connected Capital model, offering
tailored solutions to small and medium-sized companies
across a broad range of sectors.
Total portfolio
Total invested in 2020
FuM
10
£10.7m
£59.8m
Total portfolio
Total loans in 2020
FuM
119
£14.5m
£121.8m
04
Mercia Asset Management PLC
Annual Report and Accounts 2020
w
w
02
03
04
Governance
Financial statements
05
06
8 offices
across the UK
01 Ian Wilson, Fund Principal, North East
Venture Fund & Investment Committee.
02 Maurice Disasi, Investment Associate,
NPIF Equity.
03 Alex Wilson, Investment Manager,
Mercia Northern VCTs.
04 Michelle Heaselgrave, Head of
People & Talent.
05 Chris Kilroy, Investment Director, EIS.
06 Val Andrew, Fund Administrator,
Debt Finance.
We have a solid track record of investing
through economic cycles and
consistently providing returns across
all our asset classes under management.
Mercia Asset Management PLC
Annual Report and Accounts 2020
05
Strategic report
The regional investor
Right capital,
right company,
right place
As a proactive specialist asset
manager investing in the regions,
we have created an investment model
to specifically support the needs of
exciting, well-led SMEs in their rapid
growth and deliver shareholder and
fund investor value.
We pride ourselves on the
positive impact we have
made in the regions.
Our critical success factors
remain: the ability to invest
through economic and
business cycles, pick well,
buy well and exit well to
create substantial value.
Dr Mark Payton
Chief Executive Officer
06
Mercia Asset Management PLC
Annual Report and Accounts 2020
Armit Chandan
CEO, Aceleron.
Carlton Cummins
CTO, Aceleron.
Our focus
We are exclusively a domestic investor, with a focus
on the UK regions where we are a leading provider
of capital to ambitious SMEs to support those
businesses from early-stage to scale-up and growth.
Our locations
We have eight regional offices
across the UK, as well as two
additional locations from which
our staff can be based.
Distribution of
high-growth firms
Total equity
investment
across UK
46%
22%
Edinburgh
Henley-in-Arden
Hull
Leeds
Manchester
Newcastle
Nottingham
Preston
Sheffield
Tees Valley
Mercia Asset Management PLC
Annual Report and Accounts 2020
07
Financial statementsGovernanceStrategic report Non-executive Chair’s statement
Times such as these can be
challenging and difficult,
but they can also be defining
moments. I am proud to be
part of #OneMercia.
08
Mercia Asset Management PLC
Annual Report and Accounts 2020
The execution of
Mercia’s strategy
is making good
progress
The Board remains focused on the progress of
the largest balance sheet direct investments,
as well as the successful stewardship of the
Group’s growing fund management activities.
The near-term impact on fair values, and
therefore the Group’s net asset value per
share, is frustrating. However, Mercia’s strong
liquidity position, both within its managed
funds and within its own balance sheet,
provides the Group with considerable
investment capacity to take advantage of
anticipated lower entry prices as the current
financial year unfolds. Investment returns by
a portfolio are often driven more by entry
prices than by exit prices and Mercia intends
to take full advantage of the investment
opportunities, which it anticipates will arise
during the coming months.
The investment teams across all of our asset
classes, being balance sheet, venture, private
equity and debt, have been working closely
with their portfolio companies to help as
many as possible through the current
unprecedented economic slowdown. Mercia’s
marketing team has also hosted a number of
impressive and insightful webinars on a wide
range of relevant business support topics,
aimed specifically at helping our c.390
portfolio companies.
The year ended 31 March 2020 has seen
continued positive progress towards the
execution of the Group’s strategic plan.
This is reflected in the underlying progress
made by many of the businesses in the
Group’s direct investment portfolio, as
well as Mercia’s growing and profitable
fund management operations. Notable
events during a busy year for Mercia were
the successful placing and acquisition,
which were announced alongside
the Group’s interim results on
3 December 2020.
Direct investment portfolio
Valuing the direct investment portfolio on
31 March 2020, so soon into the United
Kingdom’s COVID-19 related ‘lockdown’,
is inevitably difficult. The Group has
consistently complied with the International
Private Equity and Venture Capital Valuation
Guidelines (“IPEVCVG”). This has resulted in
an overall fair value reduction in the direct
portfolio of 15.3%. It is important to note that
these fair values have been determined at a
moment of global economic crisis which will
ease over time, and that within the portfolio
are companies which are still making rapid
commercial progress. Whilst it is possible that
not all of the existing portfolio companies will
survive current sector-specific challenges,
most will, and we expect their fair values to
recover over time. Furthermore, for some of
the portfolio companies this period will
actually see their fair values accelerate faster
than would have been the case under normal
economic conditions.
Living
our values
We recruit exceptional people who
are bright, creative, with a credible
track record and a passion for what
we do and getting things done.
Growth focused:
We seek to optimise
performance and growth at an
individual, team, Group and
investee level.
Responsive:
We think deeply, always meeting
commitments and aiming to
exceed expectations.
Knowledgeable:
We are recognised as experts in
our field, sharing knowledge for
the benefit of others.
Trusted:
We are trusted partners, known
for being honest, professional,
reliable and fair.
› See more on
page 43
Mercia Asset Management PLC
Annual Report and Accounts 2020
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Strategic reportGovernanceFinancial statements Non-executive Chair’s statement continued
Successful placing and acquisition
On 3 December 2019 Mercia simultaneously
announced a proposed placing to raise
£30.0million gross and the conditional
agreement to acquire three venture capital
trust (“VCT”) fund management contracts
(‘the Northern VCT contracts’) from NVM
Private Equity LLP (“NVM”), together with their
VCT investment team, for a total consideration
of up to £25.0million. On 20 December 2019,
shareholders overwhelmingly approved the
issue of 120.0million new Ordinary shares at
25.0 pence per share via the placing, and the
acquisition of the VCT fund management
business was completed on 23 December
2019. Approximately half of the placing
proceeds were used to fund the initial cash
consideration for the acquisition and the
placing expenses, whilst the remainder has
strengthened the Group’s ability to continue
to invest in the most promising businesses,
both in its direct investment portfolio and
those showing most promise in its managed
funds.
The three Northern VCTs are long-standing,
professionally-governed and successful listed
investment trusts. The broadly regional focus,
inclusive culture and sound business values
of NVM, and within it their talented VCT
investment team, chimed closely with Mercia’s
own DNA. The Board was very pleased to be
able to agree mutually satisfactory terms with
NVM and is most grateful to the boards of the
three Northern VCTs for their agreement to
novate each of the fund management
contracts to Mercia. A post-acquisition
100-day integration plan was completed by
the financial year end, including welcoming
the VCT investment team into our #OneMercia
family. For the relatively short period of
ownership from acquisition to 31 March 2020,
notwithstanding the COVID-19 impact on
current VCT portfolio valuations and asset
value linked revenues, I am pleased to say that
the financial performance of the acquired
business met expectations.
Governance and engagement
Throughout the year the Board has focused
on the strategic direction of the Group and on
executing the priorities identified. The
Directors (together with the Group’s Chief
Operating Officer, Peter Dines) provide a
balanced leadership group with relevant
experience to drive the creation of
shareholder value. Given the evolution of
Mercia into a specialist asset manager, I said
last year that the Board intended to appoint
an additional Non-executive Director with
relevant specialist asset management
experience. No sooner had the search
commenced than Mercia entered detailed
negotiations with NVM and it was agreed that
the search would be paused until the outcome
of the proposed fund raising and acquisition
became known. That search has now
recommenced in earnest, although it is
inevitable that lockdown and the need for
social distancing is elongating the selection
process.
Since its inception in 2014, the Group has
embedded a strong corporate governance
ethic in all of 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 is
fundamentally important to our Board and
you will be able to read many examples of
how we do this within this Annual Report. In
respect of the recently acquired VCT fund
management business, I have engaged
directly with the chairs of each VCT board
and look forward to developing those
relationships for the mutual benefit of all
parties during the current financial year.
Strategic review – update
on progress
As I referred to in my statement last year,
during the early part of 2019 the Board
conducted a detailed strategic review of the
Group’s progress to date, the aim being to
continue to scale Mercia over the following
three years to become a profitable and
self-sustaining investment group. The three
key pillars to achieving these strategic
objectives are:
•
to achieve operating profitability before
fair value movements, realised gains and
all non-cash charges;
to expand the Group’s assets under
management to at least £1.0billion; and
to ‘evergreen’ its balance sheet so that the
Group’s direct investment activities are
fully funded by periodic cash realisations
from the existing portfolio.
•
•
During the year the Group made substantial
progress towards the achievement of all three
of these objectives, most notably through the
successful placing and acquisition in
December 2019. Acquisitions compress time
and successful ones enhance shareholder
value. The early signs for Mercia’s most recent
acquisition are encouraging.
Since its inception, Mercia has been clear in its
determination to trade profitably, so that its
revenues exceed the total operating costs of
the Group. The key to reaching this objective is
twofold – continuing to increase the quantum
of funds which the Group manages on behalf
of third-party stakeholders, whilst, at the
same time, maintaining control of costs.
The Group is also determined to reach the
point of balance sheet sustainability, such that
regular realised cash returns from trade sales
and the unwinding of equity stakes in listed
companies are sufficient for its annual direct
investment needs.
10
Mercia Asset Management PLC
Annual Report and Accounts 2020
The backbone of our culture is
our people
The wellbeing of our staff has always been a
priority within Mercia. The current lockdown
has helped bring our ever-growing community
even closer together; be it via the weekly
Zoom staff updates, team-specific check-ins,
a weekly Mercia quiz, our many internal Slack
channels, our in-house newsletter ‘Friday
Files’ or our ongoing charity and team building
initiatives. These daily interactions have
helped preserve our group-wide cohesion and
common purpose, being to deliver superior
long-term returns for our shareholders and
fund stakeholders alike.
Since lockdown commenced, there has been
an increased focus on the impact of remote
working on the mental health and wellbeing
of our staff. The increased level of team and
group-wide communications reflected above,
and the very obvious care and compassion for
each other being demonstrated by so many of
our staff across the business, speak louder
than any words about Mercia’s culture. We
have been fortunate thus far that the vast
majority of our staff remain fit and well,
although we have also been saddened to hear
that several members of the team have lost
relatives due to the virus. Our thoughts are
with them and their wider families.
COVID-19
In response to the challenges posed by
COVID-19, the Group’s focus has been on three
priorities: the safety of our employees,
continued support for our portfolio
companies, and maintaining long-term value
creation potential for our shareholders and
the investors in our managed funds.
Throughout this crisis, Mercia has adhered at
all times to UK Government directives and will
continue to do so. We have successfully
implemented our business continuity plans
and the Group’s transition to all staff working
from home has been remarkably smooth.
Every portfolio company has been risk
assessed and all are being closely monitored.
We have an investment team of considerable
calibre and experience that has assessed
the needs of each portfolio company. Our
significant balance sheet and managed funds’
liquidity will be deployed wisely in the current
year, to preserve the inherent future value
within each portfolio. As a result of our
increased active engagement with all portfolio
companies across our asset classes, no staff
have been furloughed. Furthermore, given our
strong liquidity position, the Group has not
needed to seek any government-supported
debt funding.
Outlook
Those of us who have been through previous
sharp downturns in the UK economy, if perhaps
not as stark as this one, will know that the
survival of any company, large or small, new or
old, often depends on two things – the strength
of its balance sheet and the quality of its
people. At a time when cash is king, Mercia is
blessed in having a very strong balance sheet,
with approximately £30million of unrestricted
cash, combined with an extremely capable and
experienced leadership team, all of whom are
pulling together in the same direction.
The results disclosed in this Annual Report and
consolidated financial statements show the
tangible progress that the Group has made
during the year towards the achievement of
its strategic objectives. They also show the
near-term impact on asset values arising from
the market’s reaction to COVID-19 and its likely
impact on the global economy.
As our 25 March 2020 business update
announcement made clear, where contracted
revenues are directly linked to the carrying
value of fund or trust assets, those recurring
revenues will reduce, until the value of the
underlying assets recovers. This is likely to be
the case for the current financial year and as a
result the Group has already taken a number of
cost containment actions.
Times such as these can be challenging and
difficult, but they can also be defining
moments. I am proud to be part of #OneMercia,
which is full of people who care about the funds
we manage, the companies in which we invest
or to whom we lend and, most important of all,
who care about each other. Thank you to all of
those people.
Finally, I should like to thank our shareholders,
both new and existing, for your continuing
support during this challenging period of
economic and social upheaval. Mercia has a
focused business model, great people and a
strong balance sheet. Hence, notwithstanding
the current economic challenges facing our
country, I am confident that Mercia will be able
to successfully execute its strategic objectives
in the months and years ahead.
Ian R Metcalfe
Non-executive Chair
Mercia Asset Management PLC
Annual Report and Accounts 2020
11
Strategic reportGovernanceFinancial statements Our business model
Realising value
for ambitious
companies
01
Key strengths
and differentiators
Regional focus
London and the South East have a significant
oversupply of capital creating high pre-money
valuations. The UK regions offer exciting deals
with businesses that are priced sensibly and
have relatively modest capital needs that we
can, if we choose to, support solely from our
own means.
Experienced team
We further strengthened our model of
combining business expertise with geographic
and investment knowledge with the addition of
the VCT investment team. We have increased
investment capacity across our regional offices
to 64 investment specialists.
Mercia Platform
Seeking to strengthen portfolio performance
to drive returns, Mercia’s Platform provides
access to high-quality business leaders,
advisory teams and operational specialists to
offer relevant support and enable the
development of our portfolio’s leadership teams.
Capital resource
Mercia has c.£800million in AuM (c.£142million
of net assets and c.£658million in FuM) of which
there is £30.2million in unrestricted free cash to
invest over the next two to five years.
Established partnerships
Powerful relationships and deeply embedded
ecosystems provide unparalleled access to a
wealth of opportunities across the regions.
From our 19 university partnerships to our
non-executive networks, we are well placed
as the investment partner of choice.
Complete
Connected
Capital
Our approach to investing has evolved
over many years and is predicated on
the cyclical nature of private capital
deployment in the regions, where
optimised returns are driven through
deep industry experience and buying well
through the cycle.
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Mercia Asset Management PLC
Annual Report and Accounts 2020
02
Complete · Connected · Capital
What we do
Mercia’s ‘Complete Connected Capital’ means that we can draw upon various pools of
capital across our asset classes, delivering the appropriate
levels of cash at the right time.
Deal flow
sources
Pathfinder
& seed
0-3 years
Early stage &
development
1-7 years
Growth
& scale
3-7 years
Exit
7-15 years
Third-party funds
c.£658million in FuM to deploy into selective,
high-growth SMEs across venture, private
equity and debt.
Balance sheet capital
Mercia has £30.2million unrestricted cash
on its balance sheet to deploy as investment
follow-on capital to promising companies
in its existing direct portfolio and its
third-party funds’ portfolio.
How we do it
Source well
Optimised returns are
driven through deep
industry experience
and powerful
partnerships that
drive deal origination,
which allows Mercia to
see 59% of deals in
the regions.
Buy well
We are focused on
investing in the
highest quadrant of
businesses that
have appropriate
pre-money
valuations and where
we can provide
support in achieving
the commercial
drivers of value
creation.
Support well
Beyond finance,
we are active advisers
to our portfolio
companies and
provide access to our
Mercia network of
business leaders,
sector experts and
non-executives to
support our
investments in
achieving profitability.
Sell well
Our ability to provide
follow-on funding
and capital for
organic growth or
acquisition supports
optimum exits and
timely realisations.
03
Stakeholder
value creation
Investee companies
Ambitious regional SMEs that require
relatively modest capital needs and are
priced sensibly.
Initial average investment from
venture
£0.5m
Third-party investors
Solid track record of investing through the
cycles and consistently providing returns
across all our asset classes.
Successful fund exits in 2020
5
Employees
93 colleagues whose individual objectives,
together with our values, drive Mercia’s
performance.
Training hours
1,929
› See more on page 40
Mercia Asset Management PLC
Annual Report and Accounts 2020
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Strategic reportGovernanceFinancial statements Our strategy
First choice
for investees,
investors and
employees
Our vision is to become the
leading manager of regional
growth funds and the leading
provider of regional capital to
growth SMEs with modest
capital needs.
Building a
sustainable
business
Scale, profitability and
investment returns
Our strategy is simple: we are growing our assets under
management to make our business consistently
profitable and we are working with our portfolio
companies to deliver cash returns to fund our direct
investment portfolio.
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Mercia Asset Management PLC
Annual Report and Accounts 2020
This strategy will translate into value for our shareholders and the investors in our funds.
To achieve this, in 2019 we set out five three-year strategic priorities:
01
02
03
Strategy
Increase AuM to
at least £1.0bn
› Organic growth in our SEIS/EIS funds
› New mandates
› Selective acquisitions
Progress
In 2020 we increased third-party
funds from c.£381m to c.£658m
› £54.3m from increased mandates
› c.£250m through the strategic acquisition
of the VCT fund management business
Strategy
Achieve 15% IRR
on third-party
and balance sheet
equity investments
Strategy
Achieve operating
profitability
› Recurring revenue from growing FuM
› Operational leverage
› Disciplined spend
Progress
Mercia is well placed with preserved capability
and liquidity to manage its immediate
priorities and sustain its strategic objective of
achieving 15% IRR in portfolio performance.
Progress
Following the acquisition of the VCT fund
management business, we expect to be
profitable on an operating basis in the new
financial year.
There continues to be operational leverage in
Mercia to support further growth.
04
05
Strategy
Become the most
active investor in
our market with up
to 20% market share
› Access to deal flow through networks
and university partnerships
› Reputation and track record of
supporting investee companies
› Complete Connected Capital offering
› Experienced team capable of completing
investments equitably and efficiently
Progress
In 2020 we increased our
market share to 18%
› Evaluated 59% of deals in the region and
invested in 18%
› Completed 133 investments across
all portfolios
The Mercia model is
different. I do think it’s
been really important for
our growth and it’s been
very important for me in
terms of being able to
understand what we
need to do to position the
business right for other
investors. It’s been great
working with Mercia
over the years.
Ryan Cawood
Founder & CEO, OXGENE.
Strategy
Evergreen our balance
sheet to fund our direct
investment activities
through cash
realisations from our
direct portfolio
Progress
Our portfolio of direct investments has an
average holding period of just under three
years. On average we target a holding period
of three to seven years, allowing our
companies to establish their business model
and scale up with our support.
Our investee companies are making
operational progress, some achieving
significant milestones, although COVID-19 and
the economic outlook are creating challenges
and, in some cases, delays.
Our focus has been on evaluating the short
and long-term impact on every business,
acting decisively and extending the cash
runway where appropriate.
Mercia Asset Management PLC
Annual Report and Accounts 2020
15
Strategic reportGovernanceFinancial statements Chief Executive Officer’s review
I am pleased to say that, in
many ways, 2020 was a year of
significant progress for Mercia
as we achieved our goal of
trading profitably a year earlier
than planned, and significantly
increased the scale of our fund
management business, both
key parts of our three-year
strategic plan.
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Mercia Asset Management PLC
Annual Report and Accounts 2020
A leading
and trusted
provider of
regional capital
Overview
These results close the first year into our
three-year strategic plan as a proactive,
regionally focused, specialist asset manager
where we set three measurable targets: (i)
to achieve operating profitability before fair
value movements, realised gains and all
non-cash charges; (ii) to expand the Group’s
assets under management (“AuM”) to at least
£1.0billion; and (iii) to ‘evergreen’ Mercia’s
balance sheet so that the Group’s direct
investment activities are fully funded by
periodic cash realisations from the
existing portfolio.
During the last 12 months we completed the
acquisition of the three VCT fund management
contracts (‘the Northern VCT contracts’) from
NVM Private Equity LLP, increasing our AuM by
c.58% to c.£800million. These contracts
brought with them additional recurring
revenues, which have helped bring us to our
goal of trading profitably on a ‘net revenues’
basis, one year earlier than planned. The
transaction also resulted in the talented VCT
investment team joining Mercia.
Following the acquisition, 82% of Mercia’s AuM
is now in third-party funds under management
(“FuM”) (up from 23% of AuM at our IPO in
2014) with the balance of 18% represented by
our consolidated balance sheet. We expect this
shift towards FuM to continue as our fund
management business develops further.
The £30.0million placing in December 2019
allowed us to complete the VCT acquisition
and has provided us with additional capital to
support our objective of achieving evergreen
status for our direct investment portfolio.
In 2020, revenue increased by 19.4% to
£12.7million (2019: £10.7million), which
enabled the Group to move from net
expenses of £1.4million in 2019 to net
revenues of £0.1million, an improvement of
£1.5million. Unrestricted cash increased to
£30.2million (2019: £29.8million). Largely
as a result of the impact of COVID-19 on asset
prices, the direct investment portfolio’s fair
value decreased by 15.3%. This reduction
also contributed to net assets at the year end
being £141.5million (2019: £126.1million).
COVID-19
The initial outbreak in China in December
2019 immediately impacted on certain supply
chains within our direct portfolio and, in
addition, the subsequent lockdown of circa
one third of the planet resulted in lost or
reduced customer demand.
We now face the possibility of one of the
largest global economic recessions since the
1930s, with domestic debt exceeding that of
World War I. It is my strong belief that there
will be a gradual recovery over a 12 to
24-month period and that experienced
investors with liquidity and preserved
capability will be well placed.
Mercia Asset Management PLC
Annual Report and Accounts 2020
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Strategic reportGovernanceFinancial statements Chief Executive Officer’s review continued
Debt
Mercia’s debt funds have been actively
lending throughout the year and our recent
Coronavirus Business Interruption Loan
Scheme (“CBILS”) accreditation will enable us
to further support regional businesses
through these challenging times.
Balance sheet
The average holding period of our direct
investments is just under three years with an
expectation that investments will be realised
over a three to seven-year time frame from
initial investment. Since Mercia’s IPO in
December 2014, we have invested £94.7million
into our current direct investments, plus a
further net £1.3million as a cornerstone
investor in four of our managed funds. Thus far
we have generated £14.5million in realised
returns. The net asset value of our direct
investments at the year end was £87.5million
(2019: £87.7million), with the overall reduction
being largely as a result of the impact of
COVID-19.
Mercia’s investment model was developed to
counter the inevitability of cyclical markets,
with many of the team at Mercia having
invested through the cycles of 2000 and 2008.
Mercia’s model is to seek material influence
(c.20–40% stakes) in companies that have
relatively modest capital needs – typically less
than £10.0million – with realistic entry
valuations. This, together with our strong
liquidity, positions us well to support our
investee companies and influence appropriate
decision making at this time.
Sadly, in every correction there are both
winners and losers. Businesses with near-term
profitable business models and business-to-
business (“B2B”) operations with strong
recurring revenue in favoured sectors such as
software, digital entertainment, medtech,
digital healthcare, diagnostics and biotech
will likely benefit. Within our direct
investment portfolio, Warwick Acoustics,
Impression Technologies (both serving the
automotive sector), Crowd Reactive (events
management) and LM Technologies (Chinese
supply chain) have inevitably suffered.
However, others have benefitted: within the
biotech sector, OXGENE and The Native
Antigen Company; within digital home
entertainment, nDreams and Soccer Manager;
and Intechnica within online queue
management and website defence. Reflecting
structural changes and new emerging sectors,
we have remodelled or pivoted certain
portfolio companies and revised our
investment approach to new prospects,
to reflect this emerging paradigm.
Fund performance
Mercia’s investment model is to target
appropriately priced regional businesses
seeking modest capital to, in part, protect
Mercia from major cyclical corrections. We
have performed a thorough COVID-19 analysis
across the whole Mercia portfolio and
adjusted valuations accordingly. Although our
venture and private equity portfolios are not
immune to these asset price corrections, we
believe that they are weathering the storm,
compared to the broader industry, with fund
portfolio fair value movements between +10%
to -30% as at 31 March 2020.
Venture
Mercia benefits from a diversified venture
portfolio of 233 businesses across different
sectors and stages of development. As a direct
consequence of COVID-19 there has been an
inevitable fair value movement in many
investee holding values resulting in fund
portfolio valuations being adjusted in the year
ranging from up by 10% to down by 31%.
Private equity
Our first private equity fund to be fully
unwound is another regional fund, the
Coalfields Growth Fund (“CGF”), which has
generated an internal rate of return (“IRR”) of
19.8% and distributions to paid-in capital
(“DPI”) of 167%. This fund benefitted from a
portfolio of eight companies generating five
trade sales at multiples above cost. The
notable exit of Woodall Nicholson in March
2020 generated a return of c.9.6x on the
original cost. The COVID-19 impact on holding
values across our active private equity FuM
has contributed to a reduction in fair values of
7% to 31%.
18
Mercia Asset Management PLC
Annual Report and Accounts 2020
during the lockdown and the Company has not
applied for any Government funding schemes,
save on behalf of our portfolio companies, as
we continue to behave as a responsible and
supportive regional investor. I have confidence
in Mercia’s intrinsic strengths and these are
reflected in our own core values. During the
recent period of remote working, Mercia’s 93
employees have been remarkably resilient and
supportive of each other and of those around
us. I am proud of the work we are doing in the
regions as we seek to strengthen our portfolio,
as a trusted partner to regional business and
thus safeguard employment and economic
prospects. Internally, we reference the Group
as #OneMercia and I welcome the excellent
people who have recently joined us through
the acquisition of the Northern VCT contracts.
I would like to thank our entire valued team for
their continued drive, commitment and
professionalism.
Dr Mark Payton
Chief Executive Officer
Portfolio highlights
Some of the investments within our FuM and
our direct investment portfolios are starting
to create significant value.
Notable direct investments initially supported
by our FuM include: OXGENE (a promising
synthetic biology business that is growing
rapidly, with revenues up by c.240% in the
past 12 months), nDreams (a fee-for-service
and proprietary content virtual reality
developer benefitting from the lockdown
period with revenue growth of c.100%),
Intechnica (providing bot analytics and
website optimisation services and tools,
with strong revenue growth of c.50%) and
The Native Antigen Company (a leading
provider of COVID-19 antigens for diagnostic,
vaccine, research and development purposes,
with revenue growth of over 200%).
Notable venture portfolio companies within
our FuM include: Abingdon Health, which
amongst other programmes, is involved in the
fight against COVID-19, and is a founding
member of the UK’s rapid test consortium
(“UK-RTC") leading the assay development
programme in partnership with the University
of Oxford; Axis Spine, which has recently
received US Food and Drug Administration
(“FDA”) approval for its lead product
addressing the lucrative US spinal implant
sector, valued annually at c.£7billion; and
Sense Biodetection, which is developing a
point-of-care instrument-free bacterial
and viral pathogen diagnostic tool for a
variety of infectious agents, including
COVID-19.
Outlook
As Chief Executive, my priorities at this time
are to ensure that Mercia is financially robust
and operationally agile, with strong liquidity
and preserved capability. As the economic
environment toughens, which I expect it to,
this ensures that we are resilient to the
downturn and able to support our existing
portfolio, whilst being prepared to take
advantage of the opportunities that will
undoubtedly lie ahead for those with strong
liquidity and available capital to deploy.
We have entered our new financial year
debt-free and with unrestricted liquidity of
c.£290million to invest across our FuM
portfolios, plus c.£30million for direct
investing. We remain focused on transactions
of typically less than £10.0million, leveraging
the asset classes we have across the Group.
We are uniquely positioned to combine equity
with debt finance, via our third-party FuM as
well as with our proprietary balance sheet
capital, where appropriate.
Over the medium term, I believe the economic
recovery will be beneficial to the types of
businesses that we have traditionally
supported, particularly those in medtech and
diagnostics, digital entertainment and
e-commerce support platforms.
Notwithstanding the current reduction in
asset price linked fund management revenues,
Mercia has begun the new financial year
trading profitably, which we expect to
continue. The long-term potential of our direct
investment portfolio, with its relatively
modest capital needs, remains positive and
we expect the value of this maturing portfolio
to accelerate beyond the COVID-19 pandemic.
None of Mercia’s staff have been furloughed
Mercia Asset Management PLC
Annual Report and Accounts 2020
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Strategy in action
Strategic
execution
Since our IPO in December 2014, we have strengthened the Group
through targeted strategic acquisitions, increasing our scale,
the breadth and depth of our offering and now our profitability.
Creating value
› Accelerates progress
towards £1.0bn AuM bringing
in c.£250m AuM
› Increases Mercia’s recurring
revenue base and operating
profit contribution
› Complements Mercia’s Complete
Connected Capital model
› Makes Mercia a leading provider
of regional seed and growth
capital
› Expands the Group’s liquidity to
deploy into regional SMEs
› Broadens Mercia’s origination
network
› Expands the direct investment
opportunities through the VCTs'
underlying portfolios
business model. Looking forward, the
acquisition strengthens our ability to raise and
win new fund mandates, continuing to grow our
fund management business and future financial
returns for the Group. Pleasingly, post period
end in April 2020 the Northern VCTs raised
£38.2million in a market environment drastically
affected by COVID-19, demonstrating the
quality, robustness and reputation of the three
Northern VCTs.
NVM’s portfolio and liquidity cement
our position
The acquisition of the VCT fund management
business complements Mercia’s Complete
Connected Capital model and cements our
position as one of the foremost regional
providers of capital to growing SMEs. Together,
the Northern VCTs’ portfolio consists of c.60
companies, including 17 listed companies, 27
private venture companies and 16 private equity
companies. This extensive portfolio creates new
opportunities for our direct investment
portfolio.
Liquidity is a key success factor in our business.
This makes us a preferred choice for quality,
potential investee companies and gives us
flexibility to support and manage our portfolios
as companies mature. Following the acquisition,
Mercia has £30.2million of unrestricted cash to
invest from its own balance sheet.
Finally, the £30.0million placing associated with
the acquisition strengthened the Company’s
financial position and its shareholder register,
bringing in new investors, which will enhance
liquidity for our shareholders.
In December 2019 Mercia acquired three
venture capital trust (“VCT”) fund
management contracts (‘the Northern VCTs’)
from NVM Private Equity LLP and
simultaneously raised £30.0million,
accelerating its progress towards its goals
of reaching £1.0billion AuM, operating
profitability and an evergreen balance sheet.
Significant value
creation opportunities
The acquisition of the VCT fund management
business is a critical inflection point for the
Group, significantly increasing our scale,
adding a new investment product to our
offering, additional capability to our
investment team and a portfolio of maturing
VCT investee companies.
Scaling accelerates path
to profitability
With the acquisition of the VCT fund
management business, Mercia’s total AuM
grew by c.£250million (an increase of c.50%
at the time of the acquisition) bringing in
additional recurring revenues that will make
us profitable at an operating level (before fair
value adjustments, realisation gains and all
non-cash charges). This is a considerable step
towards developing a fully sustainable
VCTs’ FuM at date of acquisition
c.£270m
Funds raised in 2020
£38.2m
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Mercia Asset Management PLC
Annual Report and Accounts 2020
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Tim Levett
VCT Investment
Committee.
Mercia Asset Management PLC
Annual Report and Accounts 2020 21
£25.0m
acquisition
Mercia successfully raised £30.0million
and completed the acquisition of three
VCT fund management contracts from
NVM Private Equity LLP.
Strategic reportGovernanceFinancial statements
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Key performance indicators
Strategic priorities
We focus on UK regional opportunities where our strong capital position can
help create material value for all our stakeholders over the medium term.
Scaling FuM combined with tight cost control has also enabled the Group to
reach trading profitability one year ahead of plan.
Indicator
How it was measured
Performance
Growth in value of
the Group’s portfolio
through investment
activity
Measured in terms of the gross cash
invested in direct investments £17.5m
2020
2019
£17.5m
£19.4m
The Group has demonstrated continued
investment activity resulting in growth in
the value of its direct investment portfolio
through the gross amount of cash invested
£(15.8)m
2020
£(15.8)m
2019 £3.9m
Reflects a year of continuing positive overall
momentum until impacted just before the
year end by the significant correction in asset
prices resulting from the COVID-19 pandemic
2020
2019
18
17
The Group has demonstrated continued
growth in its direct investment activities
through the number of companies in which it
has invested during the year
£30.2m
2020
2019
£30.2m
£29.8m
Mercia continues to have sufficient liquidity
for its direct investing and operating activities
Growth in value of
the Group’s portfolio
through fair value
movements
Measured in terms of the net fair
value (loss)/gain arising in the value
of the portfolio using established
valuation methodologies based on
the International Private Equity and
Venture Capital Valuation Guidelines
(“IPEVCVG”)
Number of companies
invested in during
the year
Measured in terms of all companies
invested in (both existing and new
direct investments) during the year 18
Unrestricted cash
balances and
short-term liquidity
investments held by the
Group at the year end
Measured in terms of cash, cash
equivalents and short-term liquidity
investments held by the Group,
excluding funds held on behalf of
third-party EIS investors
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Annual Report and Accounts 2020
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Indicator
How it was measured
Performance
Third-party funds
under management
(“FuM”)
Measured in terms of fund
management contracts secured
and under active management
c.£658m
2020
2019
c.£381m
c.£658m
The FuM increase was mainly due to the
acquisition of the VCT fund management
contracts, offset by distributions to fund
investors and fair value impairments
Investment realisation
proceeds received
Measured in terms of the
cash proceeds received from
realised investments
£0.0m
Revenue
Measured in terms of all
revenues derived from both
fund management and direct
investing activities
2020
£0.0m
2019
£0.0m
No cash realisations were completed during
the year, although external interest in the
Group’s direct investments is increasing.
Post year end £4.8million was received from
the sale of The Native Antigen Company
£12.7m
2020
2019
£12.7m
£10.7m
The Group’s revenue increase was largely
derived from the acquisition of the VCT fund
management contracts
Net revenues/
(expenses)
Measured in terms of total
revenues less all staff and
administrative expenses
£0.1m
Net asset value
per share
Measured in terms of the Group’s
consolidated balance sheet net
assets divided by the number of
shares in issue at the year end
2020
£0.1m
2019
£(1.4)m
In 2020 the Group reached the turning point
where its total revenues exceeded its total
operating costs
32.1p
2020
2019
32.1p
41.6p
The Group’s net asset value per share reduced
due to the dilutive impact of the placing in
December 2019 and the near-term impact of the
COVID-19 pandemic on the direct investment
portfolio valuation
Mercia Asset Management PLC
Annual Report and Accounts 2020
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Strategic reportGovernanceFinancial statements
Chief Investment Officer’s review
As we enter the new financial
year we do so with a well-
assembled portfolio of
companies that are aware of the
challenges and opportunities
that lie ahead.
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Mercia Asset Management PLC
Annual Report and Accounts 2020
Deepening
management
capabilities
At the beginning of the financial year,
I encouraged our investment teams to
focus on two areas that will accelerate value
creation across our portfolios: building out
the management teams of our investee
companies, where appropriate, through the
addition of chairs and non-executive directors
via Mercia’s talent Platform; and further
developing our network of co-investors.
We have made significant progress on both
fronts, although the positive effect on our
financial results has been masked to a large
degree by the current impact on asset prices
from the COVID-19 pandemic.
Deepening management capabilities
We have focused on increasing the collective
capability of the management teams that we
are backing. Through our talent resourcing
capabilities, we have introduced companies
to experienced board-level support, helped
our portfolio make 33 senior non-executive
director board appointments and enabled
the development of powerful leadership
teams. We are also building a collective of
successful managers with complementary
skills to support our portfolio, including CFO
input, sales process design, new market entry
and regulatory expertise.
Mercia’s network is an integral part of our
approach to adding value by building a
strong base of experienced connections,
underpinned by the online and offline
communication we offer. We make a Slack
channel available to all of our CEOs to enable
them to correspond directly with each other,
to share and seek ad hoc advice and
commercial insight, thereby creating a
network of opportunities across the portfolio.
We see this as an invaluable informal
mentoring and development tool. Our
connected approach means that we can help
our portfolio companies’ management teams
to take advantage of the opportunities ahead
of them and provide them with guidance as
they navigate the inevitable issues associated
with growing and scaling young businesses.
Expanding our network of co-investors
Expanding our network of like-minded
co-investors is critical to ensure that as our
portfolio continues to mature and grow,
we can provide companies with the scale-up
capital required, while bringing along
partners that share our vision and expand
our opportunities for an exit at the right time.
Our efforts during the year resulted in 12 new
investment partners joining syndicates
across our portfolio.
COVID-19
The COVID-19 pandemic has been an
incredibly difficult and stressful time for our
entrepreneurs and management teams; we
have seen them act decisively and sensibly at
a time of great uncertainty and I pay tribute
to them all.
Mercia Asset Management PLC
Annual Report and Accounts 2020
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Strategic reportGovernanceFinancial statements
Chief Investment Officer’s review continued
At Mercia we reacted swiftly to the lockdown.
Our priority was to ensure that our entire
portfolio understood the critical need for cash
management, extending their cash runways
to enable them, and Mercia, to assess the
longer-term effects of COVID-19 on their
businesses. We conducted a survey of the
portfolio at the beginning of the lockdown
and quickly crafted and delivered a series of
webinars to support the portfolio around
their critical concerns, ranging from cash
management and how to access the various
government support schemes, to post-
COVID-19 strategy and recovery, ensuring that
support went beyond firefighting, looking at
how to manage the exit from lockdown and
position businesses favourably to take
advantage of opportunities that might
lie ahead.
In early March we assessed the likely medium
and longer-term effects of COVID-19 across
our portfolio of companies based on 13
criteria, including reliance on supply chains,
management response, business disruption,
balance sheet strength, co-investors and cash
runway. The results provided immediate
visibility of priorities and needs. Our newly
acquired venture capital trust (“VCT”)
operation was able to review and report on its
entire portfolio of c.60 companies, including a
revaluation of the net asset position ahead
of the £38.2million successful fundraise,
announced on 3 April 2020. We are conducting
regular reviews to establish whether any
COVID-19 related impact on our entire
portfolio of companies represents a temporary
pause on progress or a fundamental challenge
to their business model.
We are in the strong position of having
significant liquidity of c.£320million across all
our asset classes. We also have the analytical
tools and skills within the team to allocate
funds effectively, both in our existing portfolio
and in new opportunities for the long-term
benefit of our shareholders and investors in
our funds.
Portfolio update
Managed funds: five exits and good
performance by debt funds
Investment and lending performance are at
the heart of what we do. Our third-party
managed funds continued their prior year
momentum, performing well against their
mandates. Across our managed funds,
we invested a total of £59.7million into 109
existing and 46 new portfolio companies.
Five exits were completed in the year,
which have now delivered a total return of
£16.3million over the holding period of the
investments. The most significant was
Woodall Nicholson, a company in our private
equity (“PE”) funds which was sold in late
March 2020 to another PE house, delivering a
9.6x return on the original cost. The Coalfields
Growth Fund (“CGF”) invested £1.0million
into Woodall Nicholson in 2013, realised 1.9x
in 2016 from a partial sale to the Business
Growth Fund and, in total, realised
£9.3million. CGF as a whole has now generated
an IRR of 19.8%.
A second example is Granby Marketing
Services, a marketing logistics company in our
PE funds that delivered a 2.13x return on cost
via a management buyback. The EV Growth
Fund (“EVGF”) invested £1.4million into the
company in 2013.
Until the arrival of COVID-19 our debt funds
were also maintaining their good overall
performance. Our Finance Yorkshire Loan
Fund (“FYLF”) now has less than £0.1million
remaining to be repaid from a total of
£41.6million lent since the last recession in
2010. It has returned a total of £44.5million:
a legacy which is c.£4million greater than was
originally anticipated from this ‘Gap’ Fund.
Managed funds highlights
Mercia continued to invest carefully and
selectively during the challenging
environment created by COVID-19 in the
fourth quarter of the financial year. We did
experience a slowdown in demand for funding
with equity syndicates weakening across the
portfolio as other institutional investors and
angel groups scaled back their investment
activity. This placed a higher burden on the
managed funds to provide greater financial
support to the portfolio in the form of
follow-on funding.
Over the last year, the Midlands Engine
Investment Fund Proof-of-Concept Fund
(“MEIF POC”), a £23.5million fund, invested
£3.8million into 18 companies, 15 follow-on
investments into existing portfolio companies
and three new deals: Industrial Phycology
(‘I-PHYC’), a pre-revenue start-up company
developing a modular wastewater treatment
system based on their novel algal bioreactor;
Iventis, a Lincolnshire-based software
business whose core product is a platform
designed for a large number of users to
collaboratively plan complex operations or
major events such as the Olympics; and Ebate,
a software-as-a-service (“Saas”) business.
The MEIF POC Fund was established in 2018
to provide early-stage capital to innovative
businesses across a wide area of the Midlands.
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Mercia Asset Management PLC
Annual Report and Accounts 2020
In the North of England, the Northern
Powerhouse Investment Fund (“NPIF”),
with a mandate to deploy c.£58million in
both equity and debt to SMEs in the region,
completed 32 transactions investing a total
of £11.8million, of which £7.0million (c.60%)
was provided to 10 new businesses across
the Yorkshire, Humber and Tees Valley region,
with the balance of £4.8million invested into
22 follow-on investments across 15 existing
portfolio businesses. Cumulatively, since
being awarded the mandate in February 2017,
the NPIF equity fund has invested £36.0million
into a portfolio of 47 businesses as at
31 March 2020. In April 2020, Mercia’s NPIF
equity mandate was increased by a further
£23.7million.
Within the NPIF equity fund is Abingdon
Health, a lateral flow rapid test manufacturer,
which has been involved in the fight against
COVID-19. It is one of the founding members of
the UK’s rapid test consortium (“UK-RTC”) and
has led the assay development programme in
partnership with the University of Oxford.
The North East Venture Fund (“NEVF”) had
a solid year, concluding 13 transactions and
investing a total of £4.2million. Of those
transactions, eight were new deals and five
were follow-on investments into existing
portfolio companies. The Northern VCTs
co-invested directly alongside NEVF in
Nutshell Software, demonstrating the value
of our Complete Connected Capital.
During the year, Mercia’s debt team provided
£14.5million of funding in 46 transactions
via the EV SME Loans Fund and the NPIF
debt fund. In April 2020 Mercia’s NPIF
debt mandate was increased by a further
£30.6million, increasing the size of the NPIF
debt fund to over £80million to support
profitable SMEs as they seek to recover from
the impact of COVID-19. Notable amongst the
new loans made was one to Rothband, where
Mercia supported the management of this
medical imaging business in their buy-out of
an institutional investor and another to
Forward2me, an online logistics business,
where Mercia enabled the buy-out of a retiring
shareholder.
Private equity continued its strong
performance up to early March 2020.
Enterprise Ventures Growth Fund II (“EVGII”)
invested £10.7million, completing three new
investments together with one follow-on
investment. Most notable amongst the new
investments was Total Resources Holdings, an
MBO that also included £2.0million of debt
support from other Mercia third-party funds.
Both EVGF and CGF are now in their
divestment phase although each has already
returned the investors’ original capital,
cleared the hurdle and are now paying
periodic carried interest to Mercia.
Direct investments – operational
progress: valuations impacted by
COVID-19
Valuations
At the half year we reported £3.2million
of net upward fair value movements across
our direct investment portfolio, and this trend
was set to continue through the second half of
the financial year, until the emergence of
COVID-19. As at 31 March 2020 the value of
the Group’s direct investment portfolio was
£87.5million (2019: £87.7million). This reflects
a downward movement in fair value for the full
year of £15.9million after net investment in
the year of £15.7million (2019: £17.7million).
We have recorded fair value gains in respect
of OXGENE (£1.6million), The Native Antigen
Company (£0.6million), Voxpopme
(£1.0million) and Soccer Manager (£0.1million)
in line with our valuation policy, which follows
the International Private Equity and Venture
Capital Valuations Guidelines (“IPEVCVG”).
The fair value gains in OXGENE and Voxpopme
relate to third-party investment and in the
case of The Native Antigen Company, as the
business is increasingly profitable and cash
generative, the uplift in fair value reflects the
tangible progress made.
We have taken a careful case-by-case review
of the likely effects of COVID-19 on each of our
portfolio companies, and where we see that
the enterprise value has been affected by
either delay, uncertainty, or potential dilution
to our stake, we have adjusted the carrying
values. We see the effects of COVID-19 being
potentially significant within the automotive
sector, as original equipment manufacturers
(“OEMs”) struggle with lower demand, supply
chain issues and their own funding situations.
This is likely to slow progress at Warwick
Acoustics and Impression Technologies.
We have therefore decreased the carrying
values of these companies by £5.3million
and £3.1million respectively.
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Chief Investment Officer’s review continued
In the events sector, Crowd Reactive has been
materially impacted by COVID-19. At the time
of the announcement of our interim results in
December 2019, the company was trading well
and was discussing a new funding round with
a number of investors; we therefore provided
new working capital to deliver on a record
order book for 2020. However, since February
2020, the order book has dissipated with little
visibility of a return to normality. We have
therefore taken the difficult decision not to
support the company further and have
accepted an offer from management to a
partial repayment of our investment, resulting
in a £2.1million fair value decrease as at
31 March 2020.
Other fair value decreases reflective of
COVID-19 related sentiment included
LM Technologies (£2.1million) and Eyoto
Group (£0.9million). We also recognised a fair
value decrease of £1.4million in Concepta, an
investment which is listed on AIM so is valued
at its bid price as at 31 March 2020. Following a
period of underperformance, the company
has undergone significant management
changes, and as a sign of our continued faith in
its products, market opportunity and new
team, we participated in the company’s
successful £1.9million placing in April 2020.
Investment activity
We have continued to support our largest and
most promising assets, with both capital and
resource. £9.0million of the £15.7million
invested during the year was allocated
across our top 10 assets including nDreams,
Intechnica, Medherant, Voxpopme, Impression
Technologies and Faradion. As many of our
direct investment portfolio companies now
look to scale their growth, our aim remains to
build and/or maintain material equity stakes at
c.20%–40%, whilst increasingly looking to
bring in new third-party capital.
We made one new direct investment during
the year into One Touch Apps, trading as
Clear Review, a company from our third-party
funds. Clear Review is a SaaS business
providing HR management tools.
HR technology remains an exciting sector,
indicative of the overall momentum of Clear
Review, which passed £2.0million in annual
recurring revenue (“ARR”) in December 2019,
less than a year after reaching its £1.0million
ARR milestone. At the end of March 2020, the
company’s ARR run rate was £2.3million.
Mercia first invested in Clear Review in 2018
through its managed funds and made an initial
£0.5million direct equity investment alongside
co-investor Albion VCT in June 2019.
Direct investments: operational
highlights
The last year was significant for a number of
our businesses, with nDreams, OXGENE,
Soccer Manager and Clear Review all doubling
their revenues and Voxpopme and The Native
Antigen Company also showing sizeable
revenue growth.
It is also worth noting the progress made by
Intechnica, Medherant and Faradion.
Intechnica, a digital performance company,
grew revenues by c.50% in the year to
c.£9million, winning new clients for its bot
management product, Netacea. Netacea was
identified by Forrester as “leading the pack”
in the sector. Its virtual waiting room product
for ecommerce businesses has also gained
traction, winning projects with Ocado and
Pets at Home.
Medherant, a transdermal drug delivery
company that has two unpartnered lead
products – an Ibuprofen patch at clinical stage
and a pre-clinical product addressing smoking
cessation – has entered into a partnership
with Cycle Pharmaceuticals to develop new
products using its proprietary TEPI Patch®
technology. This partnership demonstrates
the potential of further licensing opportunities
and the commercialisation of Medherant’s
innovative technology for the administering
of medicines to patients with rare neurological
disorders.
Faradion has also made significant progress
with its battery cell technology, developing a
number of partnerships and announcing its
first order from its joint venture partner,
ICM Australia, for its high-energy sodium-ion
batteries. Faradion’s sodium-ion technology
provides similar performance to conventional
chemistries, while replacing expensive
materials such as cobalt and lithium with
the far more abundant sodium. We are
encouraged by Faradion’s potential, as unlike
lithium-ion batteries, its sodium-ion batteries
have exceptional thermal stability and can
be safely transported and maintained at
zero volts.
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Portfolio overview and liquidity
Venture
Total portfolio
233
Total FuM
£475.6m
Liquidity
£184.4m
Private equity
Total portfolio
10
Total FuM
£59.8m
Liquidity
£24.3m
Debt
Total portfolio
119
Total FuM
£121.8m
Liquidity
£76.9m
Balance sheet
Total portfolio
25
Total NAV
£141.5m
Liquidity
£30.2m
Post period end developments
Investment activity has continued since the
financial year end with new funding rounds for
OXGENE, Eyoto Group and Medherant, into
which we have invested £1.0million, £0.5million
and £1.4million respectively. We have also
continued to provide financial support to W2
Global Data Solutions, Warwick Acoustics and
VirtTrade, as these companies make progress.
Concepta announced its £1.9million placing in
April 2020, with Mercia investing £0.7million
(£0.2million from its balance sheet and
£0.5million from its EIS funds). The company
now has a new executive team, strategy and
reduced cash burn rate.
Also in April 2020, we were pleased to announce
that the three Northern VCTs had raised
£38.2million in new capital through the share
offers that were launched in January 2020,
despite what became a very challenging market
environment. In addition, continuing confidence
in our reputation and track record was
expressed through the additional £54.3million
allocation from the British Business Bank
(“BBB”) into Mercia’s two existing investment
mandates covering the Northern Powerhouse
region, with £23.7million being allocated to
Mercia’s existing NPIF equity fund and
£30.6million to the NPIF debt fund. Shortly
thereafter, we were delighted to announce that
we were accredited by BBB under CBILS, which
enables us to increase our lending to all eligible
regional SMEs, further underpinning both our
leadership in regional capital deployment and
our Complete Connected Capital model, as we
entered the new financial year.
On 1 July 2020 MIP Diagnostics (“MIP”) became a
new direct investment. Mercia’s balance sheet
committed £0.5million alongside £0.6million
from Mercia’s EIS funds as part of a £5.1million
syndicated funding round. A spinout from the
University of Leicester (a partner university) and
originally supported via Mercia’s managed
third-party funds in 2015 (which hold a c.28%
equity stake in addition to Mercia’s direct stake),
MIP has developed a disruptive platform
technology seeking to address the c.$85billion
antibody market using synthetic antibodies via a
process known as Molecularly Imprinted
Polymers. The MIP deal also demonstrates our
continued focus on expanding our networks of
co-investors, with the Business Growth Fund,
Downing Ventures and Calculus Capital as
co-investment partners.
We are also working with the Future Fund on a
number of investments into companies across
our portfolios, including 11 in our direct
portfolio, to extend investee company liquidity
through to 2021.
On 9 July we announced the profitable sale of
The Native Antigen Company Limited (“NAC”) to
LGC, a global leader in the life sciences tools
sector, for a total cash consideration of up to
£18.0million. Mercia held a 29.4% fully diluted
direct holding in NAC at the date of sale and will
receive initial cash proceeds of £4.8million, with
up to a further £0.4million receivable upon
finalisation of customary closing working capital
calculations. The sale is anticipated to generate
an 8.4x return on its original direct investment
cost and a 65% internal rate of return (“IRR”).
Mercia first invested in NAC in 2011 through its
third-party managed funds (which as at 31 March
2020 held an additional combined stake of
20.9%) and subsequently, from its own balance
sheet as a direct investment in December 2014.
In addition to the direct investment returns, the
sale will generate a 12.1x return on a blended
third-party managed funds investment cost and
a 31% funds IRR. Mercia has proactively
supported NAC since its first day of trading,
including representation from Mercia’s Chief
Operating Officer, Peter Dines, as a non-
executive director on the NAC board through to
exit.
NAC was founded in 2010, as a divestiture from a
University of Birmingham spinout company, and
has since become one of the world’s leading
suppliers of infectious disease reagents, widely
acknowledged as being a primary source of
reagents for the study of emerging diseases.
Summary
These results reflect the strength of our diverse
investment platform, albeit currently impacted
by COVID-19, and the experienced team that has
managed these investments against a
deteriorating macroeconomic backdrop. We
remain cautious investors and our focus on
investing in regional companies with moderate
capital needs, where we believe that we can add
value, has ensured that as we enter the new
financial year we do so with a well-assembled
portfolio of companies that are aware of the
challenges and opportunities that lie ahead. We
will continue to add selectively to the direct
investment portfolio over the coming financial
year and will continue to support both it and our
fund portfolios, to deliver strong long-term
investment performance for our shareholders
and fund investors.
Julian Viggars
Chief Investment Officer
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Our portfolio
Venture
Backing the
businesses
of tomorrow
Venture investing is what Mercia is most well
known for. The acquisition of the venture
capital trust (“VCT”) fund management
business of NVM Private Equity LLP solidifies
Mercia’s dominant position as an important
provider of venture capital in the regions.
Post acquisition, we have c.£184million
liquidity to invest into the buoyant early-stage
sector with the added ability to further
support ambitious SME growth with follow-on
funding from the VCTs. We have already
concluded our first deal alongside
the VCTs.
The addition of the c.60 VCT portfolio
companies takes Mercia’s managed funds’
portfolio to c.390.
We remain an approved partner to the
British Business Bank (“BBB”), on behalf of
which we manage more than £180million of
funds. This is an important partnership for
Mercia and the continued confidence that BBB
has in the Group has been demonstrated by
the deed of variation that BBB signed after the
financial year end, increasing the fund size by
£23.7million.
The regional venture funds are led by
Will Clark, Managing Director, Regional
Venture Funds who embodies Mercia’s
proactive approach. By carefully selecting
niche opportunities, which are often hidden
in the UK regions, we leverage our networks
to build strong management teams and
accelerate growth for the brightest SMEs in
the regions.
Enquiries
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Total transaction value
£34.4m
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Lateral flow
rapid test services
Tackling diagnostics has never been so
important and York-based Abingdon Health
is a good example of one managed fund
portfolio company that has been involved in
the fight against COVID-19. It is one of the
founding members of the UK’s rapid test
consortium (“UK-RTC") and has led the assay
development programme in partnership with
the University of Oxford.
Healthy investment
Abingdon Health received £1.5million from
Mercia’s NPIF equity fund in January 2019 and
revenue increased by 83% from 2018 to 2019
(calendar year).
Abingdon Health is using the investment
from Mercia to build out its lateral flow
development and manufacturing capabilities
and invest in its AppDx lateral flow reader
technology. It is not just focused on the
healthcare sector; it also targets animal
health, plant health and environmental
testing, ensuring a diversified and sustainable
target market.
Specialist
online retailer
Currentbody is the only specialist online
retailer for home-use beauty devices. Safe,
effective treatments for hair removal,
anti-ageing and skin care allow consumers to
access the same advanced technology used by
professional clinics, but in the comfort of their
own home.
Specialist syndication
The home beauty market is now estimated to
be worth over $4billion. The investment from
Mercia’s VCT business has helped Currentbody
to grow on a global scale with 11 websites and
a joint venture in China with Thakral. More
recently Mercia has been joined by the
Business Growth Fund to further back
Currentbody’s growth plans.
Specialist safety
software provider
Health and Safety software provider,
SHE Software, provides a proprietary platform
to improve workplace safety, driving
substantial cost savings and stronger
compliance compared to traditional systems.
Safety in numbers
The company has won several awards for its
innovative approach and is recognised in the
Verdantix Green Quadrant as a specialist.
Its solution is used by blue-chip customers
including Network Rail and Eddie Stobart as
well as public sector organisations such as the
NHS and several universities.
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Our portfolio continued
Private equity
Backing
ambitious
management
teams
Whilst Mercia’s track record in the private equity
space is relatively new compared to its other asset
classes, it has generated impressive returns following
the launch of its first fund in 2009.
Mercia has a proven strategy with
well-managed risks:
› Successful companies and management
teams with long-term growth plans
› Focus on aligned interests and strong
working relationships
› Incremental improvements to increase
efficiency and reach critical mass
› Bringing operational capability to less
sophisticated businesses
The team is led by Managing Director,
Mercia PE Funds, Wayne Thomas, a chartered
accountant who joined the Group almost
15 years ago.
Enquiries
135
Total transaction value
£10.7m
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Mercia Asset Management PLC
Annual Report and Accounts 2020
Woodall Nicholson has been a coachbuilder
since 1820. It has manufacturing operations in
the North of England, the Midlands and
Germany in three specialist vehicle divisions:
Mellor and Treka buses, Coleman Milne and
Binz International ceremonial vehicles,
and emergency services.
Driving realisation
Mercia invested in Woodall Nicholson in 2013
in a syndicated transaction and since then
the investment team, led by Wayne Thomas,
has been closely involved in developing
the business. During this time sales at
Woodall Nicholson have grown by almost
500% from £20.0million to £95.0million.
The Group’s maiden private equity fund
successfully completed its highest value
exit so far, having sold a stake in the
Greater Manchester-based designers
and manufacturers of specialist vehicles,
Woodall Nicholson Group Limited, at a
multiple of 9.6 times the original
investment.
Since Mercia’s initial investment the
group has achieved more than four-fold
growth. With recent international
expansion, electric vehicle
developments and continued
innovation in market-leading products,
the group’s growth potential is very
exciting. As a result, all incumbent
shareholders have opted to reinvest
alongside the acquirer, Rutland, to be
part of the next stage.
Brian Davidson
Continuing Chairman of
Woodall Nicholson Group.
Woodall Nicholson is a great success
for both Mercia’s private equity funds
and its management team. Brian’s
team has transformed this business
into an innovative, world-leading
specialist vehicle manufacturer which
is growing in Scandinavia, Germany,
the Netherlands, Australia, New
Zealand and the Far East as well as
in the UK. Mercia’s 9.6x exit from
Woodall Nicholson is the latest in
a series of successful exits for the
EV Growth Fund, which invests in
regionally-based UK SMEs, generating
an internal rate of return (“IRR”) of
70% over seven years.
Wayne Thomas
Managing Director, Mercia PE Funds.
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Debt finance
Backing
robust
businesses
Mercia provides debt finance to ambitious
small companies. The portfolio’s
characteristics are broad, crossing a range of
business activities from complex, cutting-edge
technology, through to more traditional service
businesses. The one thing that all the debt
portfolio companies have in common is that
they are led by robust management teams,
committed to growing their businesses.
Mercia’s debt funds are led by Paul Taberner
who is the highly experienced Managing
Director, Mercia Debt Funds.
Performance exhaust
manufacturers
Cobra Sport Performance Exhausts produces
stainless steel sports exhausts and is setting
new standards in quality and performance
through innovative design and advanced
manufacturing techniques.
Deal flow for the debt funds comes from the
investment team’s extensive network with the
regional banking community, with many of
the investment team members themselves
having previously worked for banks or
alternative finance lenders.
Powering regional ambitions
The business has grown rapidly since its first
investment from Mercia in 2018, expanding
its manufacturing capabilities and entering
new markets. Turnover is up by 40% in a
three-year period.
Mercia is a proactive investor; they are
keen to see how we are progressing and
are genuinely interested in the
business, which is refreshing.
Rachel Abbott
CEO, Cobra.
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457
Total transaction value
£14.5m
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Balance sheet
Trusted
to make a
difference
Mercia’s ‘Complete Connected Capital’ model
means that we can draw upon various pools
of capital, delivering the appropriate levels of
investment at the right time.
This is exemplified by our direct investments
where we invest our own balance sheet money to
support some of the most promising businesses
from within our managed funds’ portfolios,
offering exciting potential for value growth.
Under the leadership of Managing Director,
Mercia Investments, Angela Warner, we deploy
the combined skills of our investment team and
the Mercia Platform to accelerate the growth of
these young companies.
# of portfolio companies
25
Total transaction value
£17.5m
New companies supported
1
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Critical
collaborations
Critical
collaborations
The Native Antigen Company
fully diluted equity stake
29.4%
Tackling COVID-19 together
Two of our direct portfolio companies which
we have backed since seed stage, The Native
Antigen Company and OXGENE, have formed
a new strategic partnership to scale up
COVID-19 antigen production. This
partnership has seen both companies working
together towards developing more scalable
technologies for cost-effective infectious
disease reagent production.
The Native Antigen Company was one of the
first companies to release COVID-19 antigens
and needed to scale production to meet
increasing demand. OXGENE has developed a
proprietary technology that offers a highly
scalable means of protein production, in this
case COVID-19 antigens. The partnership
seeks large-scale production of high-quality
COVID-19 antigens, which will be a critical step
toward the development of diagnostics and
vaccines for this global challenge.
Mercia has supported both companies
since their foundation and we are proud
of the work they are doing to support
the UK’s response to COVID-19. Even
during these difficult times, we
continue to invest in and nurture
early-stage technology businesses that
will find solutions to the major global
challenges we face, both now and in the
future.
Dr Mark Payton
Chief Executive Officer
OXGENE fully diluted
equity stake
30.2%
Infectious disease
reagents
Specialises in the development and manufacture
of native and recombinant viral and bacterial
antigens, antibodies and immunoassays, bespoke
product development and custom manufacturing.
Sustained success
Since its founding, the company has grown in
successive years by 92%, 61%, 25% and 22% and
is now profitable and self-supporting due to its
sales success.
Mercia has supported us with three initial
rounds of funding, enabling us to grow to
self-sufficiency. Their advice and support,
together with the network of companies
with related expertise, has been a major
factor in our success.
Andy Lane
Commercial Director, The Native Antigen Company.
Mammalian cell
engineering
Redefines what is possible in mammalian cell
engineering across three core areas: gene therapy,
gene editing and antibody therapeutics.
Engineering commercial growth
OXGENE has licensed materials to both chief
medical officers and therapeutics manufacturers
across the globe, while also reporting the ongoing
success of several service agreements. Revenue
has grown from £2.7million in 2019/20 to
£6.0million this year.
Over the course of this financial year,
OXGENE has once again doubled its revenue,
with less than a 50% increase in headcount.
Mercia has continued to support and
encourage us through this year of growth
and transition.
Jocelyne Bath
COO, OXGENE.
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Our portfolio continued
Balance sheet
Award-
winning
VR
An award-winning virtual reality (“VR”)
content developer notably winning
‘VR Game of Show’ at E3.
Real progress
During the past 12 months the company has
secured two major contracts with leading
global games companies. Revenues grew by
over 100% with gross profit up by £1.0million
in the same period. The company continues to
scale rapidly with more than 100 people now
working at nDreams. In addition, nDreams’
Phantom: Covert Ops, launched on 25 June
2020 on the Oculus Rift and Quest.
When we decided to partner with Mercia
back in 2014 we couldn’t have chosen a
better partner to support us and help us
scale, as VR moved from being a great idea
with huge potential to a fast-growing
entertainment sector with tens of millions
of active users. Major milestones in VR are
being achieved monthly – from VR games
topping the all-formats games charts, to
the first VR game selling over two million
units. Mercia has been there every day,
providing sage advice, supporting us
during the tougher moments and helping
us achieve the ambitious goals towards
which we are all working. Phantom:
Covert Ops is a great demonstration of
the quality team that we are building at
nDreams, and that simply wouldn’t have
been possible without the phenomenal
support of Mercia.
Patrick O’Luanaigh
Founder & CEO, nDreams.
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Video
feedback
platform
Voxpopme is a video feedback platform that has reimagined
the way organisations connect with consumers, customers
and employees by facilitating the capture and analysis of
video feedback at scale.
Rapid run rate
The business has demonstrated rapid growth in
both the US and Europe, with recurring revenues
having increased over 450% since initial
investment. Customers include many of the
world’s best-known consumer brands – Kimberly
Clark, Unilever, Mars, Mondelez, and AB InBev.
With investment from Mercia’s balance sheet
and venture funds in September 2019,
Voxpopme illustrates the synergies between
the funds, even prior to the acquisition of
the VCT fund management business in
December 2019.
It’s a hugely exciting time for video.
It has become the pre-eminent medium
for communication in all walks of life
which is driving the ever-increasing
demand for video feedback at the
world’s leading brands. Leaders in
every part of every business want to
see, hear and understand the people
about whom they care most. Through
real-time video feedback, Voxpopme
gives them the tools they need to build
connections and empathy, helping to
make great decisions every day.
Dave Carruthers
Founder & CEO, Voxpopme.
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Stakeholder engagement
Section 172
Statement
A key focus of the Board is to promote the success of
the Company for the benefit of its members as a whole,
whilst having regard to those specific matters outlined in
Section 172 of the Companies Act 2006 (‘the Act’), being:
› the likely consequences of any decision in
the long term;
› the interest of the Company’s employees;
› the need to foster the Company’s business
relationships with suppliers, customers
and others;
› the impact of the Company’s operations on
the community and the environment;
› the desirability of the Company
maintaining a reputation for high
standards of business conduct; and
› the need to act fairly between members of
the Company.
Throughout this Annual Report and, in
particular, the following pages, there are many
examples of how the Board has regard for the
likely consequences of any decision in the
long term; the interests of our employees;
the need to foster relationships with key
stakeholders; the impact of our operations
on the community and environment; and how
the Group maintains a reputation for high
standards, whilst conducting its business in
a fair and responsible manner. The key
stakeholders we consider in this respect are
our people who work for us, our owners, our
fund investors, our investee companies, our
local communities and those who provide the
services we rely on to operate our business.
Investor meetings
c.60
Investees’ webinars hosted
23
The following statement provides
an overview of how the Board
performs its duties.
By the very nature of its activities, Mercia has
always been a business with a long-term
focus. As the graphic on page 13 shows,
backing typically young, technology-led
businesses requires patience, knowledge and
investment/lending expertise. The Board
monitors investment activity across both the
Group’s multiple funds and its balance sheet.
Generating shareholder and fund investor
returns takes time, but Mercia’s growing track
record of successful exits and fund IRRs is
evidence that its business model is working in
the interests of its investors and investees.
As a fast-growing group, day-to-day decision
making and stakeholder engagement is
delegated to the Executive Directors, Chief
Operating Officer and other senior employees
through our governance framework and
therefore naturally occurs at an operational
level. However, the Board regularly receives
and formally meets to discuss information
covering all Group activities, to help it
understand and monitor the impact of the
Group’s operations, as well as the interest and
views of key stakeholders.
This information is provided to the Board
through detailed reports and in-person
presentations on a wide range of stakeholder
related topics. As a result of these activities,
the Board has a good overview of the
outcomes of stakeholder engagement
throughout each financial year, enabling the
Directors to comply with their duties under
the Act.
For more details on how the Board operates,
including a summary of its key activities
during the year, see pages 60 to 62.
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For more information and to see how we
promote the success of our Group, the
following are examples of our stakeholder
engagement that have taken place during
the financial year in respect of:
Our colleagues
Pages 39 to 41
Our owners
Pages 39 and 60 to 64
Our fund investors
Pages 26 and 39
Our investee companies
Pages 30 to 37 and 39
Our communities
Pages 42 to 44
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Mercia colleagues
› Weekly ‘all company’ Zoom meetings now
take place as a result of COVID-19, but prior
to this, regular communication across the
Group was conducted (and continues) in our
bi-yearly State-of-the-Business update days,
attended by the entire team at Mercia.
› These events are supplemented by the
monthly Mercia Knowledge days that take
place at different regional offices and include
training or expert presentations to support
continued learning and knowledge share in
the business.
› Yearly away days provide more informal days
for the team to engage with one another,
as well as with the Executives and senior
leadership team, to discuss the past year and
the next 12 months ahead.
› Bi-monthly newsletters provide more
personal news and views, further enhanced
by Mercia’s Slack channels that are division
or practice-led to ensure that critical and
relevant information is shared across the
entire Group in a timely manner and easily
understood format.
NEDs placed
33
Shareholders and
fund investors
Mercia investee
companies
› The timely and accurate dissemination of
› Actively supporting and managing the
regulatory and non-regulatory information
through the Regulatory News Service
ensures that Mercia complies with
transparency legislation and keeps
shareholders updated.
› Regular meetings with institutional
investors; both shareholders and non-
shareholders. During the last financial year
our Executive team attended over 60
meetings and presentations outside of
Mercia’s bi-annual reporting period.
› The Executives have regularly presented
at and participated in Q&As hosted by
third-party media outlets for our retail
shareholders. These events took place in the
key cities in the regions in which we invest to
ensure the team met and networked with as
many shareholders as possible. In the last
financial year, five events were attended.
› The investment teams for both Mercia EIS
and the Northern VCTs attended and
presented at a number of shareholder and
intermediary events, including roadshows
and round tables taking place across the
regions. Importantly, they attended industry
conferences and workshops to remain up to
date on industry news and regulations, and
equally, they presented a range of webinars
to keep shareholders, fund investors and
advisers abreast of Mercia’s funds’
performance and portfolio developments.
› Capital Market Days and Shares seminars
provide visibility and depth to our
stakeholder engagement, as these events
broaden shareholder exposure to a range of
our portfolio businesses as well as the
investment team that manages both the
funds and the portfolios.
› Quarterly update presentations are given to
our leading fund limited partners.
› Mercia’s Executive Directors attend the
board meetings of the three Northern VCTs
by invitation, to provide regular updates on
all matters pertinent to the Northern VCTs.
growth of our investees is critical to us as
an asset manager, demonstrated by the
inclusion of key Mercia team members on
the boards of these businesses. This is
further underpinned by the numerous
events that we host to empower these
businesses’ management teams and to
share business knowledge. We host portfolio
days with agendas that include subject
experts as guest speakers, as well as smaller
tailored workshops, such as our University
Day, to not only actively share best practice,
but also to engender improved
communication across our university
member network.
› Our webinars, with subjects ranging from
digital prospecting to managing cash flow in
times of crisis, are well attended. Since
lockdown began we have designed and
hosted 23 webinars that were attended by
over 1,100 CEOs, chairs and decision makers
from both our managed funds’ and direct
investment portfolios.
› We have sourced and placed 33 non-
executive directors and chairs on behalf of
our portfolio and equally, developed a
dedicated Slack channel and organised a
chair summit event that ensures that our
full network of non-executives have the
opportunity to better understand our
investees’ needs and Mercia’s key business
decisions and plans.
› Regular newsletters go out to all CEOs, chairs
and owners in both our managed funds’ and
direct investment portfolios to keep them
informed of all Mercia developments,
business decisions and progress.
› Six-monthly Net Promoter Score surveys are
conducted to ensure Mercia’s continued
improvement pathways are better
understood and communicated to the
portfolio.
Mercia Asset Management PLC
Annual Report and Accounts 2020
39
Strategic reportGovernanceFinancial statements
People, culture and values
Alissia Deane
Investment Associate, O2 team member.
Works within the Northern Powerhouse
Investment Fund – Debt Finance.
A culture of
co-operation
People remain our greatest
strength. It is our colleagues
who chart the course of
Mercia’s success, guided by
their exceptional capabilities
and the values that they
embrace.
#OneMercia is a collective that we have defined
together. Mercia’s culture of co-operation is
shaped by our values that support our every
decision, underpins each deal and helps to build
the businesses in which we invest. Our core
values thread throughout the Group, reflected
in our appraisal process where adherence to
values accounts for 20% of every employee’s
financial bonus.
Our togetherness is reflected in the strong
relationships that we develop both internally
and externally, in the way we strive to share
continual improvements and development
through knowledge sharing, growth initiatives,
outreach programmes and the care we offer to
our colleagues, customers and communities.
We are known for our healthy competition and
we embrace our professional and personal
ambitions. But we are mindful of the many
voices, needs and aspirations of our colleagues
and seek to offer an inclusive and safe working
environment that celebrates diversity and
offers equality to everyone in Mercia and to all
our stakeholders.
Importantly, because we build lasting
relationships, we take the time to enjoy each
other’s company at away days, social events
and increasingly online, where we have helped
each other mitigate the stress of COVID-19
through regular support and social
engagement.
40
Mercia Asset Management PLC
Annual Report and Accounts 2020
90+
employees
#OneMercia
8
offices across the UK
Peter Dines,
Chief Operating
Officer
Key to the success of the day-to-day
operations and responsible for all the
Group’s EIS investment activity, Peter
engenders engaged participation across
all teams, regions and projects. He is the
champion of several of our key initiatives
and working groups as well as heading up the
VCT and EIS subsidiary of Mercia. Peter joined
the Group in 2015 as Head of Life Sciences &
Biosciences, with over 20 years’ experience in
this sector, and became Chief Operating
Officer in 2018.
Collaborating for
sustained growth
O2 is a working group of engaged colleagues
that supports improved business processes
and offers a broader range of insights to
Mercia’s senior leadership team. Critical to the
sustained success of Mercia, this group offers
the benefits of its diverse opinions, ideas and
points of view that might sometimes be lost in
a more hierarchical business. The members of
this group not only provide better vertical
channels of communication to support
understanding and implementation of
Mercia’s strategy, they are also very proactive
in providing new initiatives or insights that will
shape future strategy. Many of the members of
the group will choose to progress to senior
roles within the business, as part of Mercia’s
succession planning.
Mercia Asset Management PLC
Annual Report and Accounts 2020
41
Strategic reportGovernanceFinancial statements People, culture and values continued
Courtney Yeoman
Facilities Co-ordinator &
Executive Assistant and
project lead for Mercia Spirit.
c.£21k
Raised by Mercia Spirit
Mercia Spirit
Empowering people within the business to act
for the causes that matter to them, combined
with the ‘can-do’ attitude that exists amongst
colleagues, ensured that the Mercia Spirit
programme exceeded all expectations in its
second year.
The total amount raised in the year for Cancer
Research UK was £20,597. This was achieved
through the collective efforts of every
colleague who provided their own time,
ingenuity and occasionally sweat and tears to
contribute to a charity that was chosen
because of the impact that cancer has had on
colleagues or their immediate families.
Money raised was as a result of half-
marathons run, mountains climbed, hikes,
quizzes, horse races, bake sales and the
expert craftsmanship of one colleague who
made a range of carved and handcrafted
wooden items.
The Skills Builder Partnership, designed to
help school students build key skills and be
better prepared to enter the workplace, was
another important initiative that colleagues
were keen to support during the year. We
welcomed numerous groups of young people
to Mercia throughout the course of the year,
spending time to orientate them in the
workplace and share business insights and
best practice, as part of the process to help
them transition to a full-time career. We also
welcomed students from various schools in
our local communities as part of their work
experience programmes; this quickly became
a knowledge exchange opportunity, as the
Mercia team benefitted from digital skills
shared by the students.
Ella Cuthbert
Assistant Accountant,
Finance.
Pete Sorsby
Investment Director,
NPIF – Debt Finance.
42
Mercia Asset Management PLC
Annual Report and Accounts 2020
Living our values
Growth focused:
We seek to optimise
performance at an individual,
team, Group and investee level.
Responsive:
We think deeply, always meeting
commitments and aiming to
exceed expectations.
Knowledgeable:
We are recognised as experts in
our field, sharing knowledge for
the benefit of others.
Trusted:
We are trusted partners, known
for being honest, professional,
reliable and fair.
Being responsive:
#wfh
Mercia’s value of responsiveness is in no
better way exemplified than in the context
of COVID-19 and the working from home
initiative more fondly known within Mercia
as #wfh.
The smooth transition of over 90 colleagues
from an office-based working environment to
dining room tables, bedrooms, sunrooms and
home offices was not just testament to our
contingency planning and long-term use of
tools such as Slack and Zoom, but equally,
the assuredness of every member that all the
necessary adjustments required to work
tirelessly to support our portfolio companies
and protect long-term value for our investors
could be navigated with ease. All aspects of
the unfolding effects and impact of the
pandemic were monitored and reported on by
the COVID-19 working group that met three
times a week.
The Slack channel #wfh became the focal
point for colleagues to offer each other moral
support using humour, challenges and more
informal communications to sustain the
commitment and resilience of the team. This
was underpinned by the various touchpoints
both online and offline that sought to reassure
and offer peace of mind to colleagues. Zoom
has been pivotal as a platform for morning
‘huddles’, weekly company-wide meetings
that saw nearly 80 colleagues in a mosaic of
videos listening and sharing both professional
and personal updates, weekly family and
friends quizzes as well as a virtual ‘pub’ on a
Friday evening. A series of home-delivered
gifts reminded everyone how important they
are and how much Mercia appreciates both
them and their families.
Training hours
1,929
Mercia Knowledge
Driving continual improvement, cost savings
and efficiencies are central to Mercia’s digital
transformation that also translates across
enhanced data capture, curation and
analytics. This entire remit falls to Mercia’s
Knowledge team which, like O2, is a working
group that has representatives from all
Mercia’s offices and functions across the UK to
ensure that a ‘whole Mercia’ approach is
adopted. A range of successful initiatives has
been undertaken including Mercia’s systems,
migration to the Cloud, customer relationship
management and asset management system
development that is bespoke to Mercia and
which provides improved data management
and reporting, the recruitment of a full-time
data scientist, adoption of digital marketing
and sales software and, critically, the
integration of the VCT investment team,
post acquisition.
Mercia Asset Management PLC
Annual Report and Accounts 2020
43
Strategic reportFinancial statementsGovernance Responsible business
Responsible
investment through
environmental, social
and governance awareness
Mercia has a long history of making a positive impact in the regions that is as much
a representation of our core corporate values as it is a financial return motivation. We are
committed to evolving our Responsible Investment agenda, guided by the UN’s Principles
for Responsible Investment (“PRI”), because we recognise that good environmental, social
and governance (“ESG”) awareness is associated with better business performance.
Environmental
Social
Governance
Protecting the world around us
Comprehensive environmental management
is an important item on Mercia’s agenda.
Mercia considers both the environmental
impact of its own activities and those of its
investment portfolio.
Our interest in clean technology has led to
investments in businesses which address
this very topic. Investee companies which
exemplify this include Faradion, which is
developing a sodium-ion battery technology
resulting in cheaper, cleaner energy, and
Aceleron, which is developing a lithium battery
with a longer lifetime and turning waste battery
components into second-hand batteries.
We have undertaken our own digital
transformation to improve our efficiencies
and lessen our travel, paper consumption and
energy costs. Our Mercia Knowledge steers
this digital-first agenda to deliver continuous
improvements and practices.
Protecting our people
Good social awareness is at the heart of Mercia;
it drives our culture and determines both the
type of people we recruit and the companies in
which we choose to invest. We have a diverse
team (40% of the Mercia team is female,
nearly 30% making up the investment team).
We are proud of our regional presence with
426 jobs being created in this financial
year alone.
We look to the future of the Group through the
implementation of our O2 team. This is run by
a cohort of employees, thus ensuring that
every voice across our organisation is heard
and able to drive improvements through the
empowerment of teams. Our O2 team acts
as a shadow board, challenging ideas and
driving innovation.
Careful control of our assets
As an AIM-listed business, good governance is
critical and Mercia has a robust team that
enforces every element of this.
We are diligent in both our internal governance
and that of our portfolio of investee
companies where we take an active role in
ensuring each business has good stewardship.
Our core corporate values have provided
transparency for investors and includes a
non-financial dimension which focuses on
long-term growth for our investment practice.
Our pre-investment procedures encapsulate
our standpoint around business ethics,
incorporating anti-bribery and corruption
policies, in which all our employees are trained
and monitored. We are also insistent that our
equity portfolio companies have similar
policies in place around equal opportunities,
health and safety, and a range of other
regulatory matters.
44
Mercia Asset Management PLC
Annual Report and Accounts 2020
Q
&
A
We spoke to Dr Mark Payton (CEO),
Julian Viggars (CIO) and
Jill Williams (Investment Director)
about what being a responsible
business really means.
How do you plan to develop
your strategy to incorporate
environmental, social and
governance issues (“ESG”)
into your investment
decisions and portfolio
management strategies?
Dr Mark Payton: This will be a
journey, with attainment on an
increasing basis across the
investment cycle, from deal
origination and assessment,
through ownership and towards
realisation.
In the medium term we will
increase ESG consideration in our
investment analysis and decisions
both pre and post investment – this
will embed a unified approach and
measures across the investment
process, through deal sourcing and
due diligence, then ownership
and exit.
Jill Williams: We have reviewed
the UN’s PRI which are a voluntary
and aspirational set of investment
principles that offer a menu of
possible actions for incorporating
ESG issues into investment
practice. This provides a globally-
accepted framework and ESG
roadmap; in the longer term, we
would like to think that this journey
results in us becoming a signatory
to the PRI.
What will this entail?
Jill Williams: This coming year
we will increase training for the
investment team on ESG related
risks and opportunities. We will
clearly define processes and
increase visibility of ESG within
the investment decision making
process; for example, seeking
thoughts on ESG at deal appraisal,
including ESG in investment papers
and committee discussions, as well
as embracing the monitoring and
review of ESG, developing key
performance indicators and
targets. We have started this
process by my appointment as ESG
project leader, and the training that
I’ve undertaken with the British
Private Equity & Venture Capital
Association (“BVCA”).
How will this translate
across your portfolio?
Julian Viggars: This will have to be
driven by the portfolio companies’
management teams, assisted by
Mercia. We will support these teams
with the development of ongoing
consideration post investment at
board level. We would like to see
ESG on the board agendas because
we know that managing compliance
and risk is aligned with managing
for value and should therefore
lead to strategic advantage. This
increased focus will allow both
the portfolio and Mercia to create
and protect value, ultimately, we
believe, generating market-leading
returns.
Mercia Asset Management PLC
Annual Report and Accounts 2020
45
Strategic reportGovernanceFinancial statements Chief Financial Officer’s review
The Group is now trading
profitably as a result of its
fund management activities,
providing further positive
momentum for the Group’s
future prospects.
46
Mercia Asset Management PLC
Annual Report and Accounts 2020
A year of
considerable positive
operational change
and progress
Notwithstanding the arrival of COVID-19 and
its near-term impact on UK businesses,
including many of those companies making
up the Group’s direct investment portfolio,
the year to 31 March 2020 has been one of
considerable positive operational change
and progress for Mercia Asset Management
PLC, not least in its transition from annual
net expenses to net revenues one year
ahead of plan.
Also notable amongst these positive
changes were the successful £30.0million
placing and the acquisition of the venture
capital trust (“VCT”) fund management
business of NVM Private Equity LLP (“NVM”)
in December 2019.
Net revenues
£0.1m
2019: £1.4m net expenses
Net assets
£141.5m
2019: £126.1m
Unrestricted cash
£30.2m
2019: £29.8m
Mercia Asset Management PLC
Annual Report and Accounts 2020
47
Strategic reportGovernanceFinancial statements Chief Financial Officer’s review continued
Placing of 120,000,000 shares raising £30.0million gross proceeds (‘Placing’)
On 3 December 2019 Mercia announced a conditional placing of, in aggregate, 120,000,000 Placing shares at 25.0 pence per Placing share. Shareholders
overwhelmingly approved the Placing at a General Meeting held on 20 December 2019 and the new shares were admitted to trading on AIM on
23 December 2019. Placing commission and related expenses totalled £1.9million gross.
The net proceeds of the Placing were used to fund the cash component of the initial consideration and related transaction expenses in respect of the
acquisition of NVM's VCT fund management business. In addition, the proceeds provide further balance sheet capital to enable the Group to continue to
selectively invest in its existing balance sheet direct investments, as well as new direct investments which currently sit within its third-party managed
funds, that are expected to deliver attractive returns in the future.
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, which consisted of the
acquisition of three fund management contracts ('the Northern VCT contracts') and the transfer of NVM's VCT investment team, for a total maximum
consideration of £25.0million, comprising a combination of cash and new Ordinary Mercia shares. The initial consideration was £16.6million, comprising
£12.4million in cash which was satisfied on completion and £4.2million which was satisfied by the issue of 16,800,000 initial consideration shares at a
price of 25.0 pence per share, being the same as the Placing price. The initial consideration shares were admitted to trading on AIM on 27 December 2019.
Deferred consideration of up to £8.4million will also be payable, contingent upon certain conditions being met. The deferred consideration comprises
£6.3million 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 three Northern VCTs before each respective anniversary payment date, and £2.1million payable in new Ordinary Mercia shares.
50% of the deferred consideration shares will be payable if the Group has received at least £16.0million of fees in respect of the VCT fund management
contracts during 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 three Northern VCTs collectively raise at least £60.0million 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.
Summarised consolidated financial statements
The consolidated financial statements for the year ended 31 March 2020 summarised below include just over three months of trading for the acquired
business, which has been integrated within Mercia during the first 100 days of ownership.
Summarised consolidated statement of comprehensive income
Revenue
Other administrative expenses
Net revenues/(expenses)
Fair value movements in investments
Share-based payments charge
Amortisation of intangible assets
Operating (loss)/profit before exceptional items
Exceptional items
Net finance income
Taxation
(Loss)/profit and total comprehensive (loss)/income for the financial year
Basic and diluted (loss)/earnings per Ordinary share (pence)
Year ended
31 March
2020
£’000
12,747
(12,661)
86
(15,844)
(528)
(852)
(17,138)
(695)
220
159
(17,454)
(5.11)
Year ended
31 March
2019
£’000
10,675
(12,115)
(1,440)
3,916
(171)
(301)
2,004
–
562
54
2,620
0.86
Notwithstanding the near-term impact of COVID-19 on direct portfolio fair values, Mercia continues to have strong liquidity, is now operating
profitably (before fair value movements, realised gains and all non-cash charges) and has a direct investment portfolio from which to drive future
increases in both earnings per share and net asset value per share.
Revenue increased 19.4% to £12.7million (2019: £10.7million). The Group’s revenue increase was largely due to the post-acquisition contribution of
the acquired VCT fund management business.
Staff and administrative expenses increased by 4.5% to £12.7million (2019: £12.1million). The overall increase in these costs was due to the
inclusion of the post-acquisition operating costs of the acquired VCT fund management business.
Net revenues increased by £1.5million compared with 2019 (net expenses) largely, although not exclusively, as a result of the
overall post-acquisition contribution of the VCT fund management business.
During the year, the Group invested £17.5million (2019: £19.4million) into 17 existing and one new direct investment (2019: 15 and two respectively). It also
received investee company loan repayments totalling £1.8million (2019: £1.7million). Direct investment momentum has been positive at the start of the
new financial year and is expected to selectively continue into both existing and new direct investments.
48
Mercia Asset Management PLC
Annual Report and Accounts 2020
Net fair value decreases during the year totalled £15.8million (2019: £3.9million increase) and as at 31 March 2020 the fair value of the Group’s direct
investment portfolio was £87.5million (2019: £87.7million). This decrease was predominantly due to the near-term impact of COVID-19 on direct
investment portfolio fair values, details of which are given in the Chief Investment Officer’s review on pages 24 to 29.
Net assets at the year end were £141.5million (2019: £126.1million) resulting in an overall decrease in net assets per share (being net assets of
£141.5million divided by 440,109,707 shares in issue) to 32.1 pence (2019: 41.6 pence, being net assets of £126.1million divided by 303,309,707 shares in
issue). This reduction has been due to the dilutive effect of the Placing and the decrease in the fair value of the direct investment portfolio, due
predominantly to the impact of COVID-19.
Within net assets, cash and short-term liquidity investments totalled £30.7million (2019: £30.4million), including £0.5million of cash held on behalf of
third-party EIS investors (2019: £0.6million).
The net fair value decrease contributed materially to result in an overall consolidated total comprehensive loss for the year of £17.5million (2019:
£2.6million profit). This in turn has resulted in a loss per Ordinary share of 5.11 pence (2019: 0.86 pence earnings).
Alternative performance measures
The Group has always believed that the measurement and reporting of both ‘net revenues/(expenses)’ and ‘net asset value per share’ are important
alternative performance measures of interest to investors. The reporting of net revenues/(expenses) enables a clear understanding of the impact of the
Group’s operating model on net asset value enhancement or erosion, particularly historically where operating costs have exceeded revenue.
From 1 April 2020 the Group will substitute ‘adjusted operating profit’ for net revenues/(expenses), as it is a more generally recognised alternative
performance measure for specialist asset managers. From Mercia’s perspective and for comparison purposes, the difference between the measurement
of net revenues/(expenses) and adjusted operating profit is that adjusted operating profit will include net finance income and exclude depreciation. Had
Mercia adopted this alternative performance measure for the year ended 31 March 2020 it would have resulted in adjusted operating profit of £0.5million
(2019: £0.8million loss). The table below provides a bridge between the two alternative performance measures for the years ended 31 March 2020 and
31 March 2019.
Revenue
Other administrative expenses
Net revenues/(expenses)
Depreciation
Net finance income
Adjusted operating profit/(loss) before exceptional items
Year ended
31 March
2020
£’000
12,747
(12,661)
86
212
220
518
Year ended
31 March
2019
£’000
10,675
(12,115)
(1,440)
84
562
(794)
The table below provides a reconciliation from adjusted operating profit/(loss) to operating profit/(loss) before exceptional items for the years
ended 31 March 2020 and 31 March 2019.
Adjusted operating profit/(loss) before exceptional items
Depreciation
Net finance income
Fair value movements in investments
Share-based payments charge
Amortisation of intangible assets
Operating profit/(loss) before exceptional items
Year ended
31 March
2020
£’000
518
(212)
(220)
(15,844)
(528)
(852)
(17,138)
Year ended
31 March
2019
£’000
(794)
(84)
(562)
3,916
(171)
(301)
2,004
Similarly, the reporting of net asset value per share provides an indication of the overall progress that the Group is making in terms of shareholder
value creation over the medium term. Where there is a difference between net asset value per share and the Group’s share price, that difference
represents either a discount or premium to Mercia’s net asset value.
Goodwill and acquired intangible assets
The consolidated balance sheet includes goodwill of £16.6million (2019: £10.3million) and acquired intangible assets of £20.1million (2019:
£0.6million). £6.3million of the goodwill and £19.8million of the intangible assets value arose as a result of the Group’s acquisition of the VCT fund
management business in December 2019. £7.9million (2019: £7.9million) of the goodwill and £0.3million of the intangible assets value arose as a
result of the Group’s acquisition of Enterprise Ventures Group Limited in March 2016. The balance of the goodwill arose on the acquisition of Mercia
Fund Management Limited in December 2014. The intangible assets are separately identifiable assets arising from the VCT fund management
contracts with Northern Venture Trust PLC, Northern 2 VCT PLC and Northern 3 VCT PLC (the ‘Northern VCT Contracts’) and Enterprise Ventures’
fund management contracts (the ‘EV Contracts’). The fair value of the Northern VCT Contracts’ intangible assets is being amortised on a straight-
line basis over 10 years. The fair value of the EV Contracts are being amortised on a straight-line basis over the average duration of the remaining
Mercia Asset Management PLC
Annual Report and Accounts 2020
49
Strategic reportGovernanceFinancial statements Chief Financial Officer’s review continued
fund management contracts from the date of acquisition. The total amortisation charge of £852,000 (2019: £301,000) in the consolidated
statement of comprehensive income represents the amortisation for the year ended 31 March 2020. £551,000 of the total charge relates to the
Northern VCT Contracts with the balance relating to the EV Contracts.
Revenue
Total revenue of £12,747,000 (2019: £10,675,000) comprised fund management fees, initial management fees from new investments, investment
director monitoring fees and sundry business services income.
Other administrative expenses
Total other administrative expenses of £12,661,000 (2019: £12,115,000) consisted of all staff related, office, marketing and professional
adviser costs.
Net revenues
Net revenues of £86,000 (2019: £1,440,000 net expenses) represents total revenue less all staff and administrative expenses.
Fair value movements in investments
Investment movements excluding cash invested:
Unrealised gains on the revaluation of investments
Unrealised losses on the revaluation of investments
Net fair value (loss)/gain
Year ended
31 March
2020
£’000
3,351
(19,195)
(15,844)
Year ended
31 March
2019
£’000
8,622
(4,706)
3,916
For the year as a whole, unrealised fair value gains arose in four (2019: 12) of the Group’s 25 (2019: 26) direct investments. The largest fair value
gain, being Oxford Genetics (trading as OXGENE), was £1,582,000. There were 10 (2019: three) fair value decreases, the largest being £5,313,000 for
Warwick Acoustics, predominantly due to the current impact of COVID-19 on asset values in general. The reduction in overall fair values for the
year as a whole was 15.3%, measured by expressing the net fair value unrealised loss as a percentage of the opening fair value of the direct
investment portfolio plus the net cash invested during the year (2019: 4.7% increase). For the vast majority of the direct investment portfolio we
anticipate a recovery in fair values over time.
Share-based payments charge
The £528,000 (2019: £171,000) non-cash charge arises from the issue of share options to Executive Directors and other employees of the Group
ranging from 24 April 2017 to 31 March 2020.
Amortisation of intangible assets
The amortisation charge of £852,000 (2019: £301,000) represents the amortisation of the acquired intangible assets of the Northern VCT Contracts
and the EV Contracts for the year ended 31 March 2020.
Exceptional items
During the year the Group incurred exceptional costs of £695,000 (2019: £nil). Of this total, £297,000 are transaction costs incurred in relation to the
acquisition of the VCT fund management business. The balance of £398,000 are staff related costs incurred in connection with a restructuring
which took place in March 2020. The transaction costs and staff related costs are exceptional non-trading and non-recurring costs and have
therefore been accounted for as exceptional items.
Net finance income
Finance income of £246,000 (2019: £562,000) comprised loan interest and redemption premiums received on loans repaid by investee companies
during the year, as well as interest receivable earned on the Group’s cash and short-term liquidity investments.
Finance costs of £26,000 (2019: £nil) comprised interest payable on leases, arising from the application of IFRS 16, ‘Leases’.
Taxation
The tax credit of £159,000 (2019: £54,000) represents the annual unwinding of the deferred tax liability recognised in respect of the intangible
assets which arose on the acquisition of both the Northern VCT Contracts and the EV Contracts.
Balance sheet and cash flows
Net assets at the year end of £141,460,000 (2019: £126,065,000) were predominantly made up of the Group’s direct investment portfolio, together
with cash and short-term liquidity investments. The Group continues to have limited working capital needs due to the nature of its business.
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Mercia Asset Management PLC
Annual Report and Accounts 2020
Direct investment portfolio
At the latter end of the year Mercia’s direct investment portfolio declined in fair value to £87,471,000 (2019: £87,659,000). The table below lists the
Group’s investments by value as at 31 March 2020, including a breakdown of the net cash invested during the year, fair value movements for the
year as a whole and the fully diluted equity percentage of each investee company owned.
nDreams Ltd
Oxford Genetics Ltd t/a OXGENE
Intechnica Ltd
Medherant Ltd
Voxpopme Ltd
Ton UK Ltd t/a Intelligent Positioning
Impression Technologies Ltd
Faradion Ltd
Warwick Acoustics Ltd
The Native Antigen Company Ltd
Soccer Manager Ltd
Edge Case Games Ltd
Locate Bio Ltd
VirtTrade Ltd t/a Avid Games
PsiOxus Therapeutics Ltd
sureCore Ltd
W2 Global Data Solutions Ltd
Eyoto Group Ltd
One Touch Apps Ltd t/a Clear Review
Concepta PLC
Other direct investments
Total
Investment
value
As at
1 April
2019
£’000
Net cash
invested
Year to
31 March
2020
£’000
Fair value
movement
Year to
31 March
2020
£’000
Investment
value
As at
31 March
2020
£’000
Percentage
held
As at
31 March
2020
%
15,120
10,161
6,677
5,205
3,026
5,473
5,381
3,525
7,904
2,863
2,099
2,300
500
3,938
2,377
1,834
2,000
1,755
–
1,133
4,388
1,000
–
500
1,500
2,000
400
2,000
500
1,065
–
300
–
1,750
550
160
333
–
875
500
750
1,473
–
1,582
–
–
1,004
1,519
(3,087)
–
(5,313)
630
135
–
–
(2,288)
(344)
–
–
(878)
–
(1,408)
(4,358)
16,120
11,743
7,177
6,705
6,030
4,354
4,294
4,025
3,656
3,493
2,534
2,300
2,250
2,200
2,193
2,167
2,000
1,752
500
475
1,503
87,659
15,656
15,844
87,471
36.4
30.2
27.5
30.1
17.1
28.2
25.9
16.5
52.9
29.4
34.8
21.2
17.4
25.8
1.4
22.0
15.2
15.7
3.9
22.4
n/a
n/a
Investee company loan repayments
Mercia is focused on creating shareholder value through its asset management operations, including investment in, development of and at the
appropriate time, exit from (predominantly through trade sales) its direct investments. The Group supports its direct investments via both equity
and loan instruments. During the year loan repayments of £1.8million (2019: £1.7million) were received by Mercia from Impression Technologies,
Warwick Acoustics and Crowd Reactive.
Cash and short-term liquidity investments
At the year end Mercia had total cash and short-term liquidity investments of £30,653,000 (2019: £30,398,000) comprising cash of £24,438,000
(2019: £25,210,000) and short-term liquidity investments of £6,215,000 (2019: £5,188,000), including £467,000 (2019: £629,000) of cash held 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 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.
Opening cash and short-term liquidity investments
Net cash generated from/(used in) operating activities
Net cash used in direct and certain other investing activities
Purchase of management contracts
Issue of new Ordinary share capital for cash
Ordinary share capital issue costs
Net cash used in other financing activities
Cash and short-term liquidity investments at the year end
Year ended
31 March
2020
£’000
30,398
136
(15,456)
(12,400)
30,000
(1,879)
(146)
30,653
Year ended
31 March
2019
£’000
52,908
(5,080)
(17,234)
–
–
–
(196)
30,398
Notwithstanding the near-term impact of COVID-19 on asset values and revenues which are directly linked to asset values, Mercia has made
significant positive progress during the year. Once the impact of the pandemic subsides, the underlying potential of the Group’s balance sheet
portfolio and deal flow pipeline via its managed funds will re-emerge, providing positive momentum for the Group’s future prospects.
Martin Glanfield
Chief Financial Officer
Mercia Asset Management PLC
Annual Report and Accounts 2020
51
Strategic reportGovernanceFinancial statements Principal risks and uncertainties
Risk management framework
During the year Mercia has continued to build
on its risk management framework with a
specific focus on risks and opportunities
associated with the Group’s successful
acquisition of the VCT fund management
business of NVM Private Equity LLP. More
latterly, focus has been on the range of
significant risks associated with COVID-19. The
pandemic and its effects will potentially impact
all risks and, where appropriate, we have noted
below the impacts that we believe are
potentially the most severe.
We have continued our focus on regulatory
compliance and implementation of the Senior
Managers and Certification Regime (“SMCR”).
Focus has also been maintained on
cybersecurity, effective talent management
and internal audits on investment activity. The
Board has also considered the possible effects,
on the Group and on its investee companies, of
the United Kingdom’s exit from the European
Union without a trade deal in place. The risk
management framework has been further
strengthened through the Senior Management
Team escalating new, emerging or increased
risk exposure to the Executive Team, together
with the Group’s Compliance Director
communicating directly with the Audit and Risk
Committee and ultimately, the Board.
The Group’s principal risks and uncertainties,
their possible consequences and mitigating
actions are set out in the following pages.
The Board considers that the risks detailed in
this Annual Report represent the key potential
obstacles to achieving the Group’s strategic
objectives. The key controls over the Group’s
principal risks are documented in Mercia’s risk
register, which includes an assessment of the
risk, likelihood of occurrence, severity of
impact and mitigating actions. An assessment
of the strength of mitigating controls
determines the net risk score and any further
actions required.
The Group considers identified risks under
three main categories with sub-categories as
appropriate:
Internal – including the Group’s strategy and
business planning.
External – including competitor risk,
regulatory and legal risk, and force majeure
eg pandemic risk from COVID-19.
Operational – including internal systems
and controls, people and talent risk, and
compliance risks such as financial crime.
The Board monitors, evaluates and mitigates
risks to ensure that appropriate measures are
in place to minimise the likely occurrence and
impact of those risks identified.
There may be additional risks and uncertainties
that are not known to the Board and there are
risks and uncertainties which are currently
deemed to be less material, which may also
adversely impact performance and thus are
monitored within the Group’s risk management
framework. The framework provides
reasonable, but not absolute, assurance that
principal risks are managed to an acceptable
level, whilst also acknowledging the fact that
the specialist asset management sectors in
which Mercia operates have investment risk
inherent within them. Mercia’s risk framework
is therefore constructed so as to identify and
navigate the inherent downside risks, whilst
seeking to exploit upside risk, particularly when
investing in young companies.
52
Mercia Asset Management PLC
Annual Report and Accounts 2020
Risk
Possible consequences
Mitigation
The risk of the COVID-19 pandemic
affecting staff, operational services
to portfolio companies and
business development.
Staff welfare issues, due to direct illness, family
illness and/or bereavement, potential stresses due
to isolation. Impact on the operational efficiency of
the Group.
Market falls and risks to portfolio
companies affect valuations
and net asset values which
impacts asset price related fund
management revenues. Impact on
portfolio companies individually,
leading to failures and loss of
revenues as a consequence.
Risk to the valuation of funds and VCT portfolios
managed by Mercia regulated entities, as well as
general market falls impact on direct investment fair
values.
Increased risk of portfolio valuation reductions and/
or failures and consequent reduction in revenues
from fund management contracts and portfolio
companies.
Opportunity loss where remote working reduces the
ability to source and assess new opportunities for
investment.
Mercia tested its remote working capability for all staff under its business continuity
policy and procedures ahead of the formal lockdown and has been able to move
seamlessly to working from home. Staff welfare is kept high on the agenda of the
Executive Team and morale is being maintained through the use of Zoom and
Slack for meetings, social interaction and supporting information sharing. Mental
wellbeing amongst staff is also being monitored and tools such as Headspace,
the meditation app, have been offered to all staff.
A COVID-19 working group was formed, which initially met daily before moving to
weekly, to maintain an appropriate consensus of necessary actions.
Portfolio valuations have been reviewed and fair values amended where required.
Mercia has organised briefings and webinars to assist portfolio companies and
has made use of existing forums, such as the Mercia Slack channel, exclusively for
portfolio company CEOs.
We have drawn on our networks and worked across funds, using technology to
facilitate meetings in order to maintain deal flow.
Mercia’s budget for the year ending 31 March 2021 has been reviewed in light of the
changing conditions and the revised budget has been approved by the Board.
Mercia will be carefully considering the Government strategy for easing the
lockdown to identify the appropriate path to returning to office working and
business travel as and when appropriate and safe to do so.
Potential failure to undertake appropriate due
diligence; failure to identify and maximise the value
drivers for the transaction including the synergies
between the teams and portfolios; inability to raise
future VCT funds; failure to identify the key functions
required to be covered under the transitional
services agreement (“TSA”).
Residual risks and potential consequences, post-
acquisition, included the failure to appropriately
manage the TSA and ensure continuity and standard
of services delivered to the three VCTs; the risks of
not managing a successful integration of the VCT
team members into Mercia; and building a strong
and successful relationship with the VCT boards and
indirectly with their investors.
The risks and consequences of failure to integrate the VCT business were carefully
considered through detailed due diligence and detailed integration planning before
the acquisition, with involvement of a team of senior staff and external advisers.
The TSA between Mercia and NVM, in place until 30 September 2021, reduces the
risks associated with the handover of key processes.
Mercia completed its 100-day plan in the period immediately after acquisition and
will be creating a 365-day transition plan for the final year of the TSA.
Post acquisition integration has focused on:
• people and culture: internal communications, training and social events
(prior to lockdown);
integration of key staff into management structures;
investment processes and protocols;
•
•
• oversight and monitoring of the services provided by NVM to Mercia under
the TSA;
• Board and Executive level engagement between Mercia and the VCT boards; and
• new co-investment agreement.
The acquisition and integration of
the VCT fund management business
of NVM Private Equity LLP may not
turn out to be successful and may
not deliver enhanced shareholder
value over the medium term.
Successful delivery and transfer,
over the transition period, of VCT
governance and support services
including the key processes to
ensure continuity of VCT eligibility.
Retention of the fund management
contracts for the VCTs.
In the near term, the economic
consequences of COVID-19 are
negatively impacting asset prices.
Revenues derived from the three VCT
fund management contracts are in
part linked to VCT net asset values.
Where their portfolio company fair
values have fallen, so to an extent
will the revenues received by Mercia
from those contracts.
Rosie Bhattacharjee
Group Compliance Director.
Mercia Asset Management PLC
Annual Report and Accounts 2020
53
Strategic reportGovernanceFinancial statements Principal risks and uncertainties continued
Risk
Possible consequences
Mitigation
The Group now has c.£658million
of funds under management and
derives the majority of its revenues
under fund management contracts
linked to each specific fund.
The loss of one or more of the contracts due to
poor performance or other irreconcilable LP/
GP differences could have a material impact
on the trading performance of the Group and
reputationally, its future ability to successfully tender
for new contracts.
Dedicated investment teams operate in respect of each asset class and in many
cases, each fund mandate. Senior managers oversee both fund performance and
client relationships. Detailed quarterly reports are issued for most funds.
Investment committees provide robust review of all proposed investments.
The Group’s compliance function monitors adherence to investment procedures.
The Board oversees the Group’s fund management operations, performance and
client relations.
The majority of the direct
investment portfolio comprises
businesses at a relatively early
stage in their development and
as a result carry inherent risks,
including technical and commercial
risks. Typically such companies
are developing new or disrupting
existing technologies and breaking
new ground commercially.
Portfolio companies’ risks have
been affected both positively
and negatively by the COVID-19
pandemic, with some companies
actively engaged in the development
of testing solutions.
Early-stage technology companies may not be
able to attract and retain appropriately skilled and
experienced staff; they may not be able to attract
sufficient funding to achieve their commercial
objectives; their technology niche may be overtaken
by competing technologies or may not achieve
commercial traction; take-up of their product or
service offering in their chosen markets may not
occur at levels sufficient to generate positive cash
flows and create shareholder value.
The length of time taken for these companies to
arrive at success or failure may be protracted, placing
them under severe pressure to maintain the financial
support required over a sustained period of time.
All of the Group’s direct investments are companies which have emerged from
the funds managed by the Group’s fund management operations. The funds have
a fail fast policy, which means that early-stage businesses which do not achieve
commercial traction within a reasonable time frame are not further supported.
In addition, the ‘real-time’ due diligence being undertaken by the Group’s
investment teams during an investee company’s early stage of development means
that Mercia is already familiar with the business, its commercial prospects and
its management team before it is presented to the Group’s Board (which acts as
Mercia’s investment committee) with a recommendation for direct investment.
This process of review reduces, although does not eliminate, the risk of direct
investment failure, particularly in the current pandemic-induced economic climate.
For all of Mercia’s direct investment portfolio companies, the Group continues to
assess their near-term funding and other requirements and will continue to provide
relevant support where needed and appropriate.
The value of the Group’s direct
investment portfolio may be
dominated by a single or limited
number of companies.
Portfolio company fair values
have been affected both
positively and negatively by the
COVID-19 pandemic, with some
companies actively engaged in the
development of testing solutions,
whilst others have seen their end-
user markets significantly curtailed
in the near to medium term.
A large proportion of the overall value of the direct
investment portfolio may at any time be accounted
for by one or very few companies. There is a risk
that one or more of the portfolio businesses will
experience financial difficulties, become insolvent
or suffer from poor market conditions (including the
current pandemic) and if, as a result, their values
were to be adversely affected, this would have a
materially detrimental effect on the overall value of
the Group’s investment portfolio and skew fair value
concentration into a smaller number of companies.
Currently, the top five direct investments represent
54.6% of the total portfolio by value.
The Group seeks to balance the total portfolio by quantum and value, as the total
number of direct investments and their values grow over time. The current portfolio
continues to be well balanced. However, it is the Group’s expectation that from
time to time, depending on economic conditions, the speed of development of
portfolio companies and the attractiveness of certain technology sectors, there may
be investments, and therefore specific sectors, eg Life Sciences & Biosciences, that
dominate the total portfolio by value.
The specific direct investment areas on which Mercia focuses are kept under review
and it is possible that the Group’s areas of investment focus and expertise may
evolve over time. Details of the mitigating actions taken by the Group in respect of
the impact of the COVID-19 pandemic on its portfolio companies are included in the
Chief Investment Officer’s review on pages 24 to 29.
Proceeds from the trade sale or
IPO of direct investments may vary
substantially from year to year.
Large possible cash flow variations could have a
materially adverse effect on the financial condition
and prospects of the Group.
As a result, the Group may not
be able to meet future financial
obligations or future growth may
not occur because of an inability
to raise additional balance sheet
capital if required.
The Group and its portfolio
companies are subject to
competition risk.
The Group may not be able to
continue to retain or attract
experienced, skilled and
successful Board Directors,
Investment Directors and support
staff.
A shortage of available capital for direct investment
and operating purposes would necessitate a change
in strategy to one of capital conservation.
The Group operates a direct investment model and
may find itself in competition when new investment
opportunities arise. In addition, the direct
investment portfolio businesses are predominantly
focused on the technology sector, which is intensely
competitive on a global scale. Many of the portfolio
businesses’ competitors have greater financial,
technical and other resources. Competition in the
technology sector could materially adversely affect
the prospects, financial condition and results of
operations of direct investment portfolio companies.
The Group depends on the experience, skill and
judgement of key staff in, amongst other things,
selecting possible future successful businesses
in which to invest. The Group also depends on its
network of deal flow introducers to the managed
fund business. The Group’s future success depends
in part on the continued service of these individuals
as well as the Group’s ability to recruit, retain and
motivate additional talented personnel.
54
Mercia Asset Management PLC
Annual Report and Accounts 2020
Mercia raised further funds, partly for direct investment, in December 2019 and is
well capitalised.
A number of Mercia’s direct investments could be sold to maintain sufficient
liquidity.
The Group is also now profitable in its day-to-day operating activities and is
generating operating cash inflow. It is therefore no longer having to make use of its
cash balances to fund its day-to-day operating activities.
The Group focuses its investment activities predominantly on the historically
underserved regions of the United Kingdom, where competition for investing in
new technology companies is less fierce. Companies in which the Group invests
are chosen because they are in large growth markets, have developed disruptive
technologies and have already achieved commercial traction.
The Group seeks to reduce this risk by maintaining an entrepreneurial and inclusive
working environment, referred to internally as #OneMercia, and by offering
balanced and competitive remuneration packages to all its staff. The Remuneration
Committee monitors the remuneration and incentive structures of all senior staff
across the Group, in conjunction with seeking advice, when appropriate, from
specialist remuneration consultants. The use of Goalspan, an online performance
management and personal development system, has enhanced Mercia’s ability to
manage performance and career progression.
Risk
Possible consequences
Mitigation
Certain Mercia subsidiaries are authorised and
regulated by the FCA as small authorised UK
Alternative Investment Fund Managers (“AIFM”)
(Sub-threshold).
Should any of those subsidiaries cease to be
authorised and regulated by the FCA, they would
no longer be authorised to act as the investment
manager of the respective funds or VCTs being
managed.
If that was to occur, Mercia would: (i) lose one or
more of its revenue streams; (ii) be required to
appoint a replacement UK AIFM; and (iii) lose one
or more of the principal sources of potential direct
investments for the Group.
The Group mitigates this risk by ensuring that it acts fairly at all times and with
integrity, honesty, skill and diligence in conducting its investment activities. The
Group regularly reviews the financial position of each Mercia subsidiary to ensure
that adequate financial resources are maintained in accordance with FCA rules.
The Group also ensures that it employs the resources and procedures that are
necessary for the proper performance of its business activities and seeks to comply
with all regulatory requirements applicable to the conduct of its business, so as to
promote the best interests of the funds under management and fund investors. The
Group ensures that it communicates information to fund investors in a way which
is fair, clear, timely and not misleading. It also communicates with the FCA in an
open and transparent manner when submitting regular reporting, notifications and
disclosures. The Group’s compliance function is staffed by experienced and FCA-
approved personnel. Mercia applies policies and procedures in compliance with
FCA requirements across its regulated subsidiaries. It has implemented the initial
stages of the SMCR, ensuring that its senior staff are appropriately mapped to the
new regime and that all staff understand their obligations to act with integrity.
Mercia also has a whistle-blowing policy and reporting structure in place.
No whistle-blowing reports have been made in the year.
Future European trade barriers, tariffs or border
controls may impact portfolio company growth
prospects.
Technology is a sector that works without national barriers and will only increase in
importance. Many of the Group’s direct investments have a global target customer
base.
Additional equity capital may be more difficult to
raise during periods of economic turbulence.
Portfolio companies may find hiring and retaining
non-UK resident, highly skilled staff more difficult.
Such security or infrastructure failures may result
in the loss of data, misuse of sensitive information,
reputational damage and legal or regulatory
breaches.
Attacks on portfolio companies could in addition
result in the loss of valuable intellectual property or
be disruptive to business activities.
The Group focuses on technology sectors that do not have large capital needs. The
Group therefore has sufficient funds under management and balance sheet capital
to exercise investment and operational flexibility.
Only once the final outcome of the Brexit trade negotiations are known will
the future employment and potential tariffs landscape become clearer. In
the meantime, the Group continues to monitor United Kingdom Government
announcements and will take relevant actions to respond to developments as
appropriate and relevant.
The Group reviews its infrastructure and cybersecurity processes with its
outsourced IT provider on a regular basis and continues to invest in resources
to enhance its cyber defences and improve network monitoring to minimise the
impact of any external security breach. The Group has implemented Office 365 this
year to further enhance its ability to securely store and share documents.
Business continuity plans and disaster recovery contingencies are tested regularly
and have proved to be effective to support remote working during the COVID-19
related lockdown.
The Group continues to engage frequently with its external IT and cybersecurity
consultants to monitor and periodically test its cyber defences.
Although the Directors do not believe that such
investors choose investment via SEIS, EIS or VCT
funds solely for the tax relief available, such reliefs
are an element of their decision-making and if those
reliefs were to be withdrawn this could result in the
size of the funds and VCTs being reduced, or make it
difficult for Mercia to successfully launch one or more
similar future funds.
Changes in tax legislation would affect the whole industry, so Mercia would not
be at a competitive disadvantage. Investors would make their decisions solely on
companies’ track records, executive and investment team members’ reputations
and performance.
Mercia has established an award-winning reputation with a proven track record of
delivering value to fund and VCT investors and would therefore be well placed to
continue operating in any changed environment.
Mercia subsidiaries may cease to
be authorised by the Financial
Conduct Authority (“FCA”).
The United Kingdom’s exit from
the European Union (‘Brexit’) may
impact upon both the Group and its
portfolio companies, especially if no
trade deal is successfully negotiated.
Breaches of the Group’s digital
security, through cyber attacks
or a failure of the Group’s digital
infrastructure, could result in the
loss of commercially sensitive data
and/or create substantial business
disruption.
The incidence of cyber crime
attempts and reports from portfolio
companies has increased in the wake
of COVID-19.
A proportion of the early-stage deal
flow for Mercia derives from, and is
financed via, the Group’s SEIS and
EIS funds, which include capital
raised from sophisticated investors
seeking, inter alia, tax relief. Any
changes in legislation around SEIS
and EIS tax relief could impact on
Mercia’s ability to raise adequate
funds to support all suitable
investment opportunities.
Any changes to VCT related tax
reliefs could also impact the VCT
portfolio’s access to future funding.
Events after the balance sheet date
Other than the sale of The Native Antigen Company for up to £5.2million and the continuing completion of approved direct investments, there have
been no other material events since the balance sheet date.
Approval
The Strategic Report was approved by the Board of Directors and signed on its behalf by:
Dr Mark Payton
Chief Executive Officer
13 July 2020
Mercia Asset Management PLC
Annual Report and Accounts 2020
55
Strategic reportGovernanceFinancial statements Board of Directors
Right skills,
right experience,
right people
01
02
03
Dr Mark Payton Chief Executive Officer
Date of appointment: December 2014
Experience: Mark has extensive private
investment and scale-up experience. Since
co-founding Mercia he has led the sales of
Hybrid Systems (to Myotec) to create PsiOxus
Therapeutics Ltd, Warwick Effect Polymers Ltd
(to Polytherics Ltd) to create Abzena plc and led
the founding investment in Allinea Software Ltd
(sold to ARM). Prior to Mercia, Mark played a
leading role within Oxford University Innovation
(“OUI”, the technology transfer operation of the
University of Oxford), spinning out BioAnalab
(sold to Millipore), Oxford Immunotec (listed
on NASDAQ), Oxitec (sold to Intrexon) and
Natural Motion (sold to Zynga).
Following his time at OUI Mark was the vice
president corporate development at Oxxon
Therapeutics Inc, prior to its sale to Oxford
BioMedica plc. He gained his PhD jointly between
the University of Oxford and the University of
London (King’s College). Mark also has an MBA
from the University of Warwick, is a Sainsbury
Management Fellow for Life Sciences and was
awarded the 2015 EY Entrepreneur of the Year
(regional and national).
External appointments: None
Martin Glanfield Chief Financial Officer
Date of appointment: December 2014
Experience: Martin has significant public markets
and business experience. He is a KPMG qualified
chartered accountant with more than 20 years’
experience as chief financial officer of listed,
private equity-backed and privately owned
technology-led businesses. Martin joined the
main market listed Forward Group PLC in 1993
and was group financial director from 1995 until
its sale for £129.0million in 1997. In 1999, as
deputy chief executive of Symonds plc, Martin led
the public to private of this main market listed
technology group, backed by NatWest Equity
Partners.
The group was successfully restructured and
sold within 12 months to a NASDAQ listed US
electronics group, whereupon he became a vice
president, working frequently in Silicon Valley. He
was chief executive of the private equity business
Forward Group plc from 2003 to 2005 and since
then has been group finance and IT director of
the large international food processing group
Boparan Holdings Ltd and a private equity-
backed building services business. Martin has an
honours degree in business from Aston University.
External appointments: None
Julian Viggars Chief Investment Officer
Date of appointment: April 2018
Experience: Julian joined Mercia through the
2016 acquisition of Enterprise Ventures, which
he joined in 2004 and was head of technology
investments at the time of its acquisition. He
has over 20 years of venture capital experience,
including the successful listings of companies
such as Blue Prism Group plc and OptiBiotix
Health plc. Through the subsequent sell down of
its holding in Blue Prism, Mercia’s RisingStars
Growth Fund realised c£95m, 105x the cost of its
investment. Julian leads the equity investment
team as well as managing the pipeline of Mercia’s
direct investments.
Alongside his wide experience of investing across
many sectors, Julian is fund manager for the
Northern Powerhouse Investment Fund (“NPIF”),
the RisingStars Growth Funds and the Finance
Yorkshire Seedcorn Fund. Julian played a leading
role in securing the managed funds contracts
awarded by the British Business Bank and North
East Fund Ltd and has been Mercia’s Chief
Investment Officer since April 2018. Julian has
a geology with chemistry degree from the
University of Southampton and qualified as
a chartered accountant with accountants
Smith & Williamson.
External appointments: None
56
Mercia Asset Management PLC
Annual Report and Accounts 2020
04
05
06
07
Ian Metcalfe Non-executive Chair
Date of appointment: December 2014
Experience: Ian is a qualified solicitor who retired
as managing partner of international law firm
Wragge & Co in 2014 after eight years in post. Prior
to managing the business, Ian was a corporate
partner at the firm for 14 years, acting for a
number of substantial public and private
companies and private equity houses on a
wide range of transactions. Ian is currently
a director and chair of Commonwealth Games
England, a director of the Board of the
Organising Committee of the Birmingham 2022
Commonwealth Games and the Host City
representative on the Commonwealth Games
Federation Executive Board.
He is also a non-executive director of the global
waste management group TRRG Holdings Ltd and
a non-executive director of the AIM listed Arena
Events Group plc. Ian has an MA in law from
Cambridge University and his appointment as
Mercia’s Senior Independent Director in January
2017 recognised the continuing development and
scale of the Group. He became Non-executive
Chair on 2 July 2019.
Ian has over 25 years’ experience advising
businesses of all types and sizes on their growth
activities, as well as deep corporate governance
experience, both as a legal adviser to listed
businesses and as a current and previous
non-executive board member of leading sports
and other multinational organisations.
Ray Chamberlain Non-executive Director
Date of appointment: December 2014
Experience: Ray is an entrepreneur with an
established track record of shareholder value
creation. Until 1997, Ray was executive chairman
and the principal shareholder in Forward Group
PLC, which he grew from a start-up company
in 1978 to become one of Europe’s leading
high-technology printed circuit board
manufacturers, listed on the Main Market of the
London Stock Exchange. In 1997 Forward Group
accepted a £129.0million offer from PCB
Investments plc, a company established by Hicks,
Muse, Tate & Furst. Subsequently, Ray diversified
his interests in a number of areas, which included
setting up the Forward Innovation Fund, a trust
focused on investing in university spinouts and
other technology-led start-ups. Ray was
appointed Non-executive Chair at the time of the
Group’s IPO and having steered Mercia Asset
Management through its first 18 months as a
listed company, moved to a non-executive
position in May 2016.
Ray has deep venture experience across several
decades and sectors, as both a founder of and
investor in many start-up businesses which have
resulted in successful cash exits.
Dr Jonathan Pell Non-executive Director
Date of appointment: December 2017
Experience: Jonathan brings extensive
experience in the technology sector, originally in
both finance director and chief executive roles
and latterly in investing in and helping to scale up
technology ventures. Having qualified as a
chartered accountant at PwC, Jonathan gained
significant executive experience, firstly in senior
finance positions at Convergys Corporation (NYSE
– CVG), Geneva Technology Ltd, Thomas Cook
Retail Ltd and Semitool Inc. He then became CEO
at Datanomic Ltd, where he oversaw a twenty-fold
increase in the company’s global customer base
and compound revenue growth of 105% over a
four-year period, before being purchased by
Oracle Inc (NYSE – ORCL) in 2011.
Since leaving Oracle Inc in 2012, Jonathan
has founded his own early-stage technology
investment vehicle, Thorium Technology
Investors, and currently sits on the boards of
a number of young technology businesses.
Jonathan has a degree in zoology with marine
zoology from the University of Wales, Bangor and
a PhD in cell proliferation from the University of
East Anglia.
Jonathan has considerable venture and private
equity investing experience, both as a CFO and
CEO of private equity-backed businesses that
have successfully exited, and also as the founder
of a technology focused venture angel
investor group.
Caroline Plumb OBE Non-executive Director
Caroline was awarded an OBE in the 2016 Birthday
Honours’ list for services to business and charity.
She has an MEng in engineering, economics and
management from Oxford University.
Caroline is a serial start-up entrepreneur and is
highly effective in bringing her current venture
capital investee insights to Mercia’s Board and
Strategy meetings.
Date of appointment: June 2018
Experience: Caroline is a serial entrepreneur who
previously co-founded recruitment and
innovation consultancy FreshMinds, with clients
including Jaguar Land Rover, Vodafone and
Google. She remains involved with FreshMinds as
non-executive chair and is CEO of Fluidly, which
she founded in 2016, a venture-backed SaaS
business in the fintech space. Caroline was
previously an independent panel member of the
£2.7billion Regional Growth Fund and served as
one of Prime Minister David Cameron’s Business
Ambassadors representing the Professional and
Business Services sectors.
Mercia Asset Management PLC
Annual Report and Accounts 2020
57
GovernanceFinancial statementsStrategic report Directors’ report
The Directors present their Annual Report and the audited financial
statements of Mercia Asset Management PLC for the year ended
31 March 2020.
Results and dividends
The loss for the year was £17,454,000 (2019: £2,620,000 profit). The
Directors do not recommend the payment of a dividend (2019: £nil).
Future developments and events after the balance
sheet date
Details of future developments and events that have occurred after the
balance sheet date can be found in the Strategic Report on page 55
which forms part of this report by cross-reference. On 1 July 2020 the
Board was pleased to promote Mercia’s in-house Head of Legal,
Sarah-Louise Thawley LLB (Hons), as Group General Counsel and
Company Secretary.
Directors
The Directors who were in office during the year and up to the date of
signing the financial statements were:
Ian Roland Metcalfe (appointed Non-executive Chair on 2 July 2019)
Dr Mark Andrew Payton
Martin James Glanfield
Julian George Viggars
Raymond Kenneth Chamberlain
Dr Jonathan David Pell
Caroline Bayantai Plumb OBE
Susan Jane Searle (resigned on 2 July 2019)
Directors’ shareholdings and other interests
A table showing the interests of Directors in the share capital of
Mercia Asset Management PLC is shown in the Remuneration Report
on page 68.
Directors’ indemnities
Mercia Asset Management PLC has made qualifying third-party
indemnity provisions for the benefit of all Directors of the Company and
its subsidiaries. These were in force during the financial year and
remained in force at the date of approval of the financial statements.
Financial instruments
The Group’s financial instruments comprise cash and other items, such
as trade debtors and trade creditors, which arise directly from its
operations. The main purpose of these financial instruments is to fund
the Group’s operations as well as to efficiently manage working capital
and liquidity.
It is the Group’s policy not to enter into derivative transactions and no
trading in financial instruments has been undertaken during the year
under review. The Group therefore faces few risks associated with
financial instruments.
The Group’s use of financial instruments is discussed further in note 29
to the consolidated financial statements.
Substantial shareholdings
As at 31 March 2020, the Group had been notified, in accordance with
Chapter 5 of the Disclosure and Transparency Rules, of the following
voting rights of shareholders of the Group:
58
Mercia Asset Management PLC
Annual Report and Accounts 2020
Number of
Ordinary shares
Percentage
%
Invesco Limited
Forward Innovation Fund1
Librae Holdings Limited
Ruffer LLP
Forward Nominees Limited1
The Hargreaves No 11 Settlement
NFU Mutual Insurance Society
63,113,333
38,072,336
28,208,528
24,413,000
22,631,208
14,000,000
13,341,465
1 Shareholdings connected to Ray Chamberlain.
14.3
8.7
6.4
5.6
5.1
3.2
3.0
Political donations
During the year ended 31 March 2020 the Group made no political
donations (2019: £nil).
Employees
The Group employed an average of 91 (2019: 85) staff throughout
the year and is therefore of a size where it is not necessary to have
introduced a formal employee consultation process. However, and as
more fully set out in the People, Culture and Values review beginning on
page 40, employees are encouraged to be involved in decision-making
processes and are provided with information on the financial and
economic factors affecting the Group’s performance through regular
team meetings, updates from the Chief Executive Officer and via an
open and inclusive culture. Given the Group’s continuing expansion
during the past year, talent management encompassing recruitment,
retention, communication, training and performance management
remains an important area of focus.
The Group operates a discretionary annual bonus scheme for all of its
employees with bonuses being awarded based on both their and the
Group’s overall performance, against defined objectives which
encompass the Group’s four core values.
Applications for employment by disabled persons are always fully
considered, bearing in mind the aptitudes of the applicant concerned.
In the event of a member of staff becoming disabled, every effort is
made to ensure that their employment within the Group continues
and that workspace and other modifications are made as appropriate.
It is the policy of the Group that the training, career development and
promotion of a disabled person should, as far as possible, be identical
to that of a person who does not suffer from a disability.
Disclosure of information to the auditor
So far as each of the persons who are Directors at the date of signing
the financial statements are aware, there is no relevant audit
information of which the Group’s auditor is unaware, and each Director
has taken all the steps that he or she ought to have taken as a Director
in order to make himself or herself aware of any relevant audit
information and to establish that the Group’s auditor is aware of
that information.
Auditor
The auditor, Deloitte LLP, has indicated their willingness to continue
in office and a resolution concerning their reappointment will
be proposed at the forthcoming Annual General Meeting.
Approved by the Board and signed on its behalf by:
Sarah-Louise Thawley
Company Secretary
13 July 2020
Forward House, 17 High Street, Henley-in-Arden
Warwickshire B95 5AA
Statement of Directors’ responsibilities
The Directors are responsible for preparing the Annual Report and
the audited financial statements in accordance with applicable law
and regulations.
Directors’ responsibility statement
We confirm that to the best of our knowledge:
•
•
•
the financial statements, prepared in accordance with the relevant
financial reporting framework, give a true and fair view of the
assets, liabilities, financial position of the Group and the Company
and loss of the Group and the undertakings included in the
consolidation taken as a whole;
the Strategic Report includes a fair review of the development and
performance of the business and the position of the Company and
the undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and uncertainties
that they face; and
the Annual Report and financial statements, taken as a whole, are
fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company’s and the
Group's position and the Group's performance, business model and
strategy.
This responsibility statement was approved by the Board on 13 July
2020 and signed on its behalf by:
Dr Mark Payton
Chief Executive Officer
Martin Glanfield
Chief Financial Officer
Company law requires the Directors to prepare financial statements for
each financial period. Under that law the Directors are required to
prepare the Group financial statements in accordance with
International Financial Reporting Standards (“IFRSs”) as adopted by
the European Union and Article 4 of the International Accounting
Standards (“IAS”) Regulation and have elected to prepare the Parent
Company financial statements in accordance with United Kingdom
Generally Accepted Accounting Practice (United Kingdom Accounting
Standards and applicable law), including Financial Reporting Standard
101 ‘Reduced Disclosure Framework’. Under company law the Directors
must not approve the financial statements unless they are satisfied
that they give true and fair view of the state of affairs of the Group and
the Company and of the profit or loss of the Group for that period.
In preparing the Group financial statements, International Accounting
Standard 1 requires that the Directors:
• properly select and apply accounting policies;
• present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable
information;
• provide additional disclosures when compliance with the specific
requirements in IFRSs is insufficient to enable users to understand
the impact of particular transactions, other events and conditions
on the entity’s financial position and financial performance; and
• make an assessment of the Group’s ability to continue as a
going concern.
In preparing the Company financial statements, the Directors are
required to:
•
select suitable accounting policies and then apply them
consistently;
• make judgements and accounting estimates that are reasonable
•
and prudent;
state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and
explained in the financial statements; and
• prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
The Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Group’s and the Company’s
transactions and disclose with reasonable accuracy at any time the
financial key position of the Group and the Company, enabling them to
ensure that the financial statements comply with the Companies Act
2006. They are also responsible for safeguarding the assets of the
Group and the Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Group’s website.
Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation in
other jurisdictions.
Mercia Asset Management PLC
Annual Report and Accounts 2020
59
Financial statementsGovernanceStrategic report
Corporate governance report
Non-executive Chair’s corporate
governance statement
As Non-executive Chair, I have overall responsibility for implementing
corporate governance within Mercia Asset Management PLC (‘Mercia’,
the ‘Company’ or the ‘Group’). Working with the Chief Financial Officer
and Company Secretary, I am responsible for our corporate governance
standards. The Board is collectively responsible for setting the tone and
culture of the Company and promoting good corporate governance.
Mercia has been a member of the Quoted Companies’ Alliance (“QCA”)
since 2015 to further its understanding of, and adherence to, good
corporate governance practice. It formally adopted the QCA Code on
21 September 2018, following the introduction in March 2018 of the
London Stock Exchange’s new requirement for companies admitted to
trading on AIM to adopt and comply with a recognised corporate
governance code by 28 September 2018.
The QCA Code sets out 10 corporate governance principles and requires
the Group to publish certain related disclosures; these appear in this
section of the Annual Report and on our website. This information is
reviewed annually and the date of each review is noted on our website.
Our primary means of communicating our corporate governance
structure is through our Annual Report and our website disclosures.
When on occasion specific questions are raised by private individual
shareholders and/or institutional investors on such matters, we engage
directly with those shareholders, generally through either the Chief
Executive Officer or the Chief Financial Officer. I also meet from time to
time with our leading institutional investors to maintain an open
dialogue in respect of progress against Mercia’s strategic objectives
and any other matters which our shareholders wish to raise. I set out
below how the Board is led, matters specifically reserved for it, our risk
framework and governance structures. Mercia’s Directors, both
Executive and Non-executive, believe in robust corporate governance,
and we concur with the principles of the QCA Code, in that it is key to
the long-term success of the Company – by helping, inter alia, to
improve performance and mitigate risk.
A few words about our corporate culture. We communicate our
corporate culture through regular staff communications, an induction
programme for all new joiners and, most important of all, through the
way in which the Executive Directors conduct themselves. We promote
openness and respectfulness in all our dealings. Our relatively flat
management structure and internal communication channels enable
us to monitor that ethical values are being respected and that the state
of our corporate culture remains strong – both from an internal and
external perspective. Our purpose and core values are communicated
regularly to all staff and form part of our performance management
framework. Furthermore, all employees are encouraged to contribute
to our decision-making processes and are provided with information on
the financial and economic factors affecting the Group’s performance
through regular team meetings, updates from the Chief Executive
Officer and via our open and inclusive culture. Mercia’s people and
talent management encompasses recruitment, retention,
communication, training and performance management; all important
areas of focus where our staff are our most important asset. Mercia
actively encourages open dialogue between all staff and we hold
regular face-to-face gatherings (more recently via Zoom), both formal
and informal, to elicit feedback and gauge how our values are being
maintained throughout the business.
60
Mercia Asset Management PLC
Annual Report and Accounts 2020
Finally, from an external perspective Mercia seeks to operate as a
socially responsible employer and has adopted standards and policies
which promote corporate values designed to help and guide employees
in their conduct and business relationships. The Group seeks to comply
with all laws, regulations and rules applicable to its business and to
conduct that business in line with applicable established best practice.
The Group takes a zero tolerance approach to bribery and corruption
and has enacted procedures to prevent bribery. All employees within
Mercia who are involved with the regulated business of managing
investment transactions receive compliance and anti-money
laundering training, with periodic refresher updates.
The Directors recognise the importance of sound corporate
governance. We remain committed to delivering the long-term
success of the Group through an effective framework of leadership,
management and controls. In all its activities, the Group aims to be
commercial and fair, to display integrity and professionalism and to
have due regard for the interests of all of its investors, employees,
suppliers, local communities and the businesses in which the
Group invests.
Board composition
The Board considers that it contains a range of skills, knowledge,
experience and backgrounds that are appropriate for the business.
Furthermore, the Board members are of sufficient calibre to bring
independent judgement on issues of strategy, performance, resources
and standards of conduct, which are vital to the success of the Group.
The Chief Financial Officer also served as Company Secretary
throughout the year, and up until 1 July 2020, on which date
Sarah-Louise Thawley LLB (Hons) was promoted to the role of Group
General Counsel and Company Secretary. The Board believes that it
operates in an open and constructive manner and works effectively.
Given the Group’s evolution as a specialist asset manager, the Board
intends to appoint an additional Non-executive Director with a relevant
asset management background in the near term, and furthering Board
diversity also remains important to Mercia.
Brief biographies of the Directors and their relevant experience are set
out on pages 56 to 57. Their membership of committees is set out on
pages 61 to 62.
Independence of Non-executive Directors
The Board considers many criteria in assessing the independence of the Non-executive Directors including the criteria recommended by the QCA
Code. The Non-executive Chair and Non-executive Directors are all considered by the Board to be independent of management and not influenced
by any relationship which could interfere with the exercise of their independent judgement. Notwithstanding this conclusion, Ray Chamberlain is
interested in 14.7% of the Company’s issued share capital.
Board operation
The Board has a schedule of matters reserved for its approval including, inter alia, setting the Group’s strategic direction, approving annual
budgets, monitoring performance against plan, authorising all material direct investment decisions and all corporate transactions, ensuring
effective communication with shareholders and approving changes to Board membership and committees.
Board effectiveness
In April 2019 a board effectiveness review was undertaken. Belinda Hudson Limited (“BHL”), experts in enhancing board effectiveness, were
appointed to undertake the externally facilitated review after a tender exercise. BHL has not provided any other service to the Company during
the year.
The process comprised a review of Board and committee papers over the preceding year and confidential one-to-one discussions between BHL
and members of the Board and Executive Team. BHL compiled a report which identified what was working well and those areas where there was
scope for development. The report was discussed at a Board meeting in June 2019 and actions were subsequently agreed to implement the areas
for development.
Key insights included:
•
refreshing the skills matrix and reviewing the composition of the Board to ensure that the Non-executive Directors bring the skills and
experience necessary to meet the future needs of the Company;
reviewing the extent of the Board’s involvement in relation to the oversight of balance sheet investments;
•
•
reviewing the Board meeting agenda to ensure that there is strong strategic focus and all matters within the Board’s remit are covered;
• encouraging the Executives to be clear on what they are seeking from the Board when they present investment proposals or other papers;
•
•
creating more opportunities for the Non-executive Directors to interact with a broader range of employees; and
including more time in the Board calendar for the Non-executive Directors to meet without the Executives present.
Since the review, tangible progress has been made in respect of each of the above recommendations.
Board meetings
The Board now meets formally for a minimum of eight times each year. In addition, the Non-executive Directors communicate directly with the
Executive Directors between Board meetings. The Board typically holds two dedicated meetings each year to review strategy.
Directors are expected to attend all meetings of the Board and the committees on which they sit, and to devote sufficient time to the Group’s
affairs to enable them to fulfil their duties as Directors. In the event that Directors are unable to attend a meeting, their comments on papers to be
considered at the meeting are discussed in advance with the Chair so that their contribution can be included in the wider Board discussion.
During the year to 31 March 2020 nine Board meetings occurred. Details of attendance at the scheduled Board and committee meetings during the
year is as follows:
Director
Ian Metcalfe
Dr Mark Payton
Martin Glanfield
Julian Viggars
Ray Chamberlain
Dr Jonathan Pell
Caroline Plumb OBE
Susan Searle3
1 Attended by invitation.
2 The composition of the Committee changed during the year, as outlined below.
3 Susan Searle resigned on 2 July 2019.
Board
Audit and Risk
Remuneration
Nominations
9/9
9/9
9/9
9/9
8/9
9/9
9/9
3/9
2/32
1/31
3/31
1/31
–
2/3
3/3
1/3
5/5
5/51
5/51
–
–
4/52
5/5
1/5
1/1
1/11
1/11
–
–
1/1
–
1/1
Mercia Asset Management PLC
Annual Report and Accounts 2020
61
Financial statementsGovernanceStrategic report Corporate governance report continued
Board committees
The Board delegates specific duties and responsibilities to certain committees and has established a Nominations Committee, an Audit and Risk
Committee and a Remuneration Committee, as described more fully below, except in respect of the Remuneration Committee, whose report is set
out on pages 65 to 68 of this Annual Report. The Company Secretary attends all Committee meetings. Subsequent to Susan Searle’s resignation on
2 July 2019, Ian Metcalfe became Chair of the Nominations Committee and rejoined the Audit and Risk Committee.
Nominations Committee
The Nominations Committee is responsible for identifying and nominating members of the Board and recommending the composition of each
committee of the Board, including the Chair of each committee, together with evaluating the balance of skills, knowledge, experience and
independence of the Board. The Committee also considers succession planning for Executive Directors, Non-executive Directors and other
senior executives.
During the year the Committee comprised Susan Searle as Chair and Ian Metcalfe and Dr Jonathan Pell until 2 July 2019, after which date
Ian Metcalfe became Chair and the other Committee members were Dr Jonathan Pell and Caroline Plumb OBE. The Nominations Committee met
once formally during the year and also met informally at other times. The formal meeting was fully attended.
Audit and Risk Committee
The Audit and Risk Committee is responsible for monitoring the integrity of the Group’s financial statements, reviewing significant financial
reporting issues, reviewing the effectiveness of the Group’s compliance, internal control and risk management systems and overseeing the
relationship with the external statutory and CASS auditors (including advising on their appointment, agreeing the scope of the audits, agreeing
audit fees and reviewing the audit findings). The Committee also reviews the provision of any non-audit services by the external statutory auditor.
The Committee will monitor the need for a dedicated internal audit function, focusing on financial controls. An internal audit function already
exists in respect of investment related compliance matters, under the independent leadership and direction of the Group’s Compliance Director.
The Compliance Director reports directly to the Committee on all findings.
During the year the Committee comprised Dr Jonathan Pell as Chair, Susan Searle and Caroline Plumb OBE up until 2 July 2019, after which date
Dr Jonathan Pell remained as Chair and the other Committee members were Caroline Plumb OBE and Ian Metcalfe. Executive Directors attend by
invitation. The Committee met three times during the year under review at appropriate times in the financial reporting and audit cycle. It may also
meet at other times if so required. It has unrestricted access to the Group’s external auditor.
The QCA Corporate Governance Code
From the date of our Admission to trading on AIM in December 2014, we have embedded robust corporate governance as part of our culture.
Mercia’s governance framework is not static and will continue to evolve over time.
Set out below is how Mercia complies with the 10 key principles set out in the QCA Code.
Governance principles
Compliant Explanation
Deliver
growth
1. Establish a strategy
and business model
which promote
long-term value for
shareholders
2. Seek to understand
and meet shareholder
needs and
expectations
The Strategic Report section of this Annual Report clearly explains
Mercia’s business model and strategy in detail, including how it
expects to create long-term value for shareholders.
A key strand of Mercia’s strategy is its investment policy,
which is included in the AIM Rule 26 section of its website at
www.mercia.co.uk.
Mercia’s Executive Directors participate in institutional and retail
investor roadshows throughout the year and following the
announcement of its annual and interim results. The Group’s Chair
also meets with existing shareholders from time to time as do the
Executive Directors. Capital Market Days, to which all shareholders
are invited, are held from time to time. The Group also uses its
Annual General Meeting as an opportunity to communicate with
its shareholders.
Further reading
Pages 2 to 55 of this
Annual Report and the
AIM Rule 26 section of
the Group’s website
Pages 39 and 60 of this
Annual Report and the
AIM Rule 26 section of
the Group’s website
3. Take into account
wider stakeholder and
social responsibilities
and their implications
for long-term success
Mercia’s Annual Report identifies its key stakeholders within the
Responsible Business section of this Annual Report and how
seriously the Group takes its environmental, social and
governance responsibilities.
Pages 44 to 45 of this
Annual Report and the
AIM Rule 26 section of
the Group’s website
62
Mercia Asset Management PLC
Annual Report and Accounts 2020
Governance principles
Compliant Explanation
4. Embed effective risk
management,
considering both
opportunities and
threats throughout
the organisation
Maintain a
dynamic
management
framework
5. Maintain the Board as
a well-functioning,
balanced team led by
the Chair
6. Ensure that between
them the Directors
have the necessary
up-to-date experience,
skills and capabilities
7. Evaluate Board
performance based on
clear and relevant
objectives, seeking
continuous
improvement
8. Promote a corporate
culture that is based
on ethical values and
behaviours
Build
trust
9. Maintain governance
structures and
processes that are fit
for purpose and
support good decision-
making by the Board
10. Communicate how the
Company is governed
and is performing by
maintaining a dialogue
with shareholders and
other relevant
stakeholders
Further reading
Pages 52 to 55 of this
Annual Report and the
AIM Rule 26 section of
the Group’s website
Pages 60 to 62 of this
Annual Report and the
AIM Rule 26 section of
the Group’s website
Pages 56 to 57 of this
Annual Report and the
AIM Rule 26 section of
the Group’s website
The Group’s approach to risk management together with the
principal risks and uncertainties applicable to Mercia, their
possible consequences and mitigation are set out in the Principal
Risks and Uncertainties section of this Annual Report. The Board
reviews, evaluates and prioritises risks to ensure that appropriate
measures are in place to effectively manage and mitigate those
identified – for risk tolerance (focusing on Mercia-specific internal,
external and strategic risks) and risk appetite (specifically in terms
of the Group’s investing policy).
The Board has a formal schedule of matters reserved for its
approval and is supported by the Nominations, Audit and Risk and
Remuneration Committees. All Directors are required to devote
sufficient time to carry out their role. The Governance section of
Mercia’s Annual Report details the composition of its Board and
Committees. These are also included within the Investor Relations
section of its website, under the ‘Organisational Structure’ page.
The Board is satisfied that, between the Directors, it has an
effective and appropriate balance of experience, skills and
capabilities. To ensure that the Directors maintain appropriate
skills they are provided with training when identified as
appropriate by the Chair. Mercia’s Annual Report includes a
biography of each Board member. These are also included within
the Investor Relations section of its website, under “Meet the
Board”. They list the current and past roles of each Board member
and also describe the relevant business experience that each
Director brings to the Board, plus their academic and professional
qualifications. This Annual Report describes and explains where
external advisers have been engaged (eg by the Board in April
2019). Internal advisory responsibilities, such as the role
performed by the Company Secretary in advising and supporting
the Board, are also described in this Annual Report.
The Board regularly considers and evaluates its own performance
and that of its individual members. An externally-facilitated Board
evaluation and effectiveness review was undertaken during April
2019 and the actions taken in response to the recommendations
arising from this review are set out in this Annual Report.
Page 61 of this Annual
Report and the AIM Rule
26 section of the Group’s
website
The Board believes that the promotion of a corporate culture
based on sound ethical values and behaviours is essential to
creating a workplace environment that allows people to flourish
and that this will contribute to enhancing shareholder value.
Within this Annual Report, the Chair’s statement includes specific
reference to people and culture. The People, Culture and Values
section of the Strategic Report includes a section on business
ethics and further details on how Mercia’s culture is consistent
with the Group’s objectives, strategy, business model and
approach to risk management. The Remuneration Report refers to
the Executive Directors’ KPIs – those for 2019/20 and 2020/21
include Mercia’s cultural values.
The Board is collectively responsible for the long-term success of
Mercia. It has a schedule of matters reserved for its approval which
covers key areas of management and governance of the Group.
This Annual Report details the composition and terms of reference
of the Board and its Committees. These are also included within
the Investor Relations section of its website.
Mercia’s Annual Report includes disclosure of Board Committees,
their composition and where relevant, any work undertaken
during the year. It includes a detailed Remuneration Report.
Mercia’s website includes all historic Annual Reports, results
announcements, results presentations and other governance-
related material, including notices of all AGMs. These can be found
in the Investor Relations section, under Regulatory News. This
section of the website also includes the results of all AGMs.
Pages 40 to 45 of this
Annual Report and the
AIM Rule 26 section of
the Group’s website
Pages 60 to 62 of this
Annual Report and the
AIM Rule 26 section of
the Group’s website
Pages 39 and 60 to 62 of
this Annual Report and
the AIM Rule 26 section
of the Group’s website
Mercia Asset Management PLC
Annual Report and Accounts 2020
63
Financial statementsGovernanceStrategic report Corporate governance report continued
Investor relations
The Group is committed to developing and maintaining open channels
of communication with its shareholders and the mercia.co.uk website
provides up-to-date information on the Group. The Executive Directors
are available to meet with shareholders and sector analysts at regular
intervals throughout the year and the Non-executive Directors are also
available for informal discussions if required. Shareholders will have an
opportunity to raise questions with the Board at the Group’s Annual
General Meeting, which this year will be held on 24 September 2020.
Ian R Metcalfe
Non-executive Chair
13 July 2020
Internal controls
The Board acknowledges its overall responsibility for the Group’s
system of internal controls and the ongoing review of their
effectiveness. These controls are designed to safeguard the Group’s
assets and are considered appropriate for an AIM company of the size
and complexity of Mercia Asset Management. However, systems of
internal control can only identify and manage risks, not eliminate them.
Consequently, such controls do not provide an absolute assurance
against misstatement or loss. The main features of the Group’s internal
controls system are as follows:
• A control environment exists through the close daily management of
the business by the Executive Directors. The Group has a defined
organisation structure with delineated investment approval limits.
Controls are implemented and monitored by senior staff with the
necessary qualifications and experience.
• A list of matters specifically reserved for Board approval.
• Regular detailed management reporting with comparisons and
explanations of any material variances against budget or forecasts.
• Financial and custody of asset controls operate to ensure that the
assets of the Group are safeguarded and that appropriate
accounting and FCA related records are maintained.
Share dealing, anti-bribery and whistleblowing
The Group has adopted a share dealing code in conformity with the
requirements of Rule 21 of the AIM Rules. All employees, including new
joiners, are required to agree to comply with the code. The Group has
also adopted anti-bribery and whistleblowing policies, which are
included in the Group’s internal policies, communicated to all
employees. The Group operates an open and inclusive culture and
employees are encouraged to speak up if they have any concerns.
The aim of such policies is to ensure that no blurred lines exist and to
encourage all employees, regardless of seniority, to bring matters
which cause them concern to the attention of either the Executive or
Non-executive Directors. The Group has also adopted the
requirements of the Market Abuse Regulations, to the extent required
by AIM companies.
64
Mercia Asset Management PLC
Annual Report and Accounts 2020
Remuneration report
Remuneration Committee
The Remuneration Committee is responsible for determining and
agreeing with the Board the framework for the remuneration of the
Chair, the Executive Directors and other designated senior executives.
Within the terms of the agreed framework, it is also responsible for
determining the total individual remuneration packages of such persons
including where appropriate salaries, bonuses, share options and other
long-term incentives. The remuneration of Non-executive Directors is
a matter for the Chair and the Executive Directors. No Director is involved
in any decision as to his or her own remuneration.
For the year to 31 March 2020 the Remuneration Committee comprised
Ian Metcalfe as Chair, Susan Searle and Caroline Plumb OBE until 2 July
2019. From that date the Committee comprised Ian Metcalfe as Chair,
Caroline Plumb OBE and Dr Jonathan Pell. The Remuneration
Committee meets at least twice a year and otherwise as required.
During the year the Committee met formally five times, with all
meetings being fully attended, and on several other occasions on an
‘as required’ basis.
Remuneration policy
The Remuneration Committee believes that the success of the Group
depends, in part, on the performance of the Executive Directors and
senior management team and in being able to attract, retain and
motivate people of high calibre and experience. The Committee also
recognises the importance of ensuring that employees are incentivised
and identify closely with the achievement of the Group’s strategic
objectives, the leading one of which is to achieve incremental
shareholder value over the medium term through successful
syndicated investment in, and subsequent exit from, technology-
based companies.
Accordingly, the Committee seeks to provide a fair, balanced,
competitive and affordable remuneration package for its Executive
Directors and staff, while ensuring that a significant proportion of the
total remuneration of each Executive Director is linked to the
performance of the Group, against a set of pre-agreed and largely
financial objectives. The main elements of the remuneration package
for Executive Directors are base salary, an annual performance-related
bonus scheme and participation in the Group’s long-term share option
scheme and carried interest plans. Other benefits include contributions
to a defined contribution personal pension scheme, life assurance,
private health insurance and permanent health insurance. Only base
salaries are pensionable.
Given the Group’s stage in its development, there has remained a
natural tension between ‘affordability’ and the need to ‘attract and
retain talent’ in what remains a competitive sector. In 2016 the
Committee engaged external remuneration consultants to review
executive remuneration throughout the Group. The review focused on
four elements of remuneration – base salary, annual bonuses,
long-term incentives and benefit packages – in the context of current
remuneration practices, the Group’s own objective of sustained,
long-term capital growth and benchmarking the existing remuneration
packages against a defined comparator group.
The review outputs, which were endorsed by the Committee and
remain relevant today, included a recommendation that the Group
adopts a policy of active remuneration review which is event rather
than time-driven, ie growing net asset value (“NAV”) above an agreed
target. More specific agreed recommendations in respect of the
Executive Directors are summarised below:
• Base salaries – these should move gradually towards lower quartile
market levels of the comparator group, reflecting the lower market
capitalisation of the Group in its stage of development.
• Annual bonuses – the review recommended that maximum bonuses
of up to 100% of base salary should be capable of being earned for
exceptional performance. The review also suggested that the
Committee should consider deferring an element of future bonus
awards into Mercia shares, to be retained for three years.
• Long-term incentives – asset management groups (be they listed or
unlisted) typically implement carried interest plans which allocate
20% carried interest to the senior executive and investment team.
Mercia’s plan provides for 10% carried interest to be allocated
because the Group also has a share option scheme, although the
current operation of the two schemes still does not bring the senior
team fully in line with market. The review therefore recommended
that for at least the three years to 31 March 2019 annual share option
awards be made to Executive Directors at the level of 1x base salary.
Having taken soundings from both the Group’s Nominated Adviser
and remuneration specialists, the Committee agreed in principle to
continue with this policy for the next three years to 31 March 2022,
although this will be reviewed annually.
Having carefully considered these and other recommendations,
the Committee adopted them as the Group’s performance-focused
remuneration policy. Having agreed to a maximum bonus of 100% of
base salary for exceptional performance for 2019/20, the Committee
determined that any bonus award would be payable in cash up to 50%
of base salary with the remainder in deferred shares. The agreed
criteria for determining the ultimate 2019/20 award were:
1. Material growth in assets under management – 30% weighting
2. Qualitative and quantitative progress by the direct investment
portfolio – 40% weighting
3. Operational efficiency – 10% weighting
4. Subjective measure of performance by each Executive Director
reflecting their specific areas of responsibility and influence,
including Mercia’s core values – 20% weighting
Notwithstanding actual performance against these targets, the
Executive Directors voluntarily offered to cap their bonus scheme for
2019/20 at 50% of salary, recognising the near-term challenges posed
by COVID-19. This gesture was welcomed by the Committee.
Having considered the performance of the Group and the Executive
Directors against each of these criteria, as well as the self-imposed
bonus cap, the Committee awarded bonuses to each Executive Director
of 33% of their base salary for 2019/20.
Mercia Asset Management PLC
Annual Report and Accounts 2020
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Financial statementsGovernanceStrategic report Remuneration report continued
The Committee has currently agreed to a maximum bonus of 100% of base salary for exceptional performance for 2020/21, with the bonus award
again payable in cash up to 50% of base salary and the remainder in deferred shares. The agreed criteria for determining the ultimate 2020/21
award are:
1. Total shareholder return – 45% weighting
2. Funds under management performance – 30% weighting
3. Environmental, social and governance progress, high performing teams and Mercia core values – 25% weighting
The Committee will continue to monitor the affordability and suitability of the Group’s remuneration policy and performance criteria and will
maintain informal dialogue on this subject with both the Group’s Nominated Adviser and remuneration specialists.
Directors’ service contracts
The table below summarises the service contract and letter of appointment details for each Executive and Non-executive Director as at the date of
this report:
Dr Mark Payton
Martin Glanfield
Julian Viggars
Ian Metcalfe
Ray Chamberlain
Dr Jonathan Pell
Caroline Plumb OBE
Date
of appointment
15 December 2014
15 December 2014
17 April 2018
15 December 2014
15 December 2014
22 December 2017
12 June 2018
Annual
salary
£’000
235
200
200
75
40
40
40
Notice
period
6 months
6 months
6 months
3 months
3 months
3 months
3 months
All Directors have voluntarily agreed to no base salary increase for 2020/21, as part of the Group’s cost containment actions, during the period
when COVID-19 is impacting the Group’s performance. Ian Metcalfe’s annual salary increased to £75,000 per annum with effect from 2 July 2019, to
compensate him for his new role as Chair of the Group.
Equity-based incentive schemes
The Committee has implemented two long-term incentive schemes:
The Mercia Company Share Option Plan (“CSOP”)
The Remuneration Committee is responsible for issuing awards of options to purchase Ordinary shares under the Group’s share incentive plan,
known as the Mercia CSOP, which was adopted by Mercia Asset Management on 8 December 2014. All Executive Directors and employees are
eligible to participate. The Committee intends that appropriate awards be made over time, not exceeding the limits contained in the CSOP.
The Mercia CSOP comprises two parts. The first part satisfies the requirements of Schedule 4 to the Income Tax (Earnings and Pensions) Act 2003
(so that options granted under it are subject to capital gains tax treatment). The second part will be used to grant options which cannot be granted
within the limit prescribed by the applicable tax legislation and which will not therefore benefit from favourable tax treatment. No options will be
granted under the Mercia CSOP more than 10 years after its adoption. The number of Ordinary shares over which options may be granted on any
date is limited so that the total number of Ordinary shares issued and issuable in respect of options granted in any 10-year period under the Mercia
CSOP and any other employee share scheme is restricted to 10% of the issued Ordinary shares from time to time.
The methodology for determining the market value of an Ordinary share for all grants of options under the Mercia CSOP has also been agreed with
HMRC, such that the Group will use the closing mid-market price quoted by the London Stock Exchange on the trading day immediately preceding
the date of grant.
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Mercia Asset Management PLC
Annual Report and Accounts 2020
All awards are subject to a performance condition. The performance condition requires that the total shareholder return from the date of grant to
the third anniversary is not less than 6% (compound) per annum, using a volume-weighted average share price for the 90 days prior to the third
anniversary of the date of grant. Where the performance condition has not been achieved on the third anniversary, those options lapse.
In the year to 31 March 2020 options were granted to the Executive Directors and a number of staff. The total number of options in issue at the year
end was 15,700,140 (2019: 13,413,000).
The Mercia Carried Interest Plan (“CIP”)
Mercia Asset Management operates carried interest plans for the Executive Directors and certain other senior investment-focused staff (‘Plan
Participants’). Each CIP will operate in respect of direct investments made by Mercia Asset Management during a 24-month period, save that the
first CIP was for the period from the plan’s adoption on 1 August 2015 to 31 March 2017. The second plan period ran from 1 April 2017 until 31 March
2019. The third plan period runs from 1 April 2019 until 31 March 2021.
Once Mercia Asset Management has received an aggregate annualised 6% realised return during the relevant investment period, Plan Participants
will receive, in aggregate, 10% of the net realised cash profits from the direct investments made over the relevant period, including taking account
of any investment losses. Plan Participants’ carried interest is subject to good and bad leaver provisions.
Mercia Asset Management also implemented a Phantom Carried Interest Plan (“PCIP”), based on the above criteria, in respect of the direct
investments which the Group acquired shortly before Admission in December 2014 and those new direct investments made in the post-IPO period
leading up to the implementation of the CIP on 1 August 2015.
Audited information
The following section contains the disclosures required by the AIM Rules and by UK company law.
Directors’ remuneration (audited)
The aggregate remuneration received by the Directors who served during the year is set out below:
Salaries
payable
Pension
contributions
Taxable
benefits
Performance
related bonus
Executive Directors
Dr Mark Payton
Martin Glanfield
Julian Viggars1
Matthew Mead2
Non-executive Directors
Ian Metcalfe3
Ray Chamberlain
Dr Jonathan Pell
Caroline Plumb OBE4
Susan Searle5
2020
£’000
235
200
200
–
68
40
40
40
38
2019
£’000
235
200
192
9
46
40
40
32
75
2020
£’000
2019
£’000
2020
£’000
2019
£’000
2020
£’000
26
22
22
–
–
–
–
–
–
26
22
21
–
–
–
–
–
–
69
2
3
2
–
–
–
–
–
–
7
2
4
2
–
–
–
–
–
–
8
78
66
66
–
–
–
–
–
–
2019
£’000
108
92
86
–
–
–
–
–
–
Total
2020
£’000
2019
£’000
341
291
290
–
68
40
40
40
38
371
318
301
9
46
40
40
32
75
861
869
70
210
286
1,148
1,232
Mercia pays reasonable expenses incurred by its Non-executive Directors and may settle any tax and National Insurance due on such payments
where relevant.
Julian Viggars was appointed on 17 April 2018.
1
2 Matthew Mead resigned on 17 April 2018.
3
Ian Metcalfe was appointed Chair on 2 July 2019.
4 Caroline Plumb OBE was appointed on 12 June 2018.
5 Susan Searle resigned on 2 July 2019.
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Annual Report and Accounts 2020
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Financial statementsGovernanceStrategic report Remuneration report continued
Share options (audited)
The number of options over Mercia Asset Management’s Ordinary shares held by Directors as at 31 March 2020 is set out below:
Executive Directors
Dr Mark Payton
Martin Glanfield
Julian Viggars
Number of options
As at
31 March 2020
As at
31 March 2019
Date of
grant
–
–
400,000
400,000
946,502
–
–
400,000
400,000
823,045
–
100,000
1,200,000
823,045
1,000,000
400,000
400,000
400,000
–
1,000,000
400,000
400,000
400,000
–
300,000
100,000
1,200,000
–
8 Dec 2014
27 Jul 2016
24 Jul 2017
28 Aug 2018
28 Jan 2020
8 Dec 2014
27 Jul 2016
24 Jul 2017
28 Aug 2018
28 Jan 2020
27 Jul 2016
24 Jul 2017
28 Aug 2018
28 Jan 2020
Exercise
price
50.00p
51.25p
36.00p
30.80p
24.30p
50.00p
51.25p
36.00p
30.80p
24.30p
51.25p
36.00p
30.80p
24.30p
Period of
exercise
18 Dec 2019 to 7 Dec 20241
27 Jul 2019 to 26 Jul 20262
24 Jul 2020 to 23 Jul 20273
28 Aug 2021 to 27 Aug 20284
28 Jan 2023 to 27 Jan 20305
18 Dec 2019 to 7 Dec 20241
27 Jul 2019 to 26 Jul 20262
24 Jul 2020 to 23 Jul 20273
28 Aug 2021 to 27 Aug 20284
28 Jan 2023 to 27 Jan 20305
27 Jul 2019 to 26 Jul 20262
24 Jul 2020 to 23 Jul 20273
28 Aug 2021 to 27 Aug 20284
28 Jan 2023 to 27 Jan 20305
1 The options, exercisable as to one-third from 18 December 2019, one-third from 18 December 2020 and the remaining one-third from 18 December 2021, lapsed during the
year ended 31 March 2020.
2 The options, exercisable as to one-third from 27 July 2019, one-third from 27 July 2020 and the remaining one-third from 27 July 2021, lapsed during the year ended
31 March 2020.
3 The options will be exercisable as to one-third from 24 July 2020, one-third from 24 July 2021 and the remaining one-third from 24 July 2022, if the performance condition has
been met.
4 The options will be exercisable as to one-third from 28 August 2021, one-third from 28 August 2022 and the remaining one-third from 28 August 2023, if the performance
condition has been met.
5 The options will be exercisable as to one-third from 28 January 2023, one third from 28 January 2024 and the remaining one third from 28 January 2025, if the performance
condition has been met.
Directors’ share interests (audited)
The interests of the Directors and their connected persons in the Ordinary shares of Mercia Asset Management are set out below:
Ian Metcalfe1
Dr Mark Payton1
Martin Glanfield1
Julian Viggars1
Ray Chamberlain1 2
Dr Jonathan Pell
Caroline Plumb OBE1
Susan Searle3
Number of
Ordinary shares
as at 31 March
2020
192,609
6,799,653
716,972
582,325
64,824,766
–
40,000
–
Number of
Ordinary shares
as at 31 March
2019
132,609
6,655,472
293,369
424,325
60,824,766
–
–
1,097,388
1
In December 2019 Ian Metcalfe, Dr Mark Payton, Martin Glanfield, Julian Viggars, Ray Chamberlain and Caroline Plumb OBE each increased their shareholding in Mercia Asset
Management PLC by purchasing 60,000 shares, 100,000 shares, 200,000 shares, 100,000 shares, 4,000,000 shares and 40,000 shares respectively.
2 Ray Chamberlain is indirectly interested in 64,824,766 Ordinary shares via the Forward Innovation Fund (38,072,336 Ordinary shares), Croftdawn Limited (3,994,786 Ordinary
shares), Mercia Growth Nominees Limited (126,436 Ordinary shares) and Forward Nominees Limited (22,631,208 Ordinary shares as nominee for certain members of the
Chamberlain family and close associates, including Ray Chamberlain).
3 Susan Searle resigned on 2 July 2019.
Ian R Metcalfe
Chair of the Remuneration Committee
13 July 2020
68
Mercia Asset Management PLC
Annual Report and Accounts 2020
Independent auditor’s report to the members
of Mercia Asset Management PLC
Report on the audit of the financial statements
1. Opinion
In our opinion:
•
the financial statements of Mercia Asset Management PLC (the ‘parent Company’) and its subsidiaries (the ‘Group’) give a true and fair view of
the state of the Group’s and of the parent Company’s affairs as at 31 March 2020 and of the Group’s loss for the year then ended;
the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (“IFRSs”) as
adopted by the European Union;
the parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting
Practice, including Financial Reporting Standard 101 ‘Reduced Disclosure Framework’; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
•
•
•
We have audited the financial statements which comprise:
the consolidated statement of comprehensive income;
•
the consolidated and parent Company balance sheets;
•
the consolidated and parent Company statements of changes in equity;
•
the consolidated cash flow statement; and
•
the related notes 1 to 49.
•
The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as
adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent Company financial
statements is applicable law and United Kingdom Accounting Standards, including FRS 101 ‘Reduced Disclosure Framework’ (United Kingdom
Generally Accepted Accounting Practice).
2. Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under
those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report.
We are independent of the Group and the parent Company in accordance with the ethical requirements that are relevant to our audit of the
financial statements in the UK, including the Financial Reporting Council’s (the “FRC’s”) Ethical Standard as applied to listed entities, and we have
fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
3. Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year were:
• Valuation of investments
• Acquisition of VCT fund management contracts
Within this report, key audit matters are identified as follows:
Newly identified
Increased level of risk
Similar level of risk
Decreased level of risk
Materiality
Scoping
Significant changes in our
approach
The materiality that we used for the Group financial statements was £2.7million which was determined on the
basis of 2.5% of the Group’s net assets less cash and cash equivalents and short-term liquidity investments.
99% of the Group revenue and loss after taxation and 99% of net assets was audited to full scope audit.
Other than the new key audit matter identified in relation to the business combination which took place in the
period, there were no significant changes to the prior year audit approach. However, we have considered the
impact of COVID-19 within our key audit matter in respect of the fair value of investments and in our going
concern assessment.
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Annual Report and Accounts 2020
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of Mercia Asset Management PLC continued
4. Conclusions relating to going concern
We are required by ISAs (UK) to report in respect of the following matters where:
•
the Directors’ use of the going concern basis of accounting in preparation of the financial statements
is not appropriate; or
the Directors have not disclosed in the financial statements any identified material uncertainties
that may cast significant doubt about the Group’s or the parent Company’s ability to continue to
adopt the going concern basis of accounting for a period of at least 12 months from the date when
the financial statements are authorised for issue.
•
We have nothing to report in respect of
these matters.
5. Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the
current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These
matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the
efforts of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do
not provide a separate opinion on these matters.
5.1 Valuation of investments
Key audit matter description As disclosed by the Directors as a critical accounting judgement in note 2 on page 85 of the Annual Report, the
judgement required to determine the appropriate valuation methodology of investments is significant. As detailed in
note 2, there is increased estimation uncertainty determining the valuation of investments at 31 March 2020 due to the
unprecedented impact of COVID-19. The Directors have assessed the impact on the markets in which each of the direct
investments operate, as well as assessing the trading performance of each investment and their respective liquidity
needs in determining the fair value of investments. The uncertainty of the duration of restrictions on operational
activity, and the pace and extent of recovery gives rise to this increased estimation uncertainty.
As disclosed in note 18, the Group has investments with a net carrying value of £87.5million (2019: £87.7million). The
majority of these investments have no quoted market price available. Based on the nature of the Group’s investments
in early-stage companies, there are often no current or short-term future earnings or positive cash flows. Therefore, it
can be difficult to evaluate the probability of success or failure of commercial development or research activities that
support the business models.
As a result, each non-listed investment is initially carried at cost, with adjustments subsequently made to reflect
changes in fair value, typically with reference to the price at which third-party transactions in the equity of that
portfolio company have taken place and the Directors’ review of the fair value of each investment.
If there is no readily available value following the ‘price of recent investment’ methodology, the Group considers
alternative methodologies requiring the Directors to make assumptions over the timing and nature of future revenues
when calculating fair value for these investments.
There is a risk with the ongoing valuation of investments since this is a highly complex area for the business and
requires judgement. The movement in the fair value of the investments has a direct impact on the results reported by
the Group.
We assessed the appropriateness of the Directors’ valuations of the investment portfolio by assessing the Directors’
key judgements and assumptions, as follows:
• we reviewed the Directors’ processes for valuing investments, which includes a detailed review by the Executive
Directors and the Board as a whole, and evaluated whether the valuation methodologies applied are appropriate
and where applicable, appropriate alternative valuation methodologies have been considered;
• we reviewed the valuation methodology used by the Directors to assess whether it is compliant with IFRS 13 and
the 2018 IPEVC valuation guidelines;
• we obtained the Directors’ assessment of the impact of COVID-19 on each investment in the portfolio, and obtained
updated business plans for each investee to corroborate the impact of this assessment on the year end valuation;
• we engaged our valuation experts to assess the approach adopted by the Directors and evaluated the valuation
methodology applied in reference to the Group’s own valuation policies. We also considered the effects of potential
uncertainties of the impact of COVID-19 on the viability of the investments, and the additional funding
requirements required due to operational impacts of measures introduced by the UK and overseas governments in
response to the pandemic;
• we investigated any changes in the fair value of investments and corroborated any such fair value uplifts or
write-downs;
• we performed an independent assessment to identify any corroborative or contradictory evidence on the
performance of the investee companies which may impact the year end valuation assessment; and
• we reviewed the Directors’ process for valuation of each investment against the Directors’ own formalised valuation
process and investigated any exceptions.
How the scope of our audit
responded to the key
audit matter
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Annual Report and Accounts 2020
Key observations
Based on these procedures, we found the judgements and assumptions used to be materially appropriate.
We note that the valuation methodology applied by management includes a level of prudence in determining the
fair value of investment; however we concluded that the overall carrying value of investments in the financial
statements is appropriate.
5.2 Acquisition of VCT fund management contracts
Key audit matter description This is a new key audit matter for 2020 following the acquisition of three VCT fund management contracts by the
Group in December 2019, which management have concluded meet the definition of a business under IFRS 3 and
have accounted for this as a business combination. Judgement was required to determine the valuation of the
intangible assets recognised as part of the business combination, as well as to determine the fair value of
contingent deferred consideration related to the acquisition.
The three VCT contracts were acquired for an initial cash payment of £12.4million, an initial issue of shares to the
value of £4.2million and deferred contingent cash and share payments for which the fair value at the acquisition
date has been estimated at £6.2million. A contract intangible asset of £20.3million, a deferred tax liability of
£3.9million and £6.3million of goodwill have been recognised on the Group balance sheet.
We have included the key audit matter due to the quantum of the balance, its highly judgemental nature, and the
fact that it had an impact on our overall audit strategy.
Refer to notes 2, 13 and 23 for the Group accounting policy, management’s consideration of critical accounting
judgements, business combination and deferred consideration notes respectively.
Our procedures involved:
• obtaining an understanding of the key controls over acquisition accounting;
• obtaining the underlying cash flow forecasts used to determine the value of the intangible asset, discussing
them with management, and challenging the reasonableness and consistency of the underlying forecasts by
comparing to historical results and the impact of changes to the value of funds under management in relation
to these contracts;
• agreeing the value of consideration payable to contractual agreements and to bank statements;
• assessing the assumptions used to determine the fair value of the contingent deferred consideration; and
•
reviewing the associated disclosures to assess whether they are in accordance with IFRS 3.
How the scope of our audit
responded to the key audit
matter
Key observations
We concur that the acquisition has been appropriately accounted for under IFRS 3 and that the assumptions and
methodology used in valuing the identified intangible assets are reasonable.
6. Our application of materiality
6.1 Materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a
reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in
evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements
Materiality
£2.7million (2019: £2.3million)
Parent Company financial statements
£1.6million (2019: £1.3million)
Basis for
determining
materiality
2.5% (2019: 2.4%) of the Group’s net assets less cash
and cash equivalents and short-term liquidity investments.
Materiality for the parent Company was capped at 60% of
Group materiality on the basis of the relative size of this
component to the Group as a whole. This represents 1.3%
(2019: 1.3%) of parent Company net assets less cash and cash
equivalents and short-term liquidity investments.
Rationale for the
benchmark
applied
We determined net assets less cash and cash equivalents and short-term liquidity investments to be the most appropriate
benchmark in determining materiality as this represents the most appropriate measure to assess the performance of the Group
and the parent Company and which may directly influence decisions made by third-party investors.
Net assets includes amounts of cash and short-term liquidity investments, which are significant in value. We do not deem these
balances to be direct indicators of the Group’s and parent Company’s performance and growth. As such, we have determined it
appropriate to adjust net assets by removing cash and short-term liquidity investments and use the resulting value as a basis of
our materiality determination.
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of Mercia Asset Management PLC continued
6.2 Performance materiality
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected
misstatements exceed the materiality for the financial statements as a whole. Group performance materiality was set at 70% of Group materiality
for the 2020 audit (2019: 70%). In determining performance materiality, we considered the following factors:
a. the quality of the control environment and our ability to rely on internal controls, and
b. the low number of corrected and uncorrected misstatements identified in the previous audit.
6.3 Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £136,000 (2019: £115,000), as well as
differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on
disclosure matters that we identified when assessing the overall presentation of the financial statements.
7. An overview of the scope of our audit
7.1 Identification and scoping of components
Our Group audit scoping was determined by obtaining an understanding of the Group and its environment, including Group-wide controls, and
assessing the risks of material misstatement at the Group level. Based on that assessment, our Group audit scope focused on all entities within the
Group and covered all of the material balances in the consolidated statement of comprehensive income and consolidated balance sheet of
the Group.
The audit of the Group and components were executed at levels of materiality applicable to each individual entity, which were lower than Group
materiality and ranged from £1.0million to £1.6million (2019: £0.5million to £1.4million). These account for 99% of the Group’s revenue and loss
after taxation and 98% net assets. Each component of the audit was subject to full scope audit and an independent audit report is issued for each
component’s statutory financial statements. The Group has several components, all of which are in the United Kingdom. Teams from our offices in
Manchester and Birmingham have performed audit work. Furthermore, we also audited the consolidation schedule prepared at the Group level for
accuracy and completeness.
8. Other information
The Directors are responsible for the other information. The other information comprises the information included in the Annual Report, other
than the financial statements and our auditor’s report thereon.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we
do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the
other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be
materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material
misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we
conclude that there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report in respect of these matters.
9. Responsibilities of Directors
As explained more fully in the Statement of Directors’ Responsibilities, the Directors are responsible for the preparation of the financial statements
and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group’s and the parent Company’s ability to continue as a
going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors
either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so.
10. Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is
not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
72
Mercia Asset Management PLC
Annual Report and Accounts 2020
Report on other legal and regulatory requirements
11. Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:
•
the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared
is consistent with the financial statements; and
the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements.
•
In the light of the knowledge and understanding of the Group and the parent Company and their environment obtained in the course of the audit,
we have not identified any material misstatements in the Strategic Report or the Directors’ Report.
12. Opinion on other matter prescribed by our engagement letter
In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the provisions of the
Companies Act 2006 that would have applied were the Company a quoted company.
13. Matters on which we are required to report by exception
13.1 Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from
branches not visited by us; or
the parent Company financial statements are not in agreement with the accounting records and returns.
•
We have nothing to report in respect of these matters.
13.2 Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors’ remuneration have not been made.
We have nothing to report in respect of this matter.
14. Use of our report
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit
work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report
and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and
the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Jonathan Dodworth (Senior Statutory Auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
Birmingham, UK
13 July 2020
Mercia Asset Management PLC
Annual Report and Accounts 2020
73
Strategic reportFinancial statementsGovernance Consolidated statement of comprehensive income
For the year ended 31 March 2020
Revenue
Other administrative expenses
Net revenues/(expenses)
Fair value movements in investments
Share-based payments charge
Amortisation of intangible assets
Operating (loss)/profit before exceptional items
Exceptional items
Operating (loss)/profit
Finance income
Finance costs
(Loss)/profit before taxation
Taxation
(Loss)/profit and total comprehensive (loss)/income for the financial year
Basic and diluted (loss)/earnings per Ordinary share (pence)
All results derive from continuing operations.
The notes on pages 78 to 100 are an integral part of these financial statements.
Year ended
31 March
2020
£’000
12,747
(12,661)
86
(15,844)
(528)
(852)
(17,138)
(695)
(17,833)
246
(26)
(17,613)
159
(17,454)
(5.11)
Year ended
31 March
2019
£’000
10,675
(12,115)
(1,440)
3,916
(171)
(301)
2,004
–
2,004
562
–
2,566
54
2,620
0.86
Note
3
4
6
15
7
8
9
10
11
12
74
Mercia Asset Management PLC
Annual Report and Accounts 2020
Consolidated balance sheet
As at 31 March 2020
Assets
Non-current assets
Goodwill
Intangible assets
Property, plant and equipment
Right-of-use assets
Investments
Total non-current assets
Current assets
Trade and other receivables
Short-term liquidity investments
Cash and cash equivalents
Total current assets
Total assets
Current liabilities
Trade and other payables
Lease liabilities
Deferred consideration
Total current liabilities
Non-current liabilities
Lease liabilities
Deferred consideration
Deferred taxation
Total non-current liabilities
Total liabilities
Net assets
Equity
Issued share capital
Share premium
Other distributable reserve
Retained earnings
Share-based payments reserve
Total equity
Note
14
15
16
17
18
19
20
20
21
22
23
22
23
24
25
26
27
As at
31 March
2020
£’000
16,642
20,063
125
598
87,471
124,899
1,298
6,215
24,438
31,951
As at
31 March
2019
£’000
10,328
584
153
–
87,659
98,724
782
5,188
25,210
31,180
156,850
129,904
(4,805)
(118)
(1,736)
(6,659)
(473)
(4,446)
(3,812)
(8,731)
(15,390)
141,460
4
81,644
70,000
(12,053)
1,865
(3,730)
–
(3,730)
–
–
(109)
(109)
(3,839)
126,065
3
49,324
70,000
5,401
1,337
141,460
126,065
The notes on pages 78 to 100 are an integral part of these financial statements.
The consolidated financial statements of Mercia Asset Management PLC, registered number 09223445, on pages 74 to 100 were approved by the
Board of Directors and authorised for issue on 13 July 2020. They were signed on its behalf by:
Dr Mark Payton
Chief Executive Officer
Martin Glanfield
Chief Financial Officer
Mercia Asset Management PLC
Annual Report and Accounts 2020
75
Strategic reportFinancial statementsGovernance
Consolidated cash flow statement
For the year ended 31 March 2020
Cash flows from operating activities:
Operating (loss)/profit
Adjustments to reconcile operating (loss)/profit to net cash flows used in operating
activities:
Depreciation of property, plant and equipment
Depreciation of right-of-use assets
Fair value movements in investments
Share-based payments charge
Amortisation of intangible assets
Working capital adjustments:
(Increase)/decrease in trade and other receivables
Increase/(decrease) in trade and other payables
Net cash generated from/(used in) operating activities
Cash flows from direct investment activities:
Purchase of direct investments
Investee company loan repayments
Net cash used in direct investment activities
Cash flows from other investing activities:
Purchase of property, plant and equipment
Investee company loan redemption premiums and interest received
Purchase of fund management contracts
(Increase)/decrease in short-term liquidity investments
Net cash (used in)/generated from other investing activities
Net cash used in total investing activities
Cash flows from financing activities:
Proceeds from the issue of Ordinary shares
Transaction costs relating to the issue of Ordinary shares
Payment of lease liabilities
Interest paid
Redemption of subsidiary undertaking preference shares
Net cash generated from/(used in) financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Year ended
31 March
2020
£’000
Year ended
31 March
2019
£’000
Note
(17,833)
2,004
16
17
4
6
15
19
21
18
18
16
13
20
25
26
20
73
139
15,844
528
852
(514)
1047
136
(17,449)
1,793
(15,656)
(45)
245
(12,400)
(1,027)
(13,227)
(28,883)
30,000
(1,879)
(120)
(26)
–
27,975
(772)
25,210
24,438
84
–
(3,916)
171
301
306
(4,030)
(5,080)
(19,384)
1,711
(17,673)
(92)
531
–
4,812
5,251
(12,422)
–
–
–
–
(196)
(196)
(17,698)
42,908
25,210
76
Mercia Asset Management PLC
Annual Report and Accounts 2020
Consolidated statement of changes in equity
For the year ended 31 March 2020
As at 1 April 2018
Profit and total comprehensive income for the year
Share-based payments charge
Redemption of subsidiary undertaking preference shares
As at 31 March 2019
Loss and total comprehensive loss for the year
Issue of share capital
Cost of share capital issued
Share-based payments charge
As at 31 March 2020
Issued
share
capital
£’000
(note 25)
3
–
–
–
3
–
1
–
–
4
Share
premium
£’000
(note 26)
49,324
–
–
–
49,324
–
34,199
(1,879)
–
Other
distributable
reserve
£’000
(note 27)
Retained
earnings
£’000
Share-based
payments
reserve
£’000
70,000
–
–
–
70,000
–
–
–
–
2,977
2,620
–
(196)
5,401
(17,454)
–
–
–
1,166
–
171
–
1,337
–
–
–
528
Total
£’000
123,470
2,620
171
(196)
126,065
(17,454)
34,200
(1,879)
528
81,644
70,000
(12,053)
1,865
141,460
Mercia Asset Management PLC
Annual Report and Accounts 2020
77
Strategic reportFinancial statementsGovernance Notes to the consolidated financial statements
For the year ended 31 March 2020
1. Accounting policies
The principal accounting policies applied in the presentation of these consolidated financial statements are set out below. These policies have
been consistently applied throughout the year unless otherwise stated.
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.
Details of the Group’s activities and strategy are given in the Strategic Report which begins on page 1 of this Annual Report.
For the financial year ended 31 March 2020 the following subsidiaries of Mercia were entitled to exemption from audit under section 479A of the
Companies Act 2006 relating to subsidiary companies:
Name
Company number
Mercia Investments Limited
Mercia Fund 1 General Partner Limited
Mercia (General Partner) Limited
Mercia Investment Plan LP
Mercia Special Limited Partner LP
Mercia VCT Nominee Limited
Enterprise Ventures (General Partner EVF/LEV) Limited
Enterprise Ventures (General Partner HSBC UK Enterprise Fund) Limited
Enterprise Ventures (General Partner HSBC UK European Fund) Limited
Enterprise Ventures (General Partner Coalfields) Limited
Enterprise Ventures (General Partner Coalfields Growth) Limited
Enterprise Ventures (General Partner EV Growth) Limited
Enterprise Ventures (General Partner EV Growth II) Limited
Enterprise Ventures (General Partner EVG II North West) Limited
Enterprise Ventures (General Partner FY Seedcorn) Limited
Enterprise Ventures (General Partner Midlands POC) Limited
Enterprise Ventures (General Partner NE Venture) Limited
Enterprise Ventures (General Partner NPIF YHTV Equity) Limited
Enterprise Ventures (General Partner NW Development Capital) Limited
Enterprise Ventures (General Partner NW Mezzanine) Limited
Enterprise Ventures (General Partner NW Venture) Limited
Enterprise Ventures (General Partner RisingStars) Limited
Enterprise Ventures (General Partner RisingStars II) Limited
Enterprise Ventures (General Partner RSGF MPF) Limited
EVBL (General Partner SYIF SBF) Limited
EVBL (General Partner FY Small Loans) Limited
EVBL (General Partner EV SME Loans) Limited
EVBL (General Partner NPIF Y&H Debt) Limited
09108131
03676974
09705072
LP016783
LP016780
10552972
02487876
02816740
03909893
04585313
06354288
06354293
10202807
11101233
07227779
10553329
10514693
10514398
07398809
08357666
07397841
04322437
05713861
08379651
05566745
07222495
08901773
10514387
In accordance with section 479C of the Companies Act 2006, Mercia Asset Management PLC will guarantee the debts and liabilities of the above
subsidiary undertakings.
Basis of preparation
The consolidated financial statements of Mercia Asset Management PLC have been prepared in accordance with European Union (“EU”) endorsed
International Financial Reporting Standards (“IFRSs”), the IFRS Interpretations Committee (formerly the International Financial Reporting Interpretations
Committee (“IFRIC”)) interpretations, and the Companies Act 2006 applicable to companies reporting under IFRS.
The preparation of financial statements in conformity with IFRSs as endorsed by the EU requires the use of certain critical accounting estimates. It also
requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of
judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 2 to these
consolidated financial statements.
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 IFRS 9, ‘Financial Instruments’, and explained further in the accounting policies below.
In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the
fair value measurements are observable. These are described more fully below:
• Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date
• Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly
• Level 3 inputs are unobservable inputs for the asset or liability
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Mercia Asset Management PLC
Annual Report and Accounts 2020
Going concern
On 30 January 2020, the World Health Organisation declared the outbreak of coronavirus (“COVID-19”) to be a public health emergency of
international concern. COVID-19 presents the biggest risk to the global economy and to individual companies since the 2008 financial crisis and has
had a severe impact on economic growth forecasts worldwide. The impacts of COVID-19 are not yet all apparent and the position will remain fluid
until the length and extent of the crisis become evident. Clearly, however, not all industries or companies will be impacted to the same degree. The
effects will be felt in a number of areas across the Group and its portfolio companies. Mercia continues to monitor and follow closely the
information released from the UK Government and the Directors continue to monitor the impact that the COVID-19 pandemic has on the Group
and its portfolio companies. The full extent to which the COVID-19 pandemic may impact the Group’s future results, operations and liquidity
is uncertain.
The Directors have made an assessment of going concern, taking into account both the Group’s current performance and its outlook, which
considered the impact of the COVID-19 pandemic, using the information available up to the date of issue of these consolidated financial
statements. As part of this assessment the Directors considered:
• an analysis of the adequacy of the Group’s liquidity, solvency and regulatory capital position. The analysis used has modelled a number of
adverse scenarios to assess the potential impact that COVID-19 may have on the Group’s operations and portfolio companies. The Group
manages and monitors liquidity regularly ensuring it is adequate and sufficient and this is supported by its monitoring of investments,
operating expenses and receipt of portfolio cash income. In addition, Mercia raised £30.0million gross proceeds through its successful placing
in December 2019. As at 31 March 2020 liquidity, comprising unrestricted cash and short-term liquidity investments, remained strong at
£30.2million (31 March 2019: £29.8million);
• any potential valuation concerns with respect to the Group’s direct investment portfolio as set out in these consolidated financial statements.
The approach to valuations was consistent with the normal process and valuation policy. A key focus of the portfolio valuations at 31 March
2020 was an assessment of the impact of the COVID-19 pandemic on each portfolio company, considering the performance before the outbreak
of COVID-19, as well as the projected short-term impact on the ability to generate earnings and cash flows, and also the longer-term view of
each company’s ability to recover;
the operational resilience of the Group’s critical functions, which includes the wellbeing of its staff and the resilience of its IT systems. COVID-19
has emphasised the importance of Mercia’s and its portfolio companies’ focus on keeping employees safe, motivated and able to continue to
fulfil their roles effectively where possible; and
•
• an assessment of the Group’s supplier base, considering any single points of failure and contingency plans, should suppliers be deemed at risk.
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 impact of COVID-19 on the Group’s operations and portfolio, the Directors
have a reasonable expectation that the Group is well placed to manage business risks in the current economic environment and has adequate
financial resources to continue in operational existence for a period of at least 12 months from the date of this report. Accordingly, the Directors
continue to adopt the going concern basis in preparing these consolidated financial statements.
Basis of consolidation
Subsidiaries
The consolidated financial statements incorporate the financial statements of Mercia Asset Management PLC and entities controlled by it (its
subsidiaries). Other than Mercia Fund 1 General Partner Limited (which is 98% owned) and Mercia Investment Plan LP (which is 90% owned), all
subsidiaries are 100% equity owned and have been included in the consolidated financial statements. Control is achieved when the Group:
• has power over the subsidiary;
•
• has the ability to use its power to affect its returns.
is exposed, or has rights, to a variable return from its involvement with the subsidiary; and
The Group reassesses whether or not it controls a subsidiary company if facts and circumstances indicate that there are changes to one or more of
the three elements of control listed above.
When the Group has less than a majority of the voting rights of an investee company, it considers that it has power over the investee company
when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee company unilaterally. The Group
considers all relevant facts and circumstances in assessing whether or not the Group’s voting rights in an investee company are sufficient to give it
power, including:
the size of the Group’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders;
•
• potential voting rights held by the Group, other vote holders or other parties;
•
• any additional facts and circumstances that indicate that the Group has, or does not have, the current ability to direct the relevant activities at
rights arising from other contractual arrangements; and
the time that decisions need to be made, including voting patterns at previous shareholders’ meetings.
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.
All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between the members of the Group are
eliminated on consolidation.
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Annual Report and Accounts 2020
79
Strategic reportFinancial statementsGovernance
Notes to the consolidated financial statements continued
For the year ended 31 March 2020
1. Accounting policies continued
Business combinations
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.
Direct investments
Investments that are held as part of the Group’s investment portfolio are carried in the balance sheet at fair value even though the Group may have
significant influence over those companies. This treatment is permitted by IAS 28 ‘Investments in Associates’, which requires such investments to be
excluded from its scope where those investments are designated upon initial recognition, as at fair value through profit or loss and accounted for in
accordance with IFRS 9 ‘Financial Instruments’, with changes in fair value recognised in the relevant period.
New standards, interpretations and amendments effective in the current financial year
The following new standards became effective in the current financial year:
Amendments to IFRS 3, ‘Business Combinations’
Amendments to IFRS 9, ‘Financial Instruments’
Amendments to IAS 12, ‘Income Taxes’
Amendments to IAS 19, ‘Employee Benefits’
Amendments to IAS 23, ‘Borrowing Costs’
Amendments to IAS 28, ‘Investments in Associates and Joint Ventures’
Annual Improvements to IFRS Standards 2015-2017 Cycle
There are no other IFRSs or IFRIC interpretations that are effective that would be expected to have a material impact on the Group.
IFRS 16, ‘Leases’, is effective for accounting periods beginning on or after 1 January 2019. It replaces IAS 17, ‘Leases’, and introduces new or amended
requirements with respect to lease accounting.
The new standard introduces significant changes to lessee accounting by removing the distinction between operating and finance leases, requiring the
recognition of a right-of-use asset and a lease liability at commencement for all leases, except for short-term leases and leases of low-value assets when
such recognition exemptions are adopted. The impact of the adoption of IFRS 16 on the Group’s consolidated financial statements is described below.
The Group has applied IFRS 16 using the cumulative catch-up approach which:
•
requires the Group to recognise the cumulative effect of initially applying IFRS 16 as an adjustment to the opening balance of retained earnings at the
date of initial application; and
• does not require restatement of comparatives, which continue to be presented under IAS 17 and IFRIC 4.
Impact of the new definition of a lease
The Group has made use of the practical expedient available on transition to IFRS 16 not to reassess whether a contract is or contains a lease. Accordingly,
the definition of a lease in accordance with IAS 17 and IFRIC 4 will continue to be applied to those leases entered into or changed before 1 January 2019.
The change in definition of a lease mainly relates to the concept of control. IFRS 16 determines whether a contract contains a lease on the basis of whether
the customer has the right to control the use of an identified asset for a period of time in exchange for consideration. This is in contrast to the focus on
‘risks and rewards’ in IAS 17 and IFRIC 4.
The Group has applied the definition of a lease and related guidance set out in IFRS 16 to all lease contracts entered into or changed on or after 1 January
2019. In preparation for the first-time application of IFRS 16, the Group carried out an implementation project. The outcome of the project was that the
new definition in IFRS 16 will not significantly change the scope of contracts that meet the definition of a lease for the Group.
Impact on lessee accounting
IFRS 16 changes how the Group accounts for leases previously classified as operating leases under IAS 17, which were off-balance sheet. Payments under
operating leases were recognised in the Group’s consolidated statement of comprehensive income on a straight-line basis over the term of the lease.
Applying IFRS 16 for all leases except as noted below, the Group:
•
•
•
recognises right-of-use assets and lease liabilities in the consolidated balance sheet, initially measured at the present value of the future lease
payments, with the right-of-use assets adjusted by the amount of any prepaid or accrued lease payments in accordance with IFRS 16: C8(b)(ii);
recognises depreciation of right-of-use assets and interest on lease liabilities in the consolidated statement of comprehensive income; and
separates the total amount of cash paid into a principal portion (presented within financing activities) and interest (also presented within financing
activities) in the consolidated cash flow statement.
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Mercia Asset Management PLC
Annual Report and Accounts 2020
Lease incentives (eg rent-free periods) are recognised as part of the measurement of the right-of-use assets and lease liabilities whereas under IAS
17 they resulted in the recognition of a lease incentive, amortised as a reduction of rental expenses on a straight-line basis.
Under IFRS 16, right-of-use assets are tested for impairment in accordance with IAS 36.
For short-term leases (lease term of 12 months or less) and leases of low-value assets (which includes portable electronic devices, small items of
office furniture and fixed telephones), the Group has opted to recognise a lease expense on a straight-line basis as permitted by IFRS 16. This
expense is included within ‘other administrative expenses’ in profit or loss.
The Group has used the following practical expedients when applying the cumulative catch-up approach to leases previously classified as
operating leases applying IAS 17:
• The Group has applied a single discount rate to a portfolio of leases with reasonably similar characteristics.
• The Group has adjusted the right-of-use assets at the date of initial application by the amount of provision for onerous leases recognised
under IAS 37 in the consolidated balance sheet immediately before the date of initial application, as an alternative to performing an
impairment review.
• The Group has elected not to recognise right-of-use assets and lease liabilities to leases for which the lease term ends within 12 months of the
date of initial application.
• The Group has excluded initial direct costs from the measurement of the right-of-use assets at the date of initial application.
• The Group has used hindsight when determining the lease term when the contract contains options to extend or terminate the lease.
The financial impact of the adoption of IFRS 16 is set out in note 22 to these consolidated financial statements.
New standards, interpretations and amendments not yet effective
At the date of approving these financial statements, the following standards and interpretations, which have not been applied in these
consolidated financial statements, were in issue but not yet effective:
Amendments to IFRS 3 ‘Business Combinations’ – effective for annual reporting periods beginning on or after 1 January 2020.
IFRS 10 ‘Consolidated Financial Statements’ and Amendments to IAS 28 ‘Investments in Associates and Joint Ventures’ – deferred indefinitely.
IFRS 17 ‘Insurance Contracts’ – effective for annual reporting periods beginning on or after 1 January 2021.
Amendments to IAS 1 ‘Presentation of Financial Statements’ – effective for annual reporting periods beginning on or after 1 January 2022.
Amendments to IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ – effective for annual reporting periods beginning on or
after 1 January 2020.
Amendments to References to the Conceptual Framework in IFRS Standards – effective for annual reporting periods beginning on or after
1 January 2020.
There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group.
Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for services provided in the
normal course of business, net of VAT. All revenue from services is generated within the United Kingdom. Revenue is recognised when the Group
satisfies its performance obligations, in line with IFRS 15. Revenue from services comprises:
Fund management fees
Fund management fees are generally earned as a fixed percentage of funds under management and are recognised as the related services are
provided, as performance obligations are met. Cash receipts in relation to revenues earned are generally received shortly after the start of the
relevant invoicing period.
Initial management fees
Initial management fees are generally earned as a fixed percentage of the amounts invested by the Group in recognition of the work involved in
each investment round, are one-off payments made by the investee company and are recognised when the performance obligation of providing
those services is satisfied at a point in time, being upon completion of the investment. Cash receipts in relation to revenues earned are generally
received shortly after completion of the relevant investment.
Portfolio directors’ fees
Portfolio directors’ fees are earned either as a percentage of the amounts invested by the Group, or as a fixed amount. These are usually annual
fees, typically charged quarterly in advance to the investee company. They are distinct and separable to annual fund management fees and initial
management fees. Amounts invoiced are recorded as deferred income, included in current liabilities and then amortised in the consolidated
statement of comprehensive income over the contractual period for which the related services are provided, as performance obligations are met.
Cash receipts in relation to revenues earned are generally received shortly after the start of the relevant invoicing period.
Mercia Asset Management PLC
Annual Report and Accounts 2020
81
Strategic reportFinancial statementsGovernance Notes to the consolidated financial statements continued
For the year ended 31 March 2020
1. Accounting policies continued
Interest income
Interest income earned on cash deposits and short-term liquidity investments is recognised when it is probable that the economic benefits will
flow to the Group and the amount of revenue can be measured reliably. Interest income is accrued on a time basis, by reference to the principal
outstanding and at the interest rate applicable.
Exceptional items
The Group classifies items of income and expenditure as exceptional when, in the opinion of the Directors, the nature of the item or its size is likely
to be material, so as to assist the reader of the financial statements to better understand the results of the operations of the Group. Such items are
by their nature not expected to recur as part of the normal operation of the business and are shown separately on the face of the consolidated
statement of comprehensive income.
Leases
A lease is defined as a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. All
operating leases in excess of one year, where the Group is the lessee, are included on the Group’s balance sheet and recognised as a right-of-use
asset and a related lease liability representing the obligation to make lease payments.
The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made
at or before the commencement date, plus any initial direct costs incurred. Subsequently, the right-of-use asset is depreciated using the straight-
line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The
estimated useful lives of right-of-use assets are determined on the same basis as those of property and equipment. The right-of-use assets are
reviewed annually for impairment in accordance with IAS 36, ‘Impairment of Assets’.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using
the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Subsequently the lease
liability decreases by the lease payments made, offset by interest on the liability, and may be remeasured to reflect any reassessment of expected
payments or to reflect any lease modifications.
Short-term leases (lease term of 12 months or less) and leases of low-value assets (which includes portable electronic devices, small items of office
furniture and fixed telephones) are expensed on a straight-line basis over the term of the lease and presented within ‘other administrative
expenses’ in profit or loss.
Retirement benefit costs
Payments to defined contribution personal pension plans are recognised as an expense when employees have rendered a service entitling them to
the contributions. Differences between contributions payable in the period and contributions actually paid are shown as either accruals or
prepayments in the consolidated balance sheet.
Taxation
The tax expense represents the sum of the tax currently payable and deferred tax. Current and deferred tax are recognised in profit or loss, except
when they relate to items that are recognised in other comprehensive income or directly in equity, in which case the current and deferred tax are
also recognised in other comprehensive income or directly in equity respectively. Where current or deferred tax arises from the initial accounting
of a business combination, the tax effect is included in the accounting for the business combination.
The tax currently payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the consolidated statement
of comprehensive income because it excludes items of income or expense that are taxable or deductible in other periods and it further excludes
items that are never taxable or deductible.
The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable profit, using the balance sheet liability method. Deferred tax
liabilities are generally recognised for all taxable temporary timing differences and deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available, against which deductible temporary differences can be utilised.
Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial
recognition (other than in a business combination) of other assets and liabilities, in a transaction that affects neither the taxable profit nor the
accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries except where the Group is able to
control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax assets arising from deductible temporary differences associated with such investments are only recognised to the extent that it is
probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to
reverse in the foreseeable future.
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The Group primarily seeks to generate capital gains from its holdings in direct investments over the longer term but has, since its IPO in December 2014,
made annual net operating losses (excluding fair value movements) from its operations from a UK tax perspective. Capital gains arising from the disposal
of direct investments would ordinarily be taxed upon realisation of such investments. However, since the Group’s activities are substantially trading in
nature, the Directors continue to believe that it qualifies for the Substantial Shareholdings Exemption (“SSE”). This exemption provides that gains arising
on the disposal of qualifying investments are not chargeable to UK corporation tax and, as such, the Group has continued not to recognise a provision for
deferred taxation in respect of fair value gains in those investments that meet the qualifying criteria. Gains arising on the disposal of non-qualifying
investments would ordinarily give rise to taxable profits for the Group, to the extent that these exceed the Group’s operating losses from time to time.
Intangible assets
Identifiable intangible assets are recognised when the Group controls the assets, it is probable that future economic benefits attributable to the assets
will flow to the Group and the fair value of the assets can be measured reliably.
Intangible assets represent contractual arrangements in respect of third-party limited partners’ and other similar investors’ funds under management
acquired through the acquisition of Enterprise Ventures Group Limited (‘Enterprise Ventures’) and in respect of funds under management acquired
through the acquisition of the venture capital trust (“VCT”) fund management business of NVM Private Equity LLP (“NVM”). At the date of acquisition the
fair values of these contracts were calculated and subsequently the assets are held at amortised cost. The fair value of the intangible assets arising from
the acquisition of Enterprise Ventures is being amortised on a straight-line basis over the expected average duration of the remaining fund management
contracts of five years, so as to write off the fair value of the contracts less their estimated residual values. The fair value of the intangible assets arising
from the acquisition of the VCT fund management business of NVM is being amortised on a straight-line basis over the expected useful life of the fund
management contracts.
Goodwill
Goodwill arising on the acquisition of a subsidiary represents the excess of the fair value of the consideration given over the fair value of the identifiable
net assets acquired. Goodwill is not amortised but is reviewed annually for impairment in accordance with IAS 36, ‘Impairment of Assets’.
Property, plant and equipment
Tangible assets are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is recognised so as to write off the
cost or valuation of assets less their residual values over their expected useful lives, using the straight-line method, on the following basis:
Furniture, fixtures and office equipment
Leasehold improvements
33%
over the remaining life of the lease
The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in
estimate accounted for on a prospective basis.
Financial instruments
Financial assets and financial liabilities are recognised in the Group’s balance sheet when the Group becomes a party to the contractual provisions of the
instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or
issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or
deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to
the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss.
Financial assets
All financial assets are recognised and derecognised on a trade date where the purchase or sale of a financial asset is under a contract whose
terms require delivery of the financial asset within the time frame established by the market concerned, and are initially measured at fair value, plus
transaction costs, except for those financial assets classified as at fair value through profit or loss (“FVTPL”), which are initially measured at fair value.
Financial assets are classified into the following specified categories: FVTPL and ‘amortised cost’. The classification depends on the nature and purpose
of the financial assets and is determined at the time of initial recognition.
Amortised cost
Financial assets that were part of the category of ‘loans and receivables’ under IAS 39 ‘Financial Instruments: Recognition and Measurement’ are now are
measured at amortised cost using the effective interest method, less any expected losses and categorised as financial assets held at amortised cost.
The Group’s financial assets held at amortised cost comprise trade receivables, loans and other receivables that have fixed or determinable payments
that are not quoted in an active market. They arise principally through the provision of services to customers (trade receivables).
Financial assets that meet the following conditions are measured subsequently at amortised cost:
•
•
the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows; and
the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal
amount outstanding.
Mercia Asset Management PLC
Annual Report and Accounts 2020
83
Strategic reportFinancial statementsGovernance
Notes to the consolidated financial statements continued
For the year ended 31 March 2020
1. Accounting policies continued
Financial assets that meet the following conditions are measured subsequently at fair value through other comprehensive income (“FVTOCI”):
•
•
the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling the financial
assets; and
the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal
amount outstanding.
By default, all other financial assets are measured subsequently at FVTPL.
Valuation of financial assets held at fair value
The fair values of quoted investments are based on bid prices at the balance sheet date.
The judgement required to determine the appropriate valuation methodology of unquoted equity investments means there is a risk of material
adjustment to the carrying amounts of assets and liabilities. This is a critical accounting judgement and as a result, is set out in more detail in note
2 of these financial statements.
Derecognition of financial assets
The Group derecognises a financial asset when the contractual rights to receive the cash flows from the asset expire. On derecognition of a
financial asset in its entirety, the difference between the asset’s fair value and the sum of the consideration received is recognised as a realised
gain or loss on disposal of investment in profit or loss.
Financial liabilities and equity instruments
Financial liabilities
Current financial liabilities are composed of trade payables and other short-term monetary liabilities, which are recognised at amortised cost.
Equity instruments
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity
instruments issued by the Group are recognised as the proceeds received, net of direct issue costs. Repurchase of the Company’s own equity
instruments is recognised and deducted directly in equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation
of the Company’s own equity instruments.
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group
will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.
The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date,
taking into account the risks and uncertainties surrounding the obligation.
Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those
cash flows.
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised
as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.
Cash, cash equivalents and short-term liquidity investments
Cash and cash equivalents include cash in hand, deposits held with banks and other short-term highly liquid investments with original maturities
of less than three months. Short-term liquid investments with a maturity of over three months and less than 12 months are included in a separate
category, ‘short-term liquidity investments’.
Share-based payments
Equity-settled share-based payments to Executive Directors and certain employees of the Group, whereby recipients render services in exchange
for shares or rights over shares, are measured at the fair value of the equity instruments at the grant date. Details regarding the determination of
the fair value of equity-settled share-based transactions are set out in note 6 to these consolidated financial statements.
The fair value determined at the grant date is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of the equity
instruments that will eventually vest. At each balance sheet date, the Group reviews its estimate.
The impact of any revision to the previous estimate is recognised in profit or loss, such that the cumulative expense reflects the revised estimate,
with a corresponding adjustment to equity.
Segmental reporting
An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses
(including revenues and expenses relating to transactions with other components of the same entity), whose operating results are regularly
reviewed by the entity’s Chief Operating Decision Maker to make decisions about resources to be allocated to the segment and assess its
performance, and for which discrete financial information is available. Operating segments are aggregated into reporting segments where they
share similar economic characteristics. Note 3 to these consolidated financial statements gives further details on the Group’s segmental reporting.
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2. Critical accounting judgements and key sources of estimation uncertainty
In the application of the Group’s accounting policies described in note 1 above, 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 these consolidated financial statements.
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 on 21 December 2018 and effective for accounting periods beginning after 1 January 2019.
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 or 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.
A key focus of the portfolio valuations as at 31 March 2020 was an assessment of the impact of the COVID-19 pandemic on each investee company’s
enterprise value, considering the performance before the outbreak of COVID-19, as well as the projected short-term impact on the ability to
generate earnings and cash flows, and also the longer-term view of each investee company’s ability to recover.
The Group has applied a COVID-19 overlay (assessing some 13 criteria) to help ascertain the potential effects on each of the investee companies’
enterprise values. The overall reductions in prices of listed entities was used as a basis to determine a range of COVID-19 discounts between 25%
and 100%. The methodology for determining the valuation of investments has been predominantly based on taking the enterprise value from the
last funding round and then applying a COVID-19 discount where applicable. This assessment is based on Mercia’s knowledge of the investee
companies and of the specific effects seen as relevant to each sector within which the investee companies operate. The Group then looked closer
at each investee company to assess any mitigating factors (eg Mercia’s defensive investment structuring), comparable asset or sector performance
to arrive at our valuation.
Mercia Asset Management PLC
Annual Report and Accounts 2020
85
Strategic reportFinancial statementsGovernance Notes to the consolidated financial statements continued
For the year ended 31 March 2020
2. Critical accounting judgements and key sources of estimation uncertainty continued
The uncertainty surrounding the ultimate impact of the COVID-19 pandemic has resulted in significant judgement in respect of the future cash
flows and hence enterprise values for some of the Group’s direct investments. This includes estimation in relation to liquidity and delays to debtor
payments; forecast revenue, supply chain, employee and slower growth effects; and the offsetting impact of the Government’s and the Bank of
England’s mitigation measures. The discounts applied to those direct investments which have had fair value decreases in the period reflect
increased uncertainty around the duration of stay-at-home and social distancing policies, the speed of recovery from those policies, future
inflation, power and oil prices, as well as company-specific factors. These uncertainties have also been reflected in the volatility seen in public
markets since March 2020. The direct investment portfolio is diversified by sector and underlying risk exposures. Consideration was also given to
the impact of stay-at-home and social distancing policies on the customers of the Group’s investee companies, including on their viability and
access to liquidity. Almost all of the Group’s investee companies have continued to operate since the start of the COVID-19 pandemic.
As described above, 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 venture capital trust (“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 13 to these consolidated financial statements. 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 three fund management contracts, discounted at
the rate of 15%. The discount applied is reflective of, inter alia, 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. Further details are included in note 14 to these consolidated financial statements.
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 2020. The conditions upon which
payment of the deferred consideration is contingent are outlined below and included in note 23 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. There are no indications to date that notice will be given, so this has been assumed to be true and the value payable discounted
by 10%.
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 three-year 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 value of the deferred consideration would reduce by £200,000 with goodwill decreasing by a corresponding amount.
3. Segmental reporting
For the year ended 31 March 2020, 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.
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Annual Report and Accounts 2020
An analysis of the Group’s revenue is as follows:
Fund management fees
Initial management fees
Portfolio directors’ fees
Other revenue
4. Fair value movements in investments
Net fair value movements in investments (note 18)
Year ended
31 March
2020
£’000
8,861
1,286
2,380
220
12,747
Year ended
31 March
2020
£’000
(15,844)
Year ended
31 March
2019
£’000
7,282
1,134
2,139
120
10,675
Year ended
31 March
2019
£’000
3,916
No other gains or losses have been recognised in respect of financial assets held at amortised cost. No gains or losses have been recognised on
financial liabilities held at amortised cost.
5. Employees and Directors
The average monthly number of persons (including Executive and Non-executive Directors) employed by the Group during the year was:
Asset management
Central functions
Year ended
31 March
2020
Number
Year ended
31 March
2019
Number
63
28
91
61
24
85
Central functions comprise senior management (including Executive and Non-executive Directors), finance, compliance, legal, administration,
people and talent, and marketing.
The aggregate employee benefit expense (including Executive and Non-executive Directors) was:
Wages and salaries
Social security costs
Other pension costs (note 28)
Year ended
31 March
2020
£’000
7,442
768
570
8,780
Year ended
31 March
2019
£’000
7,006
917
479
8,402
The Directors represent the key management personnel. Detailed disclosures in respect of Directors’ remuneration are included in the audited
section of the Remuneration Report on 67, which forms part of these financial statements.
Mercia Asset Management PLC
Annual Report and Accounts 2020
87
Strategic reportFinancial statementsGovernance Notes to the consolidated financial statements continued
For the year ended 31 March 2020
6. Share-based payments
The Group operates share option schemes for Executive Directors and all employees of the Group. Further details are set out on pages 66 to 68 of
the Remuneration Report.
Total options existing over Ordinary shares as at 31 March 2020 are summarised below:
Scheme
Approved share option scheme
Unapproved share option scheme
Date
of grant
Date
of expiry
Number of
share options
8 December 2014
31 July 2015
11 August 2015
27 July 2016
24 April 2017
24 July 2017
15 December 2017
28 August 2018
31 July 2019
28 January 2020
8 December 2014
31 July 2015
11 August 2015
27 July 2016
24 April 2017
24 July 2017
15 December 2017
28 August 2018
31 July 2019
28 January 2020
7 December 2024
30 July 2025
10 August 2025
26 July 2026
23 April 2027
23 July 2027
14 December 2027
27 August 2028
30 July 2029
27 January 2030
7 December 2024
30 July 2025
10 August 2025
26 July 2026
23 April 2027
23 July 2027
14 December 2027
27 August 2028
30 July 2029
27 January 2030
–
–
–
–
416,296
55,000
228,000
911,445
2,248,444
1,814,568
–
–
–
–
283,704
1,650,000
–
3,285,555
1,209,556
3,597,572
15,700,140
Exercise
price
50.00p
70.00p
69.00p
51.25p
40.05p
36.00p
37.25p
30.80p
33.50p
24.30p
50.00p
57.50p
57.50p
51.25p
40.05p
36.00p
37.25p
30.80p
33.50p
24.30p
Details of the share options outstanding as at 31 March 2020 and 31 March 2019 are as follows:
Share options outstanding as at 1 April
Granted during the year
Forfeited during the year
Exercised during the year
Expired during the year
Share options outstanding as at 31 March
Year ended 31 March 2020
Year ended 31 March 2019
Number of
share
options
13,413,000
9,040,140
(1,108,000)
–
(5,645,000)
15,700,140
Weighted
average
exercise
price
41.99p
27.99p
36.03p
–
50.81p
30.22p
Number of
share
options
11,702,000
4,629,000
(2,168,000)
–
(750,000)
13,413,000
Weighted
average
exercise
price
43.70p
30.80p
51.22p
–
56.50p
41.99p
There were no options exercised during the financial year. The options outstanding as at 31 March 2020 had a weighted average exercise price of
30.22 pence and a weighted average remaining contractual life of two years.
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Annual Report and Accounts 2020
Fair value charge
The fair value charge for the share options in issue has been based on the Black-Scholes model with the following key assumptions:
Date of grant
8 December 2014
31 July 2015
31 July 2015
11 August 2015
11 August 2015
27 July 2016
24 April 2017
24 July 2017
15 December 2017
28 August 2018
31 July 2019
28 January 2020
Exercise
price
50.00p
70.00p
57.50p
69.00p
57.50p
51.25p
40.05p
36.00p
37.25p
30.80p
33.50p
24.30p
Share price
at date of
grant
Risk-free
rate
50.00p
70.00p
70.00p
69.00p
69.00p
51.25p
40.05p
36.00p
37.25p
30.80p
33.50p
24.30p
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
Assumed
time
to exercise
10 years
10 years
10 years
10 years
10 years
10 years
10 years
10 years
10 years
10 years
10 years
10 years
Assumed
volatility
Fair value
per option
30%
30%
30%
30%
30%
30%
30%
30%
30%
30%
30%
30%
19.84p
27.78p
32.24p
27.38p
31.45p
20.35p
15.89p
14.28p
14.78p
12.22p
13.29p
9.64p
Options were granted in the financial year on 31 July 2019 and 28 January 2020. The aggregate of the estimated fair values of the options granted
on those dates is £2,531,000.
No dividends are assumed. The risk-free rate is taken from the yield on zero coupon United Kingdom Government bonds on a term consistent with
the expected life. Assumed volatility is based on a review of comparators and analysis of movements in the Group’s share price since listing.
The Group did not enter into any share-based payment transactions with parties other than Executive Directors and employees during the year.
The total charge for the year recognised in the consolidated statement of comprehensive income for share options granted to Executive Directors
and employees was £528,000 (2019: £171,000).
7. Operating loss before exceptional items
Operating loss before exceptional items is stated after charging:
Other administrative expenses:
Staff costs (note 5)
Marketing, professional adviser, travel and entertainment and other administration costs
Depreciation of property, plant and equipment (note 16)
Depreciation of right-of-use assets (note 17)
Expenses relating to short-term leases and leases of low-value assets
Operating lease costs
Auditor’s remuneration:
– Fees payable to the Company’s auditor for the audit of the Company and consolidated accounts
– Fees payable to the Company’s auditor for other services:
– The audit of the interim accounts of the Company
– The audit of accounts of subsidiaries of the Company
– CASS related assurance services
Total other administrative expenses
Share-based payments charge (note 6)
Amortisation of intangible assets (note 15)
Total administrative expenses
Year ended
31 March
2020
£’000
Year ended
31 March
2019
£’000
8,780
3,297
73
139
218
–
69
20
35
30
12,661
528
852
14,041
8,402
3,103
84
–
–
364
43
22
67
30
12,115
171
301
12,587
As part of the Group’s placing and its acquisition of the venture capital trust (“VCT”) fund management business of NVM Private Equity LLP,
auditor's due diligence and advisory fees were incurred totalling £173,000, of which £36,000 is included in equity as share issue related costs and
£137,000 is charged to the consolidated statement of comprehensive income, as an exceptional non-trading and non-recurring cost.
Mercia Asset Management PLC
Annual Report and Accounts 2020
89
Strategic reportFinancial statementsGovernance Notes to the consolidated financial statements continued
For the year ended 31 March 2020
8. Exceptional items
The exceptional items for the year ended 31 March 2020 represent costs incurred in the acquisition of the VCT fund management business of NVM
Private Equity LLP in December 2019 and restructuring costs.
Total acquisition costs amounted to £384,000. Of this total £87,000 were share issue related costs and have been charged to the share premium
account (note 26). The balance of £297,000 has been charged to the consolidated statement of comprehensive income, as an exceptional
non-trading and non-recurring cost.
The balance of £398,000 is in respect of staff related costs incurred in connection with a restructuring which took place in March 2020.
9. Finance income
Interest income arising from:
Cash and cash equivalents
Short-term liquidity investments
Investee company loans (interest and redemption premiums)
Total interest receivable
10. Finance costs
Interest costs arising from:
Interest payable on leases
Total interest payable
11. Taxation
Corporation tax:
Current year
Deferred tax
Year ended
31 March
2020
£’000
Year ended
31 March
2019
£’000
101
29
116
246
147
74
341
562
Year ended
31 March
2020
£’000
Year ended
31 March
2019
£’000
26
26
–
–
Year ended
31 March
2020
£’000
Year ended
31 March
2019
£’000
–
(159)
(159)
–
(54)
(54)
The UK standard rate of corporation tax is 19% (2019: 19%). There is no current tax charge in the year (2019: £nil). The deferred tax credit of
£159,000 (2019: £54,000) represents the unwinding of the deferred tax liabilities recognised in respect of the intangible assets arising on the
acquisition of Enterprise Ventures and the acquisition of the VCT fund management business of NVM Private Equity LLP.
A reconciliation from the reported loss to the total tax credit is shown below:
(Loss)/profit before taxation
Tax at the standard rate of corporation tax in the UK of 19% (2019: 19%)
Effects of:
Income not subject to tax
Expenses not deductible for tax purposes
Other timing differences not recognised
Unwinding of deferred tax liability
Total tax credit
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Mercia Asset Management PLC
Annual Report and Accounts 2020
Year ended
31 March
2020
£’000
(17,613)
(3,347)
(1,200)
3,181
1,366
(159)
(159)
Year ended
31 March
2019
£’000
2,566
488
(913)
(1,210)
1,635
(54)
(54)
Changes to the UK corporation tax rates were substantively enacted as part of Finance Bill 2015 (on 26 October 2015) and Finance Bill 2016 (on
7 September 2016). These included reductions to the main rate of corporation tax to 19% from 1 April 2017 and to 17% from 1 April 2020. Further
changes to the UK corporation tax rates were substantively enacted as at 31 March 2020, in Finance Bill 2020 (on 11 March 2020), which included
increasing the main rate of corporation tax from 17% to 19% from 1 April 2020.
Deferred tax at the balance sheet date has been measured using these revised rates and reflected in these consolidated financial statements.
As at 31 March 2020, a deferred tax liability of £3,812,000 (2019: £109,000) has been recognised in respect of the intangible assets arising on the
acquisition of the VCT fund management business of NVM Private Equity LLP in December 2019 and the acquisition of the entire issued share
capital of Enterprise Ventures in March 2016. A potential deferred tax asset of £7,210,000 (2019: £5,995,000) for cumulative unrelieved management
expenses and other tax losses has not been recognised in these consolidated financial statements as it is not considered sufficiently probable that
the Group will generate sufficient taxable profits from the same trade to recover these amounts in full.
12. Loss per share
Basic loss per share is calculated by dividing the loss for the financial year by the weighted average number of Ordinary shares in issue during the
year. Diluted loss per share is calculated by dividing the 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 loss and weighted average
number of shares used in the calculations are set out below:
(Loss)/profit per Ordinary share
(Loss)/profit for the financial year (£’000)
Weighted average number of Ordinary shares (basic) (’000)
Weighted average number of Ordinary shares (diluted) (’000)
(Loss)/earnings per Ordinary share basic and diluted (pence)
The calculation of basic and diluted loss per share is based on the following data:
Weighted average number of shares
Basic
Dilutive impact of share options
Diluted
Year ended
31 March
2020
Year ended
31 March
2019
(17,454)
341,401
341,627
(5.11)
Year ended
31 March
2020
’000
341,401
226
341,627
2,620
303,310
305,018
0.86
Year ended
31 March
2019
’000
303,310
1,708
305,018
13. Business combinations
The Group consists of Mercia Asset Management PLC and its subsidiary undertakings. Note 39 to the Company’s financial statements lists details
of the Company’s subsidiary undertakings.
On 23 December 2019 Mercia completed the acquisition of the VCT fund management business of NVM Private Equity LLP (“NVM”) for a total
maximum consideration of £25,000,000 comprising a combination of cash and new Ordinary Mercia shares.
The fair value of the identifiable net assets acquired and the consideration payable under IFRS 3 are as follows:
Fund management contracts intangible asset
Goodwill
Deferred tax liability arising on intangible asset
Total identifiable net assets
Fair value
£’000
20,331
6,314
(3,863)
22,782
Mercia Asset Management PLC
Annual Report and Accounts 2020
91
Strategic reportFinancial statementsGovernance Notes to the consolidated financial statements continued
For the year ended 31 March 2020
13. Business combinations continued
Under the terms of the acquisition agreement, the fair value of the consideration payable to NVM is:
Cash
Shares – 16,800,000 shares in Mercia Asset Management PLC valued at 25.0 pence per share on 23 December 2019
Total initial consideration
Deferred consideration
Total consideration
£’000
12,400
4,200
16,600
6,182
22,782
The initial consideration shares were admitted to trading on AIM on 27 December 2019.
Actual revenues and profits of the VCT fund management business
The actual revenues and profits that have been generated since the acquisition of the VCT fund management business on 23 December 2019 to
31 March 2020 are:
Revenues
Profit before taxation
£’000
1,917
547
The disclosure of the revenue and loss for the Group if the acquisition had occurred on 1 April 2019 has not been presented as the determination of
these amounts is impracticable, due to the fact that the entire NVM Private Equity LLP business was not acquired and there will have been revenues
and expenses not relevant to the VCT fund management business acquired.
Fair value
The fair value of the management contracts has been estimated using a discounted cash flow model. The estimated cash flows have been valued
at a discount of 15%, resulting in the recognition of a fair value for the fund management contracts of £20,331,000.
14. Goodwill
The goodwill arising on the businesses acquired to date, being Mercia Fund Management Limited, Enterprise Ventures Group Limited (‘Enterprise
Ventures’) and the VCT fund management business of NVM, is set out in the table below.
Cost
As at 1 April 2018
Additions
As at 31 March 2019
Additions
As at 31 March 2020
Mercia Fund
Management
£’000
Enterprise
Ventures
£’000
VCT fund
management
contracts
£’000
2,455
–
2,455
–
2,455
7,873
–
7,873
–
7,873
–
–
–
6,314
6,314
Total
£’000
10,328
–
10,328
6,314
16,642
Included in additions to goodwill in the financial year is £6,314,000 which arose on the acquisition of the VCT fund management business in
December 2019. Details of the consideration paid and assets acquired as part of this transaction are set out in note 13 to these consolidated
financial statements.
Goodwill for each business acquired has been assessed for impairment as at 31 March 2020. 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”). FVLCD for each CGU to which goodwill has been
allocated was calculated using a revenue multiple model based on the CGU’s budgeted revenues for the financial year ending 31 March 2021.
The review concluded that the FVLCD recoverable amount 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.
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Annual Report and Accounts 2020
15. 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.
Cost
As at 1 April 2018
Additions
As at 31 March 2019
Additions
As at 31 March 2020
Accumulated amortisation
As at 1 April 2018
Charge for the year
As at 31 March 2019
Charge for the year
As at 31 March 2020
Net book value
As at 31 March 2019
As at 31 March 2020
16. Property, plant and equipment
Cost
As at 1 April 2018
Additions
As at 31 March 2019
Additions
As at 31 March 2020
Accumulated depreciation
As at 1 April 2018
Charge for the year
As at 31 March 2019
Charge for the year
As at 31 March 2020
Net book value
As at 31 March 2019
As at 31 March 2020
17. Right-of-use assets
Cost
As at 1 April 2019
Additions
As at 31 March 2020
Accumulated depreciation
As at 1 April 2019
Charge for the year
As at 31 March 2020
Net book value as at 31 March 2019
Net book value as at 31 March 2020
Leasehold
improvements
£’000
Furniture
and fixtures
£’000
Office
equipment
£’000
40
2
42
–
42
10
5
15
5
20
27
22
68
9
77
1
78
48
12
60
4
64
17
14
363
81
444
44
488
268
67
335
64
399
109
89
£’000
1,504
–
1,504
20,331
21,835
619
301
920
852
1,772
584
20,063
Total
£’000
471
92
563
45
608
326
84
410
73
483
153
125
£’000
–
737
737
–
139
139
–
598
Mercia Asset Management PLC
Annual Report and Accounts 2020
93
Strategic reportFinancial statementsGovernance Notes to the consolidated financial statements continued
For the year ended 31 March 2020
18. Investments
The net change in the value of investments for the year is a decrease of £188,000 (2019: £21,589,000 increase).
The table below sets out the movement in the balance sheet value of investments from the start to the end of the year, showing investments made,
investee company loans repaid and the direct investment fair value movements.
As at 1 April 2019
Investments made during the year
Investee company loan repayments
Unrealised gains on the revaluation of investments
Unrealised losses on the revaluation of investments
As at 31 March 2020
£’000
87,659
17,449
(1,793)
3,351
(19,195)
87,471
In accordance with the Group’s accounting policy in respect of direct investments, investments that are held as part of the Group’s direct
investment portfolio are carried in the balance sheet at fair value even though the Group may have significant influence over those companies.
This treatment is permitted by IAS 28, ‘Investments in Associates’. As at 31 March 2020 the Group had investments where it holds an economic
interest of 20% or more as follows:
Warwick Acoustics Limited
LM Technologies
nDreams Limited
Soccer Manager Limited
Oxford Genetics Limited t/a OXGENE
Medherant Limited
The Native Antigen Company Limited
Nightingale-EOS Limited
Ton UK Limited t/a Intelligent Positioning
Intechnica Limited
Impression Technologies Limited
VirtTrade Limited t/a Avid Games
Crowd Reactive Limited
Concepta PLC
sureCore Limited
Edge Case Games Limited
19. Trade and other receivables
Current:
Trade and other receivables
Less: expected credit loss allowance
Net trade receivables
Other receivables
Prepayments and accrued income
Interest
held
%
Net assets/
(liabilities)
£’000
52.9
39.4
36.4
34.8
30.2
30.1
29.3
28.5
28.2
27.5
25.9
25.8
22.6
22.4
22.0
21.2
2,790
119
(828)
(2,689)
8,945
1,171
1,835
1,028
1,172
3,243
4,402
(3,025)
683
2,234
984
1,942
Profit/
(loss)
£’000
(2,054)
(383)
(1,510)
(930)
(3,963)
(2,363)
451
(12)
(190)
(3,176)
(2,763)
(1,201)
121
(2,150)
(805)
183
Date of
financial statements
30 September 2019
31 December 2019
31 March 2019
31 October 2019
30 April 2019
31 March 2019
30 September 2019
31 July 2019
31 December 2018
31 March 2019
31 December 2018
31 August 2019
31 December 2018
31 December 2019
30 June 2019
30 September 2019
As at
31 March
2020
£’000
577
(205)
372
11
915
1,298
As at
31 March
2019
£’000
569
(184)
385
4
393
782
The expected credit losses on trade receivables are estimated by reference to past default experience of the debtors and an analysis of the
debtors’ current financial position, adjusted for factors that are specific to the debtors, general economic conditions of the industry in which the
debtors operate and an assessment of both the current as well as the forecast conditions at the reporting date. The Group has defined a default as
the failure of a counterparty, including debtors, to discharge a contractual obligation or commitment into which it has entered with the Group.
As at 31 March 2020, an amount of £205,000 (2019: £184,000) has been estimated as an expected credit loss allowance in accordance with IFRS 9, in
respect of trade receivables primarily from portfolio companies in the managed funds, and recorded against revenue in the consolidated
statement of comprehensive income. The Directors believe that the credit quality of trade receivables which are within the Group’s typical
payment terms is good.
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Annual Report and Accounts 2020
The ageing of trade receivables at the year end was as follows:
Not past due
Past due 0-30 days
Past due 31-60 days
Past due 61-90 days
Past due more than 91 days
Gross
£’000
117
15
74
–
371
577
Expected credit
loss allowance
£’000
A reconciliation from the opening balance to the closing balance of the expected credit loss allowance in respect of trade receivables is set
out below:
As at 1 April 2019
Change in loss allowance due to new trade receivables originated
Amounts recovered
Amounts written off
As at 31 March 2020
(14)
(3)
(40)
–
(148)
(205)
£’000
184
125
(101)
(3)
205
The increase in the expected credit loss allowance of £125,000 (2019: £72,000 increase) has been recorded against revenue in the consolidated
statement of comprehensive income. The maximum exposure to credit risk of the receivables at the balance sheet date is the fair value of each
class of receivable shown above.
20. Cash, cash equivalents and short-term liquidity investments
Cash at bank and in hand
Total cash and cash equivalents
Total short-term liquidity investments
As at
31 March
2020
£’000
24,438
24,438
6,215
As at
31 March
2019
£’000
25,210
25,210
5,188
Included within cash and cash equivalents is £467,000 (2019: £629,000) of cash held on behalf of third-party EIS investors which is not available for
use by the Group.
21. Trade and other payables
Trade payables
Tax and social security
Other payables
Accruals and deferred income
As at
31 March
2020
£’000
729
244
908
2,924
4,805
As at
31 March
2019
£’000
206
225
794
2,505
3,730
Other payables includes £467,000 (2019: £629,000) of cash held on behalf of third-party EIS investors.
22. Lease liabilities
The only impact on the Group relates to leases for use of office premises at various locations. These were earlier classified as operating leases
under IAS 17, with lease rentals charged to operating expenses on a straight-line basis over the lease term. As required by IFRS 16, as a lessee, the
Group has recognised a lease liability representing the present value of the obligation to make lease payments, and a related right-of-use asset.
In calculating the present value of the obligation to make lease payments, the Group’s incremental borrowing rate has been used as the discount
rate, as the rates implicit in the leases are not evident. The incremental rate referred to by IFRS 16 indicates the rate of interest that a lessee would
have to pay to borrow over a similar term, with similar security, the funds necessary to obtain an asset of similar value to the right-of-use asset in a
similar economic environment. The weighted average lessee’s incremental borrowing rate applied to lease liabilities recognised in the Group’s
consolidated balance sheet as at 31 March 2020 is 3.25%.
Mercia Asset Management PLC
Annual Report and Accounts 2020
95
Strategic reportFinancial statementsGovernance Notes to the consolidated financial statements continued
For the year ended 31 March 2020
22. Lease liabilities continued
The following table shows the operating lease commitments disclosed when IAS 17 was applied at 31 March 2019, discounted using the borrowing rate
at the date of initial application and the lease liabilities recognised in the Group’s consolidated balance sheet at the date of initial application.
Operating lease commitments as at 31 March 2019
Short-term leases and leases of low-value assets
Effect of discounting operating lease commitments as at 31 March 2019
Lease liabilities recognised as at 1 April 2019
£’000
1,370
(42)
(591)
737
The Group has recognised £737,000 of right-of-use assets and £737,000 of lease liabilities on transition to IFRS 16 with effect from 1 April 2019. As
at 31 March 2020, the Group had no lease liabilities in respect of leases committed to but not yet commenced.
The table below summarises the lease costs for the financial year ended 31 March 2020.
Depreciation expense
Interest expense
Low-value and short-term lease expense
The maturity profile of the Group’s IFRS 16 leases is set out in the table below.
Due within one year
Due between two and five years
23. Deferred consideration
Payable within one year
Payable within two to five years
£’000
139
26
218
£’000
118
473
591
As at
31 March
2019
£’000
–
–
–
As at
31 March
2020
£’000
1,736
4,446
6,182
On 23 December 2019 Mercia completed the acquisition of the VCT fund management business of NVM Private Equity LLP 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,
and £2,100,000 payable in new Ordinary Mercia shares. There are no indications to date that notice will be given and so the fair value payable has
been recognised, discounted back to the acquisition date at a rate of 10%.
50% 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 fund
management 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 this
element of the deferred consideration has been based on a weighted probability of outcomes over the three-year period and discounted by 10%.
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Mercia Asset Management PLC
Annual Report and Accounts 2020
24. Deferred taxation
Recognition of deferred tax liability
As at
31 March
2020
£’000
3,812
As at
31 March
2019
£’000
109
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 Private Equity LLP. 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 2020, a deferred tax liability of £3,812,000 (2019: £109,000) has been recognised. Of this total £3,758,000 is in respect of the
intangible asset arising on the acquisition of the VCT fund management business of NVM Private Equity LLP and £54,000 is in respect of the
remaining intangible asset arising on the acquisition of Enterprise Ventures.
25. Issued share capital
Allotted and fully paid
As at the beginning of the year
Issue of share capital during the year
As at the end of the year
As at 31 March 2020
As at 31 March 2019
Number
£’000
Number
£’000
303,309,707
136,800,000
440,109,707
3
1
4
303,309,707
–
303,309,707
3
–
3
On 20 December 2019, 120,000,000 new Ordinary shares of £0.00001 each were issued at a price of 25.0 pence per share via a placing which raised
£30,000,000 (before share issue costs). These new shares were admitted to trading on AIM on 23 December 2019.
On 23 December 2019, 16,800,000 new Ordinary shares of £0.00001 each were issued at a price of 25.0 pence per share as part of the initial
consideration for the acquisition of the VCT fund management business of NVM Private Equity LLP. These new shares were admitted to trading on
AIM on 27 December 2019.
Each Ordinary share is entitled to one vote and has equal rights as to dividends. The Ordinary shares are not redeemable.
26. Share premium
As at the beginning of the year
Premium arising on the issue of Ordinary shares
Cost of share capital issued
As at the end of the year
As at
31 March
2020
£’000
49,324
34,199
(1,879)
81,644
As at
31 March
2019
£’000
49,324
–
–
49,324
The premium on the issue of Ordinary shares in the year arises from the placing of 120,000,000 new Ordinary shares of £0.00001 each issued at a
price of 25.0 pence per share on 20 December 2019 and 16,800,000 new Ordinary shares of £0.00001 each issued at a price of 25.0 pence per share
on 23 December 2019 as part of the initial consideration for the acquisition of the VCT fund management business of NVM Private Equity LLP.
27. Other distributable reserve
On 18 March 2015, the Group successfully applied to the Court for the partial cancellation of its share premium account. £70,000,000 was
transferred from the share premium account to a distributable reserve, thereby allowing the Group flexibility to pay a dividend distribution to
shareholders in the future.
28. Retirement benefit schemes
The Group contributes into the personal pension plans of all qualifying employees. The amount charged in the year to 31 March 2020 was £570,000
(2019: £479,000). As at 31 March 2020, contributions amounting to £23,000 (2019: £30,000) had not yet been paid over to the plans and are recorded
in other payables (note 21).
Mercia Asset Management PLC
Annual Report and Accounts 2020
97
Strategic reportFinancial statementsGovernance Notes to the consolidated financial statements continued
For the year ended 31 March 2020
29. Financial risk management
In its normal course of business, the Group uses certain financial instruments including cash, trade and other receivables and equity investments.
The Group is exposed to a number of risks through the performance of its normal operations. These are discussed in more detail in the Strategic
Report on pages 52 to 55 of this Annual Report.
Categories of financial instruments
The Group recognises financial instruments in its financial statements when it enters into a binding agreement to receive cash or other economic benefits
and derecognises them once all parties to the agreements have discharged all of their obligations. The description of each category of financial asset and
financial liability and the related accounting policies are shown below. Prior to the adoption of IFRS 9 and in accordance with IAS 39, the financial assets
and liabilities were classified as FVTPL or as loans and receivables. The carrying amounts have not changed on adoption of IFRS 9. The carrying amounts
of financial assets and financial liabilities in each category are as follows:
As at 31 March 2020
Financial assets
Long-term financial assets
Trade and other receivables
Cash and cash equivalents
Short-term liquidity investments
Short-term financial assets
Total financial assets
Financial liabilities
Trade and other payables
Lease liabilities
Total financial liabilities
As at 31 March 2019
Financial assets
Long-term financial assets
Trade and other receivables
Cash and cash equivalents
Short-term liquidity investments
Short-term financial assets
Total financial assets
Financial liabilities
Trade and other payables
Total financial liabilities
FVTPL
£’000
87,471
–
–
–
–
87,471
–
–
–
Amortised
cost
£’000
–
383
24,438
6,125
30,946
30,946
(1,637)
(591)
(2,228)
FVTPL
£’000
Amortised cost
£’000
87,659
–
–
–
–
87,659
–
–
–
389
25,210
5,188
30,787
30,787
(1,000)
(1,000)
Total
£’000
87,471
383
24,438
6,125
30,946
118,417
(1,637)
(591)
(2,228)
Total
£’000
87,659
389
25,210
5,188
30,787
118,446
(1,000)
(1,000)
Financial risk management objectives
The Group’s main objective in using financial instruments is to create, fund and develop technology businesses through the raising and investing of
capital for this purpose. The Group’s policies in calculating the nature, amount and timing of investments are determined by forecast future investment
activity. Financial risks are usually grouped by risk type, being: market, liquidity and credit risk. These risks are identified more fully below.
Market risk
Price risk
The Group is exposed to price risk in respect of equity rights and equity investments held by the Group and classified on the balance sheet at fair value
through profit or loss. The Group seeks to manage this risk exposure, while optimising the return on risk, by routinely monitoring the performance of
these investments, employing stringent investment appraisal processes. Unquoted equity investments are valued in line with the Group’s accounting
policy as outlined in note 1 to these consolidated financial statements. Regular reviews of the financial results, combined with close contact with the
management of these investments, provide sufficient information to support these valuations, and regular reports are made to the Board on the status
and valuation of investments.
Interest rate risk
The Group holds no interest-bearing borrowing and, as such, has fully mitigated such a risk.
Liquidity risk
Cash and cash equivalents include cash in hand and deposits held with UK banks with original maturities of less than three months.
Short-term liquidity investments comprise deposits with a maturity of over three months but less than 12 months, also with UK banks.
Ultimate responsibility for liquidity risk management rests with the Directors, who have established an appropriate liquidity risk management framework
for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by
maintaining adequate cash reserves, by continuously monitoring forecast and actual cash flows, and by matching the maturity profiles of financial assets
and liabilities.
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Annual Report and Accounts 2020
Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. A default is defined as the
failure to discharge a contractual obligation or commitment into which a counterparty has entered with the Group. The Group is exposed to this risk for
various financial instruments; for example, by granting receivables to customers and from placing cash and deposits with banks. The Group’s trade
receivables are amounts due from the investment funds under management, from those investee companies held by its managed funds and from its
directly invested portfolio companies. The Group’s maximum exposure to credit risk is limited to the carrying amount of trade receivables net of
provisions, cash and cash equivalents and short-term liquidity investments as at 31 March, as summarised below:
Net trade receivables
Cash at bank and in hand
Short-term liquidity investments
As at
31 March
2020
£’000
372
24,438
6,125
30,935
As at
31 March
2019
£’000
385
25,210
5,188
30,783
The Directors consider that all the above financial assets are of good credit quality. In respect of trade and other receivables, the Group is not exposed to
significant risk as the principal customers are the investment funds managed by the Group, and in these the Group has control of the banking as part of its
management responsibilities. As at 31 March 2020, an amount of £205,000 (2019: £184,000) has been estimated as a loss allowance in accordance with IFRS 9.
The credit risk of cash and cash equivalents and short-term liquidity investments held on deposit is limited by the use of reputable UK banks with
high-quality external credit ratings and as such is considered negligible. All cash, cash equivalents and short-term liquidity investments are held with
banks with an 'A' rating as at the year ended 31 March 2020.
Capital risk management
The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return to shareholders
through the optimisation of any debt and equity balance. The Board reviews the capital structure of the Group on a regular basis to ensure that it complies
with all regulatory capital requirements.
The capital structure of the Group consists solely of equity (comprising issued capital, reserves and retained earnings). The Group had no debt
instruments during the year. In order to maintain or adjust the capital structure, the Group may return capital to shareholders, issue new shares, sell
assets to manage cash or adjust the amount of dividends paid to shareholders. The Group aims to become dividend-paying, subject to maintaining a
conservative balance sheet approach.
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 fair value hierarchy used is outlined in more detail in note 2 to these
consolidated financial statements.
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 as at 31 March 2020. The table in note 18 of these consolidated financial statements sets out the movement in the
balance sheet value of investments from the start to the end of the year.
Assets:
Financial assets at fair value through profit or loss (“FVTPL”)
Level 1
Level 2
Level 3
Liabilities:
Financial liabilities at amortised cost – deferred consideration
Level 1
Level 2
Level 3
As at
31 March
2020
£’000
475
–
86,996
87,471
As at
31 March
2020
£’000
–
–
6,182
6,182
As at
31 March
2019
£’000
1,133
–
86,526
87,659
As at
31 March
2019
£’000
–
–
–
–
Mercia Asset Management PLC
Annual Report and Accounts 2020
99
Strategic reportFinancial statementsGovernance Notes to the consolidated financial statements continued
For the year ended 31 March 2020
29. Financial risk management continued
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
As at 31 March 2020, the Group had one direct investment listed on AIM (Concepta); this has been classified in Level 1 and valued at its bid price as
at 31 March 2020.
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.
Up until 31 March 2019, the Group classified investments included in Level 3 under four valuation techniques, being ‘price of recent funding round’,
‘cost’, ‘enterprise value’ and ‘price of recent funding round or cost adjusted for impairment’. From 1 April 2019, the Group has adopted the revised
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 2 to these consolidated financial statements provides further information on the Group’s valuation methodology, including a detailed
explanation of the valuation techniques used for Level 3 financial instruments.
30. Related party transactions
Transactions with Directors
The Group considers all members of the Board to be key management and their remuneration is disclosed in the Remuneration Report on page 67.
Directors’ shareholdings in the Group are disclosed on page 68 of the Remuneration Report.
The Group leases its head office premises from Forward Midland LLP, of which Ray Chamberlain, a Non-executive Director of Mercia Asset
Management PLC, is a member. During the year ended 31 March 2020, and under the terms of a lease agreement which commenced on
18 December 2014 and terminates on 17 December 2024, rent and service charges amounting to £226,000 plus VAT (2019: £235,000 plus VAT) were
invoiced to and paid in full by the Group. The rent charged was determined by an independent market rent valuation of the property, undertaken
in October 2014. Rent and service charges are invoiced quarterly in advance. As at 31 March 2020, prepaid rent and service charges amounted to
£52,000 plus VAT (2019: £52,000 plus VAT).
31. Ultimate controlling party
The Group has no single ultimate controlling party.
32. Post balance sheet events
The impact of the outbreak and continuing spread of the novel coronavirus (“COVID-19”) is continuing to evolve. The Group is continually
monitoring the development of COVID-19 and the current and future impacts it will have on the business. The actions to mitigate these risks have
been noted in the Principal Risks and Uncertainties section on pages 52 to 55 of this Annual Report. As discussed in the Strategic Report, at this
time, the Directors are not able to reliably estimate the length and severity of the COVID-19 public health crisis and, as such, cannot quantify its
impact on the financial results, liquidity and capital resources of the Group and its operations in future periods.
Other than the sale of The Native Antigen Company for up to £5.2million and the continuing completion of approved direct investments, there have
been no other material events since the balance sheet date.
100
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Annual Report and Accounts 2020
Company balance sheet
As at 31 March 2020
Assets
Non-current assets
Property, plant and equipment
Right-of-use assets
Investments in subsidiary undertakings
Trade and other receivables
Total non-current assets
Current assets
Trade and other receivables
Short-term liquidity investments
Cash at bank and in hand
Total current assets
Total assets
Current liabilities
Trade and other payables
Lease liabilities
Total current liabilities
Non-current liabilities
Lease liabilities
Total non-current liabilities
Total liabilities
Net assets
Equity
Issued share capital
Share premium
Other distributable reserve
Retained earnings
Share-based payments reserve
Total equity
Note
37
38
39
40
40
41
42
42
43
43
44
As at
31 March
2020
£’000
115
597
40,133
91,000
131,845
530
6,215
16,669
23,414
155,259
(1,058)
(117)
(1,175)
(473)
(473)
(1,648)
153,611
4
81,644
70,000
98
1,865
As at
31 March
2019
£’000
139
–
23,533
74,500
98,172
299
5,188
13,815
19,302
117,474
(374)
–
(374)
–
–
(374)
117,100
3
49,324
70,000
(3,564)
1,337
153,611
117,100
The Company’s profit for the year was £3,662,000 (2019: £1,259,000).
The notes on pages 103 to 107 are an integral part of these financial statements.
The Company financial statements of Mercia Asset Management PLC, registered number 09223445, on pages 101 to 107 were approved by the
Board of Directors and authorised for issue on 13 July 2020. They were signed on its behalf by:
Dr Mark Payton
Chief Executive Officer
Martin Glanfield
Chief Financial Officer
Mercia Asset Management PLC
Annual Report and Accounts 2020
101
Strategic reportFinancial statementsGovernance
Retained
earnings
£’000
Share-based
payments
reserve
£’000
(4,823)
1,259
–
(3,564)
3,662
–
–
–
98
1,166
–
171
1,337
–
528
–
–
Total
£’000
115,670
1,259
171
117,100
3,662
528
34,200
(1,879)
1,865
153,611
Company statement of changes in equity
For the year ended 31 March 2020
As at 1 April 2018
Total comprehensive income for the year
Share-based payments charge
As at 31 March 2019
Total comprehensive income for the year
Share-based payments charge
Issue of share capital
Cost of share capital issued
As at 31 March 2020
Issued
share
capital
£’000
(note 43)
3
–
–
3
–
–
1
–
4
Share
premium
£’000
(note 43)
49,324
–
–
49,324
–
–
34,199
(1,879)
Other
distributable
reserve
£’000
(note 44)
70,000
–
–
70,000
–
–
–
81,644
70,000
102
Mercia Asset Management PLC
Annual Report and Accounts 2020
Notes to the Company financial statements
For the year ended 31 March 2020
33. Accounting policies
The principal accounting policies applied in the presentation of the Company financial statements are set out below. These policies have been
consistently applied throughout the year unless otherwise stated.
General information
The general information relating to Mercia Asset Management PLC (‘the Company’) is set out in note 1 to the consolidated financial statements.
Basis of preparation
The financial statements of Mercia Asset Management PLC have been prepared in accordance with Financial Reporting Standard 101, ‘Reduced
Disclosure Framework’ (“FRS 101”) and the Companies Act 2006 (‘the Act’). FRS 101 sets out a reduced disclosure framework for a ‘qualifying
entity’ as defined in the standard, which addresses the financial reporting requirements and disclosure exemptions in the individual financial
statements of qualifying entities that otherwise apply the recognition, measurement and disclosure requirements of EU-adopted IFRS.
FRS 101 sets out amendments to EU-adopted IFRS that are necessary to achieve compliance with the Act and related Regulations.
The financial statements have been prepared on the going concern basis and under the historical cost convention. A summary of the most
important Company accounting policies, which have been consistently applied except where noted, is set out below.
New standards, interpretations and amendments effective in the current financial year
The new standards that became effective in the current financial year are disclosed in note 1 to the consolidated financial statements.
Investments in subsidiary undertakings
Investments in subsidiary undertakings are stated at cost less provision for any impairment losses.
Property, plant and equipment
Tangible assets are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is recognised so as to write off
the cost or valuation of assets less their residual values over their expected useful lives, using the straight-line method, on the following basis:
Furniture, fixtures and office equipment
Leasehold improvements
33%
over the remaining life of the lease
The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any
changes in estimate accounted for on a prospective basis.
Share-based payments
Equity-settled share-based payments to Executive Directors and certain employees of the Company, whereby recipients render services in
exchange for shares or rights over shares, are measured at the fair value of the equity instruments at the grant date. The fair value determined at
the grant date is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of equity instruments that will
eventually vest. At each balance sheet date, the Company reviews its estimate. The impact of any revision of original estimates is recognised in
profit or loss, such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to equity. Details regarding the
determination of the fair value of equity-settled share-based transactions are set out in note 6 to the consolidated financial statements.
Cash, cash equivalents and short-term liquidity investments
Cash and cash equivalents include cash in hand, deposits held with banks and other short-term highly liquid investments with original maturities
of less than three months. Short-term liquid investments with a maturity of over three months but less than 12 months are included in a separate
category, ‘short-term liquidity investments’.
Taxation
The tax expense represents the sum of the tax currently payable and deferred tax. Current and deferred tax are recognised in profit or loss, except
when they relate to items that are recognised in other comprehensive income or directly in reserves, in which case the current and deferred tax are
also recognised in other comprehensive income or directly in reserves respectively. Where current or deferred tax arises from the initial accounting
of a business combination, the tax effect is included in the accounting for the business combination.
The tax currently payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the profit and loss because
it excludes items of income or expense that are taxable or deductible in other periods and it further excludes items that are never taxable or
deductible. The Company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance
sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability
method. Deferred tax liabilities are generally recognised for all taxable temporary timing differences and deferred tax assets are recognised to the
extent that it is probable that taxable profits will be available, against which deductible temporary differences can be utilised. Such assets and
liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a
business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Mercia Asset Management PLC
Annual Report and Accounts 2020
103
Strategic reportFinancial statementsGovernance
Notes to the Company financial statements continued
For the year ended 31 March 2020
33. Accounting policies continued
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries except where the Company is able to
control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred
tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is
probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to
reverse in the foreseeable future.
34. Critical accounting judgements and key sources of estimation uncertainty
Details of critical accounting judgements, estimates and associated assumptions are disclosed in note 1 to the consolidated financial statements.
35. Summary of disclosure exemptions adopted
The following exemptions from the requirements of IFRS have been applied in the preparation of these financial statements, in accordance with
FRS 101:
• paragraphs 45(b) and 46 to 52 of IFRS 2, ‘Share-based payments’ (details of the number and weighted-average exercise prices of share options,
and how the fair value of goods or services received was determined);
IFRS 7, ‘Financial Instruments: Disclosures’;
IAS 7, ‘Statement of Cash Flows’;
•
•
• paragraphs 28 to 30 of IAS 8, ‘Accounting Policies, Changes in Accounting Estimates and Errors’ specifically in respect of the disclosure of new
•
•
standards in issue but not yet effective;
the requirement in IAS 24, ‘Related Party Disclosures’ to disclose related party transactions entered into between two or more members of a
group; and
the following paragraphs of IAS 1, ‘Presentation of Financial Statements’:
– 10(d) (statement of cash flows),
– 16 (statement of compliance with all IFRS),
– 111 (cash flow statement information), and
– 134-136 (capital management disclosures).
36. Results for the Company
The Directors have taken advantage of the exemption available under Section 408 of the Companies Act 2006 and have not presented a statement
of comprehensive income or a cash flow statement for the Company.
The auditor’s remuneration for audit and other services is disclosed in note 7 to the consolidated financial statements.
37. Property, plant and equipment
Cost
As at 1 April 2019
Additions
As at 31 March 2020
Accumulated depreciation
As at 1 April 2019
Charge for the year
As at 31 March 2020
Net book value as at 31 March 2019
Net book value as at 31 March 2020
Leasehold
improvements
£’000
Furniture
and fixtures
£’000
Office
equipment
£’000
42
–
42
15
5
20
27
22
38
1
39
35
2
37
3
2
274
45
319
165
63
228
109
91
Total
£’000
354
46
400
215
70
285
139
115
104
Mercia Asset Management PLC
Annual Report and Accounts 2020
38. Right-of-use assets
Cost
As at 1 April 2019
Additions
As at 31 March 2020
Accumulated depreciation
As at 1 April 2019
Charge for the year
As at 31 March 2020
Net book value as at 31 March 2019
Net book value as at 31 March 2020
39. Investments in subsidiary undertakings
Carrying amount
As at 1 April 2019
Additions
As at 31 March 2020
Total
£’000
–
702
702
–
105
105
–
597
£’000
23,533
16,600
40,133
The Directors believe that the carrying values of the subsidiary undertakings are supported by their value in use.
On 23 December 2019 the Company increased its investment in its subsidiary company Mercia Fund Management Limited by £16,600,000
comprising a combination of cash and new Ordinary shares. Of the total investment of £16,600,000, £12,400,000 was satisfied by cash and
£4,200,000 was satisfied by the issue of 16,800,000 Ordinary shares at a price of 25.0 pence per share. The new shares were admitted to trading on
AIM on 27 December 2019.
Details of the Company’s subsidiary undertakings as at 31 March 2020 are as follows:
Name
Mercia Investments Limited
Mercia Fund Management Limited1
Enterprise Ventures Group Limited
Enterprise Ventures Limited
EV Business Loans Limited
Mercia Fund 1 General Partner Limited
Mercia (General Partner) Limited
Mercia Investment Plan LP2
Mercia VCT Nominee Limited
WM AHSN SME General Partner Limited
Mercia Fund Management (Nominees) Limited
Mercia Growth Nominees Limited
Mercia Growth Nominees 2 Limited
Mercia Growth Nominees 3 Limited
Mercia Growth Nominees 4 Limited
Mercia Growth Nominees 5 Limited
Mercia Growth Nominees 6 Limited
Mercia Growth Nominees 7 Limited
Mercia Growth Nominees 8 Limited
Mercia Digital Nominees Limited
UGF Nominees Limited
Mercia Investment Management Limited
Mercia Technologies Limited
Place of
incorporation
and operation
Proportion of
Ordinary
shares owned
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
100%
100%
100%
100%
100%
98%
100%
–
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Nature of business
Investment company
Fund management company
Intermediate holding company
Fund management company
Fund management company
General partner
General partner
Limited partnership
Investment company
General partner
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
1. The Company owns 100% of Mercia Fund Management Limited’s Ordinary shares and thus has a 100% controlling interest in the subsidiary undertaking.
2. The Company owns 90% of the capital invested in Mercia Investment Plan LP.
Mercia Asset Management PLC
Annual Report and Accounts 2020
105
Strategic reportFinancial statementsGovernance Notes to the Company financial statements continued
For the year ended 31 March 2020
39. Investments in subsidiary undertakings continued
The companies listed above have their registered offices at Forward House, 17 High Street, Henley-in-Arden, Warwickshire B95 5AA with the
following exceptions:
Enterprise Ventures Group Limited and its subsidiaries are registered at Unit F26, Preston Technology Management Centre, Marsh Lane, Preston,
Lancashire PR1 8UQ
40. Trade and other receivables
Amounts falling due within one year:
Amounts due from subsidiary undertakings
Other debtors
Prepayments and accrued income
Current assets
Amounts falling due after more than one year:
Amounts due from subsidiary undertakings
Non-current assets
As at
31 March
2020
£’000
270
76
184
530
91,000
91,000
As at
31 March
2019
£’000
–
108
191
299
74,500
74,500
Amounts due from subsidiary undertakings are in respect of unsecured, interest-bearing loans. Interest is charged on the principal sum of the
loans typically at a rate of 4% and is paid half yearly. The terms of the loans are such that the earliest date on which Mercia Asset Management PLC
can recall a loan is five years from the loan agreement date.
41. Trade and other payables
Trade payables
Accruals and deferred income
As at
31 March
2020
£’000
164
894
1,058
As at
31 March
2019
£’000
46
328
374
42. Lease liabilities
The Company has recognised £702,000 of right-of-use assets and £702,000 of lease liabilities on transition to IFRS 16, ‘Leases’, with effect from
1 April 2019. As at 31 March 2020, the Company has no lease liabilities in respect of leases committed to but not yet commenced.
The application of IFRS 16 is disclosed in more detail in notes 1 and 22 to the consolidated financial statements.
The table below summarises the lease costs for the financial year ended 31 March 2020.
Depreciation expense
Interest expense
Low-value and short-term lease expense
The maturity profile of the Company’s IFRS 16 leases is set out in the table below.
Due within one year
Due between two and five years
43. Issued share capital and share premium
The movements in issued share capital and share premium are disclosed in notes 25 and 26 to the consolidated financial statements.
44. Other distributable reserve
The movements in other distributable reserve are disclosed in note 27 to the consolidated financial statements.
106
Mercia Asset Management PLC
Annual Report and Accounts 2020
£’000
105
25
16
£’000
117
473
590
45. Directors’ emoluments and employee information
The average monthly number of persons (including Executive and Non-executive Directors) employed by the Company during the year was:
Central functions
Year ended
31 March
2020
Number
9
Year ended
31 March
2019
Number
12
Central functions comprise senior management (including Executive and Non-executive Directors), finance, compliance, legal, administration,
people and talent, and marketing.
The aggregate employee benefit expense (including Executive and Non-executive Directors) was:
Wages and salaries
Social security costs
Other pension costs (note 46)
Year ended
31 March
2020
£’000
950
120
58
1,128
Year ended
31 March
2019
£’000
1,092
142
64
1,298
Information in respect of Directors’ emoluments, share options and pensions is given in the Remuneration Report on pages 65 to 68 of this
Annual Report.
46. Retirement benefit schemes
The Company contributes into the personal pension plans of all qualifying employees. The amount charged in the year to 31 March 2020 was
£58,000 (2019: £64,000). As at 31 March 2020, no contribution payments were outstanding (2019: £nil).
47. Related parties
The Company has taken advantage of the exemption available to companies under FRS 101 not to disclose transactions and balances between
members of the same group. Note 30 of the consolidated financial statements details the Group’s related party transactions.
48. Ultimate controlling party
The Company has no single ultimate controlling party.
49. Post balance sheet events
Note 32 of the consolidated financial statements details the post balance sheet events in respect of the Group.
Mercia Asset Management PLC
Annual Report and Accounts 2020
107
Strategic reportFinancial statementsGovernance Directors, secretary and advisers
(Non-executive Chair)
(Chief Executive Officer)
(Chief Financial Officer)
(Chief Investment Officer)
(Non-executive Director)
(Non-executive Director)
(Non-executive Director)
Directors
Ian Roland Metcalfe
Dr Mark Andrew Payton
Martin James Glanfield
Julian George Viggars
Raymond Kenneth Chamberlain
Dr Jonathan David Pell
Caroline Bayantai Plumb OBE
Company Secretary
Sarah-Louise Anne Thawley
Company website
www.mercia.co.uk
Registered office
Forward House
17 High Street
Henley-in-Arden
Warwickshire B95 5AA
Independent auditor
Deloitte LLP
Statutory Auditor
Four Brindleyplace
Birmingham B1 2HZ
Principal bankers
Barclays Bank PLC
One Snowhill
Snow Hill Queensway
Birmingham B4 6GN
Lloyds Bank plc
125 Colmore Row
Birmingham B3 3SD
Company registration number
09223445
Company registrar
SLC Registrars
Elder House
St Georges Business Park
Brooklands Road
Weybridge
Surrey KT13 0TS
Solicitors
Gowling WLG (UK) LLP
4 More London Riverside
London SE1 2AU
Nominated adviser and joint broker
Canaccord Genuity Ltd
88 Wood Street
London EC2V 7QR
Joint broker
Nplus1 Singer Advisory LLP
1 Bartholomew Lane
London EC2N 2AX
Investor relations adviser
FTI Consulting Ltd
200 Aldersgate Street
London EC1A 4HD
108
Mercia Asset Management PLC
Annual Report and Accounts 2020
Notice of Annual General Meeting
Mercia Asset Management PLC
(incorporated and registered in England and Wales with registered number 09223445)
Notice is hereby given that the Annual General Meeting (“AGM”) of
Mercia Asset Management PLC (the ‘Company’) will be held at
Forward House, 17 High Street, Henley-in-Arden, Warwickshire B95 5AA
on 24 September 2020 at 10.00 a.m. for the purpose of considering and,
if thought fit, passing the following resolutions (which will be proposed
in the case of resolutions 1 to 6 as ordinary resolutions and resolutions
7 and 8 as special resolutions):
Ordinary business
Ordinary resolutions
1. To receive and adopt the Annual Report and Accounts of the
Company for the financial year ended 31 March 2020 together with
the Directors’ Report and Auditor’s Report thereon.
2. To approve the Directors’ Remuneration Report for the financial
year ended 31 March 2020.
3. That Julian Viggars, who retires as a Director in accordance with Article
89.1 of the Articles and being eligible to do so, offers himself for
re-election as a Director, be re-elected as a Director of the Company.
4. That Dr Jonathan Pell, who retires as a Director in accordance with
Article 89.1 of the Articles and being eligible to do so, offers himself for
re-election as a Director, be re-elected as a Director of the Company.
5. To reappoint Deloitte LLP as auditor of the Company to hold office
from the conclusion of this meeting until the conclusion of the next
AGM of the Company at which the Company’s accounts are laid and
to authorise the Directors to determine the amount of the
auditor’s remuneration.
Special business
Ordinary resolution
6. That the Directors be and are hereby generally and unconditionally
authorised pursuant to section 551 of the Companies Act 2006 (the
‘Act’) to exercise all powers of the Company to allot shares in the
Company and to grant rights to subscribe for or convert any security
into shares in the Company up to an aggregate maximum nominal
amount of £440.10 provided that this authority shall expire (unless
renewed, varied or revoked by the Company in general meeting) on
the earlier of the conclusion of the next AGM of the Company and
30 September 2021 save that the Company shall be entitled to
make, prior to the expiry of such authority, any offer or agreement
which would or might require shares to be allotted or rights to
subscribe for or convert any security into shares to be granted after
the expiry of such authority and the Directors may allot shares or
grant rights to subscribe for or convert securities into shares in
pursuance of such offer or agreement as if the authority conferred
hereby had not expired. The authority granted by this resolution
shall replace all existing authorities to allot any shares in the
Company and to grant rights to subscribe for or convert any security
into shares in the Company previously granted to the Directors
pursuant to section 551 of the Act.
Special resolutions
7. That, subject to the passing of resolution 6, the Directors be and are
hereby empowered pursuant to sections 570 and 573 of the Act to
allot equity securities (as defined in section 560 of the Act) for cash
either pursuant to the authority conferred by resolution 6 above or
by way of sale of treasury shares as if section 561(1) of the Act did
not apply to such allotment, provided that this power shall be
limited to the allotment and/or sale of equity securities up to an
aggregate nominal amount of £440.10 provided that this authority
shall expire (unless renewed, varied or revoked by the Company in
general meeting) on the earlier of the conclusion of the next AGM of
the Company and 30 September 2021 save that the Company shall
be entitled to make, prior to the expiry of such authority, offers or
arrangements which would or might require equity securities to be
allotted and/or sold after such expiry, and the Directors may allot
and/or sell equity securities in pursuance of any such offer or
agreement as if the power conferred by this resolution had not
expired. The authority granted by this resolution shall replace all
existing authorities previously granted to the Directors to allot
equity securities for cash or by way of a sale of treasury shares as if
section 561(1) of the Act did not apply.
8. That the Company be authorised generally and unconditionally, in
accordance with section 701 of the Act, to make market purchases
(within the meaning of section 693(4) of the Act) of Ordinary shares
provided that:
a. the maximum number of Ordinary shares that may be purchased
is 44,010,970;
b. the minimum price which may be paid for an Ordinary share is
0.001 pence; and
c. the maximum price which may be paid for an Ordinary share is
the higher of: (i) 5% above the average of the mid-market value
of the Ordinary shares for the five business days before the
purchase is made; and (ii) the higher of the last independent
trade and the highest current independent bid for any number of
Ordinary shares on the trading venue where the purchase is
carried out.
The authority conferred by this resolution will expire on the earlier of the
conclusion of the next AGM of the Company and 30 September 2021 save
that the Company may, before the expiry of the authority granted by this
resolution, enter into a contract to purchase Ordinary shares which will
or may be executed wholly or partly after the expiry of such authority.
By order of the Board of Directors
Sarah-Louise Thawley
Company Secretary
31 July 2020
Registered Office: Forward House, 17 High Street, Henley-in-Arden,
Warwickshire B95 5AA
Coronavirus (“COVID-19”) Annual General
Meeting implications
The Company is closely monitoring 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 AGM 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 AGM in person, and as it is important that members
cast their votes at the AGM, the Company strongly encourages all
members to appoint a proxy for all votes in accordance with the
procedures set out in the notes below.
Mercia Asset Management PLC
Annual Report and Accounts 2020
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Strategic reportFinancial statementsGovernance Notice of Annual General Meeting continued
Mercia Asset Management PLC
(incorporated and registered in England and Wales with registered number 09223445)
Notes
Proxies
1. A member is entitled to appoint one or more proxies to exercise all
or any of the member’s rights to attend, speak and vote at the AGM.
A proxy need not be a member of the Company and a member may
appoint more than one proxy in relation to a meeting to attend,
speak and vote on the same occasion provided that each proxy is
appointed to exercise the rights attached to a different share or
shares held by a member. To appoint more than one proxy, the
proxy form should be photocopied and the name of the proxy to be
appointed indicated on each form, together with the number of
shares that such proxy is appointed in respect of (which, in
aggregate, should not exceed the number of shares held by the
member). Please also indicate if the proxy instruction is one of
multiple instructions being given. All forms must be signed and
should be returned together in the same envelope.
2. A form of proxy is enclosed with this notice. Forms of proxy may also
be obtained on request from the Company’s registered office.
In order to be valid any proxy form appointing a proxy must be
returned duly completed no later than 10.00 a.m. on 22 September
2020 (or, if the AGM is adjourned, no later than 48 hours before the
time fixed for the adjourned meeting), in hard copy form by post, by
courier, or by hand to the Company’s Registrar, SLC Registrars,
Elder House, St Georges Business Park, Brooklands Road,
Weybridge, Surrey KT13 0TS, United Kingdom. Submission of a
proxy appointment will not preclude a member from attending and
voting at the AGM should they wish to do so. To direct your proxy on
how to vote on the resolutions, mark the appropriate box on your
proxy form with an ‘X’. To abstain from voting on a resolution, select
the relevant 'Vote withheld' box. A vote withheld is not a vote in law,
which means that the vote will not be counted in the calculation of
votes for or against the resolution. If no voting indication is given,
your proxy will vote or abstain from voting at their discretion. Your
proxy will vote (or abstain from voting) as they think fit in relation to
any other matter which is put before the AGM.
3. Any power of attorney or any other authority under which your
proxy form is signed (or a duly certified copy of such power or
authority) must be returned to the office of the Company’s Registrar
with your proxy form.
Thresholds and entitlement to vote
4. To be passed, ordinary resolutions require a majority in favour of
the votes cast in person or by proxy at the AGM and special
resolutions require a majority of not less than 75% of members who
vote in person or by proxy at the AGM. On a show of hands every
shareholder who is present in person (or being a company is present
by a representative not themselves a shareholder) and who is
allowed to vote at a general meeting shall have one vote. Upon a
poll every member holding Ordinary shares who is present in person
or by proxy (or being a company is represented) shall have one vote
for every Ordinary share of which they are the registered holder.
5. The Company, pursuant to Regulation 41 of the Uncertificated
Securities Regulations 2001 (as amended), specifies that only those
members registered in the Register of Members of the Company at
6.30 p.m. on 22 September 2020 (or if the AGM is adjourned, members
entered on the Register of Members of the Company no later than
48 hours before the time fixed for the adjourned AGM) shall be
entitled to attend, speak and vote at the AGM in respect of the
number of Ordinary shares registered in their name at that time.
Changes to entries on the Register of Members of the Company after
6.30 p.m. on 22 September 2020 shall be disregarded in determining
the rights of any person to attend, speak or vote at the AGM.
6. In the case of joint holders, where more than one of the joint holders
purports to appoint a proxy, only the appointment submitted by the
most senior holder will be accepted. Seniority is determined by the
order in which the names of the joint holders appear in the
110
Mercia Asset Management PLC
Annual Report and Accounts 2020
Company’s Register of Members in respect of the joint holding (the
first named being the most senior).
7. A corporation which is a member can appoint one or more corporate
representatives who may exercise, on its behalf, all of its powers as
a member provided that no more than one corporate representative
exercises powers over the same share.
8. As at 31 July 2020, being the latest practicable date before the
publication of this notice of AGM, the Company’s issued share
capital consisted of 440,109,707 Ordinary shares each carrying one
vote. Therefore, the total voting rights in the Company as at 31 July
2020 is 440,109,707.
Miscellaneous
9. Copies of the Directors’ service contracts and letters of
appointment are available for inspection at the registered office of
the Company during normal business hours from 31 July 2020 and
will be available for inspection at the place where the meeting is
being held from 15 minutes prior to and during the meeting.
10. Members who have general queries about the AGM should write to
the Company Secretary at the registered office of the Company:
Forward House, 17 High Street, Henley-in-Arden, Warwickshire
B95 5AA, United Kingdom.
Explanation of certain resolutions
1. Resolution 1 – the Directors are required to present the accounts,
Directors’ Report and Auditor’s Report to the meeting. These are
contained in the Company’s Annual Report and Accounts 2020.
2. Resolution 2 – the shareholders are required to approve the
Remuneration Report for the year ended 31 March 2020.
3. Resolutions 3 and 4 – retirement of Directors by rotation
– pursuant to Article 89.1 of the Articles, at each AGM, any Directors
who are required to retire by rotation pursuant to the Articles, shall
retire and submit themselves for re-election by shareholders.
4. Resolution 5 – auditor reappointment and remuneration – at
each meeting at which the Company’s accounts are presented to its
shareholders, the Company is required to appoint an auditor to
serve until the next such meeting and seek shareholder consent for
the Directors to set the remuneration of the auditor.
5. Resolution 6 – general authority to allot – this resolution, to be
proposed as an ordinary resolution, relates to the grant to the
Directors of authority to allot unissued Ordinary shares until the
earlier of the conclusion of the AGM to be held in 2021 and
30 September 2021 (being six months after the financial year end of
the Company), unless the authority is renewed or revoked prior to
such time. This authority is limited to a maximum nominal amount
of £440.11 (representing 10% of the issued Ordinary share capital of
the Company as at 31 July 2020 (the latest practicable date prior to
the publication of this document)).
6. Resolution 7 – statutory pre-emption rights – the Act requires
that if the Directors decide to allot unissued shares in the Company
or transfer them out of treasury, the shares proposed to be issued or
transferred must be first offered to existing shareholders in
proportion to their existing holdings. This is known as shareholders’
pre-emption rights. However, to act in the best interests of the
Company, the Directors may require flexibility to allot and/or
transfer shares out of treasury for cash without regard to the
provisions of section 561(1) of the Act. Therefore this resolution, to
be proposed as a special resolution, seeks authority to enable the
Directors to allot and/or transfer equity securities out of treasury up
to a maximum nominal amount of £440.11 (representing 10% of the
issued Ordinary share capital of the Company as at 31 July 2020 (the
latest practicable date prior to the publication of this document)).
This authority expires on the earlier of the conclusion of the AGM to
be held in 2021 and 30 September 2021 (being six months after the
financial year end of the Company), unless the authority is renewed
or revoked prior to such time.
7. Resolution 8 – market purchases – the Directors are requesting
authority for the Company to make market purchases of up to
44,010,970 Ordinary shares (representing 10% of the issued
Ordinary share capital of the Company as at 31 July 2020 (the latest
practicable date prior to the publication of this document)). There is
no present intention to exercise such general authority. Any
repurchase of Ordinary shares will be made subject to the Act and
within guidelines established from time to time by the Directors
(which will take into account the income and cash flow
requirements of the Company) and will be at the absolute discretion
of the Directors, and not at the option of shareholders. Subject to
shareholder authority for the proposed repurchases, general
purchases of the Ordinary shares in issue will only be made through
the market. Such purchases may only be made provided the price to
be paid is not more than the higher of: (i) 5% above the average of
the middle market quotations for the Ordinary shares for the five
Business Days before the purchase is made; or (ii) the higher of the
price of the last independent trade and the highest current
independent bid at the time of purchase.
Mercia Asset Management PLC
Annual Report and Accounts 2020
111
Strategic reportFinancial statementsGovernance MERCIA ASSET MANAGEMENT PLC
Forward House
17 High Street
Henley-in-Arden
Warwickshire B95 5AA
+44 (0) 330 223 1430
www.mercia.co.uk