Mercia Asset Management (LSE:MERC) — Interim Results

0:00 Good afternoon, and welcome to the MERCIA ASSET MANAGEMENT PLC investor presentation. Throughout this recorded presentation, investors will be in a listen only mode. Questions are encouraged and can be submitted at any time via the q and a tab situated on the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. And then I'd like to hand you over to Mark Payton, CEO. Good

0:31 afternoon, sir. Good afternoon, and good afternoon, everybody, and thank you for your attention today to MERCIA's interim results for the financial year 2025. I'm Mark Payton, CEO, cofounder of MERCIA, a broad background in commercialization of tech and innovation with a heavy focus on life science and life science investment.

0:56 Yes. Good afternoon, everyone. I joined MERCIA just over ten years ago to float the business with Mark when there was just a small handful of us. Thank you, Martin. And, actually, yeah, this is very much a milestone for us, this ten year journey. So we have been listed now for ten years, and some of this presentation will speak to that journey and what we've accomplished over that period. We'll also talk about performance, give a performance overview, the model that we operate, and, of course, the three year strategic plan that we're on, MERCIA '27, and this is the six first six months

1:26 into that. You'll hear from Martin on the financial results, then the progress and the drivers and levers that we can pull to accelerate value within MERCIA, a broad outlook, and, of course, take any questions at the end. We look forward to those questions. This slide really summarizes, I think, quite positively these first six months of this interim highlights. We've seen revenue grow to 17,900,000. That's up 19 compared to this time last year. Along with the revenue growth, we've seen EBITDA climb to 3,700,000 for this six month period. It itself is up 34% compared to this time last year. And the board today declared an interim dividend at naught 0.37p per share, up almost 6% compared to this time last year.

2:16 Group has a very strong cash position. Our balance sheet is strong, 46,000,000 cash on hand and, of course, debt free. Our direct investments, and I'll talk a little bit to those later, at 121,000,000. And when you combine our funds under management, circa 1,600,000,000 with our direct investments and cash on hand, you have 1,800,000,000 in assets under management. We've seen 57,000,000 in terms of inflows, organic inflows into our third party funds. And across our funds and our balance sheet, we have an unrestricted cash position of circa 663,000,000. So a very liquid stock going forwards. And I think that liquidity and deployment really is showing quite well here. We've invested well over a 100,000,000 over this six month period from Bristol through London, through the Midlands North to Northeast, Newcastle, and into Scotland, very much an active manager across all of The UK.

3:16 And activity is really reflected in the differentiated business model that we operate, where we're almost exclusively focused on the private markets. A 100% of our funds are either evergreen or long dated, and this means the very structure of those funds means there's no fund redemptions. We benefit from a blended 2% fee margin and 81% recurring revenue, which is up from circa 70% last year. We very much position ourselves now as a leading domestic only specialist alternative asset manager, very much focused on The UK only across diversified asset classes in respect to strategic assets, and I'll talk a little bit to those later, and moving towards now real assets. Our near and medium term focus is expanding the platforms of deal origination and sales and distribution to meet the demand for investment and the capital deployed against strong deals.

4:11 And we'll do this through four discrete areas of focus. Investment performance really relates to our track record. And by track record, we're talking about maintaining or moving into a position of top quartile performance but based on a DPI, distributions to paid in, cash in, cash back basis. Risk mitigation, and that's by divers diversification by asset type, investor type, and fund structure type. The platforms that I just spoke to, which is deal origination and sales and distribution, looking at scaling those platforms to meet the growing opportunity within the private markets that we operate in, but also ensuring that there is shared knowledge across the group, across the teams, and across our 11 offices to continue to facilitate our own scale.

5:00 And, of course, a robust financial position with cash generative, scalable, profitable, and a very strong balance sheet. But at the heart of MERCIA's continued success is the exceptional team that we're fortunate enough to have across our 11 offices, operating across our multitude of fund mandates and asset classes, who themselves operate across core values of growth, trust, responsive connected, and responsible. The connected piece is important as technology and innovation ensures that is an efficient transfer of knowledge and connectivity across the group, But actually, a very differentiated and valuable part of MERCIA is our physical presence in 11 offices across The UK, ensuring we see the best deals at the right time. Thank you, Mark.

5:51 This slide shows our sustained organic growth in revenues, EBITDA, and operating cash generation during the period. As Mark's mentioned, revenues were up 19%, EBITDA up 34%, and we converted over a 100% of our EBITDA into cash. Interestingly, when we began our journey, approximately 30% of our revenues came from the balance sheet investing activities. Today, that is only 2%, with 98% of our revenues coming from our fund management activities. The growth in EBITDA during the period, which was all organic, came both from a combination of the five British business bank mandates that we won at the end of the last financial year, but also the continuing growth and success of the acquisition that we've made just under two years ago, Frontier Development Capital.

6:41 Thank you. Against a challenging market backdrop for many asset managers, this slide shows our stable assets under management at just over 1,800,000,000. There were no redemptions and 57,000,000 of new fund inflows. The only reduction of any magnitude was 35,000,000 of distributions to MERCIA's stakeholders, including the Northern VCT shareholders, our LP fund investors, and, of course, to our own shareholders.

7:16 And this slide provides more granularity on the makeup of our AUM by asset class investor type and fund type. And combined, these typically long dated or evergreen funds are generated a blended fee margin of circa 2%, and that's across what are now 64 separate investment mandates. And we are increasingly able to equity invest all end across The UK under the many different fund mandates that we manage. So with a combination of the 81% of contracted and recurring revenues and 98% of those revenues coming from our fund management operations, this combined provides great stability during these unpredictable times for asset managers.

8:02 This slide is our consolidated profit loss account for the period. You can see there the growth in revenues of just under 3,000,000, costs up at just under 2,000,000, resulting in that 1,000,000 increase in EBITDA. I think it's also worth noting that the finance income we generated during the period was entirely bank deposit interest from the substantial cash that we have under management. And up to September, we were still earning just under 5% on our cash balances.

8:35 We continue to have an extremely strong debt free balance sheet. Mark will talk in a moment to the £121,000,000 value of the direct investment portfolio. You can see there the 46,200,000 of cash. And as a result of this strong balance sheet and strong liquidity position, our board has recommended or has declared, sorry, a 0.37p per share interim dividend, which will cost £1,600,000.

9:04 I'm pleased to say we have a very simple straightforward consolidated cash flow statement. You can see there the operating cash inflow for the period of 4,200,000. As our balance sheet portfolio continues to to mature, we will see overall over the course of each year the amount of capital deployed into that portfolio declining. And in the first half, we only invested just under £4,000,000. You can see there the cash that we received, which was a deposit interest, and also the 5,000,000 share buyback concluded during this six month period with a final £1,800,000 of shares bought back. Thank you.

9:39 Thank you, Martin. And as Martin alluded to in terms of the direct investments, here you have listed out circa 20 of our direct holdings, our entire balance sheet investments. I can point you to the right side, which just shows the equity stakes that we hold in these businesses, which are material and influential, but also remind you that every single one of our direct investments has a third party fund position in it as well. So our influence on the businesses to help them grow and realize value is strong, but we are a pragmatic and supportive investor. We are not a forced seller, and we'll talk a little bit to our direct investment divestment strategy shortly. But that is about maximizing near term return from a maturing portfolio. So then just moving to the left, you can see we opened the period with a 100 and circa a 117,000,000 in value. We've invested circa 3,900,000 over this six month period.

10:34 And then you see the fair value movements, equate to a 185,000 upswing, which is modest and really is flat. And this is our observation across our funds and across the broader industry as well as our balance sheet, is that within the venture sphere that we operate in at least, we're seeing valuations now slight slightly ticking up. So there's been a period of devalue, a period of recorrection on pricing, etcetera. That is now showing good signs of recovery and ticking up now. So we believe we're coming through that position. And that takes you then to a closing position of approximately 121,000,000 for the direct investments. Then if I take you to what is the top 10 assets by value, and these account for over 70% of the value of all the direct investments. So a substantial amount of value within the top 10. And just sort of going through progress on these businesses, VoxPopme, which is a video analytics business, a new product platform launch with an integrated AI mechanism, revenue growth, and and approaching actually breakeven position now. Netasir, which is a bot management and bot mitigation platform operating within the cybersecurity space, strengthened management team and board, and that business continues to develop and grow.

11:52 Warwick Acoustics, which is the flat speaker technology being integrated into an OEM ready for a product launch in 2025. That's in the automotive sector. That's a very exciting development. We look forward to being able to, frankly, point at cars and say, there are a number of speakers within that one car coming out. And they have a number of OEMs coming through looking and evaluating that product, and as I said, a lead one coming to the market next year. The cards, the universe and everything, previously Vertrade, that's had a new game launched against its existing platform and another one in development, again, in strong revenue growth. Medherin, this is a patch delivery technology. It's got a testosterone patch that is developing within its own clinic, and it's also got a partner program with Bayer.

12:39 Soccer Manager, Invincible Studio, s m 25 was launched. Strong metrics in every sort of metric that you can count on that one showing good strong growth. It's also got two new games coming alongside that that will soon be launched, again, in revenue growth and trading at a breakeven basis. IOTO, just to remind people, this was this time last year, actually, we put a 50% provision against the equity on this business, restructured the focus of the business, the team and the board, appointed it a new commercial direction. I'm pleased to say it's now making early sales Locate Bio, just moving into the clinic with its graft technology, BNP graft technology. That business is developing well, and we have high hopes for that business as it moves to clinical trial.

13:25 Intelligent positioning, which is a sophisticated digital SEO platform. Again, business trading at breakeven. And lastly, Aeonic. This was the business that Endreams was sold, and this is a small residual stake that we have within Aeonic, a highly profitable business in high growth itself looking to list on the public markets in due course. And, of course, we will unwind at that position. So here you have in the top 10 business progress strong and capital requirement reducing over time. In common with other specialist alternative asset managers, we use the international private equity and venture capital valuation guidelines to determine the fair values of our balance sheet portfolio every six months.

14:12 What's interesting, I think, this six month period end is that now 93% of our portfolio is valued either on the price of a recent investment round or based on an enterprise value, which would typically be a revenue multiple as the balance sheet portfolio continues to mature.

14:29 We do use DCF as a secondary calibration mechanism, but we do not use DCF as one of our primary valuation mechanisms. We have minimal exposure to the somewhat volatile public markets with only one investment in a small AIM company, My Health Check. And once we have been through our six monthly review process and we've shared those valuations with BDO, who also review them, We then, as an executive team, have one final hand on heart review before we publish these results.

15:02 Thank you, Martin. Just keeping with the theme of our ten year anniversary, I think it's useful just to stop and look backwards as well as later look forwards. What you can see here is at IPO, we had circa 23,000,000 in third party funds under management. Ten years later, that's grown to 1,600,000,000. Our direct investments were valued at circa 9,000,000 at IPO. Now, as you've just heard, 121,000,000. The average investment size of a transaction was circa 200,000 then. It's now 1,500,000

15:34 and growing. The deployment rate over the six month period was circa 2,000,000. Now it's well in excess of 100,000,000. Six month revenue has grown from 400,000 to 17,900,000 as in these results. We were basically a breakeven business when we came to the market. 3,700,000 EBITDA in these results for the six month period. We had seven people within MERCIA, which has grown to an exceptional team of a 138 people today. We have invested something like 1,000,000,000 over the

16:04 ten years and returned 800,000,000 back to investors over that same period. So very much finding opportunities, investing, transacting, growing, and realizing returns in those. And just in respect of the asset classes we manage, this is this really is reflective here in the differentiated strategy that we operate, where you can see private venture, which is circa 952,000,000 in assets under management, and importantly, 420,000,000 of unrestricted cash to deploy going forwards. Development capital, which we include debt and private equity in this,

16:41 388,000,000 under management, 108,000,000 of unrestricted cash going forwards. Intermediate real asset finance, which is very much the stepping stone we're making into real assets, 310,000,000 under management, 89,000,000, unrestricted cash going forwards. And, of course, the balance sheet that you've heard from Martin and myself in terms of direct investments, 187,000,000 comprising direct investments, cash on hand, and LP positions as we invest in funds going forwards. That gives collectively 1,800,000,000 in AUM and 663,000,000 in unrestricted cash.

17:18 And how we will look towards meeting and exceeding that MERCIA 27 initiative. And to remind you, over three years, we're looking to take AUM from 1,800,000,000 to 3,000,000,000, grow EBITDA to 10,000,000, and look to divest progressively and pragmatically up to 70% from the by value from the maturing direct investment portfolio.

17:43 In terms of AUM growth, that will come through strategic assets, the venture and development capital just described, as well as real assets, natural resources, residential, and infrastructure, and through a series of organic and m and a activities. Just to bring a a light onto that, AUM growth historically, about 50% of that has come via acquisitions, and 50 has come via organic growth thereafter. And we would expect that to continue going

18:11 forwards. The aim building the aim to build a sustainable business, asset management business with per annum net inflows of 10%. Efficiency, 18% was the EBITDA margin as a measure of efficiency at the beginning of this period, and we've made a commitment to drive that up to 26% over time. Managed fund deployment. So the previous financial year, we'd invested 227,000,000. We'll look to grow those deployment levels by up to a 100% over these three years. And, of course, performance, as I've said before, is paramount to everything. And our focus, of course, is top quartile performance across all the assets that we manage.

18:57 And we passionately believe we're making a positive difference, not just to our investees, our fund investors, but also the regional and national domestic economy. We see strong tailwinds in regard to domestic growth prospects. We think the diversified nature of the business across deal origination, asset class, and investor type is valuable. The predicted the predictable revenue, recurring revenue of circa 81% combined with the 2% blended fee margin, we think is a robust and sustainable approach. And private markets, there's a lot more to grow from that, and our focus will continue to be on the private domestic markets. This position of 11 offices across The UK accessing these deal opportunities is importantly also being close to fund investors, the long term capital of the multitude of mandates we manage, and the structural changes that are happening within our domestic economy really does point to a positive step and environment for MERCIA to continue to develop and grow in.

20:00 And we see this through we're often referred to being a place based impact investor. We see capital coming in that direction, increased in interest in what we're doing, be it through our influence across our 11 offices and our own carbon footprint or the fact that we have in excess of 530 portfolio businesses and our influence on those businesses in terms of their carbon footprint. Our societal impact, we've invested a 129,000,000, of which 89% of that was outside of London. We've invested into 82 companies in this six month period, and I think really importantly, managed to attract 46,000,000 of other people's money alongside us. We also focus on these regeneration brownfield regeneration projects, which are a a real lead into our real asset position going forwards.

20:48 We have an appointed we have appointed an ESG dedicated ESG manager now within the group, member of the QCA, part of Martin and my remuneration. Our bonus remuneration is against cultural aspects and ESG aspects across the group, and our focus has been very much on diversity and inclusion over the years. And I'm pleased to say looking at these numbers that work is being achieved, outputs are being achieved.

21:14 As just rounding off really for today's presentation, there are four key areas that we we will be focused and remain focused on. Growth in revenue and growth in EBITDA is clearly linked to growth in AUM. Achieve those, and we continue along our progressive dividend policy, and we'd expect that to continue. Our strong balance sheet today will continue to be strengthened as we have realizations from our balance sheet direct investments. And just to remind everybody, we are not making any new investments on our direct investments. We are looking now at a maturing portfolio and delivering that capital back to our balance sheet. And the reason for that is the strong tailwinds that we are experiencing as a house on a regional and national basis, and we think that stands good stead for us to continue to grow assets under management on a domestic basis.

22:04 Thank you very much for your attention.

22:07 Mark Martin, thank you very much for your presentation this afternoon. Ladies and gentlemen, please do continue to submit your questions just by using the Q and A tab situated on the top right hand corner of your screen. Just while the company take a few moments to review those questions submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the published q and a can be accessed via investor dashboard. As you can see, we've received a number of questions throughout today's presentation. And, Mark, could I please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end. Yes. If you can just give me just there are a lot of questions, and I'm just writing them down. So if I could just have one more minute. Okay.

23:00 Thank you. So there are I I will, as always, try to theme this, and we'll look to address all these questions. So forgive me if I miss them. It's not a deliberate act. It's just that we have had quite a few questions. I think one question actually, Martin, is if we were to make a substantial realization from the balance sheet, This is in respect to restarting a share buyback. Would we contemplate restarting a share buyback if part of the question? And the other question is how would we offset that with, say, making an acquisition or growing funds under management? What what is the opportunity cost of one versus the other? Yeah. Thank you, Mark. I'm I'm sure depending on the timing and quantum of the realizations from the balance sheet, our board would definitely consider very carefully whether to keep that cash back for acquisitions or whether to distribute a reasonable percentage of that to shareholders via our sec what would be our second share buyback.

23:58 So time will tell on that. I think thinking about the history of MERCIA, we started off predominantly as an EIS manager. We then acquired our way into regional venture. We then, in 2019, acquired our way into VCT, asset management. And then in 2022, we acquired our way into more regional debt deployment at higher levels, which took us also into what we refer to as an intermediate real asset through lending to property developers essentially. So I think the the move towards real assets that we'd like to make will require us to to make an acquisition into that space because today, we don't have the credentials or the experience of real asset management. So that is our that is the board's priority. We've set out our strategic direction in our in our March 2024 annual report, and for the time being, that is the the main focus of our capital deployment.

24:55 Thank you, Martin. Another question here talks about cost management. And as the business grows and they point out there's 15.7% in terms of cost management, Do we see basically operational leverage going forward in cost management? Yes. From here on in, yes, we do. As as Mark showed at the one of the earlier slides, we were there were just seven of us when we we we floated this business, and we've experienced rapid growth over the last ten years. But I do think now with with the the sophistication and the quality of the people in our support functions in particular, that we have now reached a plateau, certainly in our support functions. And so I would expect to see the EBITDA margin grow from here and a real focus on operational efficiency.

25:42 Thank you. And can I first thank everybody? Because there's some there's some excellent questions. I'm just trying to theme them together here. I mean, one sort of central theme, actually, I think, goes across a number of questions is to do with the fund management operation versus the direct investments. And I'd say the central theme here is, you know, how do you opportunity cost between putting money into grow the third party funds versus the direct investments? I mean, one of the questions, Martin, is to do with the direct investments. How much capital do we think that they will require from us? Yes. And and we again, just going back to our our our summer results roadshow, we said then that we thought that over the next three years, we would only need to deploy another £25,000,000 in total.

26:28 And we felt that would be 12,000,000 over the course of this financial year, 8,000,000 over the course of the next one, and the third year being only 5,000,000. In the first half this year, we deployed four of that 12 for this year, and we do expect to deploy eight in the second half, bringing us in line with our first year target. Fabulous. And I think, you know, some of the points here are to do with, you know, can a focus on the fund management operation, does it really yield value to owners versus just sticking with the direct investments and and and not with the funds? I think the simple truth there is that we we we believe there's a permanent structural change that's happened in terms of private investment valuations. In other words, that we believe they will always be held now at a discount. Some of our peer group suffer a discount of 50 to 60%, and we just think that is not right for our shareholders to suffer from such a discount.

27:25 What we do believe is that if we were to turn that into cash, our inherent value increases. And if we put that into new funds and fund management operations, the yield and returns on that is an inherent value as well. And so we do passionately believe that the transition from direct investments to third party fund management will be valuable for our owners because there will be a fair reflection on the value that we'll be building within the group. Another question was to do with our direct investments and staff and staff recruitment, retention, etcetera. And, actually, we've got something like I think it's about 300 250 to 300 venture businesses across the portfolio, and there was a period of time where accessing that stuff and finding individuals and retaining them was really challenging.

28:14 We're not seeing that so now. It has always been difficult to recruit, and it always will be, but it is nothing like the level we used to see, and it's not something I'm hearing discussed at all really in any great detail about the challenges of recruitment from leadership board level all through down through to sort of suite c suite and below. We do have our own search instrument, if you like. We have what's called MERCIA nucleus. We go out. We look for board members. We look for c suite members. We're we're proactively engaged in doing that ourselves. So we're quite close to the market in terms of availability. But, yeah, no. Today, that isn't seen as a challenge to us. Another question was with the sort of, I guess, yields decreasing in the broader market context. Are we seeing more interest in what we're doing in terms of deal sourcing, investment deployment, fundraising, etcetera?

29:05 What what I will say is I I think I think you're right. I've well, that that question is absolutely right. Yields are depressing, and and I do think interest rates are sort of flattening out now for a period of time. But what we are seeing is the nature of capital allocations on a fund basis changing. And one question points towards British Business Bank, the wealth fund. Is there a regional pension funds, the local government pension schemes, for instance? Is there a change in approach and allocation? All of that comes together with a quite a loud answer of yes, and that is why we're going in the direction we're going is that we have we are having inbound from institutional capital is interested about our place based approach. They are often looking at now they are looking at domestic allocation on a regional basis, and that is across strategic and real assets.

29:50 So we do see both those areas, of growth opportunity for us. So in answer to those number of questions, yes, we are seeing all of those trends come towards us. We just to remind everybody, we we manage three discrete pools of capital, retail through EIS and VCT, and in the autumn budget, that was confirmed that that EIS and VCT would be sustained until at least 2035. So that's given stability in that area, which I think was much needed. We manage capital, so for instance, on behalf of British Business Bank, who have an increasing importance on the support of national plays in terms of strategic assets, but I think increasingly that will become real assets too. And then institutional capital, we do manage today local government pension scheme capital in certain structures.

30:35 And so we do have a good relationship there, and we're building that relation. So, actually, over the coming two and a half years, we would expect all three pools of capital to be really important for our next stage of growth. I think I have answered all questions. I'm I'm hoping I have, unless it can be pointed out I haven't. The very first question, Mark, how do you prioritize between growing your direct investments and scaling third party? So again, we said back in the summer that we are we have ceased now bringing on any new investments onto the balance sheet portfolio, and that's why over the next three years, we are looking to actually realize over 70% of the current value of the portfolio. Thank you, Martin. And I guess the only other question was about opportunities in real assets, and I think Martin addressed this earlier. I mean, we will have to acquire our way into those real assets.

31:29 And the beauty of having such a robust balance sheet is we can do that within our own means. And as the balance sheet direct investments start to unwind, we will be able to continue to do that within our own means. We do not have an intention of coming back to the city to raise more money. We believe we've built a sustainable and robust business that means we can build organically and acquisitively from our own capital needs. Well, if there are no other questions, I'm I'm truly grateful for those questions coming through. Mark Martin, thank you very much for your presentation this afternoon. Ladies and gentlemen, just before redirecting investors to provide you with their feedback, which I know is particularly important to the company, Mark, could I please just ask you for a few closing comments?

32:22 Thank you. And and I genuinely am grateful, actually, for your continued support, but actually the broader industry support. When MERCIA came to the market ten years ago, we had an ambition to make a difference across The UK and UK regions. And the only way we could accomplish that was through support from the likes of British Business Bank, support from institutional capital, and support from retail clients. That in terms of our funds and that in terms of our share register. And so we're very grateful for that support. We hope you will continue with us as we continue to build the business. We see huge tailwinds now. We think we're well placed and look forward to the coming two or three years in reporting not that we've met the MERCIA 27, but ideally have beaten that goal. Mark Martin, thank you for updating investors today.

33:07 Can I please ask investors not to close the session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations? This may only take a few moments to complete, and I'm sure be greatly valued by the company. On behalf of the management team of MERCIA ASSET MANAGEMENT PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.