Mercia Asset Management PLC

("Mercia" or the "Group" or the "Company")

Preliminary results for the year ended 31 March 2021

Record results and proposed final dividend

Mercia Asset Management PLC (AIM: MERC), the proactive, regionally focused specialist asset manager with c.£940million of assets under management ("AuM") is pleased to announce its preliminary results for the year ended 31 March 2021.

Financial results

·    Total AuM¹ increased by 17.5% to c.£940million (2020: c.£800million)

·    Revenue² increased 50.5% to £19.2million (2020: £12.7million)

·    Adjusted operating profit³ £3.3million (2020: £0.5million)

·    Net performance fees £3.8million (2020: £nil)

·    Realised gains £20.3million (2020: £nil)

·    Net fair value increase of £10.1million (2020: £15.8million decrease)

·    Operating profit £34.0million (2020: £17.8million loss)

·    Profit after taxation £34.5million (2020: £17.5million loss)

·    Earnings per share 7.83 pence (2020: loss per share 5.11 pence)

·    Proposed final dividend of 0.3 pence per share (2020: nil)

·    Unrestricted cash and short-term liquidity investments £54.7million (2020: £30.2million)

·    Net assets £176.0million (2020: £141.5million)

·    Net assets per share 40.0 pence (2020: 32.1 pence)

1    Including the Group's consolidated net assets.              

2    Excluding performance fees.

3    Adjusted operating profit is defined as operating profit before performance fees net of variable compensation, realised gains on disposal of investments, fair value movements in investments, share-based payments charge, depreciation, amortisation of intangible assets, movement in fair value of deferred consideration and exceptional items. The reconciliation of adjusted operating profit to operating profit is included in the Chief Financial Officer's review.

Managed fund developments

·    Third-party funds under management ("FuM") increased by 16.1% to c.£764million (2020: c.£658million) contributing £18.2million in revenue (2020: £11.7million)

·    Venture FuM c.£600million (2020: c.£476million)

o  Net performance fees totalling £3.8million receivable, following portfolio exits and significant net asset value ("NAV") increases across the EIS funds and Northern VCTs

·    Private equity FuM c.£54million (2020: c.£60million)

·    Debt FuM c.£110million (2020: c.£122million)

o  CBILS accredited lender for the British Business Bank's Northern Powerhouse Investment Fund, with a focus on supporting regional businesses throughout Yorkshire and the Humber

Direct investment portfolio developments

·    Direct investment portfolio fair value of £96.2million (2020: £87.5million), up 10% notwithstanding four investment realisations completed in the year

·    £15.4million net invested into 19 portfolio companies (2020: £15.7million net invested into 18 portfolio companies), including new direct investments into Sense Biodetection and MIP Diagnostics

·    Sale of The Native Antigen Company in July 2020 generated total cash receipts of £5.2million and a realised gain of £1.8million

·    Sale of Clear Review in October 2020 generated total cash receipts of £1.0million and a realised gain of £0.5million

·    Key strategic objective completed with the sale of Oxford Genetics in March 2021. Total cash proceeds of £30.7million 'evergreens' the Group's balance sheet whilst crystallising a realised gain of £18.0million, a 5x return on Mercia's original direct investment cost of £6.1million and a 51% internal rate of return ("IRR")

Post year end developments

·    Direct investments of £0.5million in Medherant and £0.3million in Eyoto post year end

·    Continuing commercial progress is being made by the majority of the direct portfolio, including each of the top five direct investments by holding value

Mark Payton, Chief Executive Officer of Mercia, commented:

"In the year to 31 March 2021 Mercia performed strongly. Our venture capital activities - both managed funds and held directly - had their strongest year so far, our debt team completed a record number of transactions and our private equity portfolio has returned to growth.

The Group is now strongly cash generative with adjusted operating profits supporting our progressive dividend policy. This, coupled with the robust performance of our direct investment portfolio, has taken NAV per share to 40.0 pence and the interim and proposed final dividends for the year to 0.4 pence per share in total.

Mercia's hybrid 'funds-first' regional investment model, combined with our local presence and excellent team, is now delivering in a sustainable manner. As is often the case, this success has been many years in the making and I would like to thank all those that have supported us as we have grown to become the leading provider of connected capital and support to thriving regional businesses. It is a great pleasure and privilege to work with all of them."

This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 which is part of UK law by virtue of the European Union (Withdrawal) Act 2018.  Upon publication of this announcement, this inside information is now considered to be in the public domain.

-Ends-

For further information, please contact:

Analyst briefing

An analyst webcast will be given by Dr Mark Payton, Chief Executive Officer, Martin Glanfield, Chief Financial Officer, and Julian Viggars, Chief Investment Officer, at 9.30am today, 6 July 2021. Analysts wishing to register are asked to contact mercia@fticonsulting.com. An audio webcast of this briefing will subsequently be available later in the day via Mercia's website.

Investor presentation

In addition, as part of its commitment to appropriate and open communication structures for all elements of its shareholder base, Mercia will provide a live management presentation and Q&A via the Investor Meet Company ("IMC") platform at 3.00pm today. Registration details can be accessed via:

https://www.investormeetcompany.com/mercia-asset-management-plc/register-investor

About Mercia Asset Management PLC

Mercia is a proactive, specialist asset manager focused on supporting regional SMEs to achieve their growth aspirations. Mercia provides capital across its four asset classes of balance sheet, venture, private equity and debt capital: the Group's 'Complete Connected Capital'. The Group initially nurtures businesses via its third-party funds under management, then over time Mercia can provide further funding to the most promising companies, by deploying direct investment follow-on capital from its own balance sheet.

The Group has a strong UK footprint through its regional offices, 19 university partnerships and extensive personal networks, providing it with access to high-quality deal flow. Mercia currently has c.£940million of assets under management and, since its IPO in December 2014, has invested c.£111million gross into its direct investment portfolio.

Mercia Asset Management PLC is quoted on AIM with the EPIC "MERC".

Non-Executive Chair's statement

The successful execution of Mercia's strategy has materially grown shareholder value

Notwithstanding the COVID-19 pandemic backdrop, with all of the ensuing social and economic challenges, the year to 31 March 2021 has been one of positive and profitable progress for Mercia.

#OneMercia

Throughout the year, the Group's senior leadership team demonstrated its business experience, investment expertise and compassion. No staff were furloughed or made redundant, no direct Government support was utilised and no payments were delayed. The excellent reaction and commitment of all staff to the sudden switch to remote working in March 2020, which has largely continued to the present day, has spoken volumes about our #OneMercia culture. Our people define us and it has been a source of huge pride to see them all doing everything they can to support our portfolio companies, and just as importantly, each other.

Direct investment portfolio

It has been an excellent year for our direct investment portfolio, with four cash exits generating £20.3million in realised gains (2020: £nil) and net fair value uplifts across the remaining direct portfolio totalling £10.1million (2020: £15.8million unrealised loss).

The highlight was the exit from our second largest direct investment (by fair value), Oxford Genetics t/a OXGENE, which over a five-year investment period, generated cash proceeds of £30.7million against an investment cost of £6.1million.

The Group's investment experience in Life Sciences, Software and Digital Gaming-related technologies came to the fore during the year, with most of the Group's investees in these sectors making accelerated commercial progress, reflected in their upward fair value movements. Whilst our advanced manufacturing businesses bore the brunt of the sudden global economic paralysis in the early days of the pandemic, they have now largely stabilised and many are now showing renewed commercial traction.

Portfolio liquidity and access to additional capital, when needed, are imperative to preserve shareholder value during economic shocks. I am pleased to say that Mercia has been able to fully support its direct portfolio with additional capital, as required, during this period. In addition, the Group has provided non-executive director/executive director resource, digital marketing support and a series of webinars on subjects relevant to managing a young business through a sharp economic downturn.

The remaining portfolio is showing excellent promise and we expect to add several new companies during the new financial year. With the direct portfolio companies well-funded and in good shape overall, the investment team is fully focused on delivering another year of successful realisations and fair value progress.

This time last year valuations were falling in many of our FuM, in parallel with wider market corrections. Those falls largely stabilised during the autumn of 2020 and it is pleasing to see further material growth in our total AuM for the year as a whole. This is being driven both by new funds raised and improved fund performance.

Strategic update - new three year targets

Set in March 2019, the Group's three-year strategic objectives were centred on making Mercia a self-sustaining investment group. The three principal objectives were:

·    to achieve operating profitability before realised gains, fair value movements and all non-cash charges;

·    to 'evergreen' its balance sheet so that the Group's direct investment activities would be fully funded by periodic cash realisations from the existing portfolio; and

·    to expand the Group's AuM to at least £1.0billion.

Two years in it is very pleasing to see the first two objectives comfortably achieved and the third within touching distance. Even though the existing strategic objectives have one further year to run, Mercia's Board has recently agreed a new and ambitious three-year plan: 'Mercia 20:20'.

'Mercia 20:20': The Group will aim:

·    to grow its AuM by an average of 20% per annum over the next three years; and

·    to deliver average pre-tax profits of £20.0million per annum over the same three-year period.

The achievement of these two new strategic objectives is expected to deliver substantial total shareholder returns during the next three years.

Dividend

On 1 December 2020, in conjunction with the announcement of its interim results, Mercia declared its maiden interim dividend of 0.1 pence per share and the start of a progressive dividend policy. The excellent second-half performance coupled with the Group's future prospects has enabled Mercia's Board to recommend a proposed final dividend of 0.3 pence per share.

If approved by shareholders at September's Annual General Meeting, the dividend will be paid on 12 October 2021 to shareholders on the register at close of business on 24 September 2021.

In anticipation of continued profitable progress in both trading and investment realisations, the Board's objective is a year-on-year progressive increase in both its interim and proposed final dividends.

Governance, sustainability and engagement

Good Board governance, cohesion and a sense of common purpose are vital when navigating any company through turbulent times. In November 2020, we welcomed Diane Seymour-Williams onto our Board. Diane's asset management background, including with Venture Capital Trusts, is an excellent addition to our existing Board skill-set and investment experience. Diane settled in quickly and started making a positive contribution immediately. In recognition of her deep asset management expertise and experience, she has recently been appointed as the Board's Senior Independent Director.

Throughout the year, the Executive Directors (together with the Group's Chief Operating Officer, Peter Dines) and Non-executive Directors have worked constructively together and willingly pooled their varying talents and experiences to steer Mercia through the pandemic. We now wish to incentivise key executives, aligning them with the performance of the business and shareholders' interests. We are therefore intending to put in place a new performance share plan, with stretching performance conditions, for certain senior executives. We believe this will both incentivise those senior executives, and act as a powerful retention tool.

These excellent financial results are testament to the collective efforts of not just the Board, but of each and every Mercia employee.

Critical to our increasing success, is continuing to meet the investment objectives agreed with our different asset class fund investors. Despite the economic shocks of the last year, we have continued to meet our commitments to all our external stakeholders. This has included continuing to hire and train new investment talent, further develop the investment skills of the existing teams whilst supporting them all with lead generation, marketing, investee recruitment resource and in-house legal investment advice. In particular, we have further developed our relationships with the three Venture Capital Trust ("VCT") boards and remain fully focused on, and committed to, investing in and supporting the VCT investment team in helping them to manage and expand the VCT portfolios.

Mercia has always been a responsible investor and many of its fund and balance sheet portfolio companies are developing technologies which help reduce carbon emissions. During the year, we asked Jill Williams, one of our private equity Investment Directors, to become our Head of Environmental, Social and Governance ("ESG"). Jill's passion for ESG and her wide-ranging brief will help Mercia to play its part in minimising our carbon footprint, contributing positively to society's needs, whilst continuing to be guided by a strong governance culture in all our dealings.

Since its inception in 2014, the Group has embedded a strong corporate governance ethic in all its internal and external interactions. As a member of the Quoted Companies Alliance ("QCA") since 2015, and with its fund management operations regulated by the Financial Conduct Authority ("FCA"), Mercia always seeks to act in the best interests of its stakeholders. Proactive engagement with all stakeholder groups remains fundamentally important to our Board. Whilst the intermittent lockdowns and remote working imperatives have curtailed face-to-face engagement during the last year, I look forward to furthering those relationships for the mutual benefit of all stakeholders during the current financial year.

Outlook

These record financial results speak louder than words can about the quality of the business which we have built and the calibre of our people. We greatly appreciate the continuing support and encouragement of our shareholders and advisers and are pleased to be delivering on our potential for shareholder value creation.

With signs of economic normality returning and heightened interest in several of those sectors into which Mercia invests, the future prospects for Mercia have never been better.

Notwithstanding our excellent cash position, we will maintain our investment discipline and focus whilst expanding our regional presence and talent pool. Our new strategic objectives speak to our growing confidence and ambition, and I look forward to updating shareholders this time next year.

Mercia has grown significantly since its IPO on AIM in December 2014, via a combination of organic initiatives and two successful acquisitions. We anticipate that this combined approach will continue during the next three years, thereby increasing total shareholder returns.

Finally, whilst the last 12 months have been challenging and difficult at times, they have exemplified what Mercia represents. As Chair, I am immensely proud to be part of #OneMercia, which continues to be a community of outstanding people who care about the funds we manage, the companies in which we invest or to which we lend, and, most importantly of all, who care about each other. The successful execution of Mercia's strategy by our staff during this tumultuous year has materially grown shareholder value and proved that the Mercia Model works for all stakeholders. Long may that continue.

Ian R. Metcalfe
Non-executive Chair

Chief Executive Officer's Review

The positive momentum of our business during the last 12 months is in part a result of the swift actions taken as the COVID-19 pandemic broke, leading to an excellent year for the Group and one which demonstrates the resilience and potential of the Mercia Model, which is now delivering with continued momentum.

·    Increase in revenue 50.5%¹ (2020: 19.4%)

·    Increase in adjusted operating profit c.550% (2020: n/a)

·    Increase in AuM 17.5% (2020: 57.8%)

·    Direct investment realisations £20.3million (2020: £nil)

·    Direct investment fair value increase £10.1million (2020: £15.8million decrease)

·    Unrestricted cash on hand £54.7million (2020: £30.2million)

·    Total Group unrestricted liquidity c.£314million (2020: c.£320million)

·    NAV per share 40.0 pence (2020: 32.1 pence)

·    Proposed final dividend 0.3 pence per share (2020: nil)

¹      Before net performance fees.

Assets under Management

The 17.5% growth in AuM has arisen from the strong performance of our venture and proprietary capital portfolios, plus net asset value increases from profitable exits.

I am incredibly proud of how the whole team at Mercia have pulled together in this remote working environment, creating new efficiencies in the way we work together, including digitalisation throughout the Group. Much of this positive change, such as digital deal origination, is now embedded and permanent as we move to a blended office / homeworking environment.

There are two elements to the Group's sustainable performance that interleaf in a highly synergistic manner. Our growing managed funds operations selectively deliver future direct investments, provide strong returns for our valued fund investors and Northern VCT shareholders, and underpin Mercia's progressive dividend policy. Connected tightly to this is our proprietary capital which selectively seeds new managed funds, accelerates the growth of promising businesses in our managed funds and provides ongoing growth capital to our direct investments. This has enabled us to deliver growth in NAV per share in the year of 24.6% and a blended direct portfolio IRR of c.15% since Mercia's IPO in 2014.

Resetting our strategic goals: 'Mercia 20:20'

Having largely delivered on the strategic targets set in 2019 one year ahead of plan, ie grow AuM to £1.0billion, move the Group to sustainable profitability and evergreen the balance sheet, it is now right to set new three-year strategic goals. We remain ambitious to deliver significant long-term growth in shareholder value and our new strategic objectives in Mercia 20:20 are aligned with this goal. Over the next three years, on average, we will aim to grow total AuM by 20% per annum and deliver £20.0million profit before tax per annum.

First choice for investors, investees and employees

Mercia's hybrid investment model has now achieved critical mass as the synergies deliver both growth in underlying profit from the fund management operations and the returns from our proprietary investment activity. This self-financing model enables Mercia to compete domestically on a regional basis across the UK. Our focus is simple - develop a model, systems and internal expertise to source the best deals, win the deals, buy well, accelerate value creation through direct support and then exit those investments for the benefit of our fund investors, management teams and shareholders.

Mercia's competitive advantage stems from our passion of concentrating on two key connected themes: (i) responsible investor and (ii) responsible employer, which are reinforced by our core values of Growth, Knowledge, Responsive and Trust.

Responsible Investor

Our origin and focus is to invest exclusively in the UK, targeting what we term as 'Thriving Regional Businesses' that are seeking capital in the form of debt, private equity, venture capital or a combination of these. Physically located in the regions, we employ locally for Mercia and our portfolio. The high-growth companies we support are typically less than 10 years old, often seeking capital of less than c.£50million in total and are frequently overlooked by most capital providers.

Our focus is the provision of finance and support for these businesses with ESG at the heart of our operation. Not only do we have an ESG team at Mercia capably led by Investment Director Jill Williams, but this emphasis also cascades from the Board throughout the Group. The ESG team have set 'diversity' for Mercia, and its portfolio companies, as their priority for this coming financial year. In addition to our investment activities, we also operate Mercia Spirit where employees give their time and raise money to support local and national causes. Our nominated charities are Cancer Research UK and The Skills Builder Partnership, the latter targeted at helping regional schools. An additional resource, which is not charged to Mercia's portfolio, is the provision of training, webinars, marketing services and executive search (for board, executive and senior management level) via our Marcomms team led by our Head of Marketing and Communications, Alison Dwyer and by our Head of Portfolio Resourcing, Lisa Ward.

Responsible employer

Fundamentally we are only as good as the people we attract, employ and retain. Our People and Talent team led by Michelle Heaselgrave are exceptional and, combined with the benefits and support we provide to our teams, we believe that Mercia is becoming a first-choice employer. Our strong focus on group-wide communications ensures aligned Group performance by a motivated team; what we term #OneMercia. In addition, we will constantly strive to develop our team further. Our Mercia Academy is an important part of this, and we are recruiting to build out the People and Talent team to provide additional internal expertise to lead on talent development.

Outlook

This last year has seen venture businesses in Diagnostics, Biotech and Software sectors excel. These sectors have delivered the majority of both the Group's investment realisations this year and net asset value growth. The 10 profitable fund and direct investment exits in this reporting period are a record for Mercia and derived from our regional venture funds, Enterprise Investment Scheme ("EIS") funds and the Northern VCTs; three of the 10 also benefitted from our proprietary capital. This excellent performance puts us in a strong position for continued growth in all asset classes within our third-party FuM.

Certain businesses operating within Deep Tech and Clean Tech, including in the Automotive sector, were negatively impacted by the pandemic back in March 2020. During the year, we focused hard on supporting these businesses, however not all of the fair value decreases from last year have reversed. Our investment thesis is that these sectors that were hurt the hardest last year will in due course recover. We passionately believe in investing through the cycle and during the year we have invested £94.4million across the Group in 76 new businesses and 97 existing portfolio companies. A number of these were in Deep Tech, Clean Tech, Life Sciences and purpose-led businesses; sectors we believe will be core value creators in the near to medium-term future.

Economists forecast UK domestic growth of between 5% to 8% for 2021. This is an excellent backdrop for Mercia and its portfolios as we begin the new financial year with confidence in our new Mercia 20:20 vision, whilst ensuring we remain both a responsible investor and employer as we continue to seek to be the first choice for investors, investees and employees.

Dr Mark Payton
Chief Executive Officer

Chief Investment Officer's review

Powered by people

I don't think any of us will forget the last 12 months. We look forward to a return to 'normality', however, it has to be said that many of the new ways of working, interacting, purchasing and consuming, adopted during the pandemic, have made us more efficient and are here to stay as the bedrock of continued growth. We have witnessed fundamental changes to the way our healthcare is delivered and to the speed of development of medical solutions. We have become acutely aware of the rapid change towards a low-carbon environment and, within that, our social responsibilities to others.

Mercia has emerged from the last 12 months in a very strong position. We have transacted 10 profitable exits across our funds and proprietary capital, returning c.£103million. Three of these companies were also held as direct investments, providing liquidity of £37.0million for the Group, and in so doing, achieving our key aim of evergreening the direct portfolio. This is down to the excellent entrepreneurs and management teams we back and I would like to thank them all for their tremendous efforts this last year.

We have continued to invest to accelerate value creation; helping to build management teams by adding experienced chairs, non-executive directors, financial directors and venture partners, and by developing our network of like-minded co-investors. Our venture partners, funded by Mercia, provide short-term input for example, to redesign sales processes, fine-tune routes to market strategies or technology roadmaps.

We developed a digital engagement platform to enhance our origination efforts, including webinars and online sessions between founders and investment professionals. These will be a permanent feature of our business and a positive example of the applied learnings and structural changes arising from the pandemic. We have also undertaken comprehensive training for our investment staff.

Direct investments - four exits and value creation through operational progress

As at 31 March 2021, the value of the Group's direct investments was £96.2million (2020: £87.5million). This reflects an upward movement in fair value of £10.1million after net investment of £15.4million (2020: £15.7million) and adjusting for the four realisations: Crowd Reactive, The Native Antigen Company, Clear Review and OXGENE, which accounted for £15.9million of fair value as at 31 March 2020.

We recorded unrealised fair value gains in Voxpopme £1.6million, Impression Technologies £1.9million, Faradion £1.2million, MyHealthChecked £3.5million and Soccer Manager £0.2million, in line with our policy, which follows the International Private Equity and Venture Capital Valuations Guidelines ("IPEVCVG"). The fair value gains in Voxpopme relate to third-party investment and in Impression Technologies, to the acquisition of a co-investor's stake. Faradion's uplift results from third-party value indicators, and MyHealthChecked saw its share price increase as a result of significant commercial progress.

Automotive-related assets that saw reductions in March 2020 due to COVID-19, primarily Warwick Acoustics and Impression Technologies, are seeing renewed interest from original equipment manufacturers ("OEMs"). Eyoto has not yet seen a meaningful recovery and we have reduced its valuation by £0.4million reflecting delays in Food and Drug Administration ("FDA") approval for its slit lamp product, with a consequent impact on revenues.

Investment activity

We continued to support our largest and most promising assets with capital and resource. £10.3million of the £15.4million invested was allocated to our top 10 assets. We also made use of the Future Fund, with a further £14.8million invested. Our aim remains to build equity stakes of between 20%-40% in the majority of our direct investments.

We made two new direct investments during the year: Sense Biodetection and MIP Diagnostics, both from our EIS funds.

MIP Diagnostics received initial investment of £0.3million as part of a £5.1million syndicated commitment resulting in a 3.3% direct stake in addition to the c.30% fully diluted stake held through our managed funds. MIP Diagnostics is a spinout from the University of Leicester, which has developed a proprietary process to provide molecular imprinted polymers to the vitro diagnostic, bioprocessing and oil and gas industries. The company recently announced a partnership with Stream Bio to develop a rapid COVID-19 detection assay.

Sense Biodetection is focused on the development of instrument-free point-of-care molecular diagnostics. Post investment, we hold a 1.2% fully diluted direct investment in addition to a 9.1% fully diluted stake in our managed funds. In 2020, Sense Biodetection raised a $50.0million Series A round and announced an accelerated programme to launch an instrument-free, point-of-care molecular diagnostic test for COVID-19, partnering with Phillips-Medisize to scale up production.

Direct investments: operational highlights

nDreams, Voxpopme, Intechnica, Soccer Manager, Virtrade, sureCore, Faradion, Medherant and W2 Global Data Solutions all achieved increased revenues during the year. Other measures of progress across the portfolio included new license deals at Impression Technologies, Medherant and sureCore, acquisitions at MyHealthChecked and Locate Bio, syndicated investment by Voxpopme and technical progress at Faradion, Locate Bio and Medherant. Highlights include:

·    nDreams saw revenues up c.30% and continued strong partnerships with virtual reality ("VR") hardware providers. The VR market saw progression with the successful release of the Quest 2 headset from Oculus.

·    Medherent, the transdermal drug-delivery company, secured an additional large pharma evaluation agreement and completed a syndicated investment round of £2.8million. 

·    Intechnica's e-commerce consultancy business had a record year, and its Netacea bot-management business continues to attract excellent reviews, blue-chip customers and increase its recurring revenue.

·    Soccer Manager, now in our top 10, benefited from new investment and focus showing c.40% revenue growth from its mobile football games and expects further growth from the launch of the 2022 season game.

Exits

We achieved four exits from our direct portfolio delivering £37.0million in cash receipts, alongside a further £17.1million in proceeds from these assets to our managed funds.

·    The Native Antigen Company was sold to LGC, a global leader in the Life Sciences Tools sector, for £18.0million generating an 8.4x return on investment cost and a c.65% IRR for our direct holding. Mercia first invested in The Native Antigen Company in 2011 through its third-party managed funds and from its balance sheet in December 2014. The sale generated a 12.1x return on a blended third-party managed funds investment cost and a c.31% funds IRR.

·    Clear Review was sold to Advanced Business Software and Solutions Limited for £26.0million representing a c.2x return on investment and a c.72% IRR. The sale also resulted in a c.8x return on Mercia's EIS managed fund investment cost and a c.122% fund IRR. Clear Review was first backed by Mercia's managed funds in 2018 before becoming a direct investment in June 2019.

·    In March, we announced Mercia's largest exit to date from OXGENE that was sold to international Life Sciences group WuXi App Tec. Mercia held a 32.1% direct holding in OXGENE and received cash proceeds of £30.7million. The sale resulted in a realised gain of £18.0million above OXGENE's £12.7million direct investment holding value at the date of sale. The sale generated a c.5x return on Mercia's direct investment cost and a c.51% IRR. The sale also generated returns of between c.13x and c.20x return on Mercia's EIS managed fund investment costs.

·    We also exited Crowd Reactive through a partial repayment of our investment, realising the holding value of £0.2million as the pandemic brutally curtailed all activity in the events sector.

NAV growth across our funds led by the Northern VCTs

Our managed funds as at 31 March 2021 totalled c.£764million. In the year, we invested £79.0million in 173 businesses, including 76 new companies. Our third-party managed funds have all shown a good performance in the second-half of the financial year with significant increases in NAV.

At the end of the period, we had c.£314million of liquidity across all our funds and proprietary capital.

A total of seven profitable exits were completed in the year, delivering a total of £66.0million in returns to fund investors.

Mercia's debt funds team saw a significant uplift in enquiries in the year completing 70 transactions (2020: 46) and investing a total of £16.8million, of which £13.7million was provided to 48 new businesses. The Group announced an extension of its Northern Powerhouse Investment Fund ("NPIF") debt mandate, which was increased by a further £30.6million and Mercia's SME Loans Fund was launched in mid-September, providing up to a further £45.0million to lend over five years. This fund is backed by the Greater Manchester Pension Fund.

Our Northern VCTs showed NAV reductions of c.22% at March 2020, however this has now more than fully recovered, driven in large part by exits from Agilitas, It's All Good and the listing of musicMagpie, alongside significant growth in other assets including Oddbox, Currentbody.com and SHE Software.

Agilitas delivers managed inventory solutions and services and is based in Nottingham. Mercia's Northern VCTs initially invested £6.4million in a management buyout, and over the next six years backed the business' ambitious plans. Agilitas delivered double-digit annual growth through continued innovation and was sold to private equity investor Perwyn, providing a c.8x return.

Gateshead-based It's All Good, which makes snacks, including the Manomasa range, was acquired by Valeo Foods Group in December 2020. Mercia's Northern VCTs first invested in February 2014. It's All Good was one of Alantra's Food & Beverage Fast 50 and one of the UK's fastest-growing privately-owned food and drinks businesses.

Oddbox is a social impact business fighting food waste on farms by offering a fruit and vegetable box delivery service. Oddbox has a strong management team with significant experience from global brands. Mercia's Northern VCTs initially invested £2.0million in March 2020 to support growth outside of London.

The Northern VCTs completed 22 transactions, including investing in two new businesses, Enate and Moonshot, and 13 follow-on investments. Complete Connected Capital investments included Newcells Biotech alongside the North East Venture Fund ("NEVF"), Currentbody.com alongside Mercia's debt funds and Voxpopme, one of Mercia's direct investments that has also received investment from Mercia's EIS funds.

Mercia's EIS funds completed 53 transactions across 21 businesses of which four were new. This was a strong year for EIS exits and with increased deal enquiries in Medtech, AI and Software as a Service ("SaaS) businesses reinforcing the dynamics seen across the Group with growth of these sectors strongly influenced by COVID -19.

NEVF invested in 11 companies, six of which were new. Newcells Biotech and Elmtronics are two purpose-led businesses that exemplify Mercia's investment agenda to support more businesses that have a viable business model and are aligned to the sustainability agenda. The strength of Mercia's networks can be seen in the co-investment into whocanfixmycar.com, which has an impressive external syndicate including Shell Ventures and Active PE.

In keeping with Mercia's stated policy of being a responsible investor, the entire Midlands Engine Investment Fund ("MEIF") portfolio falls within our stated guiding principles of sustainable economic growth and reducing inequalities in our communities. A key strand of this is to promote diversity and inclusion and we have three female-led companies in the portfolio and two with ethnically diverse founding-management teams. MEIF has a number of purpose-led investments falling under the banner of 'health and well-being for all', encompassing not only Life Science companies, but also those with an environmental focus. MEIF made six new investments this year within 22 transactions in total.

NPIF Equity invested £23.0million into 50 companies of which 20 were new to the portfolio. Growth within the portfolio was seen in the Digital, Life Sciences and Software sectors. NPIF co-investment included Mercia's direct investments Intechnica, Faradion and Soccer Manager that all traded strongly during the pandemic. New portfolio businesses that benefited both in terms of NPIF investment and from the experience of Mercia's investment team and support structures to leverage the changing consumer and business demand were: The Logically, that identifies misinformation online using AI and expert analysts, SockMonkey Studios, an award-winning gaming studio that works on top titles across all major platforms and Bubo.AI, the only AI-driven solution for a customer value-based pricing strategy for wholesalers and distributors. Both SockMonkey Studios and Bubo.AI are Teesside-based and epitomise Mercia's capability of finding and investing in thriving regional businesses.

Post period events

Post year end, we invested £0.5million in Medherant alongside current co-investors, including our managed funds to continue commercial progress, and £0.3million in Eyoto as it progresses its FDA approval process.

Following initial investment through the Northern VCTs in 2015, musicMagpie launched its £208.0million IPO on AIM in April 2021. Upon IPO, our three Northern VCT holdings were valued at £51.7million, of which half was immediately realised in cash and the unrealised portion held in shares. The total amount invested into musicMagpie via the Northern VCTs was £4.5million. The total return was 11.6x, with an internal rate of return of 58%.

As announced on 23 June 2021, strong FuM portfolio performances during the year have triggered net performance fees of £3.8million.

Summary and looking forward

As Chief Investment Officer it is important to step back and look at the sustainable themes, steering our investment toward the areas where we see longer-term structural changes and growth.

We believe that businesses will continue to look at their own efficiency and security and we have seen a real focus on sales, business development and supply chains, to the health and safety of staff. We have significant exposure to these areas across our portfolios.

We see continued opportunity in Digital, Healthcare and Digital Gaming. We expect continued moves to remote data-based healthcare, and have recently invested in Naitive Technologies, an early-stage business exposed to this trend.

Our e-commerce businesses prospered over the last year with Northern VCT assets musicMagpie, Currentbody.com and Oddbox showing rapid growth and we continue to believe that these areas will do well.

Within our Deep Tech and Manufacturing assets, we are well positioned for the 'Electric Revolution' having invested in this area for the last 10 years. While Warwick Acoustics and Impression Technologies were initially impacted by the pandemic, the 2030 ban on new petrol and diesel cars has created significant opportunities. Elmtronics from NEVF is an installer of electric charging points and progressing well, as is Midlands-based Acceleron, which enables individual battery cells to be replaced as charge efficiency drops.

This reporting year has demonstrated the resilience of our business and our people and I would like to thank all my great team members at #OneMercia for their efforts over this last extraordinary year. I am very optimistic for our portfolio companies of which we now have c.430 assets, with significant liquidity to make new fund investments and direct investments. I am confident that we will continue to grow in the new financial year.

Julian Viggars
Chief Investment Officer

Chief Financial Officer's review

Record results and accelerating momentum

Profit/(loss) before taxation

£34.0m
2020: £17.6m loss

Net assets
£176.0m
2020: £141.5m

Net assets per share

40.0 pence

2020: 32.1 pence

Unrestricted cash*
£54.7m
2020: £30.2m

* Including short-term liquidity investments.

Despite the challenging health and economic backdrop, the year to 31 March 2021 was one of significant strategic and profitable progress for Mercia Asset Management PLC. Furthermore, the Group's financial performance was achieved without having to apply for any Government-backed financial support, delay any payments to HMRC or suppliers, impose any pay cuts or make any of our valued staff redundant as a result of the pandemic.

Trading performance

The financial year comprised four very distinct quarters, in terms of the impact of the pandemic on the Group's operating performance and thus both its interim and full year results.

In the first quarter to 30 June 2020 Mercia was, like the rest of the United Kingdom, in lockdown. With the three Northern VCTs having already announced net asset value write downs averaging 22% as at 31 March 2020, Mercia experienced lower asset price linked VCT fund management revenues as a direct consequence. From an investment portfolio perspective, new deal flow (and with it initial management fee revenue) largely ceased across all asset classes and Mercia's focus immediately switched to preserving value within the portfolios and supporting investee management teams. Where deemed appropriate, director monitoring fees were deferred and loan repayment holidays were granted on a case-by-case basis. With all staff working from home and no face-to-face meetings permitted, the Group's expenditure immediately reduced. The challenge of recruiting new staff remotely also had an immediate impact on both timing and cost. During this challenging quarter for the whole UK economy, the Group exited its investment in Crowd Reactive at its holding value of £0.2million.

In the second quarter to 30 September 2020, the revenue and cost dynamics of Mercia's 'new normal' stabilised. Whilst revenues continued below previously anticipated levels, Mercia's cost base also remained materially lower than budgeted. Remote working continued to impact both deal flow and recruitment timing. More broadly, portfolio sector growth trends began to emerge, funding strategies for each of Mercia's portfolio companies were determined and the fair value of the vast majority of the Group's funds and balance sheet assets showed promising signs of stability and in some cases, recovery. The Group's debt funds division became CBILS accredited, leading to a significant increase in the number of loan applications. The Group's consolidated interim results, which included a full six months' contribution from its December 2019 VCT fund management acquisition, reflected a satisfactory first-half performance with lower costs more than offsetting the relatively subdued revenues. Throughout the first six months, Mercia's staff worked tirelessly to support the Group's c.430 investees and each other. Towards the end of the second quarter, signs of recovering momentum across the Group became evident as Mercia's timely digital marketing pivot gained traction, with greater focus on social media 'Complete Connected Capital' brand awareness campaigns, alongside the increasingly popular 'Meet the Funder' virtual events. The second quarter's performance was enhanced by the Group's profitable exit from The Native Antigen Company, ultimately realising a gain in excess of holding value of £1.8million.

In the third quarter to 31 December 2020, asset price linked VCT fund management revenues recovered to their pre-pandemic levels and investment activity picked up in earnest, although the timing of the recovery in investment momentum differed asset class by asset class. Director monitoring fees from investees, which had either been deferred or provisioned against during the first half year, started to be paid with initial management fee income also increasing quarter on quarter. Whilst the Group's overhead cost base remained largely flat, recruitment efforts in earlier months began to bear fruit. Sector by sector, growth trajectories started to become clearer. For those sectors showing the fastest growth trends (in particular Life Sciences, Software and Digital Gaming), asset values and interest grew in Mercia's most exciting investee companies. Although held for less than two years as a direct investment, the Group accepted a full offer for Clear Review, resulting in a realised gain in excess of holding value of £0.5million.

During the final quarter of the financial year to 31 March 2021, Mercia's long-held potential emerged. Revenues fully recovered, helped in part by elevated investment activity towards the tax year end, deal flow increased further as Mercia's marketing pivot bore fruit, long-running recruitment efforts succeeded in attracting new talent into the Group and the excellent continuing work of all staff, still mainly working remotely, helped maintain its operational efficiency and leverage. A year of remarkable ups and downs culminated on 1 March 2021, when Mercia announced the sale of OXGENE for a substantial realised gain over holding value. The Group subsequently provided a positive trading update which included guidance on a much higher year end closing cash position.

The more detailed financial analysis which follows therefore only tells part of the story of what was a breakthrough year for Mercia.

Adjusted operating profit - alternative performance measure ("APM")

The Group has always believed that the measurement and reporting of the difference between its revenues and total operating costs, excluding realised gains on disposal of investments, unrealised fair value movements, one-off items and non-cash charges, is an important APM of interest to shareholders.

On 1 April 2020, the Group adopted 'adjusted operating profit' as a more generally recognised APM for specialist asset managers, compared to its historic 'net revenues' APM. Adjusted operating profit is defined as operating profit before performance fees net of variable compensation, realised gains on disposal of investments, fair value movements in investments, share-based payments charge, depreciation, amortisation of intangible assets, movement in fair value of contingent consideration and exceptional items.

From Mercia's perspective and for comparison purposes, the difference between the historic measurement of net revenues and adjusted operating profit, is that the latter includes net finance income and excludes depreciation.

Results reported on an APM basis are denoted by ¹ throughout this review. The table below provides a bridge between the two APMs for the years ended 31 March 2021 and 2020.

The Directors believe that the reporting of adjusted operating profit assists in providing a consistent measure of operating performance, excluding distortions which can be caused by the reconciling items set out below for both the current and comparative years.

A reconciliation of results reported on an APM basis to International Financial Reporting Standards ("IFRS") is as follows:

Revenue

Revenue¹ increased 50.5% to £19,186,000 (2020: £12,747,000) and comprised fund management related fees, initial management fees from investment rounds, investment director monitoring fees and sundry business services income. The majority of the increase was due to the first full-year contribution from the Northern VCT fund management business, which was acquired in December 2019.

Administrative expenses

Administrative expenses¹, excluding depreciation, increased 25.6% to £15,897,000 (2020: £12,661,000) and comprised predominantly staff-related, office, marketing and professional adviser costs. The majority of the increase was also due to the first full-year incremental operating costs of the acquired VCT fund management business. The increase was lower than might otherwise have been expected due to the pandemic's impact on the time taken to recruit additional budgeted staff across the Group's activities, as well as travel-related and other cost savings arising from the prolonged working from home requirements.

As Mercia's assets under management grow and the financial benefits of operational leverage continue to be realised, the Group will ensure that an appropriate balance is kept between its investment expertise and its support functions' capacity and capability, to maintain its control environment and corporate governance culture.

Net finance income

Gross finance income of £68,000 (2020: £246,000) comprised interest earned on the Group's cash and short-term liquidity investments in addition to interest received on loans to direct portfolio companies which converted into equity instruments during the year. Finance costs of £20,000 (2020: £26,000) comprised interest payable on office leases.

Performance fees and attributable variable compensation

Performance fees and 'house' carried interest can become receivable from certain of the Group's fund management mandates, when pre-determined performance hurdles are exceeded. In the case of the Group's EIS funds, where performance hurdles are exceeded and a performance fee is receivable, a bonus scheme is in place predominantly for those staff involved in the raising, investment and administration of each EIS fund. Performance fees totalling £635,000 (2020: £nil) became receivable from four of the Group's EIS funds during the year, as the investment returns each exceeded their performance hurdle. Attributable staff bonuses (including employer's National Insurance) totalled £325,000 (2020: £nil).

During the year a performance fee totalling £284,000 (2020: £nil) was received from Northern Venture Trust PLC, based upon the growth in its net asset value per share above a hurdle for the year to 30 September 2020. As at 31 March 2021, performance fees totalling £3,305,000 (2020: £nil) became payable from Northern 2 VCT PLC and Northern 3 VCT PLC. Incremental VCT investment team bonuses (including employer's National Insurance) totalling £120,000 have also been accrued (2020: £nil).

Adjusted operating profit excluding net performance fees increased by £2,819,000 to £3,337,000 (2020: £518,000) largely, although not exclusively, as a result of the overall first full year contribution of the acquired VCT fund management business.

Realised gains on disposal of investments

During the year, realised gains totalling £20,251,000 (2020: £nil) arose on the disposal of The Native Antigen Company, Clear Review and OXGENE.

On 9 July 2020, Mercia announced the profitable sale of The Native Antigen Company followed by, on 19 October 2020, the profitable sale of Clear Review. The Group recognised realised gains of £1,755,000 and £543,000 respectively.

On 1 March 2021, Mercia successfully delivered the strategic objective of 'evergreening' its balance sheet through the profitable sale of OXGENE realising £30,696,000, crystallising a total realised gain for the year as a whole of £17,953,000. This realisation generated a 5x return on Mercia's direct investment cost of £6,129,000 and a 51% internal rate of return.

The Group also disposed of its investment in Crowd Reactive during the year, recovering its £150,000 holding value.

Fair value movements in investments

Net fair value increases during the year totalled £10,088,000 (2020: £15,844,000 decrease) and as at 31 March 2021, the fair value of the Group's direct investment portfolio was £96,220,000 (2020: £87,471,000). For the year as a whole, unrealised fair value gains arose in 11 (2020: four) out of the Group's 23 (2020: 25) direct investments. The largest fair value gain was in respect of MyHealthChecked, which accounted for £3,509,000 of the total (2020: £1,582,000 fair value gain in respect of OXGENE). There were four (2020: 10) fair value decreases, the largest being £439,000 which arose in respect of Eyoto (2020: £5,313,000 fair value decrease for Warwick Acoustics).

Share-based payments charge

The £543,000 non-cash charge (2020: £528,000) arises from the net increase in the total number of issued share options held by employees throughout the Group, ranging from 28 August 2018 to 31 March 2021.

Amortisation of intangible assets

The amortisation charge for the period of £2,317,000 (2020: £852,000) represents amortisation of the acquired intangible assets of both Enterprise Ventures Group Limited (''Enterprise Ventures'') and the VCT fund management business. The Enterprise Ventures intangible asset is now fully amortised.

Movement in fair value of contingent consideration

The VCT fund management total purchase price has a number of contingent consideration elements payable over a three year period. The total contingent consideration was fair valued at the date of acquisition. The charge to the income statement represents the unwinding of the discount on the first contingent consideration payment made in December 2020 (2020: £nil).

Taxation

The Group continues to utilise those historic trading losses which are available to set off against current year taxable profits. The overall tax credit comprises the unwinding of the deferred tax liability in respect of both the Enterprise Ventures and VCT fund management acquisitions. The Enterprise Ventures deferred tax liability was fully unwound in the year to 31 March 2021.

Total comprehensive profit for the year

The adjusted operating profit, net performance fees, realised gains made on the sale of The Native Antigen Company, Clear Review and OXGENE, together with net fair value increases for the year all contributed favourably to a record consolidated total comprehensive profit of £34,458,000 (2020: £17,454,000 loss), resulting in basic earnings per Ordinary share of 7.83 pence (2020: 5.11 pence loss per share).

Dividends

The profitable and operating cash generative first-half performance, together with its future prospects, enabled Mercia to declare and pay a maiden interim dividend of 0.1 pence per share; a landmark moment in the Group's evolution as a proactive, regionally focused, specialist asset manager. The even stronger second-half performance now enables Mercia's Board to recommend a proposed final dividend of 0.3 pence per share. If approved by shareholders at September 2021's Annual General Meeting, the total first year dividend will represent a yield of approximately 1% (2020: nil).

Balance sheet and cash flows

Net assets as at 31 March 2021 of £176,021,000 (2020: £141,460,000) were predominantly made up of goodwill, acquired VCT fund management contract related intangible assets, the direct investment portfolio and unrestricted cash. The Group continues to have limited working capital needs due to the nature of its business and generated net operating cash inflow of £5.6million (2020: £0.3million net inflow).

Intangible assets

The Group's intangible assets consist of goodwill and intangible assets recognised on the acquisitions of Mercia Fund Management Limited, Enterprise Ventures and the VCT fund management business.

Direct investment portfolio

During the year under review, Mercia's direct investment portfolio grew from £87,471,000 as at 1 April 2020 (2020: 1 April 2019 £87,659,000) to £96,220,000 as at 31 March 2021 (2020: 87,471,000), a 10% increase notwithstanding the significant cash realisations achieved during the year.

The Group invested £15,397,000 net (2020: £15,656,000) into 17 existing and two new direct investments (2020: 17 and one respectively). The quantum of direct investment activity seen in the second half of the financial year was lower than the first half, as the majority of the direct portfolio are sufficiently well funded through to at least the end of 2021.

The table below lists the Group's top 20 direct investments by fair value as at 31 March 2021, including a breakdown of the net cash invested during the period, investment realisations, realised gains, net fair value movements and the fully diluted equity percentage of each company invested in at the year end. The Group's top 20 direct investments represent 98.5% of the total direct investment portfolio value (2020: 98.3%).

Cash and short-term liquidity investments

At the year end, Mercia had cash and short-term liquidity investments totalling £54,725,000 (2020: £30,186,000) comprising cash of £54,491,000 (2020: £23,971,000) and short-term liquidity investments of £234,000 (2020: £6,215,000). The Group also separately held £2,484,000 (2020: £467,000) on behalf of third-party EIS investors. The overriding emphasis of the Group's treasury policy remains the preservation of its shareholders' cash for investment, corporate and working capital purposes, not yield. At the year end the Group's cash and short-term liquidity investments (which is cash on deposit with maturities between three and six months) were spread across four leading United Kingdom banks.

The summarised movement in the Group's cash position during the year is shown below.

Net assets

Net assets at the year end were £176,021,000 (2020: £141,460,000), resulting in net assets per share of 40.0 pence (being net assets of £176,021,000 divided by 440,109,707 shares in issue) (2020: 32.1 pence, being net assets of £141,460,000 divided by 440,109,707 shares in issue).

Outlook

It has been a year of many financial twists and turns for Mercia. These record results are a credit to everyone involved in the activities of the Group and just reward for our many patient and loyal shareholders. The Group's second-half momentum and profitable trading has continued into the first few months of the new financial year.

Venture investing does take time to produce positive results, but the three profitable cash exits from the direct investment portfolio during the year to 31 March 2021 demonstrate the potential for continuing incremental shareholder value creation. Taken together, the Group's growing trading profitability and positive operating net cash inflow underpin our recently established progressive dividend policy.

Notwithstanding the worrying times for everyone during the past year, these results show that it is now an exciting period for all Mercia stakeholders.

Martin Glanfield

Chief Financial Officer