Mercia Annual Report 2024

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The specialist

alternative asset

manager

Annual Report and Accounts 2024

Powering ambition

£1.8bn

Assets under management

2023: £1.4bn

Our vision is to be the first choice for our investors,

investees and employees.

We are trusted to deliver for all of our stakeholders. Fuelling UK

business ambitions and forging long-term partnerships, we provide

venture capital, debt and private equity investment ranging from

£100,000 to £20million, to accelerate growth and impact.

Strategic report

Highlights

Non-executive Chair’s statement

s172 compliance

Chief Executive Officer’s review

Strategy

Strategy in action

Sustainability and corporate

governance

People and talent

Impact investment

Chief Investment Officer’s review

Chief Financial Officer’s review

Principal risks and uncertainties

Governance

Board of Directors

Directors’ report

Statement of Directors’

responsibilities

Corporate governance report

Remuneration report

Financial statements

Independent auditor’s report

Consolidated statement of

comprehensive income

Consolidated statement of

financial position

Consolidated statement of

cash flows

Consolidated statement of changes

in equity

Notes to the consolidated financial

statements

Company balance sheet

Company statement of changes

in equity

Notes to the Company financial

statements

Other information

103 Directors, secretary and advisers

104 Notice of Annual General Meeting

Annual Report and Accounts 2024 Mercia Asset Management PLC

Strategic report

Operational highlights

•

Over £0.5billion of organic funds under management inflows with no redemptions (2023: £0.1billion)

– Awarded five British Business Bank regional mandates totalling c.£360million as part of the Midlands Engine Investment Fund II

and the Northern Powerhouse Investment Fund II

– Successful £60.0million fundraise by the Mercia-managed Northern Venture Capital Trusts, with allotments completed in

December 2023 and April 2024

•

Unrestricted liquidity of c.£713million across both the balance sheet and managed funds (2023: c.£378million)

•

Profitable realisation of direct portfolio investment nDreams Limited, bringing £26.4million of cash back to the Group’s debt-free

balance sheet

•

In excess of c.£225million invested and lent by Mercia-managed funds (2023: c.£144million)

Financial highlights

£30.4m

Revenue

2023: £25.9m

£5.5m

EBITDA

2023: £5.2m

£189.2m

Net assets

2023: £202.9m

0.55 pence/share

Proposed final dividend

2023: 0.53 pence/share

£46.9m

Cash

2023: £37.8m

43.4 pence

Net assets per share (“NAV”)

2023: 45.4 pence

Mercia Asset Management PLC Annual Report and Accounts 2024

Non-executive Chair’s statement

Throughout the year under review, Mercia has continued to

mature and advance.

In spite of the global and domestic market backdrop, across our

equity investing and lending asset classes, the Group achieved

record fund inflows of c.£562million during the year, taking our

total assets under management (“AuM”) to c.£1.8billion, almost

double where we were three years ago.

In 2022, we welcomed Frontier Development Capital Limited

(“FDC”) into our Group. Mercia’s third acquisition since its Initial

Public Offering in 2014, FDC comprises an excellent, well-run

team, with strong investor and lending relationships. FDC

continues to perform well and we were all particularly pleased

to see them be awarded their first British Business Bank (“BBB”)

debt mandate in February this year.

Board focus

Good governance is fundamental to the long-term success

of any company, as well as maintaining a close watch on the

horizon and evolving market dynamics. Since our early days as

a public company, we have always recognised the importance

of covering our total cost base with our revenues, thereby

preventing annual shareholder value erosion and excessive cash

burn. This has led to our increasing focus on growing the high

quality, recurring revenues of our profitable fund management

operations – both organically and by acquisition. During this

final year of ‘Mercia 20:20’, in conjunction with external advisers,

the Board spent a considerable amount of time focusing on the

Company’s most appropriate future direction of travel.

Proposed reclassification as a trading company

When Mercia was admitted to trading on the AIM Market of

the London Stock Exchange (“AIM”) in December 2014, it was

established as a proactive, specialist asset manager focused

on supporting regional small and medium-sized enterprises

(“SMEs”), to achieve their growth aspirations. As such, under the

AIM Rules, Mercia was treated as an investing company. At that

time, Mercia’s net assets were c.£81million, considerably greater

than its c.£23million of third-party funds under management.

Since its admission to AIM, the Company has successfully grown

both its balance sheet and its funds under management (“FuM”).

As at 31 March 2024, Mercia had 22 direct investments fair valued

at £116.9million, net assets of £189.2million and had grown

its FuM to c.£1.6billion. FuM now dwarf net assets, the largest

component of which is the direct investment portfolio.

As the Board looks to the future, and refreshes its three-year

strategic plan, Mercia’s intention is to focus much more on our

profitable and fast-growing FuM. Our intention therefore is no

longer to make new direct investments from our balance sheet.

We will continue to support our existing direct investments, but

anticipate that their number will reduce as these investments

are realised.

In considering these proposed changes, we believe it is more

appropriate to characterise Mercia as a trading business, whose

principal business operation is one of asset management. If held

for more than two years, the shares of most trading companies

on AIM may currently be inheritance tax exempt. As such, at

the Annual General Meeting (“AGM”) on 26 September 2024, we

will be proposing a resolution that the Company ceases to be

an investing company under the AIM Rules. Notice of the AGM

(including further details of this proposal) is set out on pages

104 to 108 of this Annual Report.

Ian R Metcalfe OBE

Non-executive Chair

Natural

evolution

Annual Report and Accounts 2024 Mercia Asset Management PLC

Strategic report

As a Board, we unanimously believe that our proposed new

strategic direction is the right one for all of our stakeholders, be

they our many longstanding fund investors, our Venture Capital

Trusts (“VCTs”), our employees and, critically, our shareholders.

If the resolution is approved by our shareholders in September

2024, Mercia’s new twin strategic objectives will be to increase

AuM to in excess of £3.0billion whilst doubling EBITDA during

the next three years to 31 March 2027.

Shareholder returns – dividends and share buyback

As part of our strategy to create value for shareholders, we have

a strong desire to make cash returns to shareholders, funded from

both our trading activities and direct investment realisations. We

adopted our progressive dividend policy in December 2020, when

the Group declared its maiden interim dividend of 0.10 pence

per share. Since then, Mercia’s continued progress has merited

measured increases in both the interim and final dividends. Last

December, the Group paid an interim dividend of 0.35 pence per

share and is now recommending a final dividend of 0.55 pence

per share, representing a total dividend of 0.90 pence per share

for the full year (2023: 0.86 pence per share), a c.5% increase on

the prior year. Given the overall strength of Mercia’s business

model and its excellent cash position, the Board’s objective

remains to maintain this progressive policy.

Following the successful exit from nDreams Limited (“nDreams”)

in November 2023, we announced a £5.0million share buyback.

This buyback concluded in May 2024 and resulted in 15.7million

shares being bought back into Treasury, at an average purchase

price of 31.8 pence per share.

Taken together (and assuming that the proposed final dividend

is approved by shareholders at this year’s AGM), Mercia will have

returned c.£18million in cash to shareholders since March 2020.

‘Mercia 20:20’

Mercia’s year to 31 March 2024 demonstrated the variability of

venture investing, from the very successful and profitable sale

of the Group’s direct investment in nDreams for £30.2million

(of which £26.4million was received in cash), to the difficult

decision in May 2024 to cease further material investment into

Impression Technologies Limited.

Across the three-year period, our many business activities have

contributed to Mercia comfortably exceeding its three-year

‘Mercia 20:20’ growth in AuM target, whilst missing its three-year

profit before tax target. It is these experiences, together with

feedback from our shareholders, which have helped shape our

thinking in terms of Mercia’s proposed future direction.

Governance

Our commitment to the governance principles of the Quoted

Companies Alliance (“QCA”) Corporate Governance Code

remains resolute and we have recently adopted the new

QCA Code. Governance codes aside, our Directors have

always regarded integrity and transparency as fundamental

cornerstones to the way in which we do business. Succession

planning is also an essential element of good governance and

this is kept under review by our Nominations Committee.

At this year’s AGM, having reached 78 years of age, our co-

founder, first Chair and, together with family trusts, Mercia’s

largest overall shareholder group, Ray Chamberlain has decided

to retire from our Board. Ray has been a serial and successful

entrepreneur over many decades. In 2010, it was Ray who

backed Mark Payton’s fund management MBO and whose family

trusts provided the follow-on capital thereafter to the most

promising fund investees. This was the genesis of what became

Mercia’s ‘funds-first’ hybrid investment model.

Ray’s measured and thoughtful Board contributions over the

last 10 years, together with his unwavering long-term support,

have provided the time and stability from which all businesses

benefit. I would also like to thank him personally for his

wise counsel during my time as Chair. We will all miss Ray’s

enthusiasm for venture investing and his support for young,

regionally based technology-led businesses, such as Warwick

Acoustics Limited. We are confident that Ray will remain

a strong supporter of our Group, including our proposed new

strategic direction.

With a Board currently comprising five Non-executive Directors

and three Executive Directors, we do not feel that it is necessary

to add an additional Non-executive Director once Ray steps

down at our AGM in September 2024. Our Nominations

Committee will of course keep our Board’s composition and

balance of skills and experience under review.

At the operating level, we appointed Jocelyne Bath during

the year as our new Chief Operating Officer, and more

recently appointed our first full-time heads of Environmental,

Social and Governance (“ESG”) and Information Systems/

Information Technology (“IS/IT”), both reporting to Jocelyne.

We remain as committed as ever to all three principles of ESG,

including continuing to measure and offset our relatively small

environmental impact, and promoting further diversity, equity

and inclusion throughout Mercia, our investment committees

and investee portfolio companies. Based upon our investment

experience, diverse teams make good teams. The appointment

of a dedicated IS/IT manager is an investment in our internal

capabilities, so as to increase our efficiency as we continue to scale.

Maintaining good stakeholder relationships also remains

critical to our future success, as does continuing to meet the

investment objectives agreed with our many asset class fund

investors. During the year we have also continued to focus on

our relationship with each of the three Northern VCT boards.

Proactive engagement with all of our stakeholder groups

remains particularly important to our Board and I am always

pleased to meet and engage with shareholders. In recent

months, Diane Seymour-Williams, our Senior Independent

Director and Remuneration Committee Chair, has also been

in contact with our leading shareholders in connection with

the one-year extension of the Executive Director’s Long-Term

Incentive Plan. We will, as last year, hold our forthcoming

AGM in London – this year at Rothschild & Co’s offices.

I and my fellow Board members look forward to engaging

with our stakeholders during the current financial year.

Mercia Asset Management PLC Annual Report and Accounts 2024

Non-executive Chair’s statement continued

Responsible investing and culture

For Mercia, responsible investing with a clear purpose,

a positive company culture and strong teamwork have always

gone hand-in-hand. We always seek to invest to make a return

for our investors, but we also aim to do so in a manner which

treats with respect all of our stakeholders, and the environment

in which we operate. You will see examples of how we do this

throughout this Annual Report and in particular, on pages 6 and

7, how our Board considers the interests of our stakeholders

when complying with its obligations under Section 172 of the

Companies Act 2006.

One recent example of this culture and shared purpose was the

significant effort put into the BBB tenders by many staff across

all parts of our business. They worked tirelessly over many

months, often at unsociable hours. Their exceptional efforts, in

conjunction with the Group’s investment track record, resulted

in the BBB awarding our Group five new fund management

mandates totalling £360.0million. ‘Leaning in’ to help others,

be it internally or externally, is what defines a #OneMercia

employee. We are hugely grateful to the BBB for the vote of

confidence placed in us and we are really excited to have won

these new and significant regional equity and debt mandates

across the Midlands, Yorkshire and the Humber. We have already

built new deal pipelines for all five mandates and completed

both equity and debt transactions.

The office working environment post COVID continues to

evolve and we are constantly looking at how best to combine

employee well-being and support with the collaboration, career

development and training that is vital in remaining a successful,

specialist alternative asset manager. We do this through

proactive engagement with our staff, whilst actively monitoring

trends across the asset management sector. In everything that

we do and say, we seek to be a valuable and well-respected

citizen in the many communities in which we are based and

whom we serve.

Looking forward

Finishing where I started, we continue to live in uncertain times.

Whilst the political and economic backdrop creates investment

returns uncertainty, it also creates opportunities for those

with the liquidity, local deal flow networks and investment

experience to make good equity investment and lending

decisions, whilst proactively managing and realising investment

returns from existing portfolios.

The Group’s future growth is likely to be driven by a structural

shift in investor allocations and Mercia, with its strong capital

base, regional presence and investment track record, is well

positioned to benefit from this emerging trend. Our profitable

SME lending operations have also now grown to FuM of

£687.0million, demonstrating our broader investment skills,

investor base and reach across the UK. Coupled with our

financial discipline and resilient capital and liquidity base,

Mercia is in a strong position to support initiatives such as the

Mansion House Compact, and we look forward to reporting

further progress in due course.

I remain immensely proud to be Chair and part of #OneMercia,

a community which works together every day to fulfil our

purpose, our investment mandates and our strategic objectives.

On behalf of our Board, I sincerely thank each and every person

connected with our Group for your continuing support.

Ian R Metcalfe OBE

Non-executive Chair

Natural

evolution continued

Annual Report and Accounts 2024 Mercia Asset Management PLC

Strategic report

I remain immensely proud to be Chair and part of

#OneMercia, a community which works together

every day to fulfil our purpose, our investment

mandates and our strategic objectives.”

Mercia Asset Management PLC Annual Report and Accounts 2024

s172 compliance

At Mercia, stakeholder engagement is not just a regulatory

requirement; it’s woven into the very fabric of our operational

culture. Our approach is driven by a commitment to

transparency, impact investment and discipline, striving

to ensure that every interaction not only meets but also

exceeds the expectations of our stakeholders, reinforcing the

foundations of trust and integrity upon which Mercia is built.

Transparency in action

For Mercia, transparency is paramount. We believe that

clear, open communication is critical in nurturing trust and

building enduring relationships. Our engagement strategy

encompasses regular updates through regulatory channels,

digital newsletters, detailed annual reports and real-time updates

via our online platforms. This ensures that our stakeholders

– be it shareholders, investors, investees, employees or other

community members – are always informed and involved in our

journey. Each communication is an opportunity to demonstrate

our commitment to being responsible, trusted, responsive,

connected and focused on growth.

Disciplined engagement

Our engagement processes are characterised by a disciplined

approach that aligns with our key objectives and core values.

We conduct regular reviews of our engagement strategies to

ensure that they are effective, whilst responding to stakeholder

feedback and evolving business needs. This systematic

approach ensures that we remain focused on delivering

value while adhering to our principles of diversity, equity and

inclusion. For instance, our employee engagement initiatives

are designed to not only enhance workplace well-being but also

to foster personal and professional growth, thereby contributing

to overall business success.

Impact through investment

At the heart of Mercia’s strategy is the drive to make a positive

impact through investment. We endeavour to focus on investing

in businesses that promise not only financial returns but also

contribute to societal and environmental needs. Our investees

are often pioneers in green technology or other emerging

technologies, embodying our commitment to impact investing.

Our approach extends beyond mere financial support; we

engage with these businesses to provide guidance and support

to ensure they thrive and, in turn, catalyse regional growth

and innovation.

Why we engage

Our stakeholder engagement is a reflection of our belief that

business success should be shared success. By investing in

our people, supporting our investees and contributing to our

communities, we are investing in a sustainable future for all.

Mercia’s engagement strategy is designed to create a ripple

effect of positive change, reinforcing that our business is

not just about achieving financial targets, but also about

making a meaningful impact.

Stakeholder engagement at Mercia transcends compliance;

it is a key pillar of our business strategy, essential for driving

sustainable growth and fostering a culture of transparency

and accountability. It is through disciplined engagement

and a deep commitment to impact investment, that Mercia

continues to meet its responsibilities. This is not just part

of what we do – it is who we are.

Stakeholder

engagement

Annual Report and Accounts 2024 Mercia Asset Management PLC

Strategic report

Mercia’s Board commits to the Group’s long-term

success for shareholders, fulfilling Section 172

of the Companies Act 2006. Directors act in good

faith, considering long-term impacts, employee

interests and community effects.”

s172 considerations

Mercia’s actions

Outcomes & highlights

Further information

(a) Long-term

decisions

Proposing ‘Mercia 27: 100%

growth’ plan to ensure growth

and sustainability.

Completion of ‘Mercia 20:20’,

exceeding AuM target.

Progress underpinned by proposed

new strategy, focusing on long-

term stakeholder value.

Non-executive Chair’s

statement: pages 2 to 4

Chief Executive Officer’s

review: pages 8 & 9

(b) Employee

interests

Comprehensive wellness

programmes, professional

development and inclusive

culture initiatives.

Enhanced employee well-

being programmes, increased

participation in volunteer activities.

People and talent

pages 16 & 17

relationships

Engaging with shareholders,

investors, investees and

partners through transparent

communication and support.

Strengthened relationships

and regional business growth,

supporting local communities.

Stakeholder engagement:

pages 6 & 7

(d) Community

and environmental

impact

Committing to environmental

sustainability and regional

community support.

Maintained carbon-neutral status,

increased regional impact.

Sustainability: pages 14 &15

People and talent: pages 16

& 17

Corporate governance: page

47 to 52

(e) High standards

of conduct

Upholding integrity and

transparency, rigorous risk

management and governance

training.

Maintained robust governance

frameworks; achieved high

compliance and ethical standards.

Audit and risk management:

pages 33 to 41

(f) Fairness among

members

Ensuring fairness in dealings

with all stakeholders; managing

conflicts of interest with

transparency.

Our approach ensures equitable

transparency and long-term

stakeholder engagement within

the framework of our Conflict and

Allocation policies ensuring all

investors are treated fairly.

Corporate governance report:

page 47 to 52

Section 172

Mercia Asset Management PLC Annual Report and Accounts 2024

Powering

growth

Chief Executive Officer’s review

Overview

The year to 31 March 2024 was characterised by market

volatility, high inflation and high interest rates driving up the

costs of doing business, alongside geopolitical uncertainty and

a thankfully short-lived recession. It is therefore pleasing to have

come through these universal headwinds with record organic

growth in our assets under management (“AuM”), driven by

Mercia’s diversified and differentiated approach to making

a positive impact for our investors and investees.

Since our Initial Public Offering in 2014, Mercia has naturally

evolved into a specialist alternative asset manager, focusing

on impactful investing throughout the UK, sourced via our

established local relationships, extensive non-executive director

(“NED”) and entrepreneurial networks, and one of the UK’s

largest venture capital and small and medium-sized enterprise

(“SME”) lending footprints across our 11 offices. Our capital

is long term in nature and not subject to redemptions, enabling

us to both equity invest and lend capital consistently through

market cycles. Our retail capital is raised exclusively via the

Enterprise Investment Scheme (“EIS”) and Venture Capital

Trusts (“VCTs”) – tax-efficient structures designed to mitigate

the market challenges of low levels of capital availability

in early-stage venture investment. We predominantly manage

public sector capital on behalf of the British Business Bank

(“BBB”), to help business owners access funding outside of

London. Additionally, our institutional capital is mainly raised

from regional pension funds which aim to support regional

businesses from their impact allocations. Where others have

faced challenges, we have delivered commercial returns that

meet the specific impact requirements of our fund investors.

This successful strategy and resulting capital returns have been

the primary drivers behind this year’s significant organic inflows.

Performance

For our financial year to 31 March 2024, we achieved

revenues of £30.4million (2023: £25.9million) and EBITDA of

£5.5million (2023: £5.2million). We closed the financial year

with £46.9million (2023: £37.8million) cash on hand, no debt

and assets under management (“AuM”) of c.£1.8billion (2023:

c.£1.4billion), up c.27% overall, exclusively driven by organic

growth in the year. As at 31 March 2024, we had completed

c.64% of the £5.0million share buyback and are pleased to

recommend a proposed final dividend of 0.55 pence per share

(2023: 0.53 pence per share) which, if approved by shareholders,

will take the full-year dividend to 0.90 pence per share, a year-

on-year increase of c.5%.

In December 2022, we welcomed Frontier Development Capital

(“FDC”) into our Group. The company continues to perform

well, securing their first BBB fund mandate in February 2024,

being the £44.0million Midlands Engine Investment Fund II debt

mandate for the West Midlands. The acquisition of FDC has also

marked the beginning of our deliberate shift towards adjacent

asset classes to venture capital.

Mercia’s direct investment portfolio was fair valued at

£116.9million as at 31 March 2024 (2023: £136.6million), with

the highlight during the year being the sale of nDreams Limited

for £30.2million in total, with £26.4million in cash returned back

to the balance sheet and a £4.5million realised gain. The overall

results were impacted, however, by the post-year end decision

to cease further material funding for Impression Technologies

Limited (“Impression Technologies”) and we therefore fully

impaired our investment fair value as at 31 March 2024. This

was an extremely tough decision to make as we have supported

the business since 2014 via our funds and since 2015 from our

balance sheet, because its novel HFQ® technology works and it

had a cornerstone customer. Ultimately however, after 10 years

of investment support, its licensing revenue model was unable to

reach critical mass and profitability. Two separate sale processes

either side of last Christmas both generated firm interest in the

business, but ultimately no sale transaction occurred.

‘Mercia 20:20’ outturn

This financial year also brings to an end our three-year ‘Mercia

20:20’ strategic plan, with AuM growing over the period by c.94%,

driven by £415.0million of acquired third-party funds under

management (“FuM”) with the purchase of FDC in December 2022,

and c.£464million via organic growth.

‘Mercia 20:20’ focused on both sides of our hybrid investment

model, firstly seeking ambitious growth in total AuM of 20% on

average per annum from c.£940million to a three-year target of

c.£1.6billion and secondly, delivering three-year cumulative profit

before tax (“PBT”) of £60.0million. Despite the tough economic

and new fund-raising backdrop, we managed to grow AuM to

c.£1.8billion, beating that three-year target. We did not reach

the cumulative PBT target of £60.0million, predominantly due

to fewer upward fair value movements, the full impairment of

our investment in Impression Technologies and fewer profitable

realisations from the direct investment portfolio and instead

delivered £21.6million, although cash realisations during the

three-year period did total c.£47million.

Dr Mark Payton

Chief Executive Officer

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