Mercia EIS Fund

Mercia Asset Management is a well established investor with £1.4 billion in assets under management. It has a focus on regions outside London with eight offices across the UK and a network of university partnerships to generate deal flow. 

Mercia seeks to attract and invest in promising early-stage companies through what Mercia calls its “complete connected capital” solution: its suite of EIS and VCT funds, then its later-stage regional investment funds and Mercia Asset Management itself. 

Since 2013, Mercia has invested £69 million in close to 120 EIS qualifying companies and achieved 12 profitable full or partial exits, returning £28.2 million to investors, with a remaining portfolio balance of £64.9 million (September 2022). Past performance is not a guide to the future. 

• Target return of c.2.5x over 5-7 years – not guaranteed
  
• Target deployment into a portfolio of around 12 companies c. 12 months from the close date 
• Minimum investment of £25,000 – you can apply online
• Next deadline: 29 December 2023 for next fund close 

The manager

Mercia Asset Management has been providing venture capital to regional businesses for almost four decades. 

Originally established as WM Enterprise Limited in 1982, the company began to focus on university spinouts in the early 2000s, with its first fund targeting opportunities from the Universities of Birmingham and Warwick. The company went on to secure further university partnerships before eventually completing a management buyout in 2010 and being admitted to AIM in 2014. 

The acquisition of the management contract of the longstanding Northern VCTs boosted Mercia’s assets under management by almost £400 million and should increase its investment capability and access to regional businesses. Mercia Asset Management now manages £1.4 billion across venture capital, private equity, private debt, and its own balance sheet funds. It has eight offices across the UK and employs 120 people.

The EIS fund is overseen by Julian Viggars (CIO) and Peter Dines (COO). Julian is responsible for the overall direction of the EIS fund while Peter manages the day-to-day responsibilities. Together they have considerable operational experience and expertise within the healthcare sector. They are supported by around 30 experienced equity investment professionals who source deal flow for the EIS funds and who are active managers on the boards of portfolio companies.

Before your subscription is invested, the cash will be held by the custodian, Mainspring Nominees Limited. Shares will be held by the nominee, MNL (Mercia) Nominees Limited.

Investment strategy

Mercia has always defined itself as a regional investor and 81% of its existing EIS portfolio is based outside London. By targeting areas such as the North and the Midlands, where investment capital is scarcer, Mercia believes it can access quality investment opportunities at competitive valuations. 

Specifically, Mercia's EIS fund looks for companies with modest capital requirements, clear opportunities to scale and multiple exit routes. Companies will be operating within specialist sectors and should have a disruptive technology targeting a large addressable market.

Most of Mercia’s deal flow is sourced from partnerships with 19 universities, together with its regional funds and eight regional offices which work with local incubators. In total, this can provide over 3,000 opportunities a year, of which Mercia would expect to invest in around 200 across all its funds. 

Within its wider structure, Mercia Asset Management has the resource to provide private equity and debt funding, as well as the ability to draw on capital from its own balance sheet. Hypothetically, this means Mercia could support successful companies all the way from seed funding through to later-stage growth. Its investee companies will also have access to Mercia’s in-house support team which can help founders with talent management, corporate advisory, legal and research services. 

Mercia expects a third of its EIS companies to fail and operates a ‘fail fast’ policy, which means it will not provide follow-on funding to failing companies which should help mitigate risk and free up capital for promising companies. 

The fund targets a return of £3 per £1 invested including tax reliefs (c. £2.50 excluding tax reliefs) over 5-7 years – not guaranteed. Tax rules can change and benefits depend on circumstances. 

Portfolio

Since 2013, Mercia’s EIS funds have deployed £69 million into close to 120 companies. 

The Mercia EIS Fund targets a portfolio of around 12 companies with investment across a range of sectors including healthcare, software, materials, gaming, and deep technology. 

Below are portfolio company examples from previous iterations of the fund. They are outlined to give a flavour of the types of companies you might expect but are unlikely to be part of a new investor's portfolio. 

Axis Spine Technologies

Axis Spine CEO Jon Arcos had already worked closely with Mercia Managing Director Peter Dines on two occasions when he approached the team about investing in his new spinal implants business. That pre-existing relationship meant Mercia was comfortable investing at the “proof-of concept” stage – earlier than might usually do.

The company’s modular spinal implants are easier to tailor to a patient’s needs and reduce the risk of damaging vertebrae during operations. The implants were approved by the US regulator, the FDA, in late 2021 and the company has now completed pre-launch of its first product. 

Mercia’s EIS fund first invested in 2017 when the business was SEIS qualifying. Since then, it has invested a total of £3.2 million, under SEIS and EIS, through extra rounds in 2019, 2020 and 2021 alongside a number of other investors including US medical specialist MedTex. The position is currently valued at 1.7x cost. Past performance is not a guide to the future. 

Tribosonics

Sheffield-based Tribosonics has created ultrasonic smart sensors that help reduce industrial machinery wear and tear and cut energy costs. 

Tribosonics’s sensors are embedded in the components and monitor factors such as friction, pressure and temperature. They collect data which, combined with advanced analytics, is provided in real time to companies so they can improve process efficiency, extend plant life and reduce maintenance and energy use. Tribosonics’s technology is used in the manufacturing, energy and transport, the three industrial sectors with the highest energy consumption.

For instance, one of Tribosonics’s clients, leading manufacturer ENGEL, uses Tribosonics’s technology to monitor the wear of the plasticising screw in a plastic injection moulding machine – a key, but difficult to access, component in the production process. Replacing a worn screw could take up to two days of unplanned production downtime. Tribosonics’s technology cut that to one hour. 

The Mercia EIS fund first invested in 2022 as part of a £1.5 million round alongside the Mercia-managed Northern Powerhouse Investment Fund.

OXGENE (example of previous exit)

Leader in synthetic biology, OXGENE™ provides DNA expertise and advanced platform technologies to laboratories discovering antibodies and pioneering cell and gene therapies.

Now a multimillion-pound revenue business, OXGENE (the trading name of Oxford Genetics Ltd) started on a shoestring in 2011, with borrowed lab bench space and second-hand equipment. 

“The vision of the business was to build DNA like we use Lego, in pre-made blocks that were pre-designed to fit and work together so that making new pieces of DNA could be done in fewer steps”, founder Dr Ryan Cawood explains.

The company has ranked 19 in the Sunday Times Tech Track 100 and doubled sales three years running – hitting £6 million in revenue in 2020.

Mercia first invested in the business through its EIS fund in July 2013, and followed on several times, through five of its EIS funds in total. In March 2021, OXGENE was sold to WuXi AppTec, a global leader in the provision of R&D and manufacturing services to the pharmaceutical, biotech, and medical device sectors. The sale has generated returns of between 13x and 20x investment cost for the five Mercia EIS funds. Past performance is not a guide to the future.

ARC Vehicles (example of previous failure)

ARC Vehicles developed a construction platform for new electric vehicle types and was spun out from Jaguar Land Rover in April 2017. 

Mercia invested £350,000 though its EIS fund in March 2018, supporting the development and launch of the company’s first product, an electric motorbike. The team believed ARC benefited from a strong management team, a disruptive product and the support of Jaguar Land Rover. Unusually for Mercia EIS, it was a business to consumer company.

Unfortunately, ARC did not secure the expected volume of pre-order deposits at launch, a failing attributed to the bike’s high-end pricing. Existing investors, including Mercia, decided not to fund ARC further, and despite a successful CrowdCube campaign, the business did not gain the required traction. The company underwent an orderly liquidation and was wound up in 2021.

Performance

Since 2013, the Mercia has invested £69 million into nearly 120 companies and achieved 12 profitable full or partial exits, returning £28.2 million to investors, with a remaining portfolio balance of £64.9 million (September 2022). Past performance is not a guide to the future; as can be expected, there have also been failures. 

The chart below shows the average performance of the total subscribed into the funds each in each full tax year from 2012/13 (or from when the current strategy was adopted if later) to 2021/22. The chart is based on the latest valuations provided by the manager, expressed on a £100 invested basis. Please note, individual investor portfolios’ performance will deviate from the average.

Performance per £100 invested in each tax year

Risks – important

This, like all investments available through Wealth Club, is only for experienced investors happy to make their own investment decisions without advice. 

EIS investments are high-risk and should only form part of a balanced portfolio. As must be expected with early-stage investments, some or even all of the companies in the portfolio could fail: the fewer the companies included in the portfolio, the higher the risk of loss if things don’t go to plan. You should not invest money you cannot afford to lose.

There is no ready market for unlisted EIS shares: they are illiquid and hard to sell and value. There will need to be an “exit” for you to receive a realised return on your investment. Exits are likely to take considerably longer than the three-year minimum EIS holding period; equally, an exit within three years could impact tax relief.

To claim tax relief, you will need EIS3 certificates, normally issued once shares have been allotted. This can take several months: please check the deployment timescales carefully. Tax reliefs depend on the portfolio companies maintaining their EIS-qualifying status. Remember, tax rules can change and benefits depend on circumstances.

Before you invest, please carefully read the Risks and Commitments and the offer documents to ensure you fully understand the risks. 

Charges

A summary of the main charges and savings is shown below. Some of these will be payable by the investor, whilst others by the investee companies. The investment may have additional charges and expenses: please see the provider documents, including the key information document, for more details.

Our view

Mercia is an experienced backer of early-stage technology companies. The business has £1.4 billion in assets under management and is supported by a large team of equity investment professionals and its regional network. This could provide deal flow which managers based in London or the South East may miss. 

The addition of the Northern VCTs to the Mercia Asset Management stable should strengthen the manager’s “complete connected capital” solution. That may further increase the appeal of Mercia as a destination for ambitious businesses seeking growth capital, although this is not guaranteed. Mercia’s track record of returning capital to investors continues to develop, with significant profitable exits from OXGENE, GENBA Digital and nDreams, although past performance is no guide to the future.

Overall, in our view Mercia has a good reputation, a well-resourced investment team and significant financial firepower. Experienced investors should form their own view.

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.