Mercia EIS Fund

New: “Meet the manager” video – watch below

Mercia Asset Management is a national investor with a focus on the UK regions. The business has eight regional offices across the UK and has built a network of university partnerships to generate deal flow. In December 2019, Mercia acquired the management of the Northern VCTs. Mercia Plc has £948 million in assets under management (September 2021).      

The Mercia EIS fund focuses on early-stage technologies from university spinouts and industry, with investment opportunities sourced from Mercia’s extensive commercial network across the Midlands, North of England and Scotland. Mercia Asset Management Plc is also able to provide later-stage funding to successful investee companies through what it calls its “complete capital solution”. The scale and wider resources of Mercia might therefore appeal to investee companies and help enhance deal flow for the EIS fund.

Important: The information on this website is for experienced investors. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and illiquid and can fall as well as rise in value: you could lose all the money you invest.

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Highlights

  • EIS offer with an SEIS option (capped at 15% of subscription)
  • Seeks to commercialise high-growth technology and intellectual property from industry and university spinouts
  • Target return 3x including tax relief (2.5x without) – not guaranteed
  • Particular focus on the Midlands, North of England and Scotland
  • Experienced, well resourced team
  • Portfolio expected to consist of between 12-15 companies with Advance Assurance
  • Minimum investment £25,000 - you can apply online

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 (MF1) 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, forming Mercia Asset Management. 

Today, Mercia Asset Management is an AIM-quoted company that manages £948 million across venture capital, private equity, private debt, and its own balance sheet funds. The business has 11 offices throughout the UK. Most recently, it acquired the management of the longstanding Northern VCTs. The acquisition has boosted Mercia’s assets under management by almost £400 million and should increase its investment capability and access to regional businesses. 

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 approximately 30 experienced equity investment professionals who source deal flow for the EIS funds and who are active managers on the boards of portfolio companies.

Watch a video interview with Peter Dines, COO at Mercia Asset Management:

 

Investment strategy

Mercia has always defined itself as a regional investor and, accordingly, nearly 98% of its existing EIS portfolio is based outside London. By targeting areas such as the North and the Midlands, which often lack sufficient investment capital, Mercia believes it can access quality investment opportunities at competitive valuations. 

Specifically, Mercia looks for companies with modest capital requirements, clear opportunities to scale and multiple exit routes. Companies should have credible management teams with promising track records and some degree of commercial traction before investment. It is expected that these types of businesses will account for around 80% of the portfolio, with the remaining portion reserved for university spinout opportunities. Mercia believes this allocation split improves the portfolio balance, helping reduce the time until first cash return while maintaining exposure to exciting startups. 

Most of Mercia’s deal flow is sourced from university partnerships, regional funds and its eight 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 has the resource to provide balance sheet capital as well as private equity and debt funding. Hypothetically, this means that 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. 

Target return

The fund targets a return of £3 per £1 invested over 5-7 years (not guaranteed). Please note, this target includes income tax relief as well as loss relief, therefore the effective target is to deliver more than 2.5x.

Mercia allows for a third of its EIS companies to fail and operates a ‘fail fast’ policy. This should help prevent underperforming businesses from receiving follow-on funding, whilst at the same time helping make more capital available to promising companies. To date, a total of 10 companies have been crystallised at a loss, including nine write-offs. 

For the companies that do succeed, Mercia expects the majority to achieve its stated target return of 3x (including tax relief) and a handful to potentially exceed this goal, not guaranteed. 

Exit strategy

Likely exit routes are expected to be a stock market listing or a trade sale, however, alternative exit options may be available. The target hold period is five to seven years, please note, exit options and timeframes are not guaranteed. 

Portfolio

Since launching its first hybrid EIS/SEIS fund in 2012, Mercia has deployed capital into 100 companies. While Mercia is increasingly focused on raising EIS funding, it does offer an option to invest up to 15% of subscriptions into SEIS companies, capacity permitting. 

Most companies are expected to fall into four categories: software & the internet, digital & digital entertainment, electronics, materials, manufacturing & engineering, and life sciences & biosciences. These sectors were selected to complement the specialist knowledge and operational insight within the investment team. 

Mercia targets a portfolio size of between 12-15 companies with investments ranging from £100,000 to £1.5 million.  

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. 

Sense Biodetection – Mercia EIS FundSense Biodetection

A molecular diagnostics company, Sense Biodetection (“Sense”) has developed a new diagnostic class of instrument free, single-use tests.

Much of molecular testing is currently dominated by Polymerase Chain Reaction (“PCR”) tests. However, PCR machines are expensive, complex, and need to be operated by trained technicians in a laboratory setting. Comparatively, Sense’s first product, a point-of-care test, can deliver rapid results and be administered directly by clinicians.

Originally, Sense developed its product for influenza (a $300 million target market), however, following the Covid-19 outbreak, the company immediately refocused its efforts to developing a Covid-19 test and entered into a manufacturing agreement with a large US-based partner.

Mercia initially invested £100,000 (SEIS) into the company in 2016. It has since completed several subsequent funding rounds in which the Mercia EIS fund has participated, including a £12.3 million Series A funding round led by Cambridge Innovation Capital and Earlybird in late 2019. In 2021, the business raised a $50 million Series B funding round led by Koch Disruptive Technologies, a subsidiary of Koch Industries, to commercialise and accelerate the launch of its Covid-19 test.

Living Map – Mercia EISLiving Map

Living Map designs interactive maps that are easily managed and understood – providing a more intuitive navigation system for the public. The company’s founder, Tim Fendley, had previously led the designs of Bristol Legible City and Legible London, two critically acclaimed wayfinding systems.  

Unlike similar services, Living Map can successfully operate between indoor and outdoor spaces and also offers users the ability to track assets, such as high-value products, in real-time. Since launching in 2010 the company has produced customised systems for destinations such as Heathrow Airport, as well as Central Park and the MET Museum in New York.  

Mercia initially participated in a £2.6 million fundraise with Committed Capital and other existing shareholders in 2019. More recently, Mercia led a £850,000 funding round, this latest investment will help the business enhance its technology and support the continued rollout of its services. 

Oxgene – Mercia EISOXGENE (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 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 now 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.

Health Centrified (example of previous failure)

Mercia invested £150,000 (SEIS) into Health Centrified to fund the development of its patient engagement platform. 

The platform allowed patients to receive appointment reminders, messages regarding their medication, and the ability to contact their care providers when needed. The team behind the business had prior experience in the sector, having developed a similar product targeted at mental health. 

While the business was early-stage, Mercia hoped to leverage the experience of the investment team and the founder’s industry contacts. A key factor of the business model was the ability to expand into the US and the company had been working closely with a US healthcare provider. However, following the introduction of travel restrictions that applied to the company’s Syrian born founder, the company lost its main customer and entered into administration.   

Performance

Since 2012, Mercia has invested £55.8 million in 106 companies and achieved 16 profitable full or partial exits, returning £20.3 million to investors. 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 fund each tax year, based on valuations as at 30 September 2021, 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

Source: Mercia Asset Management, as at September 2021. Figures are net of all fees. Past performance is no guide to future performance. These figures do not include any realised returns which would be available through loss relief. In the above examples, initial tax relief of up to 30% could also apply. Remember tax rules can change and tax benefits depend on circumstances.

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.

Investor charges
Full initial charge 2%*
Wealth Club initial saving
Net initial charge through Wealth Club 2%
Annual management charge 1.75%
Administration charge 0.25%
Performance fee 20%
Investee company charges
Initial charge 3-5%
Annual charge
All fees and charges are stated exclusive of VAT, which may be applicable in some cases. Any fees and charges payable by the investee companies or the underlying businesses do not directly come out of your investment. However, they will effectively reduce the returns generated by investee companies and therefore impact your investment.

More detail on the charges

Timing of the offer

Mercia aims to fully deploy funds within 12 months of the specified closing dates. Please note, deployment time frames cannot be guaranteed. There are three closes each year, typically at the end of March, September and December.

The deadline for the next close is 30 September 2022. 

Our view

Mercia is an experienced backer of early-stage technology companies. The business has £948 million in assets under management and is supported by a large team of 30 equity investment professionals and a regional network of eight offices throughout the UK. This provides Mercia with access to substantial deal flow and deals other managers based in London or the South East may miss. 

The acquisition of the Northern VCTs should add “firepower” to Mercia’s objective of providing entrepreneurs with a “complete capital solution”, in turn, this may 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 Oxford Genetics, The Native Antigen Company, Clear Review, although past performance is no guide to the future. Overall, Mercia has a good reputation, the investment team is well resourced and the recent Northern VCTs acquisition adds weight to the offering. 

Read important documents and then apply

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – tax-efficient investments. You should base your investment decision on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.

The details

Type
Fund
Sector
Technology & life sciences
Target return
2.5x
Funds raised / sought
-
Minimum investment
£25,000
Deadline
30 Sep 2022 for next close
Last updated: 2 December 2021

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