Mercia EIS Fund

Deadline for next tranche: 31 December 2020

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, bringing total assets under management to £800 million. 

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 advice nor a research or personal recommendation to invest. If you’re unsure, please seek advice. When you invest in early-stage businesses, you should expect some to fail. They are high risk and illiquid. You could get back less than 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 – 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
  • Additional exit route and early liquidity potentially offered by AIM-quoted parent company
  • Minimum investment £25,000

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 which manages approximately 30 EIS and regional funds. 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 run by a team of 30 investment professionals and is overseen by Julian Viggars (CIO) and Peter Dines (COO). Mr Viggars is responsible for the overall direction of the EIS fund while Mr Dines manages the day-to-day responsibilities. Together the pair have considerable operational experience and expertise within the healthcare sector . 

In total, Mercia currently has £800 million in assets under management, of which £350 million is invested in tax-efficient products . 

Investment strategy

Mercia has always defined itself as a regional investor and, accordingly, nearly 96% of its existing 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. 

The majority 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 of 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 in excess of 2.5x.

Mercia allows for a third of its EIS companies to fail and operates a ‘fail fast’ policy. This prevents underperforming businesses from receiving follow-on funding and releases more capital for companies capable of hitting their targets. To date, a total of 17 companies have been crystallised at a loss, however, only 7 had received EIS investment. 

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 90 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. 

The majority of 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. 

Oxgene – Mercia EISOxgene (formerly Oxford Genetics)

Oxgene has positioned itself as one of the leading solution providers within the synthetic biology market. The company designs and licenses its own technologies but also provides custom solutions for its clients. 

Dr Ryan Cawood, Oxgene’s founder, had been completing his own PhD in drug development when he identified several issues with common DNA design and assembly processes. After graduating in 2011, he launched Oxgene on a shoestring budget with a small investment from his PhD supervisor. Today, the company has nearly 100 employees, state-of-the-art facilities and major licensing deals.  

Mercia was introduced to the company through its network and invested £580,000 through its EIS/SEIS fund in July 2013. This holding is currently valued at £3.6 million (April 2020) and Mercia has partially realised some of its investment. 

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 has invested £1 million into the company in total and participated in a £2.6 million fundraise with Committed Capital and other existing shareholders. The latest investment will help the business launch a new software package that should allow its technology to be adopted by a wider audience.

Blue Prism – Mercia EISBlue Prism (example of previous exit)

Please note, the following example was held in one of Mercia’s regional funds, the RisingStars Growth Fund. It has been included as an example because at the time of investment the shares would have been EIS qualifying. 

Blue Prism is a pioneer and market leader in robotic process automation (RPA), a phrase it helped coin. RPA allows organisations to automate business processes, from something as simple as generating an automatic response email to handling claims processing within bank systems. 

What’s more, the software requires no coding skills, allowing processes to be business-led and integrated within companies quickly.  Automation can have significant impacts on cost efficiencies and error reductions. For example, Coca-Cola (a Blue Prism client) was able to increase the workload of its HR department by 800% without increasing its headcount. 

Mercia was one of the Blue Prism’s earliest supporters, first investing in 2004. It continued to support the company all the way through to its IPO in 2016 at a valuation of £49 million. Today, Blue Prism is valued at over $1 billion and is one of the UK’s ‘unicorns’. Based on an original investment of £900,000, Mercia realised 75x on its investment and continues to hold a 2.5% stake in the company.

DMP Portal (example of previous failure)

There have been a number of failures in previous Mercia EIS Funds, as is to be expected. 

All but four received only SEIS investment. One example is DMPortal which received £150,000 investment from Mercia Growth Fund 1 (SEIS) and Mercia Growth Fund 2 (SEIS) in 2014. The company provided a SaaS (Software as a Service) online logistics and auction platform for vehicle dealerships and transporters.

The online portal was set up to rival traditional auction houses, where dealers could sell used and ex-lease vehicles without the need for physical transportation. The company showed promise, but the founder was not able to deliver early revenue or reach commercial targets. The company underwent an orderly liquidation in June 2015 and the investment was written off.  

Performance

Since 2012, Mercia has fully exited 20 businesses of which 17 were sold at a loss. In addition, it has completed six partial exits . Please note, past performance is not a guide to the future. 

The chart below details the performance of the previous Mercia EIS funds. Valuations are as at 31 December 2019, had you invested £100 in each tax year.

Source: Mercia Asset Management, as at 31 December 2019. 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. So, for the tax year 2015/16, the total return including initial tax relief would be £146, per £100 invested. 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 / SEIS investments are high-risk so should only form part of a balanced portfolio and you should not invest money you cannot afford to lose. They also tend to be illiquid and hard to sell and value. Before you invest, please carefully read the Risks and Commitments and the offer documents to ensure you fully understand the risks. 

Tax rules can change and benefits depend on circumstances.

This EIS fund invests in early-stage businesses which are more likely to fail than larger ones. So you should expect a number of failures in the portfolio, or even be prepared for all companies to fail.

Future funding rounds may dilute existing investments. 

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. Please note, existing Mercia investors can benefit from a 1% saving on the initial charge. 

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, June and December. 

Our view

Investing in startups and university spinouts could be an exciting area for wealthy investors looking to complement a wider investment portfolio –  and Mercia has significant experience. Its regional presence provides good deal flow as well as access to quality deals which managers based in London or the South East may miss. 

More recently, Mercia has continued to invest in its business with the acquisition of the Northern VCTs. This should add “firepower” and boost the high-quality investment team, which could, in turn, increase the appeal of Mercia as a destination to ambitious businesses looking for growth finance. 

Within the earlier EIS funds, there have been positive valuation uplifts, however, it is important to note that Mercia has yet to record significant realisations. Nonetheless, Mercia has a good reputation, the investment team is well resourced and the recent Northern VCTs acquisition adds weight to the offering. The Mercia team has previously shown an ability to add value with similar investment mandates across Mercia’s regional funds.

Read important documents and 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
3x
Funds raised / sought
-
Minimum investment
£25,000
Deadline
31 Dec 2020
Last updated: 30 April 2020

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