Mercia EIS Fund

The Mercia EIS fund focuses on early-stage technologies from university spinouts and industry. Mercia has an extensive commercial network across the Midlands, North of England and Scotland and makes initially small investments across the regions. Through its AIM-listed parent company Mercia Asset Management, it then has the ability to provide later-stage support to successful investments, offering what it calls a “complete capital solution”.

Highlights

  • EIS offer with an SEIS option
  • Seeks to commercialise high-growth technology and intellectual property from industry and university spinouts
  • Target return 3x including tax relief  – returns not guaranteed
  • Particular focus on the Midlands, North of England and Scotland
  • Experienced, well resourced team
  • Portfolio expected to consist of around 15 companies with advance assurance
  • Additional exit route and early liquidity potentially offered by AIM-listed parent company
  • Minimum investment £25,000

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.

Read important documents and apply

The manager

Mercia Fund Management Ltd is an early-stage technology investor managing EIS funds and government money to develop and commercialise technology from industry and universities. It was founded in 2000 to manage money for the West Midlands Enterprise Fund and was originally named WM Enterprises Ltd.

Dr Mark Payton, CEO, led Mercia’s buyout from West Midlands Enterprise in 2010. This opened the door to external investors and Mercia’s first EIS fund.

Mercia Fund Management is part of Mercia Asset Management Plc which also owns Enterprise Ventures. 

Mercia Technology Plc listed on AIM in 2014 and has over £500 million assets under management. 

Mercia’s EIS and third-party funds provide support at the earlier stages through multiple funding rounds which gradually increase. This is to try and weed out failures as soon as possible. If a company is successful, Mercia Asset Management Plc will typically take over and help the businesses scale-up. If larger amounts are required, the Plc’s shareholders may also be invited to participate. This offers the potential for early liquidity as well as a possible additional exit route for investors, although as always exit options are not guaranteed.

Mercia invests nationwide but has a particularly strong presence in the Midlands, the North of England and Scotland. It has partnership agreements with 19 UK universities.

Watch an exclusive video interview with Paul Mattick and Julian Dennard of Mercia Fund Management:

Recorded 17 October 2017

The offer

The default investment will be entirely EIS, but there is an option to invest in SEIS-qualifying companies. Indeed, the same company may receive SEIS funding in one round, and EIS funding later. However, there will be distinct differences. Mercia will usually take a greater stake in the business in any SEIS round, as it will likely be diluted later. In addition, the technology or intellectual property will probably be further away from commercialisation. 

Unless otherwise specified, 100% of an investor’s subscription will be invested in EIS-qualifying companies, but there is an option to invest up to 15% of an investor’s subscription in SEIS-qualifying companies. The SEIS fund is limited to £600,000 and will be allocated on a first-come first-served basis at Mercia’s discretion.

The minimum investment is £25,000. The portfolio is expected to consist of around 15 companies with EIS advance assurance.

Investment strategy

The Mercia EIS Fund will invest in early-stage technology businesses with the aim of generating capital growth. It focuses on four key sectors where technology or intellectual property can be patented and exploited:

  • Life sciences and biosciences (particularly diagnostics, digital health and medical devices)
  • Digital and digital entertainment (such as virtual reality games, or mixed reality games)
  • Software and internet (cyber security, SaaS or artificial intelligence)
  • Electronics, materials, manufacturing & engineering

A proportion of these deals will come from Mercia’s extensive commercial networks, which include the investment directors’ personal networks as well as regional incubator programmes and the NHS Feeder Fund.

Others will be spinouts from universities. Currently there are 19 university partnerships including Edinburgh, Birmingham, Liverpool and Warwick.

Universities and their dedicated research teams are responsible for many of the current pioneering breakthroughs in science and technology across the globe. It is often the ‘Golden Triangle’ of Oxford, Cambridge and London that grabs investor attention, but Mercia believes there is opportunity waiting to be tapped in the UK regions. According to Mercia, 52% of all active spinouts in the UK originate from the Midlands, the North of England and Scotland.

Mercia’s university team, headed by Dr Nicola Broughton, works closely with the Technology Transfer Departments of each of the 19 university partners to help support research ideas from laboratory to the market.

Mercia’s growth funds each have their own Investment Panel and an external Advisory Committee. For all investments made, the investment team reviews each proposal and circulates the findings to the team for challenge. If the deal passes this stage, a more formal offer is made and detailed due diligence is carried out on the intellectual property. A longer and more detailed review is completed and sent to Mercia’s investment committee. Its members have the power to veto any deal and have done so in the past. 

Potential investments for the current tranche

Mercia has identified a number of companies likely – but not guaranteed – to be included in the portfolio of investors applying by 24 July.  

  1. Carbon Air has developed a particular form of activated carbon that can help improve the effectiveness of air springs (e.g. in a bike or car), reduce noise (e.g. a washing machine) or add richness and depth to sound (e.g. loudspeakers). Carbon Air has six patent application families in progress, with three more in preparation. In 2019, the company expects to move from laboratory and prototype development into full-scale manufacturing. 
  2. Clinspec Diagnostics is a spinout of the University of Strathclyde, Scotland. It has developed a new blood test that helps doctors rapidly detect and grade the severity of brain cancer the same day, reducing the number of unnecessary brain scans. The technology could also be used to detect other cancers and chronic diseases. It is currently undergoing clinical studies and aims to achieve regulatory approvals to launch in 2022.
  3. Cyberowl builds on research started at the Defence Academy of the United Kingdom and completed at Coventry University. It has developed a cyber threat monitoring and alerting system for industrial and large-scale networks.

The Mercia EIS fund is expected to co-invest alongside leading corporate investors from the UK and China, a leading VCT investor, and a well-known European venture capital fund.  There will be approximately 8 more investments in this fund. 

Target return

The overall target return of the fund is 3x. However, this includes initial tax relief, therefore the effective target (before income tax relief) is to deliver in excess of 2.5x, not guaranteed. Companies are expected to be held for five to seven years but this may vary. As with all venture capital investments, some of the portfolio companies are likely to fail and one or two companies will deliver the majority of returns, if any.

Exit strategy

As well as the two usual exit mechanisms for EIS investments – stock market listing or trade sale – Mercia has a third option for successful holdings, which could provide potential early liquidity for investors. This is Mercia’s Share Exchange. It means Mercia may offer to buy shares it itself holds which are also held by investors in the Mercia EIS Fund (including SEIS) at a 25% discount. If offered, investors do not have to take it up if they feel the discount does not offer value for money.

Previous portfolio companies

Mercia EIS Fund - MedherantMedherant

Medherant is a spinout from the University of Warwick. It is developing a novel patch technology for the delivery of a variety of drugs.

The TEPI-patch® is a thin, strong, easy-to-apply and easy-to-remove patch capable of delivering high doses of drugs directly to the areas where they are needed. This novel patch incorporates polymer technology developed by the global adhesive company Bostik and exclusively licensed for transdermal use to Medherant. 

The firm has produced and patented the world’s first ever ibuprofen patch. The technology is also capable of working with drugs that have failed clinical trials because of their unsuitability for oral consumption. 

Mercia invested £398,551 from the EIS funds in Medherant and follow on investment has been provided by Mercia Asset Management. 

Note that this is an example of an existing holding only; the latest tranche of the Mercia EIS Fund will hold different companies.  

DMPortal

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) platform for vehicle dealerships and transporters by offering an online logistics and auction solution.

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

Source: Mercia Fund Management. EIS funds only. Returns calculated using Mercia's own valuations. Figures exclude the benefit of tax relief. Past performance is not a guide to the future.

Annual Performance to March 2019

  March 2015 March 2016 March 2017 March 2018 March 2019
MGF1 34.4% 33.7% 1.7% -3.4% 15.6%
MGF2 13.7% 39.9% 39.6% 16.9% 0.2%
MGF3 84.2% -20.1% -8.3% -9.3%
MDF 69.2% 16.2% 7.8% -1.1%
MGF4 9.4% -6.1% -10.4%
UGF 30.9% -8.2% 26.9%
MGF5 -6.0% -2.3%
MGF6 -8.1% 0.1%
MGF7 1.0%
MGF8 6.7%

Source: Mercia Fund Management. Shows annual % growth in Mercia Growth Funds since March 2015. Returns calculated using Mercia's own valuations. EIS funds only. Figures exclude the benefit of tax relief. Past performance is not a guide to the future.

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 / SEIS 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.

Mercia’s investment remit is not confined to EIS investments. This can have advantages but also means there could be scenarios where Mercia’s non-EIS investments take priority over the EIS funds, for example regional deals supported by Government-backed development funds.

Fees and 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%
Dealing charge 0.35%
Performance fee 20%
Investee company charges
Arrangement fee 3 to 5%
Annual charge
There may be other charges. 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

Our view

Investing in startup and spinout technologies could be an exciting area for wealthy investors. It is high growth but also high risk. This portfolio is one way of tapping into this market with generous EIS (and SEIS) tax benefits. Mercia has invested in spinouts and technology commercialisation for many years so has siognificant experience in this sector. 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. 

Early-stage businesses often need more than one round of funding to achieve profitability and exit. Unlike some other EIS managers, Mercia has the ability to make multiple rounds of funding using SEIS and EIS for the early rounds followed by Mercia Asset Management’s own balance sheet for the later ones. This Mercia “complete capital solution” offers potential early liquidity at a discount, which could prove attractive to some.

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
£9.4 million / £30.0 million
Minimum investment
£25,000
Deadline
31 Dec 2019
Last updated: 11 July 2019

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