Mercia Growth Fund 6

UK universities are amongst the best in the world with specialisms in high tech fields. Commercialising these technologies can be very profitable, but also time consuming. Not all are going to be successful, but often when they are they can be extremely successful. Various listed companies such as Imperial Innovations and IP Group specialise in these fields, as does this EIS and SEIS offer, Mercia Growth Fund 6.

Highlights

  • High growth SEIS and EIS offer
  • 50% invested in university spin outs
  • Looking to commercialise technology and intellectual property (IP)
  • Strong team
  • 12-15 companies expected

The offer

Mercia was formed in 2000 to manage money for the West Midlands Enterprise fund. It manages university and government funds with the purpose of commercialising products based on university technology. Often a university will invest directly in promising technology and there may even be government or EU grants to help fund the start-up business. Mercia then invests alongside. Dr Mark Payton, the CEO, led Mercia’s buyout from West Midlands Enterprise in 2010. This opened the door to external investors and its first EIS fund. Recently Mercia bought northern-based venture capital manager Enterprise Ventures resulting in a total investment team now of 32 and over £300 million in funds under management.

Mercia Growth Fund 6 will invest in a mix of life science, digital entertainment and gaming, advanced materials and manufacturing, and software and internet. As should be obvious, in all these sectors technology or intellectual property can be patented and exploited. About half of the deals in the portfolio will be spin outs from universities, with the balance from Mercia’s network of contacts. Currently there have been 14 formal university partnerships including with Birmingham, Liverpool and Warwick.

When an idea comes through one of the investment team reviews it and subsequently circulates the findings to the whole investment team. Any of the team can challenge at this point. If the idea passes this stage, a more formal offer is made to the company and detailed due diligence is carried out on the intellectual property. A longer and more detailed paper is then completed and sent to Mercia’s independent investment committee. Its members have the power to veto any deal, and have done so in the past. Both company management and Mercia’s fund manager in charge of the deal have to present to this committee. Mercia’s chief investment officer, Matt Mead, ensures there is a spread of different sectors and stages of company in the fund.

EIS and SEIS split

Whilst companies for both EIS and SEIS will be similar, and indeed investee companies may receive SEIS funding in one round of funding, and EIS funding later, there will be distinct differences. The percentage stake in the business Mercia takes will be larger in the SEIS round, as it will likely be diluted later. In addition the technology or intellectual property will be further away from commercialisation. 

Unless otherwise specified, 20% of an investor’s subscription is invested in SEIS-qualifying companies and 80% in EIS-qualifying ones. The intention is to invest all monies before the end of the current tax year, although this is not guaranteed. 

Target return

There is no explicit target return, however this is a high-growth offer. Companies targeted must be able to grow at a compound rate of at least 10% per annum. Companies are expected to be held for five to seven years. Mercia’s performance fee is based upon investors at least getting their cash returned.

Exit strategy

One area Mercia has considered is follow-on funding and exit routes. Many early-stage enterprises will need more than one round of funding to achieve firstly profitability and then a successful exit. Early rounds of funding come from SEIS and EIS funds whereas later-stage financing comes from Mercia Technologies, the AIM listed investment fund.  Mercia calls this its “Complete Capital Solution Model” that ensures it takes care of a company’s funding needs so management can concentrate on growing the business. Individual companies are exited by trade sale or IPO. Additionally, Mercia has a new share exchange facility which may allow investors to sell their portfolio company shares to Mercia Technologies, but any offer will be at a discount to fair value.

Risks

This SEIS and EIS portfolio invests in very early-stage businesses which may be more prone to failure. Whilst not investing in the very first round of funding, Mercia often invests to try and commercialise the technology or intellectual property. Many companies in this space will need more than one round of funding. Mercia has addressed this with the launch of AIM listed Mercia Technologies. A secondary risk in the short term is that the recent acquisition of Enterprise Ventures distracts management – in the long term the Enterprise acquisition should however be beneficial. 

Fees

The annual management fee is 1.5%. Three years of this annual fee is charged in advance upfront, meaning the full amount of a subscription doesn’t receive EIS relief. There is an annual custodian fee of £140; again three years of this fee is charged in advance. Mercia (as do most EIS managers) benefit from monitoring fees from underlying investments, the level of which isn’t specified. There is a performance fee of 20% of returns in excess of £1.05 (based on £1 subscription price) and 30% of returns above £1.30 charged at portfolio level.

Summary

Investing in spun-out technology from universities has been one of the in-vogue investment areas of the last few years. There are some listed alternatives, but this is one way of accessing this exciting high-growth area with the generous EIS and SEIS tax benefits. Mercia is expert in this field having invested in spin outs and the commercialisation of technology since 2000. Unlike some other managers, they have the ability to do multiple rounds of funding for each company using SEIS, EIS and AIM-listed Mercia Technologies. Mercia has recently bought Enterprise Ventures, a Northern-based venture capital outfit; this strengthens and adds further depth to the investment team. Overall we like the Mercia's approach, the one downside being the lack of many disposals thus far. 

The details

Min. Investment
£25,000
Amount Raising
£5m
Type
Technology
Deadline
discretionary

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