Mercia Asset Management PLC (MERC.L) Earnings Call Transcript & Summary

Good afternoon, and welcome to Mercia Asset Management PLC investor presentation. [Operator Instructions]. The company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to let the following poll. And I now like to hand you over to Mark Payton, CEO. Good afternoon, sir.

Thank you, and welcome, everybody, to Mercia's preliminary results for the 12-month period to the 31st of March 2024. I'm Mark Payton, Co-Founder and Chief Executive of Mercia, strong background in life sciences and still have life science responsibility on certain portfolio companies. I'm joined today with Martin, Martin Glanfield, Mercia's CFO.

Yes. Good afternoon, everyone. I joined Mercia almost 10 years ago now to float Mercia with Mark, when there was just a small handful of us. My background is mainly as a CFO of listed and private equity-backed technology-led businesses in the U.K. and the U.S.

Thank you, Martin. Also within the executive team is Julian Viggars, Mercia's Chief Investment Officer and recently joining us actually from a successful Oxgene sale a while ago, which is a portfolio company, Jo Bath joins us as Chief Operating Officer. So this slide really demonstrates and what we've been referring to the natural evolution of the business is the growth from predominantly the third-party funds under management and highlight some really key features of progress made in this 12-month period. Revenue has grown by circa 17.6%. That's up to GBP 30.4 million compared to this time last year. And alongside that EBITDA of GBP 5.5 million is a 6.7% increase again on a year-on-year comparison. The proposed final dividend for this period is 0.55p per share, up by nearly 4%, and actually with the cash generative nature of the fund management operation and the successful nDreams sale towards the end of the calendar year last year, we had cash on hand of GBP 46.9 million. And again, that is up from GBP 37.8 million this period last year, and the group is debt-free. Assets under management have grown by over 26% to GBP 1.8 billion, and of that, GBP 1.6 billion is through managed funds. And that growth has come predominantly through organic growth in terms of funds inflows, nearly GBP 600 million in this period. So a strong period of growth for Mercia. And this period sees the end of what we termed the Mercia 20:20, where this had 3 key metrics over a 3-year period, AuM growth by 20% per annum over those 3 years. PBT, profit before tax, by GBP 20 million per annum over 3 years and then the start of what we call the progressive dividend policy. Looking at AuM, I'm pleased to say that we are at GBP 1.8 billion, so we beat our target of GBP 1.6 billion for that 3-year period. Profit before tax, we've arrived at GBP 21.6 million, so falling short of the original GBP 60 million target, which was predominantly driven by fair value movements, et cetera, from our balance sheet investment activity. But due to the profitable cash-generative nature of the business, the progressive dividend has continued from the initial 0.8p per share. And in terms of the direct investment portfolio over a circa 7-year period, you can see the 9 exits that have been realized from the balance sheet. If you add those up against investment cost and realizations, we've invested approximately GBP 35 million in those 9 assets and realized GBP 104 million in value, of which over GBP 100 million is in cash straight back to the balance sheet. That's a 3x return on invested capital. So the balance sheet has performed well over that period and importantly, has been generating cash back to the business to grow and keep that sustainable growth for the business going forward.

Thank you, Mark. This slide shows substantial growth in assets under management, revenues and EBITDA during the last 4 years. And over the 4-year period, AuM has grown 94% from GBP 940 million to GBP 1.8 billion. Revenue has grown from GBP 19.2 million to GBP 30.4 million and EBITDA has grown from GBP 3.3 million to GBP 5.5 million. It's obviously during a period when we've had both COVID and the prolonged period of significant cost inflation. As you can see on this slide, Mercia's AuM grew by 27% to GBP 1.8 billion, and all of this growth this year was organic. There were no redemptions and the only reduction of any magnitude was the original 3-year British Business Bank 10-year funds and our small PE fund ending their respective 5-year investment phases. When this occurs, our revenues become based on the net asset value of each mandate rather than as a percentage of the original mandate size. And once again, it's been a very strong year of AuM growth despite the continuing challenges across the wider asset management sector. This slide provides more granularity on the makeup of our AuM by asset class, investor type and fund type. Combined, these typically long-dated or evergreen funds are generating a blended fee margin of circa 2%. And this is across what we have now is 61 different investment mandates, and we are increasingly able to equity invest or lend across the U.K. under the many different fund mandates that we manage. As you can also see, we are diversified by investor type and asset class, and 76% of our revenue is contracted and recurring which is a great comfort to us during these unpredictable times with the remaining 24% arising as a direct result of our investment deployment. This is our income statement in accordance with international financial reporting standards. So you see the revenue increase of 17.6%. But what you don't see here in this format is the EBITDA of GBP 5.5 million nor do you see the GBP 9.7 million, which is what we call the adjusted operating profit, which is EBITDA plus net finance income. Our balance sheet remains extremely strong with GBP 190 million of net assets. During the year, we invested just over GBP 19 million into the balance sheet portfolio. And we still have, at the end of the year, significant liquidity with GBP 47 million and no debt. And that is why we are able to propose to shareholders a final dividend of 0.55p, a 4% increase on the prior year. Mercia is about generating cash and it's operating activities are not reliant purely on realizations for cash inflows. And as you can see here, during the year, our operating activities, our fund management activities generated GBP 7 million of cash inflow. And our investing activities, thanks to the significant disposal of our investment in nDreams, we generated more cash from our investing activities than from investing into the balance sheet portfolio with a net effect of GBP 9.4 million of cash inflow. In terms of cash outflows in the year, we paid GBP 1.5 million in deferred consideration to the vendors of FDC, the business we bought just over 12 months ago. And we also, in the period, spent GBP 3.2 million of the GBP 5 million allocated for the share buyback, which ended in May.

Thank you, Martin. Over the next section, I'll talk about investment performance of the group initially through our fund management operation and then laterally into the direct investments. Just to remind those about Mercia and how we operate, we manage broadly what we call strategic assets within Mercia Ventures, Mercia Debt and Mercia Private Equity. If you look at Mercia Ventures, we can invest anything from as little as GBP 0.5 million, up to GBP 10 million on a regional and on a national basis. We exclusively deploy capital within the U.K. We deliver that through one of our 11 offices across the country from London all the way to Newcastle. We have GBP 913 million in funds under management within the ventures operation. And importantly, GBP 404 million of which is in unrestricted free cash to invest going forward. Mercia Dept can invest anything from GBP 0.2 million up to GBP 20 million, again on a regional and national basis. GBP 687 million of funds under management within our debt teams, GBP 262 million of which is unrestricted and free cash. Mercia Private Equity, which is a relatively small fund and as Martin says, gets adjusted into it's harvest period on a net asset basis. That's a shrunk because it's returned capital back to the limited partners in that fund. That fund is performing very well, and we're in the process of a follow-on fund to come after that. And that typically invests anything from GBP 2 million to GBP 10 million. And then our proprietary capital, I'll come on to in a moment. But if you run through that right bar, the GBP 713 million of unrestricted cash across the group and a GBP 1.8 billion asset under management business, we have substantial capital in picking new deals and supporting existing portfolio. And then on to our proprietary capital, our direct investment portfolio. On this table is listed, the 20 assets we now hold on the direct investment portfolio with nDreams sale moving across towards the bottom. So we started the year at GBP 136.5 million. We invested GBP 19.6 million across the portfolio. If you remember, for those that have been following us, we stopped making new investments this time last year. So this is an existing portfolio being supported. With the successful sale of nDreams, approximately GBP 26 million, GBP 27 million came back to the balance sheet and a modest stake, circa GBP 3.7 million remains within the acquirer, Aonic, and I'll talk to that in a moment. The fair value movements of that transaction as shown there, the GBP 4.5 million. And with fair value movements upwards and downwards, we have a net provision position of GBP 17.3 million, predominantly driven by the full provision of Impression Technologies. In our interims, we reported on a 50% provision against Impression Technologies following an unsuccessful sale of the business. We restarted that. That did not result in a successful sale and hence, the full provision against that asset. So we closed the year with that provision and the full sale of nDreams at GBP 116.8 million. Now of those 20 holdings, the top 10 account for about 60% by value of the direct investment portfolio. And here listed is the top 5 of those top 10. We have Voxpopme as our #1 holding by value, strong revenue growth, strong ARR growth. Business is now at a breakeven position, so it does not require any more support on a capital basis from us and that business continues to progress well. Netacea, which is a bot detection and mitigation platform in a real-time basis service side. Again, strong revenue and ARR growth. We have a final plan to get that business to breakeven and are looking to support that to that case. Warwick Acoustics, a business developing electrostatic flat speakers, both in very high-end, high-quality headphones as well as now integrated into the automotive sector, again, continues to perform extremely well. We had a recent funding round into that business with an external investor. Medherant, this is a business in the life science, MedTech space. It has a significant partnership with Bayer and is developing an in-house HRT testosterone patch which has gone through clinical range finding, dosing and is now moving into a registration trial in due course. And then finally, in the top 5, we have Avid Games with their game, the Cards, the Universe & Everything. That's a business actually where revenue has plateaued and because of the softer revenue multiples in the gaming sector, we've actually taken a provision against that business and lowered its value of holdings. Then into the next 5 businesses, we have Invincibles Studios, which is soccer manager. We've seen revenue continue to grow in that business. But to my point before, due to the softer revenue multiples in the gaming sector, that's taken a modest provision against that holding. Locate Bio, which had a recent and successful fully funded round, is about to enter into the clinic on a BMP scaffold to get bone repair. That business progresses well. That brand had a slight up round and hence, the write-up in that business. Eyoto in our first half results. Because it has slipped behind business plan, we had put a provision against that, and we maintain that provision in the full year. Intelligent positioning has now got to a breakeven position, doesn't require further capital from us and our business benefited from a modest upswing in valuation. And finally, Aonic, which is our residual holding from nDreams that was sold to them. This is a business turning over approximately EUR 100 million, making EUR 25 million profit EBITDA and we have a small stake in that business, and we expect to realize that in due course.

Thanks, Mark. In terms of valuation methodology of private assets, we, like everybody else in the asset management industry, follow what's known as the IPEV guidelines. And in respect of our balance sheet portfolio, 68% of the portfolio was valued based on the price of our last investment round and 25% of the portfolio was based on an enterprise value basis. We are required to calibrate those principal valuation methodologies, which we always do. And in some cases, we'll use DCF as a secondary calibration mechanism, but we never use DCF as our primary valuation methodology. As you can see in the top circle of this page, we only have one direct investment on the public markets, which is MyHealthChecked on AIM. So we have minimal exposure to the volatile public markets. And when we've been through this exercise, which we do every 6 months, we still adopt a final hands-on part reviewed, Mark and I and Julian making sure that we feel comfortable with those final fair values. And in the bottom right-hand corner of this chart, you can see that our direct investment portfolio is still quite well spread against those 4 investment sectors that we've always focused on.

Thank you. Martin. To why hold shares in Mercia, why invest in Mercia? And I guess it's that classic overnight success. It's taken us 10 years to build on; a, where we have now a very sustainable liquid and profitable cash-generative business going forward. And in terms of the sustainability, this slide brings us somewhat to life. In terms of our third-party funds, as I've said already, GBP 1.6 billion under management, which has grown year-on-year by 32%. That has dry powder. So unrestricted cash across it of circa GBP 700 million. It in itself has grown 89% year-on-year. But importantly, if we were to assume, and this will not happen, but if we were to assume we did not raise any new funds for the next 3 years, and we maintain the existing investment rate across our funds in terms of backing new deals and in terms of supporting existing portfolio, we have a 3-year runway of capital here. So a substantial runway for our managed funds going forward across the asset classes we manage. And then we flow down to the balance sheet portfolio, which we're seeing finished on just under GBP 117 million closing at the year-end. We have GBP 47 million at the year-end of dry powder of unrestricted cash to invest and we have modeled the portfolio requirement over the next 3 years. And it is important to note, as I'm sure many of you would have picked up about our sentiment here about this being a natural evolution for the group, is that we will be now divesting from our direct investments in an orderly fashion over these 3 years, and we would expect to sell out of most of these businesses within the next 3 years for most of them. And that actually means that it will be generating cash. But in the context of just ignoring that, generating cash, they will be consuming GBP 25 million. So in other words, we have well in excess capital to support the portfolio over the next 3 years as well. So what we have across the group is substantial unrestricted cash, which means for the next 3 years, we can support those businesses going forward. And then in terms of the group net asset value, if you look at the bar chart below it, of that GBP 189 million, you can see a substantial amount of that makes up what we call the hard NAV, so cash plus the direct investments, a majority of the value of the group now. And our investors and our behavior is very much one of being an impactful and responsible investor, be it through retail, be it through institutional or British Business Bank. And we operate very clearly against those 3 metrics that measure that. If it's within the house, as we look at the electric vehicle rollout, et cetera, or within our portfolio, we have over 500 companies across debt, private equity and venture or indeed businesses we bank and Nova Pangaea, which is on the balance sheet, and it held across our funds, a business focused on bio-aviation fuel, biochar, et cetera, business is generating a lot of attention and interest. Social impact, we will have invested over this 12 months from our funds GBP 227 million and 90% of that outside of London. We have a London office and London is an important area for us to invest in, but a majority of our investment expertise and activities outside of London. And we've backed 155 companies during the 12-month period and leveraged in alongside that investment activity GBP 161 million of co-investment. And in addition to this, and I'll talk a little bit about real assets in a moment, we have financed 14 projects focused on urban regeneration in opportunities such as Cornerstone, the Hippodrome here in Birmingham, and Telegraph building. As a listed business and a business within the financial services and governance is clearly a very important metric to us. And you can see a number of memberships and agencies that are a member of in that respect. But I also think it's important that the executives, they are measured and part of the remuneration is against culture and ESG. And importantly, our focus for us over this Mercia 20:20 period is to try and get more women into the financial services industry, which is essentially a male-dominated industry. And I'm very pleased to say that 40% of the nonexecutive directors of this listed business are women, 39% of the Executive Committee, 25% of the executive team, and importantly, 41% of the entire Mercia Group are women. So work is still to be done, but I think a real proactive achievement there. And then finally, with forums such as IMC, which frankly, is an excellent forum to reach out to all of you and for you to reach out to us for your questions. We are actively engaged in retail and in institutional events to ensure that we hear and speak to you directly about the changing approach to the business and understand any comments or concerns that you may well have. Differentiated investment strategies and asset classes are at the heart of what Mercia does. And I've spoken to the strategic asset classes of private venture, debt and private equity and of course, the balance sheet. But since our acquisition, as Martin alluded to over 12 months ago in our frontier development capital, FDC, we've moved increasingly into; a, what we call intermediary real asset finance; b, that brownfield remediation, regeneration or social housing or infrastructure. And this is an area of growth from the Midlands that we see going nationally. And real assets will become an important part that will be very complementary to the strategic asset classes that we manage. You can see the split of AuM across at the top table and at the lower end of the table, the split of unrestricted cash available across all those asset classes. As you will have seen in this morning's announcement, when we floated on AIM in 2014, we floated as what's called an investing company. And that is because our primary objective in raising the GBP 70 million that we raised back then was to build a balance sheet portfolio, and therefore, we were classified as an investing company. And you can see there that post IPO, the net assets were GBP 81 million, and the funds under management were only GBP 23 million. If you roll the clock to today, you can see how our funds under management now dominate our balance sheet net assets. And therefore, over time, we really become much more of a trading company than an investing company. And to move to trading company status, we need to seek shareholder approval for that move under the AIM rules. And therefore, a resolution will be proposed at the September AGM to do just that.

Thank you. As you will have seen before, if you've watched this webinar before, we have, for an AIM company, a fantastic blue chip shareholder base that any main market listed company would be really proud to have. And I'm pleased to say that we've had a very stable shareholder base throughout the year, as you can see here on this slide.

Thank you Martin. So just in conclusion, we have always had and many of you will be familiar with this, a single vision within Mercia, which is to be the first choice for investors, investees and our team, our employees. And these results, which are our strongest as yet, particularly around the fund management operation, demonstrate the delivery against this vision with a record year of organic fund inflows of GBP 562 million. Liquidity, strong liquidity, which is critical in this environment of GBP 46.9 million on the balance sheet, but over GBP 600 million in our funds. And I think that sort of GBP 666 million in the funds is really important because what we're seeing at the moment, in the current environment of decreasing liquidity, is increasing quality and quantity of deal originations across all of what we do. So that is helping us pick bigger and better opportunities as we pace forward. The business performance means we can continue to deliver against this progressive dividend policy with a proposed final dividend up circa 4%. We benefit from a blended 2% fee margin and I think the outlook for what we are terming Mercia '27 to our next 3-year strategic plan, which is 100% growth in EBITDA over those 3 years and to take AuM up to GBP 3 billion, is very positive. We are targeting, for this financial year, 10% organic inflows of new funds under management. We're building systems to help scalable, efficient approaches as we build our AuM under management. Real assets and associated adjacent asset classes have been mapped out and we will look to grow in that area. To put that into context, we are currently looking for a head of institutional distribution to join us. We have retail distribution as an internal engine. We're wanting to replicate that now for institutional distribution. We have full and strong alignment across the group with employees, with the management team and the Board with the rest of our shareholders as we own 17% collectively, and we're in a very strong financial position. We're very well set up to go forward in terms of our unrestricted cash across the group. And I think, importantly, tailwinds for a change because we've had years, frankly, of headwinds, any leadership team, I'm sure would say that, but we see now tailwinds facing forwards as the group's prospects continue to improve. Thank you very much for your attention.

Martin, thank you very much for your presentation this afternoon. [Operator Instructions]. As you can see, we have received a number of questions throughout today's presentation. I please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end.