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

Good afternoon, and welcome to the 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 submit the following poll. And I'd now like to hand you over to Mark Payton, CEO. Good afternoon, sir.

Good afternoon, and good afternoon, everybody, and thank you for your attention today to Mercia's interim results for the financial year 2025. I'm Mark Payton, CEO, Co-Founder of Mercia, a broad background in commercialization of tech and innovation with a heavy focus on life science and life science investment...

Yes, good afternoon, everyone. I joined Mercia just over 10 years ago to float the business with Mark when there was just a small handful of us.

Thank you, Martin. And actually, yes, this is very much a milestone for us, this 10-year journey. So we have been listed now for 10 years, and some of this presentation will speak to that journey and what we've accomplished over that period. We'll also talk about performance, give a performance overview, the model that we operate and of course, the 3-year strategic plan that we're on, Mercia 27, and this is the first 6 months into that. You'll hear from Martin on the financial results, then the progress and the drivers and levers that we can pull to accelerate value within Mercia, a broad outlook and of course, take any questions at the end, and we look forward to those questions. This slide really summarizes, I think, quite positively these first 6 months of these interim highlights. We've seen revenue grow to GBP 17.9 million. That's up 19% compared to this time last year. Along with the revenue growth, we've seen EBITDA climb to GBP 3.7 million for the 6-month period. It itself is up 34% compared to this time last year. And the Board today declared an interim dividend at 0.37p per share, up almost 6% compared to this time last year. The group has a very strong cash position. Our balance sheet is strong, GBP 46 million cash on hand and of course, debt free. Our direct investments, and I'll talk a little bit to those later at GBP 121 million. And when you combine our funds under management, circa GBP 1.6 billion with our direct investments and cash on hand, you have GBP 1.8 billion in assets under management. We've seen GBP 57 million in terms of inflows, organic inflows into our third-party funds. And across our funds and our balance sheet, we have an unrestricted cash position of circa GBP 663 million. So a very liquid stock going forward. And I think that liquidity and deployment really is shown quite well here. We've invested well over GBP 100 million over this 6-month period from Bristol through London through the Midlands, North to Northeast, Newcastle and into Scotland, very much an active manager across all of the U.K. And activity is really reflected in the differentiated business model that we operate, where we're almost exclusively focused on the private markets. 100% of our funds are either evergreen or long dated. And this means the very structure of those funds means that there's no fund redemptions. We benefit from a blended 2% fee margin and 81% recurring revenue, which is up from circa 70% last year. We're very much positioned ourselves now as a leading domestic-only specialist alternative asset manager, very much focused on the U.K. only across diversified asset classes in respect to strategic assets, and I'll talk a little bit to those later and moving towards now real assets. Our near- and medium-term focus is expanding the platforms of deal origination and sales and distribution to meet the demand for investment and the capital to deploy against strong deals. And we'll do this through 4 discrete areas of focus. Investment performance really relates to our track record. And by track record, we're talking about maintaining or moving into a position of top quartile performance, but based on a DPI, distributions to paid in cash in, cash back basis. Risk mitigation, and that's by diversification by asset type, investor type and fund structure type. The platforms that I just spoke to, which is deal origination and sales and distribution, looking at scaling those platforms to meet the growing opportunity within the private markets that we operate in, but also ensuring that there is shared knowledge across the group, across the teams and across our 11 offices to continue to facilitate our own scale. And of course, a robust financial position. We're cash generative, scalable, profitable and a very strong balance sheet. But at the heart of Mercia's continued success is the exceptional team that we're fortunate enough to have across our 11 offices operating across our multitude of fund mandates and asset classes, who themselves operate across core values of growth, trust, responsive, connected and responsible. The connected piece is important as technology and innovation ensures that is an efficient transfer of knowledge and connectivity across the group. But actually, a very differentiated and valuable part of Mercia is our physical presence in 11 offices across the U.K., ensuring we see the best deals at the right time.

Thank you, Mark. This slide shows our sustained organic growth in revenues, EBITDA and operating cash generation during the period. As Mark mentioned, revenues were up 19%, EBITDA up 34% and we converted over 100% of our EBITDA into cash. Interestingly, when we began our journey, approximately 30% of our revenues came from the balance sheet investing activities. Today, that is only 2%, with 98% of our revenues coming from our fund management activities. The growth in EBITDA during the period, which was all organic, came both from a combination of the 5 British Business Bank mandates that we won at the end of the last financial year, but also the continuing growth and success of the acquisition that we made just under 2 years ago, Frontier Development Capital. Against a challenging market backdrop for many asset managers, this slide shows our stable assets under management at just over GBP 1.8 billion. There were no redemptions and GBP 57 million of new fund inflows. The only reduction of any magnitude was GBP 35 million of distributions to Mercia's stakeholders, including the Northern VCT shareholders, our LP fund investors and of course, to our own shareholders. And this slide provides more granularity on the makeup of our AUM by asset class, investor type and fund type. And combined, these typically long-dated or evergreen funds have generated a blended fee margin of circa 2%. And that's across what are now 64 separate 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. So with a combination of the 81% of contracted and recurring revenues and 98% of those revenues coming from our fund management operations, this combined provides great stability during these unpredictable times for asset managers. This slide is our consolidated profit loss account for the period. You can see there the growth in revenues of just under GBP 3 million, costs up at just under GBP 2 million, resulting in that GBP 1 million increase in EBITDA. I think it's also worth noting that the finance income we generated during the period was entirely bank deposit interest from the substantial cash that we have under management. And up to September, we were still earning just under 5% on our cash balances. We continue to have an extremely strong debt-free balance sheet. Mark will talk in a moment to the GBP 121 million value of the direct investment portfolio. You can see there the GBP 46.2 million of cash. And as a result of this strong balance sheet and strong liquidity position, our Board has recommended or has declared, sorry, a 0.37p per share interim dividend, which will cost GBP 1.6 million. I'm pleased to say we have a very simple straightforward consolidated cash flow statement. You can see there the operating cash inflow for the period of GBP 4.2 million. As our balance sheet portfolio continues to mature, we will see overall over the course of each year, the amount of capital deployed into that portfolio declining. And in the first half, we only invested just under GBP 4 million. You can see there the cash that we received, which was a deposit interest and also the GBP 5 million share buyback concluded during this 6-month period with a final GBP 1.8 million of shares bought back. Thank you.

Thank you, Martin. And as Martin alluded to in terms of the direct investments, here you have listed out circa 20 of our direct holdings, our entire balance sheet investments. I can point you to the right side, which just shows the equity stakes that we hold in these businesses, which are material and influential, but also remind you that every single one of our direct investments has a third-party fund position in it as well. So our influence on the businesses to help them grow and realize value is strong, but we are a pragmatic and supportive investor. We are not a forced seller, and we'll talk a little bit to our direct investment divestment strategy shortly, but that is about maximizing near-term return from a maturing portfolio. So then just moving to the left, you can see we opened the period with circa GBP 117 million in value. We've invested circa GBP 3.9 million over this 6-month period. And then you see the fair value movements, which equate to GBP 185,000 upswing, which is modest and really is flat. And this is our observation across our funds and across the broader industry as well as our balance sheet is that within the venture sphere that we operate in, at least, we're seeing valuations now slightly ticking up. So there's been a period of devalue, a period of recorrection on pricing, et cetera. That is now showing good signs of recovery and ticking up now. So we believe we're coming through that position. And that takes you then to a closing position of approximately GBP 121 million for the direct investments. Then if I take you to what is the top 10 assets by value. And these account for over 70% of the value of all the direct investments. So a substantial amount of value within the top 10. And just sort of going through progress on these businesses, Voxpopme, which is a video analytics business, a new product platform launch with an integrated AI mechanism, revenue growth and approaching actually breakeven position now. Netacea, which is a bot management and bot mitigation platform operating within the cybersecurity space, strengthened management team and Board, and that business continues to develop and grow. Warwick Acoustics, which is the flat speaker technology being integrated into an OEM ready for a product launch in 2025, and that's in the automotive sector. That's a very exciting development, and we look forward to being able to frankly point at cars and say there are a number of speakers within that one car coming out. And they have a number of OEMs coming through looking and evaluating that product. And as I said, a lead one coming to the market next year. The cards, the universe and everything, previously VirtTrade, that's had a new game launched against its existing platform and another one in development, again, in strong revenue growth. Medherant, this is a patch delivery technology. It's got a testosterone patch that's developing within its own clinic, and it's also got a partner program with Bayer. Soccer Manager, Invincible Studio, SM25 was launched, strong metrics in every sort of metric that you can count on that one showing good strong growth. It's also got 2 new games coming alongside that, that will soon be launched, again, in revenue growth and trading at a breakeven basis. Iota, just to remind people, this was -- this time last year, actually, we put a 50% provision against the equity on this business, restructured the focus of the business, the team and the Board pointed at a new commercial direction. I'm pleased to say it's now making early sales traction. Locate Bio, just moving into the clinic with its graft technology, BMP Graft technology. That business is developing well, and we have high hopes for that business as it moves to clinical trial. Intelligent Positioning, which is a sophisticated digital SEO platform, again, business trading at breakeven. And lastly, Aonic. This was the business that nDreams was sold, and this is a small residual stake that we have within Aonic, a highly profitable business in high growth itself looking to list on the public markets in due course. And of course, we will unwind that position. So here, you have in the top 10 business progress strong and capital requirement reducing over time.

In common with other specialist alternative asset managers, we use the international private equity and venture capital valuation guidelines to determine the fair values of our balance sheet portfolio every 6 months. What's interesting, I think, this 6-month period end is that now 93% of our portfolio is valued either on the price of a recent investment round or based on an enterprise value, which would typically be a revenue multiple as the balance sheet portfolio continues to mature. We do use DCF as a secondary calibration mechanism, but we do not use DCF as one of our primary valuation mechanisms. We have minimal exposure to the somewhat volatile public markets with only one investment in the small AIM company, MyHealthChecked. And once we have been through our 6-monthly review process, and we've shared those valuations with BDO, who also review them, we then, as an executive team, have one final hand-on-heart review before we publish these results.

Thank you, Martin. And just keeping with the theme of our 10-year anniversary, I think it's useful just to stop and look backwards as well as later look forwards. What you can see here is that IPO we had circa GBP 23 million in third-party funds under management. 10 years later, that's grown to GBP 1.6 billion. Our direct investments were valued at circa GBP 9 million at IPO. Now as you've just heard, GBP 121 million. The average investment size of the transaction was circa GBP 200,000 then. It's now GBP 1.5 million and growing. The deployment rate over the 6-month period was circa GBP 2 million. Now it's well in excess of GBP 100 million. 6-month revenue has grown from GBP 400,000 to GBP 17.9 million as in these results. We were basically a breakeven business when we came to the market, GBP 3.7 million EBITDA in these results for the 6-month period. We had 7 people within Mercia, which has grown to an exceptional team of 138 people today. We have invested something like GBP 1 billion over the 10 years and returned GBP 800 million back to investors over that same period. So very much finding opportunities, investing, transacting, growing and realizing returns in those. And just in respect of the asset classes we manage, this is -- this really is reflected here in the differentiated strategy that we operate, where you can see private venture, which is circa GBP 952 million in assets under management and importantly, with GBP 420 million of unrestricted cash to deploy going forward. Development capital, which we include debt and private equity in this nomenclature, GBP 388 million under management, GBP 108 million of unrestricted cash going forwards. Intermediary real asset finance, which is very much the stepping stone we're making into real assets, GBP 310 million under management, GBP 89 million of unrestricted cash going forwards. And of course, the balance sheet that you've heard from Martin and myself in terms of direct investments, GBP 187 million, comprising direct investments, cash on hand and LP positions as we invest in funds going forwards. That is collectively GBP 1.8 billion in AUM and GBP 663 million in unrestricted cash. And how we will look towards meeting and exceeding that Mercia 27 initiative. And to remind you, over 3 years, we're looking to take AUM from GBP 1.8 billion to GBP 3 billion, grow EBITDA to GBP 10 million and look to divest progressively and pragmatically up to 70% from the -- by value from the maturing direct investment portfolio. In terms of AUM growth, that will come through strategic assets, the venture and development capital just described as well as real assets. natural resources, residential and infrastructure and through a series of organic and M&A activities. Just to bring a light on to that, AUM growth historically, about 50% of that has come by acquisitions and 50% has come via organic growth thereafter. And we would expect that to continue going forwards. The aim to build a sustainable business, asset management business with per annum net inflows of 10%. Efficiency, 18% was the EBITDA margin as a measure of efficiency at the beginning of this period, and we made a commitment to drive that up to 26% over time. Managed fund deployment for the previous financial year, we've invested GBP 227 million. We will look to grow those deployment levels by up to 100% over these 3 years. And of course, performance, as I've said before, is paramount to everything. And our focus, of course, is top quartile performance across all the assets that we manage. And we passionately believe we're making a positive difference, not just to our investees, our fund investors, but also the regional and national domestic economy. We see strong tailwinds in regard to domestic growth prospects. We think the diversified nature of the business across deal origination, asset class and investor type is valuable. The predictable revenue, recurring revenue of circa 81% combined with a 2% blended fee margin, we think, is a robust and sustainable approach. And private markets, there's a lot more to grow from that, and our focus will continue to be on the private domestic markets. This position of 11 offices across the U.K. accessing these deal opportunities, importantly, also being close to fund investors, the long-term capital of the multitude of mandates we manage and the structural changes that are happening within our domestic economy really does point to a positive step and environment for Mercia to continue to develop and grow. And we see this through -- we're often referred to being a place-based impact investor. We see capital coming in that direction, increased interest in what we're doing, be it through our influence across our 11 offices and our own carbon footprint or the fact that we have in excess of 530 portfolio businesses and our influence on those businesses in terms of their carbon footprint. Our societal impact, we've invested GBP 129 million, of which 89% of that was outside of London. We've invested into 82 companies in this 6-month period. And I think really importantly, managed to attract GBP 46 million of other people's money alongside us. We also focus on these regeneration -- brownfield regeneration projects, which are a real lead into our real asset position going forward. We have appointed -- we have appointed an ESG -- dedicated ESG manager now within the group, member of the QCA. Part of Martin and my remuneration, our bonus remuneration is against cultural aspects and ESG aspects across the group. And our focus has been very much on diversity and inclusion over the years. And I'm pleased to say looking at these numbers that work is being achieved, outputs are being achieved. So just rounding up really for today's presentation, there are 4 key areas that we will be focused and remain focused on. Growth in revenue and growth in EBITDA is clearly linked to growth in AUM, achieve those, and we continue along our progressive dividend policy, and we'd expect that to continue. Our strong balance sheet today will continue to be strengthened as we have realizations from our balance sheet direct investments. And just to remind everybody, we are not making any new investments on to our direct investments. We are looking now at a maturing portfolio and delivering that capital back to our balance sheet. And the reason for that is the strong tailwinds that we are experiencing as a house on a regional and national basis, and we think that stands good stead for us to continue to grow assets under management on a domestic basis. Thank you very much for your attention.

Mark, Martin, thank you very much for your presentation this afternoon. [Operator Instructions] I'd like to remind you that recording of this presentation along with a copy of the slides and the published Q&A can be accessed via investor dashboard. As you can see, we've received a number of questions throughout today's presentation. Mark, could 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.

Yes. If you can just give me -- just there are a lot of questions, and I'm just writing them down. So if I could just have one more minute. Okay. Thank you. So there are -- I will, as always, try to theme this, and we'll look to address all these questions. So forgive me if I miss them, it's not a deliberate act. It's just that we have had quite a few questions. I think one question actually, Martin, is if we were to make a substantial realization from the balance sheet, this is in respect to restarting a share buyback. Would we contemplate restarting a share buyback is part of the question. And the other question is, how would we offset that with, say, making an acquisition or growing funds under management? What is the opportunity cost of one versus the other?