Dr Paul Mattick, Head of Sales and Investor Relations at Mercia Fund Managers, took time to explain to GBI Magazine how Mercia’s EIS Funds provide a solution to building a well-validated early-stage businesses investment portfolio.
Tell us how the Mercia EIS Funds came about?
Mercia launched its first EIS Fund in 2012 with its original team traced back to WM Enterprise, an organisation commercialising IP from the universities of Birmingham and Warwick. The founders had noticed a gap in commercialising IP outside London and saw that the UK regions had much more to offer. So, they expanded their networks and built a business which now has almost 90 employees uncovering exciting young businesses across core regions of the Midlands, the North and Scotland.
What is your investment strategy?
Mercia leverages both its broad relationships with the investment community and university networks to ensure we uncover great regional investment opportunities. These are typically deals that have modest capital requirements, where we can see clear opportunities to scale, in sectors which we know well, and perhaps most importantly, where we can see multiple paths for exit.
We’re already recognised in the market even though we are relatively young ourselves. We’re in the top four most active UK investors, according to Beauhurst’s analysis of the investors in UK, and in the last year alone, Mercia invested circa £60million (a figure that will increase again in 2019).
The majority of investors’ capital today is deployed into companies which have already gained a certain amount of commercial traction, which may have revenues of up to £3million at the point of first investment. The Mercia group saw almost 3,000 opportunities in the 2018/2019 tax year, of which 80% were from our commercial networks and 20% were university spin-puts. Diversification of portfolios away from being purely focused on University spin outs provides an optimal combination of reduced time until first cash return, while maintaining the possibility of finding a company that delivers a very big return.
How experienced is your team?
We have 50 investment staff and over £500million of assets under management, which includes our EIS fund and Group assets. Our team has a broad range of experience and skills across entrepreneurial start-ups, venture capital, finance and multinational corporations. Our Investment Directors and Managers are entrepreneurs or investment specialists, providing us with deep sector expertise and an incredible investment track record.
For example, Mike Hayes is a former CEO of Sega UK; our Chief Investment Officer Julian Viggars identified a company within the Mercia Group which has grown from seed to unicorn and delivered 104x return, while Peter Dines, our COO and Head of Life Sciences & Biosciences has been involved with a number of turnarounds and exits. The investment team’s track record is one of the main reasons that Mercia has been awarded so many of the British Business Bank’s investment mandates; in the last two years we have secured more than £120 million of these funds and an additional £27 million from North East Finance to invest in this region.
What benefits do investors get with EIS funds?
- Mercia EIS Funds invest in companies with commercial protections, which may be first mover advantage, significant sector experience and of course intellectual property.
- The EIS Funds enjoys strong deal flow; across the Group we received almost 3,000 applications in 2018.
- Mercia EIS Funds aim to invest before any other institutional money is secured, with an opportunity for Mercia Technologies PLC to provide follow on capital.
- Each investor receives a diverse portfolio of 12-15 investments covering early stage to pre-IPO opportunities across differing technology sectors, including life sciences and biosciences, software and internet, digital and digital entertainment, electronics, materials and manufacturing/engineering.
What do you look for in a business?
We specifically hunt for deals with a viable business model that can be scaled quickly.
As any investor worth their salt knows, the commercial success of an opportunity is dependent on far more than just a great idea. This is why we spend a great deal of time getting to know founders and management before any potential investment is made. Although every opportunity is different, there are several criteria that we look for in entrepreneurs including pre-investment traction, the management team and its track record.
Alternatively, start-ups from our university partners will often be research intensive, have strong intellectual property, and have the potential to be truly ground-breaking.
Tell us about three EIS investments
- Oxford Genetics operates in the synthetic biology market providing world leading technologies and advanced techniques for drug and gene therapy development. The world’s first biologic, insulin, was brought to the market in the early 1980s and today approximately 20% of all treatments are biologics, with over a quarter of new therapeutics approved in the US in 2017 being biologics. This demonstrates the highly progressive nature of this expanding sector;
- nDreams is a developer and publisher of content for VR platforms. It creates and publishes its own experiences and games, and develops for strategic third parties. Mercia first invested in nDreams in March 2014 through its managed funds and it was held in the managed funds portfolio for approximately one year. The company is now known as one of the UK’s leading developers and publishers of VR content and was one of the first to enter the VR games market;
- Voxpopme is a Birmingham-based SaaS business that provides video analytics software to firms in the market research and customer experience sectors. The company’s key products comprise a suite of video analytic tools enabling market research companies to gain better quantitative and qualitative feedback and data from surveys than was previously possible from a standard marketing questionnaire.
What have you got coming up in the deal flow pipeline?
We have over £30million currently in the deal flow pipeline and our team is conducting due diligence on several opportunities in sectors such as enterprise software, drug delivery and even investments in the exciting electric vehicle sector. In 2018, we held over 1,000+ meetings with prospective and current portfolio companies and invested over £12million in EIS, while the Mercia Group invested over £60million.
Can you tell us about past performance of Mercia EIS Fund?
Our past performance is updated on a quarterly basis, and as an example, our EIS funds from the tax year ending on 5th April 2014 are currently valued at 3.1 times original cost (3.5x with tax reliefs) and have distributed 23% of the original capital (March 2019 data); we expect significant cash distributions in the next 12-24 months.
Our track record has also been recognised by the industry – we’re pleased to be recognised as Investment Week’s Best Single Sector EIS in 2017 and 2018, Best EIS Investment Manager 2017 in the Growth Investor Award, Finalist in Best EIS Investment manager and Growth Investor of the Year in 2018. In addition, we were highly commended in the Best EIS Manager at the Enterprise Investment Scheme awards 2018.
How quickly can you deploy funds?
Our EIS fund deploys rapidly – our target is 12 months and we average 8 months for full deployment from receiving the initial subscription, which is faster than our established competitors. However, we invest focused on the overall portfolio return, which should be the main consideration with any EIS investment.
We can deploy rapidly due to our scale and the number of high-quality opportunities that we see, and this rapid deployment provides investors and advisers more visibility for their tax planning.
Are there any issues with advanced assurances?
Advanced assurances applications are important for the security of EIS qualification. Mercia works very effectively with HMRC and receives advanced assurance submissions normally within a week.
What happens in practical terms when an investor invests with you?
When we receive an application, we notify the investor that we have accepted their investment, set them up on our investor portal, the Mercia Investor Centre, and start investing on their behalf after the fund has closed. After each investment is made from the portfolio, details will be added to the Mercia Investor Centre and the tax certificate will be uploaded as soon as it is available from HMRC.
We are committed to reducing administration burden, and so investors will have access to all documentation including EIS certificate valuations, investment committee reports, loss relief letters and even have electronic application forms.
In summary, what sets you apart from other EIS funds and why should investors invest with you?
There are a number of factors including:
- Clear investment strategy
- Diversification in a high-risk environment
- Top rated funds in terms of awards, and research funds, such as Allenbridge
- Institutional scale of Mercia Group and track record of delivering multiple exits
- Our Investor Centre provides an unrivalled service to track fund performance
- Managed risk by diverse investing from seed to pre-IPO listed businesses across different technology sectors in which we have deep expertise
- Institutional scale enables us to deploy at a faster pace than competitors
(picture shows art work from Shooty Fruity Arcade from nDreams)