‘Best results yet’ for Mercia lays platform for share buyback

Regional investor Mercia Asset Management has delivered its “best results” in the nine years since it floated despite the challenging economic backdrop.

The West Midlands-based equity and debt provider has launched a £5m share buyback, buoyed by the significant cash return from the sale of nDreams, which had been the most valuable investment in its portfolio.

Dr Mark Payton told TheBusinessDesk.com: “These are a strong set of financial results driven by our third-party funds with over £40m of new capital coming into our existing funds as well.

“We have great expectations that the momentum will continue into the next half. We see that growth coming and, as our third party funds grow, so does the profitability of the group – and we see further to come.”

Revenue increased 23% to £15.0m while EBITDA, which is a measure of operating profitablity, was up 33% to £2.8m.

However that doesn’t take into account changes in the fair value movement in direct investments, amongst other things, and the value of the portfolio fell by £1.6m.

This was driven by big falls at Coventry-headquartered Impression Technologies and Birmingham-based Eyoto Group, with aluminium specialist Impression’s £15m value in April being cut in half.

Mercia had set itself three-year targets, which end next March. It expects to achieve an increase of assets under management by 20% per annum to reach £1.6bn, but will fall well short of averaging pre-tax profits of £20m per year with the cumulative total just above £30m with six months to go.

Payton said: “Our profit before tax is driven by the growing profitability of our third party fund management business. But a lion’s share of that is driven by the direct investments, either their profitable realisations or their fair value movements.

“A majority of our balance sheet investments are venture portfolio companies and in the last 12 to 18 months, not just Mercia but across the broader sector – and not just domestically, but globally – venture has been difficult in terms of growth.

“People are either static or going backwards and that really is a reflection of the broader economic situation we find ourselves in with venture.”

Mercia has paused its direct investments although it continues to “actively invest” through its third-party funds, deploying around twice the amount in this six-month period as it did a year earlier.

“We’re cautious, as is our sector more broadly,” said Payton. “We have the capital resources to amend and change that tack in the fullness of time but, at the moment, we are not adding new deals to the balance sheet.”

Mercia is looking out for signs of improvement in the public markets before the environment for venture investments returns.

He added: “At the moment globally, public markets are underperforming, and typically venture as an asset class is something like nine months behind the public markets recovery. When we start to see recovery in the public markets, as we’ve seen in previous cycles, one would expect venture to come back.

“The question really is when will the public markets come back rather than when will venture come back, because one follows the other.”

The sale of nDreams boosted Mercia’s cash position to £60m and it has chosen to return some of that cash to shareholders through a £5m share buyback.

Mercia’s net asset value per share was 45p at the half-year point, at the end of September, but its share price has been stubbornly below 30p since February.

“We think that Mercia is a cheap investment, frankly, so as a house we’re we’re buying into that,” Payton said.

It is also continuing to look out for opportunities that offer good value.

“We have the capital available for our own growth, as well as to continue to support the existing portfolio which is maturing,” he added.

Mercia is considering “very selective acquisitions” to accelerate the growth of its managed funds’ operation. It said its acquisition of Frontier Development Capital last year “is continuing to perform well”.