Mercia Asset Management (LSE:MERC) — Northern VCT 3rd Digital Forum

0:03 Good morning, ladies and gentlemen. Welcome to the Northern VCT Digital Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time using the Q and A tab situated on the right hand corner of your screen. Just please simply type in your questions at any time and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company review your questions submitted today and publish responses where it's appropriate to do so. Before we begin, we would like to submit the following poll. And if you would give that your kind attention, I'm sure the company be most grateful. And I'd now

0:34 like to hand over to head of sales and investor relations, Paul Mattek. Good morning, sir. Good morning to you, and thank you very much attending today. As you will notice, the third digital forum for Northern VCTs, which joined the part of MERCIA group back in 2019. So as I said, I'm Paul Masek, and I head up the the sales investor relations for at MERCIA, including Northern VCTs. So today's agenda is quite varied, and we'll have a a number of different case studies from Alex and Adam. And Peter Dines will be talking about building a portfolio for Northern VCTs and cover some of the exits recent exits from the the VCTs. But just as a a high level summary of Northern VCTs.

1:23 So I joined the the MERCIA ASSET MANAGEMENT group in 2019, December 2019. And subject to that, we've been operating and investing across the across the country, investing some great regional companies. And the the group's deploying, I think, it's a 165,000,000 into companies in the last tax year. And as you'll see from subsequently, around 30% of that, 35% of that came from the northern VCTs. So on that note, I think I'll introduce Peter Dines. I hope you bring up Peter Dines, and he'll walk you through various different parts of the the deployment over the last few years. So, Peter, over to you.

2:04 Thanks, Paul, and good afternoon, everybody. And as Paul said, it's my pleasure to speak with you today. And my role at MERCIA is to head up the Northern VCTs in terms of team that we operate. And as can be seen here on this slide, the last two years have been a very successful year as we continue to execute our strategy of building the portfolio of companies. And our strategy is to to build a diversified portfolio that's both from a sector diversification perspective, a stage diversification, and also the profile of companies across the whole of The UK. So as can be seen here, the last two years have been particularly strong with 45,000,000 and last year, 49,000,000 being deployed in both new companies and follow on companies as we continue to to support the portfolio.

3:01 And, also, the the final graph is that it's how we've been doing this year as well with with a a new investment in a company called CAMEMENT, a life sciences company. So here's a a high level summary of of the new companies that have joined our portfolio. And it it really is a range of both life science companies where we've we've we've been actively increasing our exposure because we've got we've built out the expertise within the investment team with a focus around health tech and life sciences and a number of software platforms as as well. And and also the the third area where we focus on is consumer. Although with the the current headwinds, we have been cautious in that regard. But certainly software and life sciences, we we continue to be to be active.

3:51 So Camino, as I mentioned, is our most recent company to join the portfolio, and they they are developing complex DNA products that sell to pharma companies. Centura Global is a software platform that helps support companies develop internationally and grow internationally. Send is a Insurtech platform business, and LMC or LogMyCare is a care and domiciliary software platform. So you so you can see a a wide range of of different new investments across both health tech and software companies.

4:30 I'd now like to pass to a colleague of mine, Alex, who works in the investment team just to give a bit more of a detail around turbine, which is also one of the new investments. You can pass to Alex. Yeah. Hi, Alex. If you just turn on your camera at the top of the screen, that'd be great. For some reason, it's not permitting me. Just give me one second. Just give me one second, Peter, and we'll bring Alex back into the room.

5:30 Go ahead, Alex. The floor is yours, sir. Thank you. Hi, everybody. Sorry about that. So Turbine is a company using AI to support drug discovery and development. They've built a cancer cell simulation model that can uncover novel cancer treatments and identify specific patient groups. They are partnering with several large pharma companies to progress cancer treatments towards the clinic. So we invested in them back in September 2022. We invested 4,500,000 as part of a £17,000,000 round alongside funds such as Accel, Delin, XTX, and MERCIA ASSET PLC, which is milestone PLC, MERCIA ASSET a important

6:19 fifteen years. Turbine can help reduce that cost and for accelerate the process. They have strong IP that they have developed over a number of years. Turbine have one of the few AI models that can explain the why to their answers and not just the what. This makes a big difference to researchers actually trusting in Turbine's results to progress their drugs. And finally, we're joining a strong syndicate of highly respected investors. This includes the venture arm of MERC, the global pharmaceutical company, whose investment comes with a pilot study for MERC and Turbine scientists to collaborate on. Since our investment, we focused heavily on helping the company form a strong board to steer its growth. We're pleased to say Turbine have now pulled together one of the highest profile boards we've seen. It features deeply experienced experts from the world of AI and pharma who can both advise the company and open doors to important contacts.

7:12 The team is now working towards signing more large scale drug discovery partnerships as well as progressing several of their own assets in their pipeline. We look forward to helping Turbine continue to grow and bring these new cancer treatments to market. Now I'd like to pass over to my colleague, Adam, to talk through his case study. Great. Thank you, Alex, and pleased to be here speaking with you all this afternoon. So with Social Value Portal, I'll just run through some background of what the company does, why we bought the business, and what's happened post investment. So the Northern VCTs invested 5,000,000 in Social Value Portal at the end of February. This formed part of a wider 6,500,000 round alongside MERCIA's wider EIS funds. So the whole round was funded by MERCIA. It's a good example of our connected capital model in play. Writing a larger check was important to winning the deal, and so a good example of how we work with other MERCIA funds.

8:08 SPP are an ESG software business, helping public and private sector businesses quantify, track, and improve the s in ESG. They've developed a novel framework denoted the TOMS framework, which has become the trusted and market leading social value measurement framework in The UK. The origin of the business is in the public sector. There are regulations in place which require businesses bidding for public sector work to quantify the social value they deliver on the bid. But in recent years, and what's encouraging is the business has made strong inroads into a larger opportunity in the private sector, signing up some real blue chip customers such as Accenture, Fujitsu, and Vodafone.

8:46 So why we bought the business? We looked at the broader ESG software markets. The the g segment is more mature, and interest and acceleration in the e has really accelerated over recent years with carbon accounting firms attracting significant levels of funding. But the s has been relatively overlooked but is now garnering much more attention. And SVP are benefiting from these market tailwinds, really showing strong growth since their series a round with Beringia in 2020. The reason we think they're winning is because of the trust they built around their framework and the fact it goes further than just measuring employee engagement and diversity and inclusion. True social impact goes further, includes capturing jobs and skills, volunteering, impact on local businesses and communities, and environmental regeneration.

9:37 Another big attraction for us was the CEO and the management team. So the CEO, Guy Battle, is a real thought leader on social value and was actually involved in shaping the social value act back in 2012 following selling an ESG consulting business to Deloitte. Together with his cofounder Nathan, they've built a fully formed management team across all functions of the business, and so we've got a good foundation for scaling. And finally, what's happened post investment? We're only a few months in, but we've really been focusing on helping the team with value creation activities. So firstly, we're working with the financial DD provider on the deal to help SVP improve the quality and depth of data it has in the business to provide the foundations for scaling. Secondly, we've engaged Edwin Abel, who's an operating partner at MERCIA, to do a deep dive into the sales and marketing function to identify some operational improvements.

10:29 And thirdly, we've also engaged executive coaching across the whole of the management team to help support them on their scaling journey, and we're looking forward to working closely with the business as it scales. I'll hand back over to Peter. Thank you. Thanks, Adam. Thanks, Alex. So as well as deployment and building the portfolio, it's important that we're continuing to, as as Adam just mentioned there, create create value and then ultimately exit businesses. And I'm I'm pleased to say we've had a another strong year of of divestments, including Lineup, IdeaGen, and and Intechnica here. Intechnica actually was a a planned divestment because it it was a group of companies that we invest in with the consultancy arm Intechnica plan to be degrouped and then divested in a short period of time as to enable us to continue to back the other business net of steer in the in the cybersecurity space.

11:36 Current body was a partial divestment where they've continued to grow significantly, especially in the Chinese market. So we're we're a current holder as they continue to grow. And then last but not least, post the year end period, was a a very successful exit for us. It's a a 35,000,000 cash realization back to the northern VCTs. And as mentioned, divestment continues to be important both to recognize

12:08 our track record as as venture capital investors as well as then generating cash that covers the the dividend cover for the for shareholders. So we thought we'd share next just a short video to hear directly from the CEO of Evatix, Matthew. I'm Matthew Elson. I'm the chief executive of Evatix. Evatix provides a health and safety software solution. So if you're responsible for health and safety, you need to record, investigate your incidents, follow through on any actions, you need to understand your risks and mitigations, people are trained, assets inspected, contractors are competent, etcetera. Lots of customers in our target space still doing that with pen and paper and Excel spreadsheets. So we're providing them with a solution that helps them to capture, store, organize their information, simple workflows to maintain compliance, and powerful business intelligence in order to slice and dice their data and understand where their improvement opportunities lie.

13:09 But we're a SAS business. It's a multi tenanted SAS solution. Everybody's on the same code base, and we're updating that code every couple of weeks.

13:20 Having stabilized the business, we had some great years of bootstrap growth. We'd created additional growth opportunities that we knew we couldn't sense continue to fund from internal cash flows, in particular, the North America market. We actually, worked with an organization called Scale Up Group. We were lucky that Scale Up Group introduced us to some some great investors and, really enjoyed meeting with MERCIA and just felt that was a great alignment between PLC. Us and MERCIA ASSET

13:55 There's been a lot of consolidation in our industry, and so we always knew that at some stage we wanted to participate in that. EHS sits at an interesting intersection of different segments. So are we part of HR tech? Are we part of governance risk and compliance? Like, are we part of effective operations? So we knew we were going to need to talk to a lot of people. So we did all prep, and then I think we had a total of 52 fireside chats from whom we we had 15, you know, indicative offers, and then we shortlisted that to four. SAI three sixty, relatively late to to to the game because they themselves only just been acquired, but I was delighted when they came onto the onto the scene because the strategic fit, for us was very, good. It's an exciting market. We are the only player in our market who can cover everything from mid market up through enterprise, and have global presence. So, you know, we we think we're in a great position versus our competitors, and we're excited about the opportunity to create a new safety, or new EHS and S business by combining the capabilities which exist within SAI three sixty with Evotec's capabilities and creating a new independent company that's going to go after that opportunity.

15:32 So this slide gives a schematic of how our portfolio is split both from stage of companies, so shareholders will be aware of the patient capital review which changed the VCT rules. And and you can see post 2015, which is when that came into place, the majority of the portfolio is now made up of of growth capital investments. And you can see by sector as well, software is our largest exposure by sector. But as I mentioned earlier on, our health care biotech percentage has been steadily increasing as we've built out the expertise within within the investment team in in that area where we do think that The UK is one of the strong points for The UK, and and there are many opportunities in in that area. And consumer being the third area, as I mentioned earlier, we we are cautious at the moment around consumer considering some of the the headwinds.

16:31 During the last few years as well, and since we've managed the the Northern VCTs, we've continued to build out the team as well. So rather than just being based in London, our investment team are are based around The UK. So I won't go through each individual, but you'll see we've got a team that's almost doubled in size compared to three years ago. And a number of different functions based in either our London, Bristol, Midlands, Manchester, and Newcastle office. So we've we've got quite an extensive team now that's also we've built out also our portfolio functions. So Nigel and and Martijn, who I mentioned here, they they have a wealth of experience and have joined the team to to manage the ever increasing portfolio. And and as I've mentioned earlier, focus on that value creation and ultimately focus on exits and realizations.

17:26 The other area we have under Lisa is the the whole value add and the operating partners that Adam mentioned and and other areas of expertise that we just need to help and support the portfolio. So Lisa's sole role is is to to focus in that area and and really just build the the value of the the portfolio as as much as and proactively as we can. I'll hand back back to Paul now. Great. Thank you very much. And it'd be really interesting hearing about some of the the portfolio companies, both case studies and, obviously, directly from the the CEO. Also trying to understand the the kind of the the increasing deployments over the last few years is that we build out the team and we can see since the Northern BCTs joined the MERCIA groups that the deployments expanded substantially.

18:21 And that follows on to what we wanted to talk about at the end of this presentation today, and that's in September, we we will be announcing we'll be launching a £60,000,000 offer, and that'll be a £42,000,000 of across the three VCTs with the £18,000,000 top up. As you all know, the in the investments we're deploying and the realizations that we're we're we're making over the last few years is is how we how we create the dividends, and the dividends have been very strong over the last few years. And you can see the the quote from MJ Hudson showing dividend yield between 8.414.8%.

19:00 And that's something which is is very important to all our investors, I'm I'm sure. That's something which, with our realizations we've had over the last few years, is is well covered. But as I say, the the got this £60,000,000 offer, which people are very welcome to to look and investigate more when the offer comes out in mid September, and then the application will be available in late September. As this timeline shows, the the, say, the offer is open in September, but then after that, we there will be an interim share allotment in December, and that'll be ahead of the interim dividend. And then we expect the offer to be open for a few months. It's a 60,000,000, so it's slightly it's it's bigger than we've previously done, but it's also early in the year. I should understand previously most of our offers have been out in January.

19:48 We're bringing it forward to September and raising more. So we do expect the offer still to

19:53 be open in January, February 2024, but the the final allotment will be just at the start of April in in in this tax year, in the 2324 tax year. And after that's been allotted, then there'll be a so it will be a a final dividend paid in in August 2024.

20:12 I can see there's been a few questions submitted already, but please do feel free to submit some more questions. And then we'll we'll if it's okay with you, we'll move on to the the the q and a section of that now. So I can see the one first question is from from Michael asking, are there any sectors that we avoid, and what sectors do you feel the greatest upside at the moment? And I think that's that's probably a question for for Peter. Feel free to bring in others.

20:41 Yeah. So as I mentioned earlier on, we broadly, we're we're focused on software, which which can impact many sectors, life sciences, which is also quite a broad church, and then consumer. There are three verticals that we tend to to be focused on. What that probably doesn't include, and it's it's mainly around our team expertise would be fintech. So I'd say that's an area that we we tend not to to to invest. It's it's potentially got upside, but it it's it's an area that, you know, we we tend to focus on where we've got internal and also external expertise within our our networks.

21:28 We do try and have a an investment strategy that also offers diversification around upside as well because whilst on because we are investing at the at the series a stage, typically, that is still at the the risky end. So what whilst some opportunities may have significant upside, it it may be if it's if it's binary technical risk, it it's often an investment that will will not progress with. So we we do try and ensure that we're we're looking to make sure that we're we're mitigating risk as as much as possible, recognizing that we are we are in venture capital. Great. Thank you, Peter. There's another question which I think pretty sits with you is what is your view of the broader market given the increasing number of headwinds across inflation, high interest rates, and how is the portfolio managing during these challenging times?

22:23 Yeah. I mean, it's certainly been an interesting few years for both our our teams and and also our portfolio in that we've we've had COVID to deal with. We've had Ukraine war to deal with, and now we've got the the macro economic challenges. And and it's I I think on balance, it's fair to say the portfolio of of of handled all three well. We we do sit on the boards of of of all companies that we invest in and from a governance perspective and risk management perspective, each of the companies are are assessing their own individual risks and and and trading fairly well in that regard. Most companies haven't got a huge amount of leverage and debt.

23:10 So from an interest rate perspective, they're they're shielded. Inflation has been a challenge and wage inflation has been a challenge for for most companies. And certainly last year, the energy crisis impacted some portfolio companies quite significantly. But interestingly, the the latest both risk and opportunity assessment we're doing is around AI and large language models and the impacts either positive positively or negatively across the portfolio. So so that's an a current area where where the team are are very focused to make sure that we we are managing risk as much as possible. Great. Thank you, Peter. And I'll I'll bring Adam in on this one. It's a slightly different what are the the key attributes does an investee company need to display to to win our investments?

24:05 So if you wanna take that, Adam. Yeah. Thanks, Paul. I think at the highest level, we look at the management team. We look at the markets, and we and we look at the products or service. So to dig into those one by one, The team, given where, you know, we're backing early stage companies, and we're we we we really are placing our trust confidence in the management teams to deliver on their plan. They know their markets, and it's for them to get across the vision to us as to, you know, how they can win in this market and why they're differentiated against competitors in the space. So I think a good balance of pragmatism, but also confidence and ambition we're looking for in the management teams. In terms of the markets, we obviously want to invest in businesses that are in a growing market. But I think what's more interesting from my perspective is not necessarily the top line number of what the market size is. It's the direction of travel, and how differences in regulation or or trends in consumer preferences or other market factors drive growth in the markets and the way products and services are built sorry, built.

25:18 So if we look at Social Body Portal, for example, you know, we I discussed the the sort of market tailwinds there. So really truly understanding the market they're operating in and that it's a growing space and this and the business we're looking at looks set to win in that space. And finally, on product and service, we are looking for, you know, differentiation, And there there will always be competitors in the space. And arguably, if there are no competitors, you might be a little bit early in the sector. So really understanding how the company differentiates to its competitors, and and that could be in the product or service. But it could also be in the go to market motion, for example, in the way that they engage with customers, you know, to to build out the case studies and build out trust and confidence. So those are the the broad three areas that I would look at when assessing an opportunity.

26:08 Great. Thank you. And I'll bring in Alex for this one. And can you talk about the valuations of new companies that we're looking at and and our our management teams being realistic? It's obviously a big question at this this point in the cycle. Yeah. Good question. So I think on the whole, we've seen a correction on on valuations and and people taking a slight pinch of salt when they're thinking about what they expect or ask their companies to be valued at. But, interestingly, when there are still excellent companies that we find, they still do attract quite big multiples and quite high valuations. But, certainly, at the moment, it feels like we're seeing more sensible valuations in some rounds where the CEOs have appreciated, particularly if they raised in the year of 2021, that this round isn't gonna be a big uplift.

27:00 So, yeah, it's it's a bit of managing expectations and and working to to evaluation that makes sense for both the founder and for us as investors as always. Great. Thank you very much. And, Peter, this this is probably one for you. Can you tell me about the the the dividend policy that's coming from Steve? Thank you very much for the question. But can you just brief us on the overall dividend policy of the Northern VCTs? Sure. Yeah. So there are there are three VCTs, Northern MVT, n two, and n three. So each have independent boards, but the MBT and n two aim for a a 5% dividend, and then three aim for a a 4.5% dividend. And then each board, will they then make separate decisions based on any special dividends that are disputed as well on on a case by case basis.

27:54 Great. Okay. And I think that there are some other questions, which was okay. I think we'll take offline, but partly to the interest of time. And but, Peter, I I think I'll hand over to you at this point to give a give a summary of what we've been talking about during this this session. Yeah. No. Thanks, Paul. And, yeah, it's it's a pleasure to to be running the the Northern BCT team within within MERCIA. As you as you've seen, we've been growing both the team and and the portfolio and continuing to have some successful realizations, which we we're confident to keep maintaining. So, yeah, look forward to to speaking to shareholders and existing and new again. We're also planning to have a a an in person event in October for shareholders, which post COVID, we we very much look forward to as well. So thank you very much, and and look forward to speaking again soon. That's great. Peter, Paul, Adam, Alex, thank you very much indeed for your time this afternoon and for updating investors. Could I please ask investors not to close this session?

29:03 This will only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the team from Northern VCT, we'd like to thank you for attending today's presentation. That now concludes today's session, and good afternoon to you all. Thank you very much.