Mercia Asset Management (LSE:MERC) — Preliminary Results

0:01 Good afternoon, and welcome to the MERCIA ASSET MANAGEMENT PLC preliminary results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the q and a tab situated in the right hand corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question received in the meeting itself. However, the company will 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.

0:29 And I'd now like to hand you over to doctor Mark Payton, CEO. Good afternoon, sir. Good afternoon, and welcome everybody. And we do encourage those questions and comments. We do like to answer where practical and possible. So joining me today is Martin Glamfield and Julian Viggers. Perhaps, Martin, you can give us an introduction. Yes. Good after afternoon, everyone. I joined MERCIA just under eight years ago now to help mark IPO the company, and my background is as the CFO of multiple publicly traded and private equity backed technology based businesses. And Julian Julian Biggers. Yeah. Thanks, Mark. Good afternoon, everyone. So I oversee the group's equity investment activities.

1:16 I have done since 2018. I also sit on the board of Endreams and Invincible Studios. And I have been a fund manager across the venture part of MERCIA's activities, including the funds that

1:32 had Blue Prism with within them and also for Radian over time. Thank you, Julian. My name is Mark. Mark Peyton co founded MERCIA back in 2010. Martin and I actually floated the business back in 2014. Like Julian, I sit across a number of portfolio companies. My background is

1:55 within life sciences, so I have three life science portfolio company responsibilities. I was on OXGEMENT's board ahead of its sale a little over a year ago as well. So this this slide, slide four, just shows, I I I guess, the theme to today's presentation and discussion. This time last year, we talked about the MERCIA 2020, and I'll talk to that 2020 vision in a moment.

2:23 At this time, within the sort of turbulent markets, many leadership teams find themselves in, having something like 300,000,000 of unrestricted cash on hand across the group in our funds and on our balance sheet is a very strong and comfortable place to be. And those funds that we have are what we call long dated managed funds. So it's typically ten to twelve year funds or evergreen funds such as the VCT funds that we manage. And the beauty of those funds is there are no redemptions. Those are long term capital locked in. And in regard to our portfolio across our funds as well as across our balance sheet, these businesses are well funded. And something that we've spoken to really over the years is that we deliberately choose businesses with quite modest capital needs. Typically, they need less than sort of 20,000,000, maybe 10,000,000, but they're very modest in their needs. And that's because venture in particular and across the sectors of venture is a cyclical nature, and syndication risk really does raise its ugly head in times of turmoil. And although there are opportunities to be had, one also needs to be able to support the existing portfolio, and we can across our funds and across our balance sheet. And those businesses have strong commercial progress, particularly the businesses on our balance sheet, our direct investment portfolio.

3:37 We often refer to those as diversified in terms of their stage of development as well as their sectors that they sit within. And finally, on these bullet points here, we have limited public market exposure. What we mean here is those direct investments that we have, and Julian will talk to those in a little while, those business only one of those are on the public market. So we do not have those same challenges that others who are managing listed tech businesses, for instance. To the right, we have always and will continue to be focused on the domestic economy of The United Kingdom. We now have eight offices across the country. We recently, opened an office in Bristol. We see great opportunities across the Southwest, and we continue to drive and grow in that direction. This slide really could be just used as the only sole slide today. It shows the great strength and breadth across the group in terms of the operational activity or or investment activity if you like, and you hear that from Julian. And that builds on a strong break base from the previous year. So these are good figures building on very good figures from the previous year as well. And the same is true of our financials in terms of turnover, in terms of unrestricted cash and profitability as we drive NAV per share. And I think importantly, with the confidence in the board as they look to propose a final dividend of naught 0.5p per share, taking the full year dividend to naught 0.8p per share share. And importantly, as we've stated before, this is a progressive dividend policy, and that makes it double the dividend that it was the previous year.

5:10 This slide six really demonstrates the scalable platform that we have developed over a decade and is now delivering. And I think it's important to note in the title, MERCIA is debt free. So this is a highly profitable, cash generative, debt free group where our proprietary capital has three specific purposes. We selectively invest in a number of the funds that we manage. We invest alongside the funds selectively in portfolio companies that emerge from those funds, and, of course, we look to make acquisitions, and I'll talk to that in a moment. That activity is driving both NAV per share or capital growth and yield in terms of dividend. As those funds age and start to return capital, that capital flows back into our proprietary capital balance sheet position.

5:56 And with those direct investments, as they realize cash through exits, that comes back into our balance sheet as well, which can then be recycled across the group. This is a business with strong cash position, cash generation, and it does not envisage going back to the market to raise further money. A fully aligned model that is delivering. And just in terms of delivering and scale, as I mentioned in my introduction, actually, we IPO ed the business back in 2014. And just ahead of that IPO, we had approximately 13,000,000 in direct investments in a a young portfolio and 23,000,000 in what is what was CDIS and EIS funds, again, at the early stage of venture.

6:43 And over the years till to date, we have scaled the group. We've scaled assets under management from 36,000,000 to 959,000,000 through scaling venture from just early stage through to regional capital and VCT, adding private equity and debt, and greatly scaling our proprietary position. And that's been through looking at adjacent assets that we can really scale against our existing capabilities. And in all metrics, we see that growth coming through, and you'll hear that from Julian and Martin. As we scale the group, there are a 120 of us, growing from seven back in 2014 and eight offices, as I've alluded to, from the one initially in Henley and Arden, and it is in Henley and Arden today that the three of us are talking to you. So in terms of assets under management and how does MERCIA scale AUM, we obviously break that down into two parts, and that's organic and acquisition.

7:36 We have mentioned in the past that we have historically grown 50% of our AUM has come through acquisitions, and we would expect that dynamic to continue going forwards. But just looking at organic fundraising, you can break that down into three discrete pools of capital.

7:53 Retail investors, so that's our EIS and VCT investors. Now we're in the top four manager now across The UK in terms of EIS and VCT management. Within EIS, if you look at the market back in 2021, the latest published figures, 1,600,000,000 in EIS was raised. And in the last twelve months, we've raised circa 15,000,000. So clearly, considering our track record, a lot to go after in terms of EIS raise and deployment. And then within VCT, the latest figures there, 1,100,000,000 raised. And in the last twelve months, we've raised approximately $44.00. So, again, a lot of opportunity to grow that part in terms of distribution and scale and, of course, deployment. And then the next area, is what I'd call the sort of pseudo public sector public sector pool.

8:41 Good example there is, British Business Bank. We currently manage approximately 40% of the venture and debt regional funds that are looked after by British business bank. In the spending review just recently in 2021, there was a commitment by government for the next generation of these regional funds of 1,600,000,000. And put that into context, that's over twice the size of the previous regional funds. And based on our capabilities and track record, we would be confident and optimistic that we should be able to secure continued capital within that second generation. And the final pool of capital that we'll look to grow organically is the institutional capital side of things. And here, this is specifically within private equity and also within debt.

9:27 Based on our strong track record in those two places, we would expect to be able to raise further funds going forward, specifically in private equity. And this, of course, is through regional pension funds. As an as a regional asset manager, we're well placed with those regional pension funds. But as I mentioned, approximately half of the AUM growth will come through M and A, has come from M and A, we would expect that trend to continue over the foreseeable future. We operate a very deeply disciplined approach here where we have it driven through a value driver analysis, and that's where we're looking for at least 20 defensible discrete reasons that why you would be buying a particular business. And that, you know, at the top of that list is strong cultural fit. I mean, culture is clearly critical in terms of extracting extracting value from an acquisition, but importantly, by further scaling it. They have to be earnings enhancing.

10:22 We are a domestic investor, so they have to be capital focused on the domestic market and in particular within the third party funds under management, the proper operation that we have. The fee structures that you'll hear from Martin in a moment, we look to maintain those. So, again, that plays to the value driver analysis and, of course, a strong fit with our investment model, our internal capabilities investment team, and the proprietary systems that we have built ourselves in terms of asset management and scale up. The two acquisitions that we have made historically, the first was Enterprise Ventures. Back in 2016, one of the most active, venture investors, in the North Of England, indeed, Julian Julian Viggers, MERCIA's CIO, joined us from the EV acquisition. That was an 11,000,000, pound structured investment through shares and cash, bringing 200,000,000 of funds under management onto MERCIA.

11:12 And the metric there in terms of multiple was a 7.9 times profit before tax multiple. Three years later, 2019, MVM, we acquired three VCT fund management contracts as well as the team there. 25,000,000 was the price for that, again, structured over a period of years in shares and in cash. 270,000,000 of FUM came across to MERCIA in that regard, and that was acquired at a 6.3 times profit before tax. That really does set the scene for the sorts of businesses that we look to evaluate that against those value drivers and against those sort of profit multiples when we're looking at those acquisitions. And just finally, in this opening summary, I'm just reminding you of that 2020 MERCIA vision that we set out basically this time last year. And that's where we see 20,000,000 of profit before tax per annum averaged, and that's important, averaged over three years.

12:10 And in addition to that, 20% growth in AUM per annum, again, averaged over three years, driving two important value metrics within MERCIA, growing

12:19 NAV per share and growing the dividend. That table to the right, I think, sort of nicely summarizes that position where actually, look at it as a three year cumulative target where we have profit before tax, the target being 60,000,000 in that three year period, two years left now to deliver against that 27,400,000, through these numbers that we're presenting today. And then in three in two years time now, our three year target to get to circa $15,000,000,000, AUM, our starting point from today is 959,000,000. And we remain confident that those two targets will be met over the remaining two years. Martin? Thank you, Mark. I'm pleased to confirm that MERCIA has had a second consecutive year of strong financial performance.

13:05 And as a result, in the last two years, has generated over 60,000,000 of pretax profits on 40,000,000 of headline revenues. As you can see here on this slide, the two years together. And it's worth noting the big jump in adjusted operating profit, which has come both from growth in profits from our fund management activities, but also we've had a very strong increase in our finance income, which has come from some of the very adept structuring that Julian and the investment team put into our our direct investments. Our profit before tax of 27,400,000 was a 133% of revenue. And at the end of the year, as Mark said, we had 61,300,000 of unrestricted cash.

13:48 And this together led to a 14% growth in net asset value per share. And this next slide speaks to the quality of our fee income as a percentage of our assets under management. And what you can see here is that we are still at roundabout two percent as a revenue margin, which in our industry is a very, good fee margin. And that dip in 2020 is simply because we we

14:20 had only managed the BCT contracts for three months at the end of that financial year. But at the end of that financial year, we had included all of the BCT FUM of $270,000,000 in our closing assets under management. It's also worth noting, think, that and this is points to the reason why our RNS was headed robust results because 95% of our total revenues are now coming from our funds under management, and 87% of our total revenues are contracted and recurring.

14:51 And that is a great place to be in a period of uncertainty when you know the vast majority of your revenues year on year will be the same. This next slide is our income statement reported under international financial reporting standards. And here, you can see the revenue is up at 23,000,000 because it includes a performance fee that we received earlier in the year from one of the three venture capital trusts that we manage.

15:17 Julian, in a moment, will speak to the realized gain of almost £10,000,000 on the sale of Radian and also to the 11,400,000 of fair value movements. And further down, you can see the finance income, a very strong performance of redemption premiums and convertible loan interest that we've received from a number of our direct investments during the year. And one final note on this page is that we have become tax paying. And this is, I guess, is a sign of success and maturity of our business model in that we have utilized our remaining tax losses faster than we had expected simply because of the the profits that we've made in the last two years. Now we don't pay tax. The good news is we don't pay tax on our, you know, profit before tax of 27,400,000 because the vast majority of that is derived from our asset management activities on the balance sheet.

16:08 And where those investments qualify for what's called substantial shareholder exemption on disposal, then there is no corporation tax for us to pay. So we are really only going forward paying corporation tax on our adjusted operating profit.

16:26 In our balance sheet, not that long ago, I was saying that we were pleased to have reached a benchmark of 200,000,000 of gross assets. And now I'm pleased to say that we've reached that same hurdle of 200,000,000 of net assets. And you can see there the two key numbers on the balance sheet is the investment portfolio and also our strong cash position.

16:49 And as I've also said before, in the cash flow statement, we are very focused not just on making profits, but turning those profits into cash. And you can see here on the very first line that we generated just over 9,000,000 of cash from our operating day to day operating activities. And you can also see there the amount that we invested into the balance sheet portfolio.

17:10 And finally, for for me, for the moment, it's very reassuring for a company of our relative youth and and relative size that we have such a fantastic share register made up of, obviously, individual investors such as yourselves, but also a number of really blue chip long holder institutions. And and quite recently, we're pleased to say that Fidelity, as a long holder, has joined joined our share register. Thank you, Martin. Yes. Thanks, Martin. So my first slide shows the progression of our assets under management. So we started the period with $940,000,000, added 50,000,000 through EIS raises and new LP commitments to our regional funds.

17:58 And our performance has also been strong,

18:02 particularly across our legacy venture and and older EIS funds and our our balance sheet itself. More more on that in a minute. So that and strong realizations has led to returns to our LPs and increased dividends to our VCT and balance sheet shareholders. So and that has resulted in 90,000,000 of distributions

18:26 back to give us a closing position of 960,000,000 at the year end. So it's important also to recognize, as MERCIA said, that our funds are either LP closed structures or evergreen, so we don't suffer redemptions from those from those structures. And it's also equally important to note that we added a further 45,000,000 early in April, just ahead of the tax year end, in VCT and EIS raises to take our AUM to over 1,000,000,000.

19:02 So onto some stats from across the group. So as always, dealer origination remains a priority for us. And again, I've noticed a question there. So we get our deals from a variety of sources, from our networks of of of non execs and other investors. So we have circa a thousand non execs now that that are within our networks. We also get them through advisers, but also we search out investments ourselves in in proactive

19:41 fashion. So 220 or so new opportunities coming through the door or or that we find per month on average, enabled us to deploy a record 124,000,000 last year across a 148 businesses. 95 of those were in fact new to us. And of that 95, half of those are new debt deals. So particularly strong deployment last year across the VCTs, 45,000,000, and our regional funds at about 26,000,000. And again, in terms of performance, I'm really pleased. Last year was another excellent year.

20:25 After the 103,000,000 or so of realizations in 2021, we realized a further 155,000,000 last year, and that came across thirty thirty exits from our equity funds,

20:42 and generated a very good three times, 3.1 times on average cash performance. So this slide shows the majority of that 155,000,000 came through the venture activity within the funds, but also with 20,000,000 going back to the balance sheet through the sale of Faradion. The second pie chart there shows the 4.4 times cash we received from Faradion onto the balance sheet.

21:14 But equally importantly, you know, that on average, we are making three times our money on the 29 or so other venture fund exits. So I'd just like to to spend a couple of minutes on on Faradian because it's a real super example of our ability to create value. So back in 2011, Ashwin Kumaraswami, a colleague, an an investment director, myself, and a couple of other colleagues set out to create something disruptive in the battery tech space because we could see this was a really important area going forward, having seen a lot of kind of more incremental technologies coming coming at us. So we searched and found two individuals, highly highly respective respected in

22:11 the field, Jerry and Chris. And and their brief was to to find or or indeed create a more sustainable lower cost solution, but critically the one that would fit into current manufacturing techniques. And in Sheffield, with initially as little as a 100,000,

22:33 They focused down on on sodium ion chemistry, did the first POC in terms of the the the solution and and filed the first first patents. After a couple of years in two thousand thirteen, fourteen, we managed to demonstrate the world's first sodium ion powered electric bike, and that was in conjunction with Williams, the Formula one team. 2017, we added the balance sheet in order to help scale further the business. And really, traction accelerated with the arrival of Jim Quinn as as the CEO across two thousand nineteen and twenty when the company's battery packs could be placed in the hands of of potential customers.

23:24 So one of those was Reliance Industries, which happens to be India's largest company spanning retail, telecommunications, distribution, energy sectors. And they were particularly keen on the on the sustainability of energy supply, and and they also disclosed to us that they spent over $1,000,000,000 a year on their batteries for their their their vehicles and also for stationary power. So, during mid twenty twenty one, we started license discussions. Those discussions led over the course of the year two acquisition and Reliance paid a 100,000,000 in December for Friday. Now we're really pleased that that Reliance continues to invest in Friday in The UK.

24:21 Has doubled the headcount of the company, and that that's really important to us. Okay, so this slide shows this is the balance sheet, so our proprietary capital. So we started the period with 96,000,000 of value in our portfolios, Added as Martin's covered circa 80,000,000 of new cash, that's both to the portfolio, but also in two new deals, Forensic Analytics and Pimbly, both software businesses. The next two columns really back out from the portfolio. There's the 10,000,000 realized gain. And the following column is the 11,400,000 of of fair value movements.

25:11 As you can see, are some some some really interesting uplifts there. So the largest of which is 6,700,000 against End Dreams following a large 20,000,000 investment coming into the business in in March. But also in Technica, Warwick, Vert Trade, Invincible Studios also have shown some some really sizable uplifts. And that and that's on the back of, again, third party investors, but also progress made within the businesses. One downward movement, which is My Health Checked. As MERCIA said, it's the only listed investment we have. In my view, that doesn't do justice to the strength of the management, the cash or indeed the progress that that business is making.

26:01 And that meant that we closed the year out with a portfolio value of 120,000,000. So I just wanted to highlight a few areas where I believe we could see significant value inflection over the course of the next eighteen months or so. So, starting with IOTA, which is at the forefront of remote eye care. So, they have two products, one of which is a remote slit lamp, which enables a centralized practitioner to inspect the eye from head office, perhaps covering five to 10 sites. Partnerships with the top top five so we have a partnership with a a top five US chain who have pre ordered significant volumes of that machine post what we believe is pretty imminent FDA clearance.

26:59 Onto Verttrade, which is mobile games. So we've been really focusing on improving the return on advertising spend. So that's acquiring new users, and that's showing significant benefits month on month. So revenues now are of the order of four times the the levels that we've seen in in the later part of 2021. So good progress there. Netasea, which is now standalone following its demerger from Intechnica in April. So this is server side bot management. Again, recently highly recommended from the latest Forrester Wave report. Around 6,000,000 of ARR and significant US traction seen in that business now.

27:49 And again, lastly, on this slide, Warwick Acoustics. So, this is our flat, flexible electrostatic speakers that produce very high quality sound but are very much lower weight. Very interesting to the automotive OEMs. So and and the reasons are, you know, that low weight and and low power help to enhance electric vehicle ranges. It also enables a much more free and flexible design within the cab and also helps those OEMs move to net zero because Warwick uses recycled and upcycled materials in its products. So we're aiming at the the luxury and premium brands.

28:40 Examples of those would be the likes of McLaren, Lexus, Polestar, JLR, Audi, MERC, etcetera. We are working with a selection of those. We're we're particularly excited here because we we believe we could see Warrick's products on first vehicles in the latter part of 2024. Now it's interesting that these iOTO, VERC trade, and Warwick were businesses that we impaired during the pandemic in terms of value. But as as hopefully I've I've outlined, we can see some some really interesting progress being made within them now. Thanks, Mark. So as you'd expect with a funds portfolio of 250 or so equity investments, we've got a very healthy proprietary whip for our balance sheet.

29:39 So we're looking at in in-depth some nine or 10 really interesting businesses. So just a flavor across the sectors here. So Axis Spine is is another example of where we've effectively created the the business from from scratch at finding a really capable individual. So this business is involved in spinal implant cages. So these are now FDA cleared. They're much more versatile and lead to much less aggressive surgery. Surgery is going on as we speak in The US. Unifi, which is touchscreen technology at the human machine interface. Discover, which is very early, all cancer detection diagnostic, around to MindTech, which is an AI platform that creates data in order to train other AI systems much faster and accurately, And tribasonics, so it's an ultrasonic measurement of wear and tear in real time bearings and components in Sheffield.

30:52 And lastly, Nova Pangaea, which is a process technology that converts plant biomass into bioethanol and activated carbon and other usable products. So a lot of traction from the aero industry because it is very relevant for the production of sustainable aviation fuel. So I think you'll see new additions to our balance sheet over the course of the next next few months. Thank you, Julian. So very much a theme of more to come, which is really reassuring. Often, talk about being the first choice for investees, investors, and employees, and at the heart of that is one of being a responsible investor, you know, making an impact in what we do. As a as a regional investor that doesn't just deploy capital, but we support teams through our own searches, etcetera, to build teams, build management teams, and drive business growth, we are very much dedicated to helping regional businesses with responsible investment at the heart of our activity, and I think these results show that responsible investment works in terms of delivering in the ground and delivering returns to our stakeholders.

32:07 We've had for some time now a dedicated team to responsible investment as led by Jill Jill Williams, I'm part of that responsible investment team. Recently, one of the many outcomes from that was, a knowledge intensive impact EIS fund that was launched and raised very quickly, and that is currently being delivered again in regional as an impact purpose driven vehicle. There are a 120 employees across MERCIA in eight region regional offices. I mentioned the Bristol office being our eighth office that we've recently opened. We have 19 university partnerships, but I think it's important to note that actually they sort of account about 5% of our portfolio are university spinouts. But there are other things we use the universities for expertise, etcetera, but also an internship program. We work with the University of Warwick, for instance, where the responsible investment team, Jill, has been working there to bring through interns from people who've just not been fortunate in terms of opportunities they've been presented with over time, and they'll be working across MERCIA.

33:06 39% of our staff, 2020% of our investment team, and two of the five NEDs are women. Evidently, that is work in progress, and diversity is an important driver going forwards. On the right is a word cloud where we brought a number of our team well, full team came together and asked them to describe MERCIA in one word, and it's really pleasing to see actually ambitious in the middle of that. And perhaps another way of first choice is actually being ambitious for our investees, our investors, and our employees. And ambitious is something that actually really defines what MERCIA is about. And in this final slide, I think, brings together what both, Julian and Martin have spoken to. In times like this, strong liquidity, strong unrestricted cash of 300,000,000, of which 60,000,000 of that is on our cash on our balance sheet, puts us in a great place, in a great place to pick opportunities for new investments to support our portfolio and selectively look towards potential M and A, etcetera.

34:06 As we grow AUM, in particular through our third party funds, the maintenance of that fee margin on that scaling profitable operation is important, and we continue to maintain that fee margin. And those funds, just to remind you, are those long dated ten year plus funds or evergreen funds, which are not subject to redemptions. Again, a very strong, solid position to be in. Our portfolio is well funded. There are a number of questions that we will answer against that portfolio of direct investments. And as we've said, historically, we always look for businesses with modest capital needs. We have, as you've just heard from Julian, just one direct investment, a small direct investment in the public market. So our exposure to the public markets is highly limited. And in conclusion, just one year in to the three year MERCIA twenty twenty, we believe we're on track to achieve that and to meet and beat that within the next and remaining two years.

35:02 So I'd like to thank you for your time and attention today, and we'll endeavor between the three of us to answer some of the questions that have come up. Mark, Martin, Julian, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just using the q and a tab situated in the top right hand corner of your screen. But just while the company take a few moments to review those questions submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the published q and a can be accessed via investor dashboard. As you can see, we received a number of questions throughout today's presentation, and thank you to all the investors for submitting those. Mark, if I if I could just hand over to you to run the q and a session and give responses where it's appropriate to do so, that'd be great, and then I'll pick up from you at the end. Excellent. I'll do that. So there there are a number of questions around our direct investments, Julian. So I'll just I'll just pull those together in in separate themes.

35:54 One question was to do with the maturity of the direct investments. So over time, we've talked about when we invest, we look typically to exit these businesses on three to seven years. And the question is is what is the maturity of those businesses? Do we expect those exits to continue going forwards? And is there a weighting against age? In other words, are the value of those businesses going up over time? Yes. So so the clearly, the the portfolio is is is certainly maturing, and and and we have, you know, for example, in in Technica, Vertra, Invincibles, our businesses that are that are now profitable or or very close to being being profitable.

36:46 I guess in terms of disposals in general, the the outlook, that was one of the questions I think, you know, we we we have made since the the period end further £18,000,000 of realizations. Do we think that the the the levels that we've we've we've achieved over the past couple of years will will continue? Probably not. But we will still certainly continue to churn the the portfolios. But I think the fundamental point here is that we are very happy to continue to grow this portfolio. And and, you know, if if if, you know, the the exit environment is not quite as healthy as it as it was in the last two years, that's that's absolutely fine for us. And, you know, many of our investments are not going to be sold off the back of of multiples, you know, as we've demonstrated with the likes of Faradion.

37:49 You know, the acquirers of of of many of our businesses are gonna do that for strategic reasons, and I and I think that that will continue. There's another question which is which is kind of related, Mark, around the cash levels, I think. Yeah. So that I was I was gonna say that there's a there's a there's basically a split of we've talked about the use of the proprietary capital being investment in funds, the direct investments, and indeed in m and a. And I was gonna split that into two. Actually, there was no question on the funds, but there was a question in terms of what is the cash needs of the proprietary capital in terms of direct investment. And, Martin, if I could ask you to talk to the m and a after that. Yeah. So so the cash needs I mean, I guess the first first point to make is, you know, this portfolio is is is is not one where we are requiring to to really kind of, you know, put our hands in our pockets for for the next 100,000,000 or or 200,000,000 funding round, you know, for for high growth kind of fintech or or other types of types of businesses. So that is not where this portfolio sits.

38:57 So we we've we've done a lot of work and and looking at where, you know, and how the next eighteen to twenty four months looks across the portfolio, except in some of these businesses are now profitable or breakeven. So as a as a an overarching observation, our portfolio, if you if you were to exclude the holdings that we we have less than 2%, which is Sarxes and and Sense, which are already very, very aptly served by existing syndicate members. Our portfolio requires possibly between 20 and £25,000,000 in total over the next eighteen to twenty four months. That's before, you know, syndications.

39:44 So we are syndicated on on on many of these these deals with the likes of our own VCTs, BGF, some really high profile angel investors as well. So our portfolio needs in terms of cash are relatively small. Brilliant. And Martin, in terms of M and A, Yes. A question we've had a question around sort of M and A and sector sentiment and multiples and so on, which I'd like to give a bit of color on that. So if we go back to slide nine, you'll see that the two acquisitions that we've completed, 2016 and 2019, the purchase price multiples from a profit perspective were between six point three and seven point nine times.

40:32 And around and in during that period, those were similar multiples to which we saw in other transactions. So certainly, Gresham House's purchase of of some VCTs were in that in that range for for profit multiples. But then in in 2021, there was a transaction where it changed completely changed the dynamic of of M and A in the specialist asset management sector transaction. This And is not to criticize it at all, but transaction when when Matti Earlywood bought Maven Capital, and the headline purchase price is 14 times profits. And, of course, at that point, what happened was some of the conversations that we were having with with potential partners was that all of a sudden, they all felt understandably that their business was also worth 14 times profit. So at that point, we we backed away from from some of those conversations, kept our powder dry, and waited.

41:29 And then what we've seen I'm pleased to say what we've seen in more recently in in a couple of transactions that happened in in in June 2022 is Foresight have recently purchased Downing's Venture division, and it looks like the the profit multiple there is back down to about six times. And ASSET CO recently purchased an SVM, a specialist asset manager as well. And, again, it looks like there the the profit multiple is is more sensible. So we are very very much hoping that we'll be able to make some progress of ourselves in the next twelve months. I'm pleased to say we are having some early conversations with a number of companies that we believe would be a great fit for MERCIA, but we'll see how the year year plays out.

42:19 Thank you very much, Martin. I'm gonna keep you in the hot seat, I'm afraid. Is it coming coming quick and fast? So there's a question on structuring and how does that lend itself towards revenue generation in terms of the investment structuring? I guess this is a convertible loans Yeah. And whether or not that's a sustainable position. Yes. And and, obviously, Julian is the is the clever one here who who puts these structures together. But but, essentially, we don't simply go in our balance sheet. We don't go equity round to equity round because there there are times when it's not appropriate for the next round of funding for one of our young investee companies for it to be an equity round. And so what we sometimes do instead is we'll put either a convertible loan into that investing company or a straightforward simple loan. And if it's a simple loan, there might be a redemption premium attached to that simple loan with an interest coupon.

43:08 If it's a convertible loan, then there'll be an interest coupon, but also when an equity round subsequently does take place, that loan will we have the option of that loan converting at a discount to the future equity round. And we put those instruments in place. We don't account for the possible interest that may accrue on those convertible loans, and we don't account for any possible upside in the future equity round from the discount. And we don't account for any redemption premiums. And the reason for that is quite simply that those those future rounds may not take place. Those companies may not progress. But even if they do and a subsequent equity round does take place, it doesn't necessarily mean to say that future investors coming in with their waste of capital, you know, they they may wish in a commercial negotiation to try and and squash those those rights. What I am pleased to say is that during the last twelve months, some of those some of that structuring came to fruition through a number of our investments, most notably through the Endreams equity funding round and the disposal of Faradion.

44:05 And those two transactions alone triggered the majority of what you see there as the finance income. So what that financing can represent is a combination of some redemption premiums related to loans made to Faradian, some convertible loan interest on loans made to both Faradian and also Endrips. And then looking to the future, we do have that sort of structuring in a number of our other balance sheet portfolio companies. One never knows when those those the next equity round will come along, next commercial inflection point, if at all. But whilst it may well not be at the same level as it has been for the last twelve months, there are other convertible loans and there is other interest that may, at some point in the future, crystallize.

44:52 So we we may see that that finance income line continue to be positive during the next couple of years. Thank you, Martin. And can I just ask you another question, which is many questions within one? So can you add some detail about details about what what what's meant by progressive dividend policy? Yeah. Will there be any share buybacks or special dividends? Yes. So the the key point about progressive what we call a progressive dividend policy is that we are deliberately not anchoring our dividend approach to any particular part of our p and l account. And that is simply because there's two strings to our bow. There's our fund management profitability, but there's also the performance of the balance sheet portfolio from fair value movements and and cash realizations.

45:41 So if we were if we anchored our dividend policy to, say, a cover ratio of adjusted operating profit, then what that would do would completely ignore years when, you know, we we had a great overall profits performance. So we feel our board feels that having a policy where we seek to increase the dividend year on year progressively, irrespective of of how the adjusted operating profit performance is and how the balance sheet realization performances is a good way of thanking shareholders and providing them with a a sensible yield. And then adding to that was Share buybacks. Special dividends or share buybacks? Yes. And and we never rule either of those things out. Mean, we have absolutely exceptional realization and we had really nothing better to do with the the cash proceeds, then we would definitely give those, you know, special dividends or consideration.

46:34 We're we're very aware, and we fully understand the concept and the positive impact of share buyback programs on earnings per share, NAV per share, and dividend per share, and we and we never we never rule anything out. And we're also very aware of their popularity, particularly in The US and commentary thereon by the likes of Warren Buffett and Jamie Dimon. You know? However, they are typically investing in and running enormous businesses with considerable share trading liquidity throwing off hundreds of millions of of excess cash each year that they have no better use for. And we also note Terry Smith's view that, you know, buybacks should only occur if management teams have no better use for that cash. And also the chair of BlackRock, Larry Fink, who prefers quoted companies to use excess cash to invest in the growth of their businesses.

47:23 So we were we're aware of those sentiments. In our case, if we were to say, undertake a £10,000,000 of our 60,000,000, a £10,000,000 share buyback at a share price today of circa 30 p, that in theory would enable us to buy back 33,300,000 of our 440,000,000 shares in issue. That 10,000,000, however, would represent 16% of the of our available cash on our balance sheet, and that would be gone permanently against what is currently a very uncertain economic backdrop. And if you were to run those numbers with a reduction in the number of shares in issue, it would actually only increase our NAV per share by 1.3p, which would be a 3% increase in our NAV per share, but having spent 16% of our cash in the process.

48:15 And by comparison, one looks at the opportunity cost of that £10,000,000, and we believe with a current balance sheet investment portfolio with an IRR of just under sixteen percent and two successful acquisitions so far using part cash, part shares, we believe that there is a better use for our cash than the share buybacks, continuing to invest in our direct investment portfolio and also continuing to preserve our cash for possible m and a. Our current view, therefore, is that we do have a better use for our cash than a share buyback. And also, we've got two recent examples of where companies in our sort of sector have adopted share buyback programs. The first one being IP Group who have spent 27,000,000 in the past twelve months on share buybacks and have suffered a 42% drop in their share price. So the share buyback concept has not worked for them, and also Augment and Fintech have also spent in the last twelve months approximately £1,000,000 on share buybacks. And although they're they're I'm pleased to see their share price bounce positively yesterday on the announcement of their results. Nevertheless, over the last twelve months, since they initiated their share buyback program, their share price has actually fallen.

49:29 So we always in conclusion, we always seek to act in the best interest of all of our shareholders. And if we did ever reach a point of having excess cash, which we could see no better shareholder value creation use for, I am sure that our board would exercise all or part of its current shareholder authority to offer a share buyback. However, today, we continue to believe that spending, say, £10,000,000 of our cash on a share buyback program would do nothing for our share price whilst hindering our ability to execute on our strategic plans. So I I hope shareholders will on this call will will appreciate and understand the rationale behind our our views. Very clear. Thank you very much, Martin. I'll I'll take the next two, and then there are just two more left after that.

50:14 The and I'll roll this into one, which was a there was a question about the balance sheet. Is it is it cherry picking? And by the way, works synergistically with the funds. We don't we don't control any of those businesses in the funds. It is fundamentally up to the funds, up to the managers, and the founders and entrepreneurs where they take their capital from and the price of which that capital comes to it. And then, you know, we can be a price taker or price setter, but fundamentally, we are part of a process. So cherry picking is something that we ensure very carefully that we do not fall a victim of that through very clear capital allocation and conflicts strategies, and approaches, and processes that Julian sits across. And the other question, which is interesting, is very much related to the question that Martin's just addressed, which is if we're gonna go and make an acquisition, are we coming back to the market to raise money? The answer is a categorical no.

51:09 You've heard from Julian how much the portfolio needs, existing portfolio. You've seen the shadow portfolio and the opportunities that come across that, and you've heard from Martin about the acquisitions that that we're sort of looking at and driving and discussing with people. And you can see the examples of the acquisitions we've historically made. So there is no expectation to come back to the market as this group continues to generate cash and value in its own right. Julian, there was one question about MHC, the listed business, and and and I know we're not we don't have a board seat, and therefore, we're not privy to any kind of information that any other shareholder would be. But there's a question about, you know, is the timing right to come out of that business, or should we stay in that business? Yes. It's good question. I mean, I think I think we we are we are certainly holders of that business given its its its share prices is is possibly only, you know, a few million pounds in terms of enterprise value above its cash levels now. So it it would not, in my view, be the right time for us to come out.

52:16 What what we do have access to is discussions with with with the board, you know, in in in informal style. But but we we have, of course, in the past, added those board members into the business. So so we know what they're capable of, and that's why we've we've we've done it. So we do we do think that that management team will make a real success of the business. It has significant cash levels itself. It's still trading well off the back of various different COVID revenues, and it's got new products coming onto the market and some some pretty sensible ideas how to how to kind of drive drive users and and customers to to those products. So for us, it's it's not the right time for us to to to be leaving that that business.

53:12 Thank you. Yeah. And so so, Martin, there's a there's a question on performance fee actually that that's come through, which was about, you know, how how's performance fee earned? What level is it? And who gets that performance fee? Yes. Absolutely. So for some of the funds that we we manage, if certain performance thresholds are achieved, then the manager, us, we are entitled to performance fees. And the the main category of asset under which those performance fees might become payable is our three VCTs. And so what I'm gonna say now, there's nothing I'm I'm telling you now which is not already in the public domain because the VCTs themselves publish their own annual annual reports and interest statements.

53:58 So during the last twelve months, we did receive a performance fee from one of the three VCTs, Northern Venture Trust PLC. And the formula for that particular BCT, and each one is slightly different for the other two BCTs, is that the manager is entitled to a return of 15% of the total improvement in NAB above a hurdle. The hurdle is current hurdle is 6%. There is a cap on the on the fee on the total cost of quarter 22.25% net assets, and also there's a high watermark to be achieved as well. So that is the that is the the calculation in respect of that particular performance fee.

54:44 For some of our other legacy funds, older funds, which where we're no longer really receiving a fee on a day to day basis for managing the fund because it's gone beyond its investment phase, and it may even have gone beyond its theoretical realization phase. Where we do subsequently realize assets that are remaining in those legacy portfolios, we receive an additional fund management fee as an incentive to to wind those portfolios up. When when those fees happen, one can never really tell. We don't budget for them. We don't forecast them. But when they arrive, obviously, we're, you know, we're appreciative, and it's another sign of of our investment performance. Thank you, Martin. And I'm I'm just gonna sort of wrap up with a couple of trying to answer a couple of these questions all in one go. And, I wanna pass them over to you as well. So so one one question was about the VCT tax release. There's a lot in treasury has just had a a call for evidence. You know, will VCT tax release be lost? Will EIS tax release be lost? There's an ongoing dialogue. But back to that slide that I talked about where 1,600,000,000 in EIS, 1,100,000,000 in VCT. That's that's 2,700,000,000 targeting predominantly early stage companies in The UK. That would be a terrible loss to that. So the the initial meetings with the treasury select committee have been positive in terms of their recognition that these are good things to go forward. So that is an active dialogue going on. I cannot

56:14 confirm that they will will maintain those, but we remain optimistic that common sense will prevail and they that the likelihood is they will do. There was also a question in regard to the share register. So, you know, 17% of the share register is held by management, held by the board, held by employees to really align within, with other, investors within MERCIA. Of course, 10% is held by retail, and we have the deepest respect. And that's why platforms like this are a great opportunity for us to engage with you and vice versa. But there was a question, Martin, on on Libra and why is it selling below NAV per share. Yes. Absolutely. So Libra Holdings is a global, highly sophisticated investor who we were very grateful came onto our share register at time for our 2019 placing. So they came on a 25p per share and have been extremely supportive of us ever since.

57:13 And we meet with them at least every six months. They're also interested in some of our portfolio companies, which is also greatly appreciated. The fact that they chose to trim their their holding is obviously a matter for them, but we we greatly respect that. They've taken it down to 3%. They haven't gone completely. And so as a as a as a highly sophisticated global investor, we we respect the fact that, you know, they they take a decision from time to time to reduce that. But we know that they are they're very happy with what we're doing. We are actually seeing them on our roadshow virtually, actually on Zoom, and we look forward to presenting these results to them as well. But but we we speak continue to believe that they are a very supportive investor at MERCIA. Thank you, Martin, Julian. So I I'm hoping we've addressed all the questions. If we haven't, we will look through these and make sure that we follow-up them, but I'm hoping that we've addressed those questions being asked today.

58:06 Mark, Martin, Julian, thank you very much for that. I think you have addressed those questions you can from investors. And, course, the company will review all questions submitted today, as Mark has just said, and we'll publish those responses on the investment company platform. But just before redirecting investors, provide you with their feedback, which you know is particularly important to the company. Mark, could I just ask you for a few closing comments? Absolutely. The the three of us have been consistently passionate about the value locked up within The UK regions and have worked really hard to demonstrate that. I think last year's roles results and then this year's results demonstrate the value in the MERCIA model, the hybrid model of the proprietary capital alongside the managed funds. But I think, really importantly, the value of our team that we have the great fortune of working with at MERCIA and the great value of our investees, the businesses that we are looking to support.

58:56 But without our investors, whether they are in our EIS and VCT, whether they are British business bank in the public sector funds or our institutional capital, we would not have the capital to support those regional businesses. So, really, I'd just like to draw this as an opportunity to thank all those who've supported MERCIA on its journey, to reassure everybody that our MERCIA 2020 vision will be achieved in the next two years, and we really look forward to engaging with you in the coming period over our interims and prelims to share our results again. Mark, Martin, Julian, thanks once again for updating investors today. Could I please ask investors not to close the session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, and I'm sure be greatly valued by the company. On behalf of the management team of MERCIA ASSET MANAGEMENT PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.

59:49 Thank you.