Mercia Technologies PLC has quietly established itself as the place to go for cash for early stage businesses in the Midlands, the North and now Scotland.
Funds under management total £336million while the company’s own assets are worth £124million, including £65million of direct investments.
These are chunky amounts, especially for a business that shuns the start-up hot spots of London, Oxford and Cambridge.
Tech-focused: Mercia focuses on areas where other venture capital investors rarely tread
While there are many great businesses setting up in and around London, they are just too expensive to back, says Mark Payton, Mercia’s chief executive.
‘Entry prices are eye-watering compared to the Midlands, the North and Scotland.’
That is the nub for a business such as Mercia, as sale prices for any investment are set by what it is worth at time of exit not when it was bought.
This focus on areas where other venture capital investors rarely tread can give Mercia an immediate advantage, but it’s not just its geographical focus that marks it out.
The investment strategy is distinctly different from almost any other listed venture capital vehicle in the UK.
On the fund management side, the focus is on businesses right at the start of their journey. As such, the casualty rate is high and between 40-50 per cent of the firms backed by its funds fail, says Payton.
To cope with this heavy attrition the funds it manages are by necessity very long-term vehicles with lives of between 10-14 years.
That is a long time to be locked in, too long even for many institutions while retail investors are excluded completely except through Mercia’s EIS funds.
For retail investors, though, there is always the option to invest in the parent company Mercia Technologies PLC.
One big plus of this is that often it has pre-emption rights over any cash calls undertaken by businesses where its funds have invested.
‘In effect, it means our funds are our proprietary deal flow,’ says Payton.
Or in other words, Mercia Technologies gets an extended due diligence period that can last months, even years, over the circa 300 businesses within the funds.
That gives an invaluable insight into how management and a business are performing and crucially when is the best time for the parent company to take a stake.
Relationships have also been established with nineteen UK universities in the Midlands North and Scotland. Those give access to products or technology the universities might want to commercialise.
Mercia also underlined its position in the regions when it was apportioned a large chunk (circa £108million) of the government’s initial allocations of the Northern Powerhouse Investment Fund and £23million of the equivalent equity element via the Midlands Engine Room Investment Fund.
Payton says people in the City are still surprised when he explains how large the business has become.
‘The City does not know that, for example, that we raised £200million in the last twelve months.’
Mercia invests in virtual reality games specialist companies
Mercia can also boast some big winners from its investments. Most famous is the Liverpool-based automation group Blue Prism.
An investment of £900,000 has turned into £70million with the fund concerned still owning 2.5 per cent of the £866million market cap group.
Allinea Software was sold to ARM for £18.1million or 21 times the original investment, while most recently Science Warehouse was bought by Advanced Business Software for £16.9million.
These were cash deals and that is another must when it comes to an exit. Mercia Tech PLC had meaningful stakes in both these businesses. In directly held portfolio currently, virtual reality games specialist nDreams is one to watch says Payton.
He foresees an explosion in content for VR once the next generation of headsets hits the market, a development expected to occur within months.
DNA-design group Oxford Genetics is another seeing rapid revenue growth while InTehnica has developed a bot traffic filter that helps to help allocate tickets for the Glastonbury festival among other things.
One intriguing aspect of the strategy is that if Mercia identifies an opportunity but can’t find a business that fits, it will build it itself.
‘It’s like a home bake. Get to understand a sector, hunt for the right people and tech and see if we can build it.
‘Don’t look for it overseas, the UK’s regions have more than enough to offer.’
At 37.5p, Mercia is valued at £113million or a 9 per cent discount to assets, which looks a low risk way into some very exciting tech.