Mercia Asset Management PLC

Good afternoon and welcome to the Mercia Asset Management PLC investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged and can be submitted at any time via the Q&A tab situated on the right-hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can 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. I'd now like to hand you over to Mark Payton, CEO. Good afternoon, sir.

Good afternoon and welcome everybody to Mercia's preliminary report results for the 31st of March, 2026. And for those of you that have not met Martin and I, we'll just quickly introduce ourselves. Mercia was originally established as a sort of scalable platform to deliver on a profitable basis, place-based gap finance. I think these results show that that model is scaling and working. Now that model was set up some time ago and we worked together an individual high net worth within the Midlands to both build out the fund management operation and then to selectively bring businesses from those funds onto what became latterly the direct investments that was done in a private context and we took it to the public markets in 2014 and ahead of that that individual his own money was the scale-up capital then when we took it to the public markets the money we raised was how we created those direct investments and this presentation will talk to now the simplification of the business as we look now to focus continually on the asset management piece martin thank you mark yes good afternoon everyone i joined mercia almost 12 years ago to float the business with mark

when there was just seven of us and 23 million of funds under management. And Mercia is my fourth quoted company as a CFO.

Thank you. So that regional advantage, as we put it then, we were looking to scale that into what is now a national platform. And as we look into FY27, so this financial year we're now in, we see four key strategic priorities for the group. The first, which is important, is this ongoing simplification of the business. And what we mean by that is the divestiture of the direct investments. Our origin, which was bringing across this hybrid model and scaling those direct investments, we are now looking to run those down on an asset by asset basis. But we're also considering other options, such as rolling that portfolio together and looking at how we move those through. In addition to that, it's about scaling the operational efficiency of the business as we look to grow EBITDA and we look to grow margin. And we do that through the delivery of our scaling third party fund management operation. And then that speaks really to the three platforms that we've been developing, as Martin said, for that some 12 years. The first being deal origination. So we have teams across the UK, 11 offices across the UK, where we're looking to see deals ideally that others do not see. We're also now developing quite a sophisticated digital AI driven outreach mechanism as we track new deals as they come through, as we continue to build our footprint and origination. And we do that through venture capital, through development capital for us that's private equity and loans provided to SMEs and property finance and that's loan that's lending money to property developers and as that origination builds and those opportunities continue to build across the UK sales and distribution is the next platform that needs to meet those growing opportunities and here we refer to retail to public sector and to institutional capitals are three legs of the stool for our sales and distribution. Retail for us is EIS and VCT, the tax efficient products. Public sector is predominantly local authorities and British Business Bank. And institutional capital at the moment is predominantly local government pension schemes. And then coupled to that is investment performance. Again, focused at the third party fund level, we're trying to get each asset class and each fund into top quartile performance. And I'm pleased to say in one asset investment strategy, we're now top decile globally in its performance. And we sit within three large growing and addressable markets, as I mentioned, venture development capital and property finance. Our future growth prospects as reflected over the last two years with strong FUM inflows can all occur within these three markets and we see these large addressable markets as ample room for our continued growth with it. As we look back on FY26, You can see that FY25 we invested some 274 million across the group and in this FY26 reported period that's 230 million and that really reflects the more difficult market in general across where we operate in the UK. However I'm pleased to say revenue has remained flat and importantly with cost efficiencies and capital and scale efficiencies we see EBITDA growing We see EBITDA margin growing. And I think really critically, as we continue to scale this part of the business, FUM, third party funds under management inflows increasing. So FY27, 237 million was a strong year for us. This year, we've seen that grow by 51% to 357 million in fund inflows. which takes me on to Mercia 27 as we enter the third year of our three-year strategic plan which really should be seen as a framework continue to build and scale this business and as I've mentioned those FUM inflows that have developed have to be seen in the context of an increasingly competitive market for raising funds so I think a great achievement of the team here at Mercia And when you look at the four elements of what we outlined for the strategic plan, growing AUM from 1.8 billion to 3 billion, growing EBITDA from 5.5 to 10, and EBITDA margin from 18.2% to 26%, we're on a good, strong growth journey. And that is done on an organic basis. And we'd always said that we expect for FUM, half of that to come through organically and half through inorganically through acquisitions. where the business is stalling, has fallen backwards, is in terms of the direct investment portfolio, but not in terms of its technical progress, not in terms of its commercial growth, many growing at 20% plus in terms of revenue year on year. This really reflects the market context in which the balance sheet operates, and I'll talk in more detail to that later on.

Thank you, Mark. This slide shows our four-year summarised results. Our FY26 revenues were £34.1 million and we achieved a £500,000 increase in EBITDA to £8.1 million. Our interim and proposed final dividend combined has reached the small milestone of one pence per share and our proposed final dividend is a 5% increase on the prior year. We are maintaining a significant cash buffer at £26.4 million and can continue to fund our progressive dividend policy and our annual 3 million share buyback program from our profitable fund management operations. And whilst our net assets and net assets per share have decreased at this year end due to a reduction in the fair value of the direct investment portfolio, this is more a reflection of current market valuation multiples rather than, as Marcus said, a lack of commercial progress by the portfolio overall. This slide shows our continuing growth in both EBITDA and EBITDA margin with a 6% increase in EBITDA during FY26 and a 7% increase in the EBITDA margin, which was driven by our increasing scale and operational efficiency. This slide shows our strong growth in assets under management, combining 357 million of new funds raised during the year and those awarded during the year, but on fee just post the tax year end, which is a huge vote of confidence in our deployment capability, but also in our investment track record. Taken together, the overall growth in assets under management today is 12% since the beginning of the last financial year. And we are now managing 2.2 billion, and that is an 87-fold increase on that 23 million 11 and a half years ago. There were no redemptions in the year and none of our funds are open ended in nature. This slide focuses on our long dated and diversified funds under management by asset class, investor type and funds type as at the 31st of March. Combined, these typically long-dated or evergreen funds are generating a blended fee margin of 1.74% across 63 live investment mandates and 83% of our revenues are contracted and recurring. This slide shows our consolidated income statement. Our increase in EBITDA during the year stemmed largely from a reduction in the average number of employees by 10. with a decrease coming in part from our focus on, as I've mentioned, operational efficiency and automation. And this slide shows our consolidated balance sheet and you can see our strong cash position supporting our proposed final dividend of 0.61 pence per share, which if approved will cost 2.6 million pounds. And this slide shows our consolidated cash flow statement as you can see our operating activities are consistently cash generative we invested 11.6 million net into the direct investment portfolio and we completed our first annual 3 million share buyback thank you and finally from me this slide shows our capital allocation policy in action with shareholder returns thus far of 26.8 million since our maiden dividend in December 2020. Thank you.

So moving on to the direct investment portfolio, and I would expect reasonably for questions to resolve around these two. So firstly, looking at the direct investment as its entire portfolio, We opened the period at circa 126 million and 11.6 million was invested into that portfolio. It's important to note that of that 11.6, circa 1.4 was as a limited partner, an LP, stake into our managed third-party funds. As the business continues to grow, and I think it's worth putting in context, we've got 2.2 billion now in assets under management, circa 125 million of that being our direct investments, that we would expect those LP stakes to marginally increase throughout time. So that really means 10 million invested across the direct investment portfolio in this 12 month period. We no longer add direct, new direct investments to the portfolio. And historically, before we started Mercia 27, we were investing 20 to 25 million per annum, in part because we're not investing in new direct investments, but in large part because of the maturing portfolio reaching either profitability or requiring less investment going forwards. We have fair value movements. accounting for 13 million downward swing. I will take you through a number of case studies and talk to our valuation methodology to bring that alive as to why those downswings and we close out on 125 million as a portfolio value. And what that If you look to the right side of this column is that we have material equity stakes in these businesses, typically between 20 to 30%. And that's the direct investment position. Many of these also have our managed funds alongside them. So our influence on these businesses is great. So just choosing three case studies from the direct investments. Now the top 10 of our direct investments account for approximately 82% of the total value. Vox Pop Me is the number one holding by value. It has also had a sizeable reduction in holding value. Now this business is growing and it's growing well and it's growing year on year. Last year grew by about 20% in terms of revenue growth. So this business is performing well. You can see by the quality of its customers, it has a good customer set too. It operates in the video analytics space. It's cash generative and it does not require any investment support from us. And you can see our holding on that is over 20%. I'm going to pass Warwick Acoustics on to Martin, who I think has a passion as he's a Range Rover owner as well.

Thank you, Mark. So as many of you will know, Warwick Acoustics was actually one of those balance sheet investments at the time of our IPO. So we have been invested in Warwick Acoustics for many, many years. and have backed the development of its electrostatic audio technology. So to reach the milestone that we reached with Warwick Acoustics a couple of months ago where Jaguar Land Rover launched the technology in its highest ever Range Rover, the SV Ultra, is a real milestone not just for Warwick Acoustics but also for Mercia. uh it's a really exciting moment and as many of you will have also seen in the past week we've announced an up to 7.5 million funding round from both uh mercia funds but also existing and new third-party shareholders and that funding round is sufficient now to drive warwick acoustics forward and develop its business and its potential thank you martin

And as Martin says, so this business doesn't require further investment, neither from us or anybody else. The investment will take this business now through to profitability. And if any of you happen to be at Goodwood in the coming weeks, you'll be fortunate enough, hopefully, to see one of these cars on demonstration there. So this business, these cars are now being rolled out. Which takes me on to the third case study. And this is a business called Netacea. We've just closed a small investment round with others into it. That's its last investment round. This business is growing. It operates within the cybersecurity bot detection sphere and is a very attractive business in respect of the markets addressing. On the far right gold box there, you can see the leading platform title. A year ago, this was doing bot management and threat intelligent reports. It's now introduced two new products. Verify and Agentic Analytics, which is playing to the ever increasing onslaught of AI initiatives, and in this case, AI enabled robots attacks, so bot attacks on websites. This is a business that we've also written down. So one of the questions is asked, how come your businesses are being written down? You talk about geopolitical conflicts. Well, I think in this instance, We made these valuations and I'll talk to that in the next slide, but on the 31st of March, and for many of you, you'll remember the commentary really in the media and the markets in regard to the AI potential impact on software businesses. And our multiples are based on publicly traded businesses and actually our auditors then discount that to reflect private businesses. And so we have followed those multiples. So although these businesses are growing and developing, the multiples by which we value them against have softened dramatically. Now that softening is coming off now because I think people are realising that that AI impact, and we see it in our own portfolio, is either non-existent or often enabling rather than degrading. But that really, I hope, answers that one question about why have your top assets seen a downward swing? It is because of the trading multiples that we are operating against. So Netosir in growth. We have again a strong stake in that over 30% and requires no further investment. And this slide here really talks to, this is a really important slide when we look at the direct investments and their progress and their valuations. The first slide on the left, that pie chart there, looks at the company numbers. Now today we have 16 direct investments down from 17 We sold, we unwound from a listed business Fortis and no longer hold that business. If you look across those, what were 17 businesses across the sectors that we operate in, you can see they're highly diversified. So there isn't an over concentration on software or on life sciences, et cetera. They're diversified across sectors. And I think that's a really important feature of our balance sheet direct investments. The next point does speak to the AI piece where we looked through the portfolio to look for vulnerabilities in terms of AI, either degradation of existing customers, clients and revenue, or actually replication of its model. And you can see there of the 1712, have no impact. So we just talked about Warwick Acoustics. Warwick Acoustics is not vulnerable to any form of AI impact, any form of software impact in that regard. So a large share of our portfolio are not impacted negatively by AI. Some of them, though, are net beneficiaries. So both VoxPopMe and Netacea are beneficiaries of AI and are AI-enabled. And I spoke to Netacea and the AI bot-driven attacks and where their agentic AI analytics is a countermeasure to that. So we have three that are net beneficiaries and we have two companies where there is a true and genuine challenge and we have worked with the management teams of these businesses to address that. Now those two businesses are outside of our top 10 and if you remember the top 10 accounts were 82% of the portfolio value. And then the next point really speaks to some of the questions that we've received in terms of valuation. Now, the valuation methodology we use is the International Private Equity Venture Capital Venture Guidelines, Valuation Guidelines. Sorry, it's quite a name that. But anyhow, which most people are meant to be operating. Unfortunately, not all do. And some will choose a DCF or will choose some measure that avoids, I think, the inevitable, which is the pragmatic valuation at the time. which is 31st of March for us when you look at these. So what you can see is about half, so that's 60 million of that 125 million, approximately half of our portfolio is valued at the price of last investment. Now that's good for the businesses that are raising investment and there's a price setting event, but actually with our portfolio as it matures, there are no further investments coming into it. So that accounts for half of the portfolio only. Asset Management PLC which says six on it, the six million that relates to AONIC. Now AONIC for those that will recall was the business that acquired almost all of the end dream stake for cash that we had returned back. We kept a small residual stake. That small residual stake has been valued on a net asset value basis in a business that's currently turning over 300 million euros making approximately 80 million euro EBITDA. And then the final amount is enterprise value. And those are based on trading multiples. And that is accounting for the downswing that we see because of the significant softening of multiples at the time of the valuation process for this. So I'm hoping that explains the valuation basis, the downswings in valuations, but also reassuring you that we take a very honest and pragmatic approach to the valuation of our portfolio. We always have done. And the next few slides just look forwards really in terms of process and progress and outlook. The first slide here relates to capital deployment across FY26. And again, and I'll use that word again, diversification, how diversified we are across the investment strategies that we operate, whether it's venture capital, whether it's property finance, et cetera, also against the markets. So if you look at the logos to the right, those are across a broad suite of markets. and of course, diversified across stages of businesses. We have businesses in there that are turning over 2, 3 million. We have businesses in there that are turning over 100 million. So there are some late stage businesses within our portfolio and some very early stage. And I think that diversification across the group is a strength of the group as we look to scale deal origination and capital deployment going forwards. And a number of you will have heard Andy Burnham, I'm sure, speaking yesterday. We provide gap finance. We do it on a profitable basis. We are seen and supported by investors in what activity we do. And we expect that sort of commentary to drive further regional capital deployment to seek managers such as Mercia to deploy that. And then from origination, it takes us on to sales and distribution. You can see the organic growth here, and I'll talk a little bit more to this on the next slide. But again, it shows the diversification across the types of assets classes that we manage in terms of investor types. VCTs in particular is worth bringing that one out is that we were raising 50 million and in consultation with the Northern VCT boards, in light of the changes coming through on the autumn budget in particular the drop from 30 income tax relief to 20 we increased our investment capacity we look to raise 80 million versus the original 50 and 50 would have been one of our largest fundraisers 80 million was by a long way our largest fundraise and as one of the top five vct operations out there and one of the larger operations out there We were able to raise that 80 million, but I think quite importantly, that means that we are able to deploy capital, continue momentum going into this new year. And I think finally, the changes within that, the VCTs that were introduced, there were some very positive ones. Many people are focused on the 30% to 20%, but we can now back larger businesses based on net asset. We can deploy twice as much money per annum into these businesses and twice as much money per lifetime into these businesses. So those changes are positive. We just think the advisory community will take time to digest those changes. And we felt it was prudent and appropriate to raise more money last financial year and less this financial year. And then just in terms of the growth of AUM through FUM, you can see this trajectory here where I've already mentioned in FY26, it was a 51% increase in terms of third party funds spread across retail and across public sector. As we look to FY27 we have a strong pipeline of opportunities going forwards and we expect we're targeting circa half a billion on an organic basis and a large part of that driven through institutional funds and that's because of the LGPS the local government pension schemes going through consolidation and now right pointing if you like to then start to capital allocate to managers and we expect that to start this summer. So we're are confident in that pipeline. And as I've spoken to, you can see retail is a smaller number because our VCT target fundraise will be smaller in itself. So just in conclusion, we see strong domestic tailwinds. I think yesterday's announcement by the potential new prime minister is very supportive of the model that Mercia operates, and we look forward to further dialogue in that regard. The diversification across the group, whether it's investor type, whether it's markets, whether it's asset class, puts us in good strength instead as we look forwards. The predictable recurring revenues of 83% is a strong position for the group to be in. The blended fee of 1.74% is a good place as well. And as Martin said, we're returning money back to shareholders with nearly 27 million back over time. I think just rounding up and concluding, is that this is an asset manager in the private markets with potential for strong growth going forwards. The simplification of this business fundamentally is a framework to divest the portfolio. And by divest the portfolio, that could be on an asset by asset basis or it could be the entire portfolio in some form of alternative transaction. We're exploring all those options and we originally guided the market. It would take us three to five years. And although working hard for this year to try and achieve that, we have been honest upfront to say in the current geopolitical challenges that the market faces, we may not achieve that in this year. We are driven to try and get that through. And as I said, we are looking at all options to achieve that. Thank you very much for your attention and time today. So I think, bar one, I've addressed the questions. I mean, there are two nuances here, which is why are the direct investments taking so long to exit? This isn't a Mercer issue. So this isn't a balance sheet issue. So if we look, we've got 260 venture businesses across our funds, of which 16 of those are our balance sheet. We're seeing this as a challenging environment to sell businesses. The IPO market is closed, so that's not an option. and trade acquirers are nervous and cautious. And it wouldn't surprise you when you're thinking about inflationary risk, you're thinking about interest risk, We still have the Middle East conflict going on. And of course, there have been the Trump initiatives that have impacted larger businesses as well. So caution threads throughout. And that is why the industry is struggling to make exits quickly. And that is why we have been very honest with you all to say we're working hard to get it through this year, but that might not be delivered. And therefore, we're looking at alternative options to do that. Another question which we have always answered and read out all questions. So I will talk about this one, which is basically in a nutshell, you tell us that you're positive, you have told us that you're positive and doing well every year. However, the share price doesn't move anywhere. And it's quite It's quite ironic, actually, and quite bizarre because the business is stronger than it ever has been on a trading basis. On any measure you want to do, it's stronger than it's ever been. And I was at a meeting recently where somebody reached across the table and said, how have you managed to do that with your share price, which I thought was going to be a derisory comment. And they were it was a bunch of small cap as much bunch of small cap businesses, chief execs. whose share prices are all going down no matter what they do. And he was congratulating Mercia on keeping a static share price. That is not our intention. Our intention is to drive this share price up. We think the anchor on this share price is our direct investments and we are pursuing every option to reduce that anchor and focus on the growth of the business through our private asset management group. I think there are no more questions.

That's great. Thank you for addressing those questions as you can from investors. And of course, the company can review all questions submitted today and will publish those responses on the Invest and Meet company platform. Just before redirecting investors to provide you with their feedback, which I know is particularly important to the company, Mark, could I please just ask you for a few closing comments?

Yeah, I think that the key take home message today is that we are rapidly scaling a capital light alternative investment strategy asset management business focused on gap financing and across the country on a region by region basis. We've seen growth in FUM, growth in profitability, growth in margin. Our focus now is to continue to grow that side of the business while focused sternly on how we address the balance sheet anchor to our share price to correct the share price for our shareholders benefit. And that is our every focus.

That's great. Thank you for updating investors today. Can I please ask investors not to close this 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 may take a few moments to complete and I'm sure be greatly valued by the company. On behalf of the management team, we'd like to thank you for attending today's presentation and good afternoon to you all.