| "A Deeply Undervalued Specialist In Private Markets"

Tue 7:33am by Equity Development

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Equity Development initiates coverage today on Mercia Asset Management (LON:MERC) as they announce a strategic shift to focus on highly profitable and fast growing fund management

Full research report with audio summary here: https://www.equitydevelopment....

Mercia is one of the largest investors in ‘regional’ (ex-London) UK growth businesses. Its primary focus is managing funds of around £1.6bn for third parties (FUM) in structures such as Venture Capital Trusts, EIS funds and funds for institutional investors. The business is scaling. FUM has more than doubled in two years. Record net flows exceeded £0.5bn in FY24. And growth is by far the highest among a London-listed peer group.

FY24 revenue grew 18% y-o-y to £30.4m, EBITDA 7% to £5.5m, a margin of 18.2%, likely to ratchet up over the longer term as the business scales further. Indeed, the newly announced Mercia 27:100% growth strategy aims to reach £3bn AUM (FUM + proprietary capital) and £11m EBITDA in 3 years.

Mercia also invests its own capital into a portfolio of ‘direct investments’ (NAV: £189m on 31 Mar 24). Its record is impressive.

A strategic change is to be proposed at the 2024 AGM - to focus primarily on highly profitable and fast-growing fund management, and to stop making new direct investments (while supporting existing investments). This allows Mercia to reclassify from an investment company to a trading company under AIM rules, allowing gains made on shares to be IHT-exempt (under certain conditions).

With a fundamental value 65% above the share price, we see potential for a significant rerating.

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Charles Mitchell

Tue 11:36am

I have heard all this before I am afraid. I was a shareholder, sold at a loss as I got fed up with the same story and a falling share price. The company did not reply to several emails asking for information. So as they appeared not to value a small shareholder I sold.

turbo

Tue 11:15pm

Mercia reveals ‘natural evolution’ as it ends direct investments

Mercia Asset Management has unveiled a “natural evolution” of its strategy that will see it stop making new direct investments from its balance sheet.

The regional investor floated nearly 10 years ago with £23m of funds under management (FuM). That has now grown to £1.6bn, from institutions, retail, and the government-backed British Business Bank.

Mercia recently secured £360m across five mandates from the Bank’s regionally-focused funds in the North and Midlands, NPIF II and MEIF II.

The “Mercia 27: 100% growth” strategy is focused on building the enterprise value, and is partly a response to the stubborn share price which is at almost exactly the same price as five years ago, despite the progress made. Payton hopes the “simplified business model” will make it more attractive.

Dr Mark Payton, chief executive of Mercia, said: “Over the next three years as Mercia continues its natural evolution, and subject to shareholders approving our proposed new investment approach, we will seek to drive Assets under Management to in excess of £3.0bn whilst doubling EBITDA, focused on building value for shareholders and our other key stakeholders as a growing and sustainable, specialist alternative asset manager.”

He told TheBusinessDesk.com: “We have 11 offices across the UK now, 140 people who actively deploying third party capital – whether it’s retail, whether it’s institutional, whether it’s British Business Bank – and we’ve been performing very well across all those fronts.

“We’ve taken the lead from our capability and our strengths, and we will continue to grow third party funds under management.”

There aren’t expected to be any significant operational changes because “the change has already taken place”, said Payton, with the strategy for the next three years building on where the business currently is.

Payton added: “It sets the backdrop for what we think will be a successful three-year period that we’re facing in an environment where, ironically, two years ago, people looked at the UK and saw instability and challenges, and now in the current climate with global elections etc, the UK is looking like a stable environment to build and grow a business in – and that’s a really good place to be a provider of capital.”

Mercia is currently an investing company under the rules of the Alternative Investment Market (AIM). It is proposed to reclassify the company as a trading business, whose principal business operation is asset management.

"A deeply undervalued specialist in private markets"

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