Written evidence submitted by Mercia Asset Management (LRS0035)

About Mercia Asset Management PLC (‘Mercia’)

With origins in Birmingham dating back to 1982, Mercia Asset Management is a specialist UK asset manager focused on regional businesses. Our purpose is to provide tailored growth capital solutions to regional UK businesses including venture capital, private equity and debt (Mercia’s “Complete Connected Capital”). We believe that by providing growth capital and business support we contribute to the broader regional development across the country, promoting entrepreneurship, job creation and innovation within an Environmental, Social and Governance (ESG) framework that aims to create long term sustainable development.

Mercia is listed on AIM and employs c.100 investment and support staff. Today, its headquarters remain in the Midlands, in Henley-in-Arden. The firm manages multiple investment mandates as well as its own capital (together totalling c.£800m of Assets Under Management (AuM)), of which over £300m is available capital to invest over the next 2-5 years.

Core to Mercia is its regional UK footprint and investment focus with eight offices, 19 university partnerships and extensive professional networks, providing it with good visibility of the regional growth businesses requiring capital. 

Mercia reviews over 3,000 investment applications each year and in the last 12 months has been responsible for c.11% of the regional investment activity in businesses seeking less than £10m of investment support.

Mercia has a strong track record of investing through economic cycles, delivering attractive returns through targeted impact regional funds such as the Rising Stars Growth Fund, Coalfields Enterprise Fund and Coalfields Growth Fund.

 

Why is Mercia submitting evidence to this inquiry?

As a leading asset manager with first-hand experience of providing scale-up capital to high growth regional businesses underserved by traditional capital, we understand thoroughly the capital needs and investment requirements of founder-led and entrepreneurial-spirited companies. Mercia currently supports c.390 regional UK businesses with capital and an experienced local team of investment professionals.

Our long history across economic cycles provides us with relevant expertise to address the challenges and opportunities arising from COVID-19. We believe that at this time, it is more critical than ever, that the investment needs of regional businesses are heard at the highest level in Government. Any new initiatives and measures should be informed by parties with a complete and realistic picture of the circumstances facing these businesses, tooled with the relevant experience and who have the regions’ best interests at heart.

Mercia strongly believes that investment in the UK regions should be placed at the forefront of Britain’s economic recovery and the country’s overall levelling-up agenda.

Mercia suggests that dialogue, policy and debate around ‘levelling-up’ do not have at present sufficient regional representation and believes its heritage and presence in the UK regions give it an important and highly relevant perspective, which could be put to greater use.

 

 

The impact of COVID-19 on the UK regions and regional disparity

The impact of COVID-19 on the UK economy is without doubt profound and the full-extent of it is yet to be realised. What we do know is that the economic consequences of this pandemic will be felt disproportionately across the country.

According to the annual reviews of investment deployment across the UK on a regional basis published by the British Venture Capital and Private Equity Association (BVCA, https://www.bvca.co.uk/Research/Industry-Activity), prior to the COVID-19 outbreak, almost 80% of high growth SMEs (those growing at a rate of 20% or more) were located outside of London, yet only half of all investment went to the regions. Mercia anticipates that the recession driven by COVID-19 could be deeper than that of the financial crisis of 2008 with a marked impact on regional capital deployment, exacerbating that disparity and creating an urgent need for regional capital solutions to prevent a disproportionate increase in unemployment.

Debt in the form of the bounce back loans and CBILS are relevant to profitable SMEs and are welcome as an immediate near-term measure. However, if such SMEs are going to grow, thrive and expand to employ more people, longer-term measures and infrastructure need to be put in place to ensure that flows of capital are reaching the right businesses.

Typically, regional businesses have modest capital needs and are dependent on existing providers of capital such as regional institutional investors and business angels via Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs). We strongly believe that equity investment is an important requirement as regional SMEs look past pure survival and towards longer-term sustainable growth. In addition, the Future Fund has been a welcome near term intervention.

In recent media reports, it is becoming clear that the larger venture funds are focussed on deploying capital into existing portfolio companies and are predominantly re-trenching to London. The equity gap from seed through to series A (providing capital typically of less than £5m) is becoming more pronounced, particularly on a regional basis.

Mercia’s recommendation: Any government intervention should be able to sit and function alongside EIS and VCTs. A matched equity fund is one solution which can co-invest with existing forms of capital such as EIS, VCT and institutional capital – targeted at funding rounds of £10m or less specifically to businesses outside of greater London. In addition, lifting the restrictions on the age of businesses allowable for EIS and VCT intervention should be lifted to allow already existing pools of capital to be deployed.

 

The demand for growth capital in the UK and perils of leaving it unaddressed

The COVID-19 pandemic has exacerbated the capital needs of regional UK businesses. Mercia believes that leaving the regional equity gap unaddressed could amplify regional imbalances further, counteracting the ambitions of the Government’s levelling up agenda. Without question, policy reform and the role of regional and local government to deliver better regional economic outcomes needs to be explored to avoid extensive job losses, to reignite entrepreneurship and provide opportunities for young people to upskill. Without doing so, we risk losing a disillusioned COVID generation within the workforce and a raft of businesses that have the potential to provide significant employment opportunities, unique R&D capabilities and innovation to drive entire sectors forward and help the UK economy recover.

Empowering regional decision makers to channel the right capital through the right infrastructure to the right investment opportunities will not only drive faster growth but create substantial value for shareholders and investors, whether they be public or private thus creating a virtuous cycle of investment. The trickle-down effect from this has real potential to support the UK’s economic recovery post-COVID, boosting regional economies, productivity and employment.

The importance of effectively linking government interventions to both public and private “connected capital” cannot be underestimated.

 

Case Study: Impression Technologies Ltd

 

Impression Technologies Ltd (ITL) is a leading developer of advanced aluminium lightweighting processes and has a patented technology called Hot Form Quench (HFQ®) for pressing strong, lightweight aluminium components for the automotive sector. Based in Coventry, ITL’s novel forming process was researched at the University of Birmingham, one of Mercia’s 19 university partners, and further developed and spun out of Imperial College. Initially supported by University Challenge Fund (one of a minority focussed in the Midlands providing seed funding to university spinouts to actually evergreen itself), then Mercia’s EIS Funds and additional managed fund investment, ITL was subsequently scaled via Mercia’s balance sheet capital in 2015.

 

Furthert follow on investment from Mercia and co-investors has allowed ITL to open the world’s first HFQ® pressing facility in October 2016 and in 2018 a further funding round led by Mercia, enabled ITL to drive significant commercial adoption of its HFQ® technology by a growing pipeline of global automotive original equipment manufacturers and Tier 1 suppliers including Aston Martin and Lotus Cars. To facilitate further growth the company has also benefitted from extensive research grant support and a loan from Birmingham City Council

 

 

Mercia’s recommendation: A joined-up approach addressing the needs of the UK regions in a strategy executed by local Government and private sector third parties and co-ordinating with central policy makers will aid more consistent regional growth.

 

Engagement with regional and local Government: Mercia’s experience

Mercia has always worked cohesively with the British Business Bank, the LEPs and local councils due to the very nature of its business model, being to deploy much needed capital into the regions. Working with these partners we have been successful in providing diverse finance options to reduce the imbalances in access to finance for smaller businesses. The power of these networks, that have deep understanding and expertise in supporting SMEs in challenged areas, cities and regions has seen critical regeneration, job creation and sustained opportunity.

 

 

Case Study: SockMonkey Studios

SockMonkey Studios is an award-winning studio located in Middlesbrough founded in 2013 and employing 18 people. The company received investment from Mercia via the Northern Powerhouse Investment Fund. This investment will be used to create 12 more jobs and to launch a new game that is the continuation of this local success story. Skilled employees that make up the SockMonkey team and that are being attracted to the studio include, programmers, producers, and concept- character- 3D- and environment artists – qualifications that are all offered at Teeside University to support this growing demand for talent.

 

Mercia’s involvement in Sock Monkey Studios with its expertise in gaming and appreciation of what is needed to stimulate growth in this area has contributed to SockMonkey Studios being described by Tees Valley Mayor, Ben Houchen, as a key player in Middlesbrough’s digital and creative sector that will continue to play a pivotal role in creating real jobs for local people and showing the expertise of Teesside on the world stage.

 

 

There has to be more focused and structured opportunities to connect entrepreneurs and SMEs to university graduates; providing internships and employment at both a local and regional basis to a newly skilled work force in order to help mitigate the challenges that these graduates will be facing, post-COVID-19, in securing employment.

Examples of the need for greater university collaboration can be viewed through the optics of university spinouts. Mercia’s 19 university partnerships are critical to the regional ecosystem and account for c.20% of investments Mercia made in 2019/19. A strong example of this includes The Native Antigen Company, a University of Birmingham spinout in which Mercia was a founding investor via its EIS Funds. Today, the company is the world’s leading supplier of high-quality infectious disease antigens which was recently acquired by LGC for a total cash consideration of £18million.

 

Mercia’s recommendation: The government should support existing regional infrastructure (now is not the time for change) in which it is important to include existing investment managers. The success of these partnerships between the BBB and c.130 such managers has been demonstrated by the delivery of not just Government money to the smaller business finance market, but the much-needed expertise brought by the managers that help make these businesses sustainable over the longer-term. In addition, initiatives should be sought that connect local / regional providers of capital and support with regional SMEs and regional universities (specifically graduates for internship programmes, new employment etc).

 

UK Shared Prosperity Fund: Mercia’s view

As much as the UK Shared Prosperity Fund should reduce inequalities between regions and communities, as highlighted earlier in this submission, there are some that need more support than others. Apart from major shovel-ready infrastructure projects that will be welcomed if they address those areas that will be hardest hit by Britain leaving the EU, there is also an urgent need to address local economic issues and provide sustainable growth and employment/skills support. This can be achieved through business start-up and growth services and partnerships, sector-specific support targeted at local opportunities.

In addition to this should be the provision of programmes to incentivise universities to develop a presence and business partnerships in smaller towns. A good working example of this is Middlesbrough’s Boho Zone – the digital, creative and business hub of the Tees Valley. Made up of seven buildings, between them they accommodate everything from start-ups, to the multimillion-pound turnover stalwarts of the Tees Valley digital scene. Not only are the companies here the stars of the national digital industry, but they are also the font of digital solutions for a multitude of other market sectors.

 

Call to action – the Mercia wish list for change

The disruptive and perfect-storm of COVID-19 combined with the UK’s exit from the EU and one of the deepest recessions that the UK will experience in living memory, presents the Government with an opportunity to make real and lasting change that could leave a positive lasting legacy for UK society.

Mercia believes that in this inquiry, the following themes should be catered for:

 

 

 

 

In Mercia’s view, there exists an opportunity to improve connectivity and channels of communication between local government bodies and the private sector at the same time as providing the autonomy to these local government bodies to make devolved decisions through business frameworks that are tailored and localised. Mercia therefore urges the Government to support the expertise and decision makers in the regions by providing a platform for them both in central government and via briefings to the national media.

 

Mercia is of the opinion that the levelling-up agenda can most effectively be progressed if perspectives are more balanced across all UK regions. We would welcome the opportunity to be at the forefront of delivering these recommendations and in so doing, help enable the worthy ambitions of the levelling up agenda to be delivered in a timely manner.

 

September 2020