Mercia fund flows bolster its credentials

The reported results for Mercia Asset Management (MERC), the regionally-focused early-stage investment specialist, didn’t quite tell the whole story as negative changes in fair value direct investments resulted in non-cash charges of £17.3mn playing havoc with the income statement.   

In fact, the asset manager experienced a positive year with fund inflows totalling £562mn at a time when the industry generally is only just recovering its poise after at least two years of poor investor sentiment. The flows meant that total assets-under-management (AUM) were up by around 26 per cent to £1.81bn. The company’s basic fund management fees were also in positive territory after increasing by £1.7mn to £19.2mn.

The inflow of funds is based on the company’s ability to attract mandates from public sector-based clients who have an interest in regional development. For instance, during the year Mercia won three mandates from the government-backed British Business Bank worth £263mn to be invested across the West Midlands, Yorkshire and the Humber regions.

The reported loss was a reminder that not all investments are winners. The non-cash charge resulted because of the impairment of Mercia’s direct investment in Impression Technologies, the carrying value of which had to be written off after two failed attempts at a trade sale. This also meant that the direct investment portfolio declined in fair value by £20mn to £117mn.

Price to net asset value (P/NAV) is a more stable valuation measure for Mercia, where earnings are impacted regularly by fair value changes, and broker Canaccord Genuity forecasts a P/NAV of 0.7 for 2025. This implies that there is still value on the table for investors, particularly with political change on the horizon. Buy.

Last IC View: Buy, 26p, 28 Nov 2023