This has been a tough period for the listed venture capital stocks. US-based Allied Minds (LON: ALM) shocked the market in April with a massive $147 million write-off and withdrawal of financial support for seven of its subsidiaries. The shares more than halved as a result. Closer to home, the proposed merger of the UK’s leading university technology-transfer offices, IP Group (LON: IPO) and Touchstone Innovations (AIM: IVO), has further undermined sentiment.
These two stocks share common shareholders in Woodford, Investec and Lansdowne who could force the deal through given their majority ownership. The premium to NAV has shrunk quite dramatically for both shares, with IP’s share price down 26 per cent year to date and Touchstone down 21 per cent. Sentiment is clearly negative towards these businesses currently. However they offer a diversified exposure to the most promising commercial technology emerging from our world-leading universities. So they are well worth keeping an eye on.
It was against this backdrop that we spoke recently with the management of Mercia Technologies (AIM: MERC). Mercia looks to make investments in early-stage businesses outside of the south-east. It now has eight regional offices and a focus on technology. It avoids the costly and high-risk therapeutic healthcare sector, but does invest in medical device and diagnostic companies alongside software, digital, and electronics. CEO Mark Payton argues that valuations are more reasonable away from the ‘golden triangle’ of London-Oxford-Cambridge, and that his regional focus offers a real advantage.
Mercia has bulked up through a £40 million placing in February which has left it with £64 million of cash in the context of a£121 million net asset value. Its largest holding is an £11 million 47 per cent stake in nDreams, which is in the exciting field of virtual reality games publishing. With listed VR play EVR Holdings (AIM: EVRH) valued at £80 million, nDreams could be a big winner. Mercia has a £330 million managed funds business which makes 40-60 new investments a year, from which it hopes to find ‘emerging stars’ for significant follow-on investment on its own balance sheet.
Discount to NAV
The latest NAV was 40.4p, which makes for a 15 per cent discount to NAV at the current 34.5p share price. With half the assets in cash a discount is not completely unreasonable, but it does illustrate the value on offer whilst the sector is out of favour.