Intangible asset finance

Last updated January 29, 2024

Intangible asset finance, also known as "IP finance", is the branch of finance that uses intangible assets such as intellectual property (legal intangible) and reputation (competitive intangible) to gain access to credit. Like other areas of finance, intangible asset finance is concerned with the interdependence of value, risk, and time.

Basic principles

Business can benefit from unlocking value from their intangible assets, with intellectual property and other intangibles adding at least double the value to products as tangible capital.^[1]

In 2003, one estimate put the economic equilibrium of intangible assets in the U.S. economy at $5 trillion, which represented over one-third or more of the value of U.S. domestic corporations in the first quarter of 2001.^[2]

Among companies in the S&P 500, intangibles including intellectual property account for 90% of the total market value.^[3]

Intangible assets include business processes, intellectual property (IP) such as patents, trademarks, reputations for ethics and integrity, quality, safety, sustainability, security, and resilience. Today, these intangibles drive cash flow and are the primary sources of risk. Intangible asset information, management, risk forecasting and risk transfer are growing services as the economic base divests itself of physical assets. Rights to tangible and intangible assets are intangible, and can be traded globally.^[4]

Policymakers have explored a variety of measures around IP-backed financing including the creation of dedicated funds; education programs to develop standards, raise awareness and promote good practice; as well as, in some cases, subsidized interest rates for loans based on IP as collateral. It is still a relatively new policy area with both firms and governments are experimenting with how they can support IP-rich businesses to grow.^[5]

Business models using IP-backed financing

A number of intangible asset business models have evolved over the years.

Patent licensing & enforcement companies ("P-LECs"):^{[ citation needed ]} These are firms that acquire patents for the sole purpose of securing licenses and/or damages awards from infringing parties. Another name for a P-LEC is "patent troll," although this is viewed as a pejorative reference. Recently,^{[ when? ]} hedge funds have raised capital for the specific purpose of investing in patent litigation.^{[ citation needed ]}
Royalty stream securitizers: These are firms that are engaged in the buying and selling of what are essentially specialized asset-backed securities. The assets that are securitized are typically intellectual properties, such as patents, that have been bearing royalties for a period of time. Royalty Pharma is a well known firm that uses this business model, and which has done by far the largest and most high-profile deals in this space.^{[ citation needed ]} Royalty Pharma handled what many consider to be the first pharmaceutical patent-backed securitization to be rated by Standard and Poors, which involved a patent on the HIV drug Zerit.^[6] The other parties involved in the Zerit transaction were Yale (the owner of the patent) and Bristol Myers Squibb.
Reinsurers: These are firms that use the techniques of reinsurance to mitigate intangible asset risks. In the same way that some firms issue cat bonds to mitigate the risks associated with extreme weather, earthquakes, or other natural disasters, firms exposed to substantial intangible risk can issue "intangible asset risk-linked securities" that transfer intangible risk to hedge funds and other players in the capital markets with a sufficient appetite for risk.^{[ citation needed ]}
Market makers: Firms that are working to provide more liquidity to the market for intellectual property. Early market makers offered on-line intellectual property exchanges where buyers and sellers could exchange rights in licensed intellectual property, usually patents. On April 22, 2008, Ocean Tomo reported^{[ citation needed ]} that it had transacted approximately $70 million in its IP auctions across Europe and the United States. Between 2009 and 2015, The Intellectual Property Exchange International (IPXI), headquartered in Chicago, operated as the world's first stock exchange with an intellectual property focus.^[7] In 2017, Ocean Tomo launched its Bid to Ask market.^[8]
Investment Research Firms: Companies that provide specific advice to investors on intellectual property issues. Recently, hedge fund managers have been hiring patent attorneys to follow and handicap outcomes in high-stakes patent cases.^{[ citation needed ]}

Significant transactions

1997: David Bowie securitizes the future royalty revenues earned from his pre-1990 music catalogue by issuing Bowie Bonds.
2000: BioPharma Royalty Trust completes the $115 million securitization of a single Yale patent with claims covering Stavudine, which is a reverse transcriptase inhibitor and the active ingredient in the drug Zerit. This was the first publicly rated patent securitization in the U.S. At the time of the deal, Bristol Myers Squibb had the exclusive rights to distribute Zerit in the U.S. Not long after closing slow sales of Zerit along with an accounting scandal at Bristol Myers Squibb triggered the accelerated and premature amortization of the transaction. Many observers believe that this deal was ultimately unsuccessful because of a lack of diversification as it involved a single patent and a single licensee.
2005: UCC Capital Corporation securitization of BCBG Max Azria's royalty receivables generated from worldwide intellectual property rights worth $53 million. This transaction is recognized as the first "whole company securitization" involving primarily intangible assets. UCC Capital Corporation was founded by Robert W. D'Loren, and was acquired by NexCen Brands, Inc. in 2006. NexCen sold substantially all of its assets to Levine Leichtman Capital Partners in 2010.^{[ citation needed ]}
2005: Ocean Tomo holds its first live IP auction. Although proceeds from the first auction were unremarkable, the relative success of the Ocean Tomo auctions that followed showed that the live auction is a reasonably viable business model for monetizing intellectual property.
2006: Marvel Entertainment's film rights securitization in conjunction with Ambac Financial Group to provide a triple-A financial guarantee on a credit facility for Marvel backed by a slate of 10 films to be produced by Marvel Studios and intellectual property related to some of Marvel's most popular comic book characters.^[9]
2012: Alcatel-Lucent secures €1.6 billion in a loan secured by its intellectual property portfolio and other assets.^[10]
2020: Aon launched an intellectual property capital market solution designed to help companies protect and maximize the value of its intangible assets. Its first deal involved an agriculture technology firm, Indigo, which gained access to $100 million through IP collaterals.^[11]
2020: American Airlines secured a $1.2 billion investment by Goldman Sachs Merchant Bank in the form of two senior secured note transactions to be collateralized by intellectual property and other assets.^[12]
2020: IP Finance Transactions of South Korea Surpass KRW 2 Trillion.^[13]
2021: BDC Capital provided $2.6 million in growth capital to Novarc Technologies in IP Backed-Financing Fund's first deal.^[14]
2021: entrinsic biosciences secures $49 million in non-dilutive growth capital from Jefferies Funding LLC in deal supported key Collateral Protection Insurance.^[14]
2022: Agriculture commerce bank of Zhangjiagang, based in China's Suzhou province issued a 500,000 digital yuan loan supported by intellectual property.^[15]
2022: BDC Capital announced the addition of eight portfolio companies to its IP-Backed financing fund.^[16]
2022: Chinese municipal bank issues first digital yuan loan holding IP as collateral.^[17]
2024: Natwest Group launches IP-based lending product.^[18]

Government, societies, think tanks, and other non-profits

The World Intellectual Property Organization (WIPO) is a self-funding agency of the United Nations, with 193 member states. Its stated mission is to lead the development of a balanced and effective international IP system that enables innovation and creativity throughout the world.^[19] In June 2021, WIPO released its Medium Term Strategic Plan (MTSP), which included working with its partners to catalyze international discussions on the important questions of intellectual property valuation and finance. The organization is launching a new report series, studying country experiences with IP-backed financing.^[20] The series was formally launched in 2022.^[21] It includes China^[22], Jamaica^[23], Japan,^[24] Singapour,^[25] Switzerland,^[26] and the United Kingdom.^[27] In November 2022, WIPO held a High-level conversation on Unlocking Intangible Asset Finance,^[28] announcing its action plan on the topic. In November 2023, WIPO held their second IP Finance Dialogue.^[29]

The United Nations Commission on International Trade Law (UNCITRAL) plays a key role in developing progressive harmonization and modernization of international trade law. UNCITRAL does so by promoting the use and adoption of legislative and non-legislative instruments in a number of strategical areas of commercial law . The UNCITRAL Legislative Guide on Secured Transactions promotes low-cost credit by enhancing the availability of secured credit. In line with this objective, the Supplement on Security Rights in Intellectual Property is intended to make credit more available and at a lower cost for Intellectual property rights owner.^[30]

The Organisation for Economic Co-operation and Development (OECD), is an international organization that works in establishing evidence-based international standards and finding solutions to a range of social, economic and environmental challenges. In addition to other topics, the organization explores the role of intellectual property rights, studies the economic impact of IP regimes globally. In 2019, it produced a paper on the use intangibles to strengthen SME access to finance.^[31]

The International Financial Reporting Standards Foundation (IFRS) is a nonprofit accounting organization, which promotes the development of financial reporting standards. Its International Accounting Standards (IAS 38) set out the criteria for recognizing and measuring intangible assets: "An intangible asset is an identifiable non-monetary asset without physical substance. Such an asset is identifiable when it is separable, or when it arises from contractual or other legal rights."^[32]

Challenges in IP-backed finance

Challenges in intangible asset financing include:

High transaction costs.^[20]
Lack of confidence in IP valuation methodologies^[33]
Liquidity of the underlying assets^[34]
Lack of familiarity with intellectual property as an asset class among lenders.^[31]

Related Research Articles

Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, copyrights, trademarks, and trade secrets. The modern concept of intellectual property developed in England in the 17th and 18th centuries. The term "intellectual property" began to be used in the 19th century, though it was not until the late 20th century that intellectual property became commonplace in most of the world's legal systems.

The World Intellectual Property Organization is one of the 15 specialized agencies of the United Nations (UN). Pursuant to the 1967 Convention Establishing the World Intellectual Property Organization, WIPO was created to promote and protect intellectual property (IP) across the world by cooperating with countries as well as international organizations. It began operations on 26 April 1970 when the convention entered into force. The current Director General is Singaporean Daren Tang, former head of the Intellectual Property Office of Singapore, who began his term on 1 October 2020.

Technology transfer (TT), also called transfer of technology (TOT), is the process of transferring (disseminating) technology from the person or organization that owns or holds it to another person or organization, in an attempt to transform inventions and scientific outcomes into new products and services that benefit society. Technology transfer is closely related to knowledge transfer.

<span class="mw-page-title-main">Valuation (finance)</span> Process of estimating what something is worth, used in the finance industry

In finance, valuation is the process of determining the value of a (potential) investment, asset, or security. Generally, there are three approaches taken, namely discounted cashflow valuation, relative valuation, and contingent claim valuation.

Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses its internal reserves to satisfy its necessity for cash, while the term financing is used when the firm acquires capital from external sources.

Structured finance is a sector of finance — specifically financial law — that manages leverage and risk. Strategies may involve legal and corporate restructuring, off balance sheet accounting, or the use of financial instruments.

An asset-backed security (ABS) is a security whose income payments, and hence value, are derived from and collateralized by a specified pool of underlying assets.

In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan. The collateral serves as a lender's protection against a borrower's default and so can be used to offset the loan if the borrower fails to pay the principal and interest satisfactorily under the terms of the lending agreement.

A celebrity bond is commercial debt security issued by a holder of fame-based intellectual property rights to receive money upfront from investors on behalf of the bond issuer and their celebrity clients in exchange for assigning investors the right to collect future royalty monies to the works covered by the intellectual property rights listed in the bond. Typically backed by music properties, the investment vehicle was pioneered in 1997 by rock and roll investment banker David Pullman through his $55 million David Bowie bond deal.

A real estate mortgage investment conduit (REMIC) is "an entity that holds a fixed pool of mortgages and issues multiple classes of interests in itself to investors" under U.S. Federal income tax law and is "treated like a partnership for Federal income tax purposes with its income passed through to its interest holders". REMICs are used for the pooling of mortgage loans and issuance of mortgage-backed securities and have been a key contributor to the success of the mortgage-backed securities market over the past several decades.

Intellectual property assets such as patents are the core of many organizations and transactions related to technology. Licenses and assignments of intellectual property rights are common operations in the technology markets, as well as the use of these types of assets as loan security. These uses give rise to the growing importance of financial valuation of intellectual property, since knowing the economic value of patents is a critical factor in order to define their trading conditions.

An intellectual property broker mediates between the buyer and seller of intellectual property (IP) and may manage the many steps in the process of creating a deal with regard to the purchase, sale, license, or marketing of intellectual property assets. This may include: patents, trademarks, or inventions (prototypes).

Intellectual property valuation is a process to determine the monetary value of intellectual property assets. IP valuation is required to be able to sell, license, or enter into commercial arrangements based on IP. It is also beneficial in the enforcement of IP rights, for internal management of IP assets, and for various financial processes.

World Intellectual Property Indicators (WIPI) is an annual statistical report published by the World Intellectual Property Organization (WIPO). The publication provides an overview of the activity in the areas of patents, utility models, trademarks, industrial designs, microorganisms, plant variety protection, geographical indications and the creative economy.

Patent monetization refers to the generation of revenue or the attempt to generate revenue by a person or company by selling or licensing the patents it owns.

Keith Daniel Bergelt is an American corporate executive and former U.S. diplomat. He is CEO of Open Invention Network where he is responsible for coordinating the establishment and maintenance of a patent ‘‘no-fly” zone around Linux. As such, he is responsible for safeguarding an open and competitive landscape in key technology markets such as back-office transaction processing, mission critical IT applications, mobile communications/smartphones, and desktop computing.

Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling their related cash flows to third party investors as securities, which may be described as bonds, pass-through securities, or collateralized debt obligations (CDOs). Investors are repaid from the principal and interest cash flows collected from the underlying debt and redistributed through the capital structure of the new financing. Securities backed by mortgage receivables are called mortgage-backed securities (MBS), while those backed by other types of receivables are asset-backed securities (ABS).

A patent box is a special very low corporate tax regime used by several countries to incentivise research and development by taxing patent revenues differently from other commercial revenues. It is also known as intellectual property box regime, innovation box or IP box. Patent boxes have also been used as base erosion and profit shifting (BEPS) tools, to avoid corporate taxes.

A royalty fund is a category of private equity fund that specializes in purchasing consistent revenue streams deriving from the payment of royalties. One growing subset of this category is the healthcare royalty fund, in which a private equity fund manager purchases a royalty stream paid by a pharmaceutical company to a patent holder. The patent holder can be another company, an individual inventor, or some sort of institution, such as a research university.

The World Intellectual Property Report (WIPR) is a biennial analytical publication by the World Intellectual Property Organization, an agency of the United Nations. Each report examines a different theme, focusing on trends in a particular area of intellectual property and innovation. The report uses macroeconomic analysis and includes case studies to examine the role of intellectual property and other intangibles in the global economy.

References

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