Intangible asset finance

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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.

Contents

Basic principles

Total intangible and tangible investment 1995-2023 Total intangible and tangible investment 1995-2023.png
Total intangible and tangible investment 1995-2023
Intangible investment as a share of GDP, 1995 versus 2023. Multiple economies Intangible investment as a share of GDP, 1995 versus 2023.png
Intangible investment as a share of GDP, 1995 versus 2023. Multiple economies

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.

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. [9] 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. [10] The series was formally launched in 2022. [11] It includes China, [12] Jamaica, [13] Japan, [14] Singapour, [15] Switzerland, [16] and the United Kingdom. [17] In November 2022, WIPO held a High-level conversation on Unlocking Intangible Asset Finance, [18] announcing its action plan on the topic. In November 2023, WIPO held their second IP Finance Dialogue. [19]

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. [20]

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. [21]

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." [22]

Challenges

The ecosystem for Intangible asset finance still faces a number of obstacles, making it difficult to scale. These transactions require more effort and take longer than more common financing deals. That is primarily due to the following factors:

Measuring intangible investments

Measuring intangible investments may have the following benefits [26]

The measurement of intangible assets poses several challenges. First the “non-physical” nature of intangible assets makes them intrinsically hard to measure and report. Moreover, many intangible asset types, such as brands or design, are still not recognized as investment under national accounting frameworks. The existing data also suffers from gaps in coverage and time lags, especially outside high-income economies. [26]

The combined efforts of multiple international projects [27] established a first harmonized database of intangible capital at the business sector level, INTAN-Invest, which proposes harmonized cross-country data on intangible investment by industry covering 15 EU countries and the United States from 1995 on. [28] [29] [30] McKinsey reported that the share of total investment of intangibles as defined by the INTAN-Invest database increased by 29 percent between 1995 and 2020. [31]

Global INTAN-Invest, launched in 2024, is a database expanding on INTAN-Invest and building on EUKLEMS & INTANProd. It features cross-country quarterly and annual measures of intangible assets for high-income but also emerging economies (contrariwise to the INTAN-Invest). [32]

Significant transactions

See also

References

  1. Organization, World Intellectual Property (2017). World Intellectual Property Report 2017 : Intangible Capital in Global Value Chains. Geneva: World Intellectual Property Organization. ISBN   978-92-805-2895-4. OCLC   1128429013.
  2. "A Trillion Dollars A Year In Intangible Investment," Leonard Nakamura in Intangible Assets: Values, Measures and Risks at 28, Hand & Lev, Oxford University Press (2003).
  3. Banker, Rajiv D.; Huang, Rong; Natarajan, Ramachandra (Ram); Zhao, Sha (2015). "Market Reaction to Intangible Asset Value: Evidence on SG&A Expenditure" . SSRN Electronic Journal. doi:10.2139/ssrn.2589319. ISSN   1556-5068.
  4. Gio Wiederhold; Valuing intangible Capital, Multinationals and Taxhavens; Springer Verlag, 2013.
  5. Organization, World Intellectual Property (2017). World Intellectual Property Report 2017 : Intangible Capital in Global Value Chains. Geneva: World Intellectualsw Property Organization. ISBN   978-92-805-2895-4. OCLC   1128429013.
  6. "Avoiding Transaction Peril," Heller et al., in From Ideas to Assets: Investing Wisely in Intellectual Property at 487, Bruce Berman, John Wiley & Sons, 2002
  7. "Broken by a system that encourages bad behaviours, IPXI closes down | IAM". www.iam-media.com. Retrieved 2021-12-31.
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  11. "New WIPO Report Series on Unlocking IP-Backed Finance". www.wipo.int. Retrieved 2022-01-17.
  12. World Intellectual Property Organization. (2024). Country Perspectives China's Journey. Unlocking IP-backed Financing. World Intellectual Property Organization. doi:10.34667/tind.48728.
  13. EN (2023). "Country Perspectives Jamaica's Journey". www.wipo.int. Unlocking IP-backed Financing. doi:10.34667/tind.48730 . Retrieved 2024-01-28.
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  15. WIPO (2021). "Unlocking IP-backed Financing: Country Perspectives Singapore's Journey". www.wipo.int. doi:10.34667/tind.44582 . Retrieved 2023-02-07.
  16. En, Alfred RadauerEN (2023). "Country Perspectives Switzerland's Journey". www.wipo.int. Unlocking IP-backed Financing. doi:10.34667/tind.48568 . Retrieved 2023-12-09.
  17. "Country Perspectives on IP-backed finance". www.wipo.int. Retrieved 2022-07-31.
  18. "HIGH-LEVEL CONVERSATION ON UNLOCKING INTANGIBLE ASSET FINANCE".
  19. "IP FINANCE DIALOGUE EXPANDING HORIZONS ON IP FINANCE AND VALUATION - WIPO HL IP GE 23".
  20. UNCITRAL legislative guide on secured transactions : supplement on security rights in intellectual property. United Nations Commission on International Trade Law. New York: United Nations. 2011. ISBN   978-92-1-133708-2. OCLC   746172450.{{cite book}}: CS1 maint: others (link)
  21. 1 2 Brassell, Martin; Boschmans, Kris (2019-01-08). "Fostering the use of intangibles to strengthen SME access to finance". OECD SME and Entrepreneurship Papers. doi: 10.1787/729bf864-en . S2CID   170002648.{{cite journal}}: Cite journal requires |journal= (help)
  22. "IFRS - IAS 38 Intangible Assets". www.ifrs.org. Retrieved 2021-12-31.
  23. 1 2 3 4 5 "WIPO and Intangible Asset Finance Moving Intangible Asset Finance from the Margins to the Mainstream" (PDF). Creative Commons by small.svg  This article incorporates textfrom this source, which is available under the CC BY 4.0 license.
  24. Using Intellectual Property to Access Growth Funding, British Business Bank, 2018. https://www.british-business-bank.co.uk/wp-content/uploads/2018/11/502-IP-Report_singles_v2.pdf PDF download. pg 16. Retrieved 12-31-2021
  25. "Enquiries Into Intellectual Property's Economic Impact" (PDF). OECD. 2015. p. 465.
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  30. "Gross fixed investment and intangible capital" (PDF).
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  33. "Ambac's press release, 2006" (PDF). Archived from the original (PDF) on 2006-10-16. Retrieved 2008-05-14.
  34. "Alcatel-Lucent secures €1.6B loan package to refinance debt". www.spglobal.com. Retrieved 2021-12-31.
  35. "Aon announces IP capital market solution, first $100mn deal - Reinsurance News". ReinsuranceNe.ws. 2020-10-06. Retrieved 2021-12-21.
  36. "AMR grabs 'largest US private placement' in airline sector | Analysis | Airfinance Journal". www.airfinancejournal.com. Retrieved 2021-12-21.
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  38. 1 2 "Novarc Technologies receives $2.6M in growth capital from BDC Capital". BDC.ca. Retrieved 2021-12-21.
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  40. "World IP Day: BDC Capital's IP-Backed Financing Fund celebrates a busy year helping Canadian companies grow". BDC.ca. Retrieved 2022-10-02.
  41. Pessarlay, Wahid (2022-08-09). "Chinese municipal bank issues first digital yuan loan holding IP as collateral". CoinGeek. Retrieved 2023-12-09.
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Further reading