Royalty fund

Last updated October 13, 2021

A royalty fund (also known as royalty funding) 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.^[1]

Structure of Royalty Investments

Royalty funds are a specific type of income trust, used for special-purpose finance, created to hold investments or cash flow in operating companies. These funds aren’t stocks or bonds but a form of investment fund. A royalty fund raises capital in order to purchase the right to a royalty of a product or service. However, unlike many other corporate entities, the profits derived from the royalties aren’t taxed on a corporate level. These profits are distributed to shareholders in the form of a dividend, which is taxed on the personal income level. By doing so it avoids double taxation, enabling higher returns on dividends. Thus making royalty funds an attractive investment.^[3]

Royalty funds are structured in a number of ways. A fund can purchase a royalty or a percentage of a royalty from researchers at a university or a corporate entity for examples a Biotech firm, therefore exchanging capital for ownership of the royalty. Alternatively, the fund can act as a private equity vehicle, extending debt or making loans, in exchange for a proportion of the royalty or securing other assets from the institution as collateral. Usually, investments make go to fund a research project or cover costs of a research project.^[3] Royalty funds invest in a range of business areas, including, commodities, energy, entertainment, franchise, patents and IP, pharmaceuticals, and other trademark royalties.

An example would be a company making an investment into a pharmaceutical company through the acquisition of a healthcare product or service royalty. The operation of the pharmaceutical company continues, as usual, manufacturing and distribution of the products or services. But once the product has been sold a proportion of the profits will go to the fund that purchased the royalty (the amount or percentage will vary between companies based on the acquisition/investment terms).^[4]^[5]

Another example would be the purchase of royalties in the oil and gas industry, where the rights oil wells, oil mines or oil fields are owned by a royalty fund or also known as royalty trust. Other companies perform the operational aspect of extracting the minerals, paying a “royalty” in order to extract them.^[6]

Funds vs. Investment Trust

Investing in composite funds gives an investor the opportunity to gain exposure into foreign markets that they wouldn't be able to do on their own. By investing in a fund and not one particular stock, an investor is able to reduce their level of risk, by spreading their investment over an average number of 50 assets. This increases an investors diversity and reduces the level of risk. This is possible due to the pooling of capital from multiple investors. Fund managers represent the investors and meet with executives and conduct deals.^[6]

There are two main decisions an investor can make;

Where to invest (emerging markets or global financial companies, commodities, etc.)
How to invest (Open-end fund or Closed-end funds)

Open-end Funds

By making an investment into an open-end fund, you are essentially buying ownership stake into a range of investments managed by the fund manager. The fund manager combines all the investors capital and aims is to increase its value. The share prices will be dependent on the value of the assets held by the fund, divided by the number of outstanding shares. Shares outstanding are all the shares authorized, issued and purchased by investors.

However, this sort of fund can cause liquidity issues, if a lot of shareholders decide to withdraw their funds, resulting in a negative effect on the performance of the fund. This also makes open-end funds less suitable for certain assets. For example, in 2007-2008 during the financial crisis, investors lost a lot of capital, because the fund managers weren't able to sell off assets quick enough. The investors capital was stuck in the funds for months.^[6]

Closed-end Funds

Like an open-end fund, closed-end funds pool capital from a variety of investors and has a fund manager make investments on their part. Closed-end funds also have a board of directors to provide another level of oversight of the investments made.

Fees and charges tend to be lower than open-end funds, which means that;

Fixed pool of assets
Funds performance unaffected by asset flows

However, since assets are being bought and sold between investors in the fund prices can be undervalued or overvalued. Meaning that investors could be at an advantage or disadvantage when buying or selling shares. A final overall drawback is that investment funds aren't offered by many platforms, meaning investors would have a hard time finding them.^[6]

Benefits & Disadvantages

Benefits

This includes:

High Yield, royalty funds offer attractive yields to investors in comparison to stocks and bonds. High-end royalty funds offer 8-15% in dividends.^[6]
Powerful Investment Tool for people who don’t have the resources or risk tolerance to buy into a certain industry, but wish to invest directly into an industry on a smaller scale.
Tax-Advantage Yield, higher yields as profits don’t need to be taxed on a corporate level.
No Corporate Taxes, profits are passed onto the holders of the fund and are declared on their individual tax returns. Enables double taxation to be avoided.
Peculiar Tax Credits. For example, tax breaks may be offered if the investment is in a pharmaceutical product that would benefit health care. It is in the government’s interest to offer such a tax break to boost R&D of new products that would help the society.^[7]
Potential Inflation Hedge. Since investments are made into assets, the inflation of cash would be avoided. However, the asset would need to be non-depreciative, otherwise the investment may not be profitable.
Higher Sales Price, it appeals to companies who want to sell assets producing cash flow, because they have a higher sales price than what is achievable with conventional finance tools.^[8]

Disadvantages

This includes:

Sensitive to interest rates. Share prices will decline when interest rates go up and increase when interest rates fall.
Too good to be true. Often referred to as a “get rich quick,” which could indicate that it’s an industry with quite some risk if you are one wrong side. Additionally, there is no such thing as “getting rich quick,” good things take time.
Volatile Markets, oil and gas, pharmaceuticals, etc. Performance based, an element of high risk = high reward. If a project fails, the outcome would be no revenue and no profit, resulting in a loss. However, if it does succeed the rewards are high.
High level of risk that a royalty/patent won’t pay off. Because investments are made into researching institutions ahead of time, it can never be certain whether a patent for a pharmaceutical product or potential oil field will actually pay off.^[8]
Investments are complex due to the nature of how investments are made. In order for the fund to be successful, it requires a lot of research and in-depth knowledge of the industry. So investment in specific management of analysts, scientists, geologists, etc. is necessary in order for research to be accurate and profitable. The way of investing is also specific, a lot of paperwork and contracts need to be cleared in order for the purchase to go from the researcher to the fund.^[6]

Examples in Intangible Asset Finance

Intangible asset finance deals with the financing of intangible assets such as patents, trademarks, intellectual property, reputations, etc. In 2003, the intangible assets economy of the U.S. was estimated at $5 trillion.

Royalty Pharma: (investing in top therapeutics, typically billion dollar blockbusters products.)^[9]
PDL BioPharma: (investing mainly in antibody humanization patents and license agreements in different biotechnology and pharmaceutical companies.)^[10]
Permian Basin Royalty Trust: (leading royalty trust in oil and natural gas, with a market cap of US $790,000,000).

History and Significant transactions

David Bowie issues Bowie Bonds on future royalty revenues derived from 25 albums recorded before 1990.^[11]
In 2000 PDL BioPharma completed a $115 million deal for a single patent from Yale University. The patent claims to cover Stavudine, a nucleoside analog reverse-transcriptase (NARTI) active against HIV. This was the first acquisition ever made of one whole single pharmaceutical patent.^[12]
In 2005 UCC Capital Corporation securitization of BDBG generating property right revenues of roughly $53 million. First to be recognized as a “whole company securitization” containing primarily intangible assets.
2005 also included the first ever-live Intellectual Property (IP) auction. Launched by Ocean Tomo, the aim was to speed up patent deals by bringing together patent buyers and sellers in a single venue. Its tremendous success monetarily has resulted in further developments, including an online platform, Royalty Exchange where property rights/patents can be sold and bought.^[13]
In 2014 Royalty Pharma acquired the royalty stream promised to the Cystic Fibrosis Foundation by Vertex Pharmaceuticals on sales of the drug, Kalydeco, for $3.3 billion; the CFF had invested in discovery and development of the drug under the venture philanthropy model, and said it intended to use proceeds from the royalty sale to further invest in treatments for cystic fibrosis.^[14]^[15]

Related Research Articles

A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction and risk management techniques in an attempt to improve performance, such as short selling, leverage, and derivatives. Financial regulators generally restrict hedge fund marketing to institutional investors, high net worth individuals and others who are considered sufficiently sophisticated.

Business Organization undertaking commercial, industrial, or professional activity

Business is the activity of making one's living or making money by producing or buying and selling products. Simply put, it is "any activity or enterprise entered into for profit."

To invest is to allocate money with the expectation of a positive benefit/return in the future. In other words, to invest means owning an asset or an item with the goal of generating income from the investment or the appreciation of your investment which is an increase in the value of the asset over a period of time. When a person invests, it always requires a sacrifice of some present asset that they own, such as time, money, or effort.

An index fund is a mutual fund or exchange-traded fund (ETF) designed to follow certain preset rules so that the fund can track a specified basket of underlying investments. While index providers often emphasize that they are for-profit organizations, index providers have the ability to act as "reluctant regulators" when determining which companies are suitable for an index. Those rules may include tracking prominent indexes like the S&P 500 or the Dow Jones Industrial Average or implementation rules, such as tax-management, tracking error minimization, large block trading or patient/flexible trading strategies that allow for greater tracking error but lower market impact costs. Index funds may also have rules that screen for social and sustainable criteria.

A closed-end fund (CEF) or closed-ended fund is a collective investment model based on issuing a fixed number of shares which are not redeemable from the fund. Unlike open-end funds, new shares in a closed-end fund are not created by managers to meet demand from investors. Instead, the shares can be purchased and sold only in the market, which is the original design of the mutual fund, which predates open-end mutual funds but offers the same actively-managed pooled investments.

Private equity (PE) typically refers to investment funds, generally organized as limited partnerships, that buy and restructure companies. More formally, private equity is a type of equity and one of the asset classes consisting of equity securities and debt in operating companies that are not publicly traded on a stock exchange.

An investor is a person that allocates capital with the expectation of a future financial return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Types of investments include equity, debt, securities, real estate, infrastructure, currency, commodity, token, derivatives such as put and call options, futures, forwards, etc. This definition makes no distinction between the investors in the primary and secondary markets. That is, someone who provides a business with capital and someone who buys a stock are both investors. An investor who owns a stock is a shareholder.

In finance, valuation is the process of determining the present value (PV) of an asset. Valuations can be done on assets or on liabilities. Valuations are needed for many reasons such as investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability.

An exchange-traded fund (ETF) is a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold from other owners throughout the day on stock exchanges while mutual funds are bought and sold from the issuer based on their price at day's end. An ETF holds assets such as stocks, bonds, currencies, and/or commodities such as gold bars, and generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value, although deviations can occasionally occur. Most ETFs are index funds: that is, they hold the same securities in the same proportions as a certain stock market index or bond market index. The most popular ETFs in the U.S. replicate the S&P 500 Index, the total market index, the NASDAQ-100 index, the price of gold, the "growth" stocks in the Russell 1000 Index, or the index of the largest technology companies. With the exception of non-transparent actively managed ETFs, in most cases, the list of stocks that each ETF owns, as well as their weightings, is posted daily on the website of the issuer. The largest ETFs have annual fees of 0.03% of the amount invested, or even lower, although specialty ETFs can have annual fees well in excess of 1% of the amount invested. These fees are paid to the ETF issuer out of dividends received from the underlying holdings or from selling assets.

An income trust is an investment that may hold equities, debt instruments, royalty interests or real properties. They are especially useful for financial requirements of institutional investors such as pension funds, and for investors such as retired individuals seeking yield. The main attraction of income trusts is their stated goal of paying out consistent cash flows for investors, which is especially attractive when cash yields on bonds are low. Many investors are attracted by the fact that income trusts are not allowed to make forays into unrelated businesses: if a trust is in the oil and gas business it cannot buy casinos or motion picture studios.

A vulture fund is a hedge fund, private-equity fund or distressed debt fund, that invests in debt considered to be very weak or in default, known as distressed securities. Investors in the fund profit by buying debt at a discounted price on a secondary market and then using numerous methods to subsequently sell the debt for a larger amount than the purchasing price. Debtors include companies, countries, and individuals.

A unit trust is a form of collective investment constituted under a trust deed. A unit trust pools investors' money into a single fund, which is managed by a fund manager. Unit trusts offer access to a wide range of investments, and depending on the trust, it may invest in securities such as shares, bonds, gilts, and also properties, mortgage and cash equivalents. Those investing in the trust own "units" whose price is called the "net asset value" (NAV). The number of these units is not fixed and when more is invested in a unit trust, more units are created.

The pharmaceutical industry in India, US$40 billion by value, world's 3rd largest by overall volume and world's largest as provider of generic medicines globally, with 20% and 3.5% share of total global pharmaceutical exports by volume and value respectively to more than 200 countries and territories in 2021. With industry standards compliant mega production capabilities and large number of skilled domestic workforce, Indian exports meet the standards and requirements of highly regulated markets of USA, UK, European Union and Canada. According to the Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers, domestic pharmaceutical market turnover reached Rs 129,015 crore in 2018, growing 9.4 per cent year-on-year and exports revenue was US$17.28 billion in FY18 and US$19.14 billion in FY19.

Venture philanthropy is a type of impact investment that takes concepts and techniques from venture capital finance and business management and applies them to achieving philanthropic goals. The term was first used in 1969 by John D. Rockefeller III to describe an imaginative and risk-taking approach to philanthropy that may be undertaken by charitable organizations.

An alternative investment is an investment in any asset class excluding stocks, bonds, and cash. The term is a relatively loose one and includes tangible assets such as precious metals, collectibles and some financial assets such as real estate, commodities, private equity, distressed securities, hedge funds, exchange funds, carbon credits, venture capital, film production, financial derivatives, cryptocurrencies, and non-fungible tokens. Investments in real estate, forestry and shipping are also often termed "alternative" despite the ancient use of such real assets to enhance and preserve wealth. Alternative investments are to be contrasted with traditional investments.

Intangible Asset Finance is the branch of finance that deals with intangible assets such as patents and reputation. Like other areas of finance, intangible asset finance is concerned with the interdependence of value, risk, and time.

A portfolio manager (PM) is a professional responsible for making investment decisions and carrying out investment activities on behalf of vested individuals or institutions. The investors invest their money into the PM's investment policy for future fund growth such as a retirement fund, endowment fund, education fund, or for other purposes. PMs work with a team of analysts and researchers, and are responsible for establishing an investment strategy, selecting appropriate investments, and allocating each investment properly towards an investment fund or asset management vehicle.

An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of the investment by a significant percentage. These advantages include an ability to:

DRI Capital Inc. is a Toronto-based fund manager of healthcare royalty funds, a type of private equity fund. Its CEO is Behzad Khosrowshahi, the son of Iranian business magnate Hassan Khosrowshahi.

Real Assets is an investment asset class that covers investments in physical assets such as real estate, energy, and infrastructure. Real assets have an inherent physical worth. Real assets differ from financial assets in that financial assets get their value from a contractual right and are typically intangible.

References

↑ Joseph Haas (2013). "DRI Capital To Pursue Phase III Assets With Some Of Its Third Royalty Fund". The Pink Sheet Daily.
↑ "Definition Royalty". Investopedia. Investopedia. 2014. Retrieved 30 October 2014.
1 2 "Royalty Income Trust". Investopedia. Investopedia. 2014. Retrieved 30 October 2014.
↑ Milburn, Robert (2014). "Funds that buy medical patents". barrons.com. Retrieved 30 October 2014.
↑ "Canada DRI Capital". PE HUB. 2013. Retrieved 30 October 2014.
1 2 3 4 5 6 "Funds vs. Investment Trust". Morningstar. 2014. Retrieved 30 October 2014.
↑ "Building and Income Portfolio using Close-end funds". Seeking Alpha. 2014. Retrieved 30 October 2014.
1 2 "Royalty and Income Fund". Cushing Close-end Funds. 2014. Retrieved 30 October 2014.
↑ "Royalty Pharma". Royalty Pharma. 2014. Retrieved 30 October 2014.
↑ "PDL BioPharma". PDL. 2014. Retrieved 30 October 2014.
↑ "Who's Who in Bowie Bonds". Projects.Exeter.ac.uk. 2007. Retrieved 30 October 2014.
↑ "Alder BioPharma Hits IPO". xconomy. 2000. Retrieved 30 October 2014.
↑ "Ocean Tomo" (PDF). Ocean Tomo. 2005. Retrieved 30 October 2014.
↑ Andrew Pollack for the New York Times. Nov 19, 2014 Deal by Cystic Fibrosis Foundation Raises Cash and Some Concern
↑ Lauren Arcuri Ware for the Robb Report. April 1, 2014 Venture Philanthropy: A New Driver for Research

This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.

[1] Joseph Haas (2013). "DRI Capital To Pursue Phase III Assets With Some Of Its Third Royalty Fund". The Pink Sheet Daily.

[2] "Definition Royalty". Investopedia. Investopedia. 2014. Retrieved 30 October 2014.

[investo-3] 1 2 "Royalty Income Trust". Investopedia. Investopedia. 2014. Retrieved 30 October 2014.

[barrons-4] Milburn, Robert (2014). "Funds that buy medical patents". barrons.com. Retrieved 30 October 2014.

[5] "Canada DRI Capital". PE HUB. 2013. Retrieved 30 October 2014.

[vs-6] 1 2 3 4 5 6 "Funds vs. Investment Trust". Morningstar. 2014. Retrieved 30 October 2014.

[Seeking_Alpha-7] "Building and Income Portfolio using Close-end funds". Seeking Alpha. 2014. Retrieved 30 October 2014.

[CEF-8] 1 2 "Royalty and Income Fund". Cushing Close-end Funds. 2014. Retrieved 30 October 2014.

[9] "Royalty Pharma". Royalty Pharma. 2014. Retrieved 30 October 2014.

[10] "PDL BioPharma". PDL. 2014. Retrieved 30 October 2014.

[11] "Who's Who in Bowie Bonds". Projects.Exeter.ac.uk. 2007. Retrieved 30 October 2014.

[12] "Alder BioPharma Hits IPO". xconomy. 2000. Retrieved 30 October 2014.

[13] "Ocean Tomo" (PDF). Ocean Tomo. 2005. Retrieved 30 October 2014.

[NYTwindfall-14] Andrew Pollack for the New York Times. Nov 19, 2014 Deal by Cystic Fibrosis Foundation Raises Cash and Some Concern

[15] Lauren Arcuri Ware for the Robb Report. April 1, 2014 Venture Philanthropy: A New Driver for Research

[1]

[2]

[3]

[4]

[5]

[6]

[7]

[8]

[9]

[10]

[11]

[12]

[13]

[14]

[15]