Royalty fund

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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.[ citation needed ] Royalties are a usage-based payment from one individual or entity to another individual or entity, giving the right to use an asset, product, service or idea. [1]

Contents

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. [2]


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 are not 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 royalties are not taxed on a corporate level, but 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. Investments may go to fund a research project or cover costs of a research project. [3] Royalty funds invest in a range of business areas, including, mining, 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]

Examples

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History and Significant transactions

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References

  1. ↑ "Definition Royalty". Investopedia. 2014. Retrieved 30 October 2014.
  2. ↑ Joseph Haas (2013). "DRI Capital To Pursue Phase III Assets With Some Of Its Third Royalty Fund". The Pink Sheet Daily.
  3. 1 2 "Royalty Income Trust". Investopedia. 2014. Retrieved 30 October 2014.
  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.
  6. ↑ "Funds vs. Investment Trust". Morningstar. 2014. Retrieved 30 October 2014.
  7. ↑ "Royalty Pharma". Royalty Pharma. 2014. Retrieved 30 October 2014.
  8. ↑ "PDL BioPharma". PDL. 2014. Retrieved 30 October 2014.
  9. ↑ "Who's Who in Bowie Bonds". Projects.Exeter.ac.uk. 2007. Retrieved 30 October 2014.
  10. ↑ "Alder BioPharma Hits IPO". xconomy. 2000. Retrieved 30 October 2014.
  11. ↑ "Ocean Tomo" (PDF). Ocean Tomo. 2005. Retrieved 30 October 2014.
  12. ↑ Andrew Pollack for the New York Times. Nov 19, 2014 Deal by Cystic Fibrosis Foundation Raises Cash and Some Concern
  13. ↑ Lauren Arcuri Ware for the Robb Report. April 1, 2014 Venture Philanthropy: A New Driver for Research
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