“For IP-rich companies seeking a strategic financial partner, or bankers working on their behalf, the time has come to include IP-centric investors in the investor search. But while the market for such investors is maturing, the specifics around the financings themselves remain opaque.”
Intangibles, and particularly intellectual property, are curious assets. By some estimates, intangibles comprise a large overall percentage of the S&P 500’s total value. Yet – as most IP-rich companies know – leveraging the value of intellectual property to secure a financing has traditionally been very hard to do. Yes, the litigation finance industry offers capital to intellectual property owners who need to finance the tremendous expense of intellectual property enforcement litigation. And yes, some litigation finance deals provide for operating expenses. But many IP-rich companies have financing needs that do not center around litigation or jive with the litigation finance industry’s cost of capital.
IP-rich companies seek capital for a range of purposes. Some, for instance, seek non-dilutive solutions, such as debt, to reach the next corporate inflection point without having to sell equity at a discount to near term potential value. But when a company’s most valuable asset is its intellectual property, rather than traditional “hard” assets that can be easily valued, finding strategic financing solutions has traditionally been a challenge.
The Traditional Finance Community Has Not Shown Comfort with Intellectual Property
For traditional investors, understanding the value of intellectual property (and particularly patents) has been a historical challenge. Yes, there are economists who can assign value to such assets via a range of valuation methodologies. But is that the same value that a lender can expect to receive if forced to take over and recover the value of intellectual property collateral? Just because a particular company’s intellectual property is valuable to it, will that same intellectual property be valuable to the market? All very tough questions to answer for investment teams that are not experts in finance and intellectual property. Hiring legal counsel doesn’t solve the problem as the business and legal worlds of intellectual property can be vastly different.
This is not to say that the traditional investment community has not offered solutions where intellectual property serves as part of a collateral package. It surely has. But where intellectual property has been part of a collateral package, it is usually there as a “catch all,” not to drive the deal itself.
The Market Is Changing
This is where the market for financings tied to intellectual property value is finally changing. Because investment teams are now combining necessary skillsets in intellectual property and finance, new financial offerings are coming to market, such as:
- Credit solutions where intellectual property is the material driver of collateral value;
- Structured equity solutions that allow IP-rich companies to strategically finance the business in a non-dilutive fashion;
- Insurance products that protect collateral in debt deals or litigation wins that are facing appeal; and
- Financings that allow intellectual property owners to purchase such insurance policies in the first place.
When investors can gain comfort in the financial health of a counterparty and the value of its intellectual property, solutions are offered with pricing that is very favorable compared to traditional, non-recourse litigation finance. This is so even where patent litigation or licensing may be a use of capital — a welcome change for IP-rich companies indeed.
Defining ‘Financeable’ IP
For a company’s intellectual property to support a financing, it must obviously be valuable. But value is often in the eye of the beholder. If I am a technology or life sciences company developing cutting edge products, the intellectual property that protects those products is surely going to be valuable to me. But if a market does not, or can’t be anticipated to, develop around those products, the intellectual property’s ability to support a deal may be limited. Sure, an economist may value the intellectual property highly based on the current value of what the products may one day be worth, but such a valuation may not prove informative to the outside world.
The equation changes where market adoption is possible. Where markets have or will form around the technology that intellectual property embodies, such intellectual property takes on significant potential value. This is even more so when the intellectual property meets particular legal requirements, and is owned by a company possessing other positive attributes, such as recurring revenues, a value-add Board and the potential for significant future growth. Where these circumstances are present, the IP-centric investor can play a valuable role in corporate growth.
For IP-rich companies seeking a strategic financial partner, or bankers working on their behalf, the time has come to include IP-centric investors in the investor search. But while the market for such investors is maturing, the specifics around the financings themselves remain opaque. What financing options are out there? What deal structures work best? What is the cost of capital compared to litigation finance?
To find out, join us in Dallas on September 13 for IP Watchdog LIVE 2021: Intangible Assets and IP Rights: Do They Matter For Valuation and Success?
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3 comments so far.
Kimberly CauthornSeptember 9, 2021 12:45 pm
Michael, thank you for this very timely post. The number of debt financing options available to companies seeking to leverage their IP is definitely growing. For example, PIUS’ insurance product is wrapped around notes that are sold as privately placed, rated corporate bonds. Over 100 million dollars’ worth of these bonds have been placed thus far. These CLip(TM) Notes (Collateralized Loans on Intellectual Property) benefit the borrowers by offering a lower overall cost of capital and by allowing them to borrow non-dilutive, larger amounts of capital while the insurance protects the bond investors.
AnonSeptember 9, 2021 11:23 am
IP c – I concur. Well stated.
IP conscienceSeptember 8, 2021 10:30 pm
The more profitable Intellectual Property becomes, the more investment capital becomes available, the more is invested in R & D to accumulate IP, the more design-around technology is developed, the more competitive the country’s products become, and on and on as the technology advances. And the better protected IP is the more the technological advances because the above reasons become compounded—profitability and protection. And none of this technological advancement involves government contracts—it does not cost the taxpayers anything, it is the American system at work. More technology begets more technology and on and on forever. See the article about Thomas Edison in the Sept. 1, 2021 issue of IP Watchdog.
Dr. Noyce invented and patented the integrated circuit, he became a billionaire, and, as IP Conscience wrote in a comment to the Edison article, Dr. Noyce’s integrated circuit invention “makes the World go round.” And it did not cost the taxpayers anything. That is an unbelievable return on investment.