Intangible asset finance

Intangible Asset Finance is the branch of finance that deals with intangible assets such as patents (legal intangible) and reputation (competitive intangible). Like other areas of finance, intangible asset finance is concerned with the the interdependence of value, risk, and time. Some people refer to this field as "IP Finance."Fact|date=July 2008

Basic principles

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. [ [http://books.google.com/books?id=RmFLUk7NydQC&printsec=frontcover&dq=Intangible+Assets:+Values,+Measures+and+Risks,&sig=W2d87NPMzvfWlTDrmUNijOziu-8#PPA28,M1 "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).] ]

One of the goals of people working in this field is to unlock the "hidden value" found in intangible assets through the techniques of finance. Another goal is to measure how firm performance correlates with intangible asset management.

Intangible assets include business processes, 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.

Business models

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

*Patent Licensing & Enforcement Companies ("P-LECs"): These are firms that acquire patents for the sole purpose of securing licenses and/or damages awards from infringing parties. Perhaps the most famous P-LEC is NTP, Inc., which has successfully asserted patents related to email push technology. Another name for a P-LEC is "patent troll," although this is viewed as a pejorative reference. Recently, hedge funds have raised capital for the specific purpose of investing in patent litigation. One such hedge fund is Altitude Capital Partners, which is based in New York.

*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. [ [http://www.thedeal.com/newsweekly/features/a-seller's-market.php#bottom "A seller's market," The Deal, September 5, 2008] ] 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. [ [http://books.google.com/books?id=rESRFPqSKzQC&pg=PA487&lpg=PA487&dq=zerit+patent+securitization&source=web&ots=sN9S5ZWcrM&sig=LhlE-nYfxXddjCKeoGql6ap5KxM&hl=en#PPA487,M1 "Avoiding Transaction Peril," Heller et al., in From Ideas to Assets: Investing Wisely in Intellectual Property at 487, Bruce Berman, John Wiley & Sons, 2002] ] 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. Steel City Re, which is based in Pittsburgh, is a thought leader regarding the use of risk transfer techniques to protect and recover intangible asset value. [ [http://www.steelcityre.com/accelerating_innovation.shtml Steel City Re] ]

*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. In 2008, Ocean Tomo launched [ [http://www.patentbidask.com/ Patent Bid Ask] ] , which it styled as "the first and only public marketplace that allows buyers and sellers to place and receive offers for their intellectual property in a completely transparent fashion." Patent Bid Ask now complements Ocean Tomo's experience in providing multi-lot, live auctions for intellectual property. The next Ocean Tomo auction is scheduled to take place on June 25-26, 2008 in Amsterdam. On April 22, 2008, Ocean Tomo reported [ [http://www.oceantomo.com/press/Europe_Auction_Catalogue_Release_4.22.08.pdf Ocean Tomo Press Release April 22, 2008] ] that it had transacted approximately $70 million in its IP auctions across Europe and the United States. In 2009, The Intellectual Property Exchange International (IPXI), headquartered in Chicago, will begin operations as the world’s first stock exchange with an intellectual property focus.

*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. IPD Analytics, which is based in Miami, is known for is research reports on patent litigation pending in the United States district court as well at the United States Court of Appeals for the Federal Circuit.

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 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 has since been acquired by NexCen Brands, Inc., which is currently helmed by Robert W. D'Loren. NexCen is a vertically integrated global brand management company focused on assembling a diversified portfolio of intellectual property-centric companies operating in the consumer branded products and franchise industries. On May 19, 2008, NexCen issued a press release in which it stated that there was substantial doubt about its ability to continue as a going concern. [ [http://www.nexcenbrands.com/press_release93.html NexCen Press Release, May 19, 2008] ]

*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. [ [http://www.ambac.com/pdfs%5CDeals%5Cmarvel.pdf Ambac's press release, 2006] ]

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

On June 23, 2008, the United States National Academies hosted a one-day conference in Washington, D.C. entitled "Intangible Assets: Measuring and Enhancing Their Contribution to Corporate Value and Economic Growth."

The Intangible Asset Finance Society provides a forum for finance, innovation, legal and management professionals to discover better ways to create, capture and preserve the value of intangible assets.

The Athena Alliance is a non-profit organization dedicated topublic education and research on the emerging global information economy. On April 16, 2008 it published [ [http://www.athenaalliance.org/pdf/IntangibleAssetMonetization.pdf "Intangible Asset Monetization: The Promise and the Reality"] ] a widely-circulated working paper on the topic of intangible asset finance.

References

Further reading

* [http://books.google.com/books?id=jCLqq80CpwwC&dq=rembrandts+in+the+attic&pg=PP1&ots=XpvuUlYAtv&sig=UkrpK3Dt_bFbI8Hcix46iZIQGhU&hl=en&prev=http://www.google.com/search%3Fhl%3Den%26q%3Drembrandts%2Bin%2Bthe%2Battic%26btnG%3DSearch&sa=X&oi=print&ct=title&cad=one-book-with-thumbnail#PPR7,M1 Rembrandts In the Attic: Unlocking the Hidden Value of Patents]
* [http://www.nytimes.com/2007/09/09/business/09frame.html?ei=5124&en=f04ad9659c3221fa&ex=1346990400&adxnnl=1&partner=permalink&exprod=permalink "When Balance Sheets Collide With the New Economy," New York Times, September 9, 2007]
* [http://news.morningstar.com/newsnet/ViewNews.aspx?article=/DJ/200804291343DOWJONESDJONLINE000826_univ.xml "IP-Focused Hedge Funds Launch Amid Market Volatility", Dow Jones, April 29, 2008]
* [http://www.law.com/jsp/article.jsp?id=1178701483131 "Hedge Fund Spies in the Courtroom, IP Law & Business, May 10, 2007]
* [http://www.iam-magazine.com/blog/default.aspx Intellectual Asset Management Magazine Blog]

External links

* [http://www.iafinance.org/ Intangible Asset Finance Society]