BREDEMA

SECURITISATION: intangible assets can finance Businesses … as well as Tangible assets…

The recent evolution of financial techniques now allows us to find other forms of funding based on patents and brands.

 

Yale University has recently set up a new funding resource: funding a biotechnology research and development building worth US $115 million based on it’s patents being exploited by the BMS company (Bristol Meyers Squib) for a medical drug. Yale University sold it’s future revenues from the license agreement granted to BMS to a special fund allowing direct access to immediate cash…The anti-retroviral drug is in fact protected by two US patents, which are exploited for the drug Zerit. The university can therefore speed up the funding of its research. For businesses, this method of funding also allows them to improve their competitiveness by upgrading their positioning in the market, with regards to products originating from its technologies. Disposing of a well-established funding based on industrial property enhances dramatically the origination of valuable research, which allows in its turn to finance more research…

New funding sources
The securitisation of Intellectual Property (IP) portfolios is a new phenomenon, which is going to be a huge success and important in all countries. This has already happened to the United States funding resources.

In fact, securitisation of IP offers many advantages to investors and of course to IP owners.
Chrysler carried out the first project in 1981. Chrysler struggled to gain access to monetary market funds due to the economic crisis and to monetize its debt. Chrysler could raise a funding backed with a guarantee on it’s patents portfolio.

From then on, the monetisation market called Assets Backed Securitisation has not stopped expanding.

Dow Chemical in 1992, raised funds on it’s patents portfolio and afterwards, there was the famous « Bowie Bond » managed by the Pullman Group in 1997, based on 25 music titles. The singer has assigned the exploitation revenues of his music titles.

For the time being, securitisation is well established for films and music portfolios. On a global level, the generation of royalties shot up to the order of 7 to 10 billion US dollars in 2003 according to different sources.

The monetisation of IP portfolio is a very recent phenomenon but with a solid foundation. Essentially it concerns Music and films portfolios, sport licenses and fast food chains in a decreasing order of funding markets. Films portfolios are quite predictable in their revenue structure and they display a weak volatility and secure cash-flows, contradictory to the film industry itself. A small number of IP elements generate most of the portfolio revenues.

Legally speaking, securitisation consists of selling future revenues from any assets (not selling the assets themselves). But most of the techniques allowing fund raising backed on assets are often called securitisation. To put it simply securitisation consists of every technique that transforms non-liquid assets into cash or into liquid assets.
This attractive funding technique is a low cost alternative to obtaining loans from banks or generating negotiable titles or others funding techniques which have a dramatic impact on the balance sheet and its security and equilibrium ratios…

A favourable new context

The securitisation market is flourishing because there is a grasp of general awareness of the value of IP.
There is also an awareness shared by managers in companies of the urgency of managing IP.
Several economics statistics studies demonstrate that nowadays IP value represents 60% to 70% on average of the business value. Whether or not these businesses are linked to new technology, those with a large part of IP assets are more profitable than those without.
The value of IP is growing globally in the same manner, relatively to other assets. We can also notice that the value of specific IP items is more and more valuable.

If the security of IP is traditionally perceived as important due to the complexity of the law, it is very much due to the lack of knowledge in IP techniques and IP strategies. The weak diffusion of evaluation tools and the lack of specific norms weigh heavily on the development of financial techniques relating to IP.

However, innovation is seen as more and more fundamental in order to reach a competitive advantage. Moreover, estimations show licensing revenues at world level being close to 500 billion US dollars.
Many good reasons for exploiting these new tools, is because the key to using IP as an underlying tool for financial projects is relatively simple: knowing how to analyse IP portfolios and proceed to accurate evaluation.

A panel of techniques

The most established and well known technique of financing based on non-liquid assets, collateral security, is still often quite badly exploited. Because this generally wears on the small business funding techniques, where the techniques exist in order to separate IP items by their nature : brands and patents or data bases and data processing programs allows reduction of risks and the raising of more funds when financed separately.
It is also less expensive from an administrative point of view (registrations) than in the case of a transfer of goodwill. Collateral security gives a guarantee without transferring the IP ownership or the IP revenues, the transfer only takes place in the case of bankruptcy.

The supporting lease-purchase connected to patents is also of course technically possible but isn’t used for the moment. OséoAnvar and the French Ministry of Research are thinking about a specific tool.

The most widespread technique which is very much in fashion at the moment is the SPV (Special Purpose Vehicle) technique or the SPC (Special Purpose Company). A dedicated legal entity is created to pinpoint the IP rights. It is therefore possible to action tax optimization in accordance with the chosen country for the vehicle and the tax situation of the patent holder.
The advantages for the patent holder are:
• Limited exposition to credit, because it’s the underlying elements and their values that are more important for the lender than the holder’s signature.
• The risk for the business (patent holder) decreases as compared to traditional financing since financial structure and capital output ratios improve.
• IP is generally underexploited and this technique facilitates a stronger manner of exploitation in order to reach the highest and best use of the IP assets.
• This tool in certain cases helps the purchasing objectives in order to finance business targets or in order to finance other specific research programs.

Another technique consists of bonds issues, the guarantee being the licensing revenues (IP asset backed securities). This tool is more developed in the United States and allows procurement return rather than traditional bank loan.

Securitisation « stricto sensu » in a juridical sense consists of transferring debt coming from the exploitation of the patent or brand portfolio to the debt community chest which doesn’t have any legal entity expressed by the bank. In exchange, the originator of the IP portfolio receives cash, the return coming from the licensing revenues being directly received by the debt community chest and no longer by the originator of the IP.

Tracer stocks correspond to the bonus issue supporting a business’s licensing activity. For example, Alcatel Optronic or EDS which was sold by Ross Perot to G&E.

Conclusion

There aren’t any technical difficulties to raise funds on an IP basis, but there is a range of juridical and tax solutions, which must be adapted to each individual case. Patent backed securitisations need numerous technical skills from many professionals : investors, insurers, patent attorneys (or IP management consultancy firms), specialised IP evaluators and a finance firm dealing with IP.

The assets market is in a phase of maturation because there are only a small number of IP assets with any real value, and the agglomeration of assets makes sense. In addition, the cost of such an operation implies a project of a certain size. Practically speaking, it would be difficult to settle an IP asset backed securitisation operation less than ten million euro.

It’s better to analyse each particular case because there is no particular standard compatible solution with all the situations without taking higher risks. Recently, the French Tax administration questioned the method of valuation and the amounts relating to Business Objects’ IP portfolios which were transferred to it’s Irish subsidiary.

Alain KAISER
Consultant IP Financial Evaluations
Partner BREDEMA- PARIS
Professeur Associé University PARIS 13