Intangible asset finance
Encyclopedia
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 interdependence of value
, risk
, and time
.
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.
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, Intellectual Property (IP) such as patents, trademarks, reputation
s 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.
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 to
public education and research on the emerging global information economy. On April 16, 2008 it published a widely-circulated working paper on the topic of intangible asset finance.
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
that deals with intangible assets such as patents (legal intangible) and reputation
Reputation
Reputation of a social entity is an opinion about that entity, typically a result of social evaluation on a set of criteria...
(competitive intangible). Like other areas of finance, intangible asset finance is concerned with the interdependence of value
Value (economics)
An economic value is the worth of a good or service as determined by the market.The economic value of a good or service has puzzled economists since the beginning of the discipline. First, economists tried to estimate the value of a good to an individual alone, and extend that definition to goods...
, risk
Risk
Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...
, and time
Time
Time is a part of the measuring system used to sequence events, to compare the durations of events and the intervals between them, and to quantify rates of change such as the motions of objects....
.
Basic principles
In 2003, one estimate put the economic equilibriumEconomic equilibrium
In economics, economic equilibrium is a state of the world where economic forces are balanced and in the absence of external influences the values of economic variables will not change. It is the point at which quantity demanded and quantity supplied are equal...
of intangible assets in the U.S. economy
Economy
An economy consists of the economic system of a country or other area; the labor, capital and land resources; and the manufacturing, trade, distribution, and consumption of goods and services of that area...
at $5 trillion, which represented over one-third or more of the value of U.S. domestic corporations in the first quarter of 2001.
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
Management
Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively...
.
Intangible assets include business processes, Intellectual Property (IP) such as patents, trademarks, reputation
Reputation
Reputation of a social entity is an opinion about that entity, typically a result of social evaluation on a set of criteria...
s for ethics
Ethics
Ethics, also known as moral philosophy, is a branch of philosophy that addresses questions about morality—that is, concepts such as good and evil, right and wrong, virtue and vice, justice and crime, etc.Major branches of ethics include:...
and integrity
Integrity
Integrity is a concept of consistency of actions, values, methods, measures, principles, expectations, and outcomes. In ethics, integrity is regarded as the honesty and truthfulness or accuracy of one's actions...
, quality, safety
Safety
Safety is the state of being "safe" , the condition of being protected against physical, social, spiritual, financial, political, emotional, occupational, psychological, educational or other types or consequences of failure, damage, error, accidents, harm or any other event which could be...
, sustainability
Sustainability
Sustainability is the capacity to endure. For humans, sustainability is the long-term maintenance of well being, which has environmental, economic, and social dimensions, and encompasses the concept of union, an interdependent relationship and mutual responsible position with all living and non...
, security
Security
Security is the degree of protection against danger, damage, loss, and crime. Security as a form of protection are structures and processes that provide or improve security as a condition. The Institute for Security and Open Methodologies in the OSSTMM 3 defines security as "a form of protection...
, and resilience
Resilience
Resilience is the property of a material to absorb energy when it is deformed elastically and then, upon unloading to have this energy recovered. In other words, it is the maximum energy per unit volume that can be elastically stored...
. Today, these intangibles drive cash flow
Cash flow
Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.Cash flow...
and are the primary sources of risk. Intangible asset information, management
Management
Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively...
, 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 technologyPush technologyPush technology, or server push, describes a style of Internet-based communication where the request for a given transaction is initiated by the publisher or central server...
. Another name for a P-LEC is "patent trollPatent trollPatent troll is a pejorative but questioned term used for a person or company who is a non-practicing inventor, and buys and enforces patents against one or more alleged infringers in a manner considered by the target or observers as unduly aggressive or opportunistic, often with no intention to...
," 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 YorkNew YorkNew York is a state in the Northeastern region of the United States. It is the nation's third most populous state. New York is bordered by New Jersey and Pennsylvania to the south, and by Connecticut, Massachusetts and Vermont to the east...
.
- Royalty stream securitizers: These are firms that are engaged in the buying and selling of what are essentially specialized asset-backed securitiesAsset-backed securityAn asset-backed security is a security whose value and income payments are derived from and collateralized by a specified pool of underlying assets. The pool of assets is typically a group of small and illiquid assets that are unable to be sold individually...
. 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. 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 HIVHIVHuman immunodeficiency virus is a lentivirus that causes acquired immunodeficiency syndrome , a condition in humans in which progressive failure of the immune system allows life-threatening opportunistic infections and cancers to thrive...
drug Zerit. The other parties involved in the Zerit transaction were YaleYALERapidMiner, formerly YALE , is an environment for machine learning, data mining, text mining, predictive analytics, and business analytics. It is used for research, education, training, rapid prototyping, application development, and industrial applications...
(the owner of the patent) and Bristol Myers Squibb.
- Reinsurers: These are firms that use the techniques of reinsuranceReinsuranceReinsurance is insurance that is purchased by an insurance company from another insurance company as a means of risk management...
to mitigate intangible asset risks. In the same way that some firms issue Cat bonds to mitigate the risks associated with extreme weatherExtreme weatherExtreme weather includes weather phenomena that are at the extremes of the historical distribution, especially severe or unseasonal weather. The most commonly used definition of extreme weather is based on an event's climatological distribution. Extreme weather occurs only 5% or less of the time...
, 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 leaderThought leaderThought leader is business jargon for an entity that is recognized for having innovative ideas.The term was coined in 1994 by Joel Kurtzman, editor-in-chief of the Booz Allen Hamilton magazine, Strategy & Business. "Thought leader" was used to designate interview subjects for that magazine who had...
regarding the use of risk transfer techniques to protect and recover intangible asset value.
- 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. On April 22, 2008, Ocean Tomo reported that it had transacted approximately $70 million in its IP auctions across EuropeEuropeEurope is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
and the United StatesUnited StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
. In 2009, The Intellectual Property Exchange International (IPXI), headquartered in Chicago, will begin operations as the world’s first stock exchangeStock exchangeA stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...
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 attorneysLawyerA lawyer, according to Black's Law Dictionary, is "a person learned in the law; as an attorney, counsel or solicitor; a person who is practicing law." Law is the system of rules of conduct established by the sovereign government of a society to correct wrongs, maintain the stability of political...
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 courtUnited States district courtThe United States district courts are the general trial courts of the United States federal court system. Both civil and criminal cases are filed in the district court, which is a court of law, equity, and admiralty. There is a United States bankruptcy court associated with each United States...
as well at the United States Court of Appeals for the Federal CircuitUnited States Court of Appeals for the Federal Circuit-Vacancies and pending nominations:-List of former judges:-Chief judges:Notwithstanding the foregoing, when the court was initially created, Congress had to resolve which chief judge of the predecessor courts would become the first chief judge...
.
Significant transactions
- 1997: David BowieDavid BowieDavid Bowie is an English musician, actor, record producer and arranger. A major figure for over four decades in the world of popular music, Bowie is widely regarded as an innovator, particularly for his work in the 1970s...
securitizes the future royalty revenues earned from his pre-1990 music catalogue by issuing Bowie BondsBowie BondsBowie Bonds are asset-backed securities of current and future revenues of the 25 albums that David Bowie recorded before 1990.Issued in 1997, the bonds were bought for US$55 million by the Prudential Insurance Company. The bonds paid an interest rate of 7.9% and had an average life of ten years, a...
.
- 2000: BioPharma Royalty Trust completes the $115 million securitization of a single Yale patent with claims covering StavudineStavudineStavudine is a nucleoside analog reverse transcriptase inhibitor active against HIV.-History:...
, which is a reverse transcriptase inhibitorReverse transcriptase inhibitorReverse-transcriptase inhibitors are a class of antiretroviral drug used to treat HIV infection, tumors, and cancer. RTIs inhibit activity of reverse transcriptase, a viral DNA polymerase enzyme that retroviruses need to reproduce.-Mechanism:...
and the active ingredient 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 scandalScandalA scandal is a widely publicized allegation or set of allegations that damages the reputation of an institution, individual or creed...
at Bristol Myers Squibb triggered the accelerated and premature amortizationAmortizationAmortization is the process of decreasing, or accounting for, an amount over a period. The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo-French amorteser, alteration of amortir, from Vulgar Latin admortire to kill, from Latin ad- + mort-, mors death.When used...
of the transaction. Many observers believe that this deal was ultimately unsuccessful because of a lack of diversificationDiversificationDiversification may refer to:* Diversification involves spreading investments* Diversification is a corporate strategy to increase market penetration...
as it involved a single patent and a single licenseeLicenseeA licensee is someone who has been granted a licence.- Tort law :The term is used in the USA law of torts to describe a person who is on the property of another, despite the fact that the property is not open to the general public, because the owner of the property has allowed the licensee to enter...
.
- 2005: UCC Capital Corporation securitization of BCBG Max AzriaMax AzriaMax Azria is a French fashion designer of Tunisian Jewish descent who founded the contemporary women's clothing brand BCBGMAXAZRIA. Azria is also the designer, chairman and CEO of BCBGMAXAZRIAGROUP, a global fashion house that encompasses over 20 brands...
'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 managementBrand managementBrand management is the application of marketing techniques to a specific product, product line, or brand.The discipline of brand management was started at Procter & Gamble as a result of a famous memo by Neil H...
company focused on assembling a diversified portfolioPortfolio (finance)Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual.-Definition:The term portfolio refers to any collection of financial assets such as stocks, bonds and cash...
of intellectual property-centric companies operating in the consumerConsumerConsumer is a broad label for any individuals or households that use goods generated within the economy. The concept of a consumer occurs in different contexts, so that the usage and significance of the term may vary.-Economics and marketing:...
branded products and franchiseFranchisingFranchising is the practice of using another firm's successful business model. The word 'franchise' is of anglo-French derivation - from franc- meaning free, and is used both as a noun and as a verb....
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.
- 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 EntertainmentMarvel EntertainmentMarvel Entertainment, LLC , formerly Marvel Enterprises and Toy Biz, Inc., is an American entertainment company formed from the merger of Marvel Entertainment Group, Inc. and Toy Biz, Inc....
's film rights securitization in conjunction with Ambac Financial GroupAmbac Financial GroupThe Ambac Financial Group, Inc., generally known as Ambac , is an American holding company whose subsidiaries provide financial guarantee products, such as bond insurance and other financial services to clients in both the public and private sectors around the world...
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 propertyIntellectual propertyIntellectual property is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized—and the corresponding fields of law...
related to some of Marvel’s most popular comic bookComic bookA comic book or comicbook is a magazine made up of comics, narrative artwork in the form of separate panels that represent individual scenes, often accompanied by dialog as well as including...
characters.
Government, societies, think tanks, and other non-profits
On June 23, 2008, the United States National AcademiesUnited States National Academies
The United States National Academies comprises four organizations:* National Academy of Sciences * National Academy of Engineering * Institute of Medicine * National Research Council...
hosted a one-day conference in Washington, D.C.
Washington, D.C.
Washington, D.C., formally the District of Columbia and commonly referred to as Washington, "the District", or simply D.C., is the capital of the United States. On July 16, 1790, the United States Congress approved the creation of a permanent national capital as permitted by the U.S. Constitution....
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 to
public education and research on the emerging global information economy. On April 16, 2008 it published a widely-circulated working paper on the topic of intangible asset finance.
Further reading
- Rembrandts In the Attic: Unlocking the Hidden Value of Patents
- "When Balance Sheets Collide With the New Economy," New York Times, September 9, 2007
- "IP-Focused Hedge Funds Launch Amid Market Volatility", Dow Jones, April 29, 2008
- "Hedge Fund Spies in the Courtroom, IP Law & Business, May 10, 2007
- Intellectual Asset Management Magazine Blog