Key takeaways
- Intellectual property (IP) has historically produced revenues for owners via cash flow from securitization and royalties, as well as through capital appreciation following the increase in value of the IP portfolio.
- As these assets can potentially appreciate and can generate cash flow, they can be an attractive investment opportunity.
- Yieldstreet is offering access to a well-known industry player that has been long investing in intellectual property.
Licensing
Licensing is the transfer of a right to use intellectual property to a third party, in exchange for royalties.
The licensing of patents and other intellectual property assets is a traditional way to monetize from IP rights, and has become an increasingly lucrative and effective method of establishing and retaining market advantage. Indeed, companies tend to license non-core intellectual property assets to spread the costs of upfront investments on research and development or because they may require that technology/patent for their own products – firms in certain sectors such as healthcare or technology can be overly reliant on previously-patented assets.
Licensing agreements offer substantial flexibility in determining the scope of permitted use, and can be tailored to match the expectations or needs of the parties by not offering either too much or too little access to a licensor’s intellectual property.
Thus, licensees should clearly identify their intended uses of the IP portfolio before entering negotiations and ensure the licensing agreement clearly authorizes them.
Securitization
Securitization is the process of pooling and repackaging of homogenous illiquid financial assets into marketable securities that can be sold to investors. Historically, securitization tends to be possible with assets that have stable and fairly consistent cash flows, as well as availability of a large, diversified portfolio of similar assets.
When it comes to patents, research and development (R&D) can be extremely expensive. Through securitization, companies that are R&D intensive can quickly realize returns and utilize the newly obtained funds to finance further research.
Securities backed by intellectual property are valued based on the expected future earnings of the specific copyright or patent pool. The incentive for the IP owner to securitize is that it can offer swift access to collateral, which for many firms – especially startups – can be problematic at times. It can also potentially capture additional upside, as patent value can increase over time.
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IP owners retain equity, which means they can participate in the appreciation of the patent/copyright (most likely, a pool of patents) in excess of the interest paid, even as they lose control over the cash flow. Most importantly, because the loan is securitized, it does not affect the risk profile of the borrower.
In an iconic past deal, in 1997, the English songwriter and singer David Bowie raised $55 million by issuing 10-year bonds backed by future royalties on several pre-recorded albums. The purchaser of the bonds gained the right to be paid the royalties from Bowie’s albums until the principal plus an 8% annual coupon was repaid. Similar deals were structured for other artists such as James Brown, the Isley Brothers and the estate of Marvin Gaye, with structuring fees of close to 10%.
Sale – License-Back transaction
An intellectual property sale/license-back transaction is an additional opportunity to monetize IP assets that have a high market value, for companies that are looking for liquidity.
A company with an intellectual property portfolio can transfer it to a – most likely – wholly owned “Special Purpose Entity (SPE),” which then in turn licenses the intellectual property assets back to the parent company. Instead of leasing back, the SPE may also post the IP as collateral to get a loan from a financial institution, and use the loan proceeds to reimburse the parent company.
An investor looking into investing in any SPE used for intellectual property securitisation is likely to want to receive assurance that the transfer of intellectual property rights to the SPE can be legally enforced.
Litigation
A major driver of returns can be patent litigation. IP investors prefer to step in when there’s already been a patent infringement as it proves there’s value (if it’s been breached, it means someone wanted to use it) and as there is the potential to generate value from a settlement or a court judgment.
A widely exploited investment strategy identifies a patent that is being infringed, pushes to launch an enforcement campaign, wins a settlement, sets up a licensing/royalty program, and then sells the patent to another entity.
Yieldstreet’s IP investment opportunity
Together with a well-known, large institutional investor, Yieldstreet has launched an IP fund with the goal of investing in patent portfolios to generate cash flow and take advantage of long-term appreciation.
