Presentation on theme: "CONFIDENTIAL. IP as an Asset Class The London IP Summit London Stock Exchange 13th – 14th October 2014 Auckland | San Diego | London."— Presentation transcript:
CONFIDENTIAL. IP as an Asset Class The London IP Summit London Stock Exchange 13th – 14th October 2014 Auckland | San Diego | London
CONFIDENTIAL. Valuation, value drivers and impact Asset class characteristics Beyond current mainstream investment strategies Agenda:
CONFIDENTIAL. 3 Definition: what are we talking about? Patents Copyrights Trademarks Brands Trade Secrets Know How Intellectual Property is the intangible product of R&D spend
CONFIDENTIAL. 4 Audience: who are we talking to? Family Offices and Multi Family Offices Asset Managers Pension Funds & Consultants Insurance Companies Endowments Hedge Funds Private Equity Funds
CONFIDENTIAL. 5 IP is Mispriced IP value may be calculated by various accounting methods. DCF: NPV of future cash flows Market Comparable: last transaction or industry average Cost basis: what did the IP cost to create? For all but the simplest DCF the value of qualitative judgement and market knowledge is the most significant factor in value. The inability to systematically and transparently value IP creates huge bid/offer and significant opportunity to generate excess returns.
CONFIDENTIAL. 6 Traditional IP Investment Strategies Royalty Investing Purchase of future cash flows, structured deals now predominate Falling Yields due to weight of investor money Litigation Finance Financing patent disputes Costs of litigation in USA increasing and strategy lacks scale Venture Capital Wide dispersion of returns as significant execution risk Secondary funds have best performance
CONFIDENTIAL. 7 A Vast, Growing, Uncorrelated Market WIPO valued the US market at $8 trillion generating $180bn in annual income in Income is primarily generated by licensing, commercialisation and litigation. This market size makes IP the largest asset class in the US and one of the largest globally. IP filings in the USA have grown in excess of 15% pa CAGR over the past 7 years. This type of growth is not confined to the USA. Patents, copyrights and other forms of IP are not subject to the same systemic risks as traditional asset classes and are also uncorrelated with the common forms of alternatives (hedge funds, private equity, real estate).
CONFIDENTIAL. 8 Illustrative Asset Class Comparison CorrelationVolatilityLiquidityTransparencyYield/Return Intrinsic Value IG Bonds HighLowHigh LowModerate LC Equities High ModerateLow Hedge Funds ModerateHighLow ModerateLow Private Equity ModerateLow HighModerate Real Estate HighModerate High IP Low High
CONFIDENTIAL. 9 Expanding beyond traditional investment strategies i. IP lending ii. Special situations iii. Direct investments in IP rich companies IP provides a unique perspective on R&D intensive industries, where value drivers are often IP related but not understood or properly covered by traditional analysts. The key investment skill is valuation in context.
CONFIDENTIAL. 10 IP lending Extend credit secured by IP portfolios (and other assets ) Value the IP on a conservative cash flow and loan to value basis Enhance collateral packages with IP assets valuation Upon default, IP broker network can be used to exit the collateral Low teens coupons + warrants: mid teens coupons w/o warrants. >2% origination fees
CONFIDENTIAL. 11 Special situations Distressed IP Activism Change of Control Patent Arbitrage IP Litigation Outcomes
CONFIDENTIAL. 12 Distressed Nortel Auction Generates 3x Expected Price, Bonds Get Par + Accrued Subs Turn Out to be an Even Better Bet
CONFIDENTIAL. 13 IP Activism See Appendix 5 for analysis of a specific IP activist opportunity
CONFIDENTIAL. 14 Change of Control
CONFIDENTIAL. 15 Patent Arbitrage CPTN Implied Price per Patent (000’s) Coupling superior IP purchasing analysis with long-term capital permits the arbitrage of IP portfolio value Implied Price per Patent (000’s)
CONFIDENTIAL. 16 IP Litigation Outcomes
CONFIDENTIAL. 17 Direct investing Liquid long/Short position based on IP analysis Illiquid PE investment in IP strategic play
CONFIDENTIAL. 18 Illustration of a typical long/short portfolio Long/short investing in companies with deep value IP Catalysts Due to informational asymmetries, IP stocks have greater vol. and dispersion than the broad market Market Neutral Book Expected Return 10%+ annual Implied Vol (~ max)6 % Exposure <=10% market Positions paired off Average Position size 400 bps Position risk -12.5%, -20% max 18 Fundamental Long/Short YTD – 7/14/14
CONFIDENTIAL. 19 Private Equity Many public companies have either failed to monetize their IP or have important IP whose value is not reflected in their stock price Low dose, fast acting pain medicine using old patent that is re-protected (patent) Unique assured cloud solution for high security data storage (trade secret/know how) 80% cost reduction and enhanced thermal stability in LEDs (patent/trade secret/know how) Textile that recycles body heat and emits at IR radiation (patent, trade secret) Thermoplastic polymer road furniture with high tensile strength (patent, trade secret/know how) can be exploited by and inure to the benefit of private equity holders This IP can be used to finance LBO debt and, through collateral package enhancement, either reduce the coupon on or increase the principal amount of the LBO debt available In Life Sciences patent repositioning strategies can acquire dead or dying drugs and increase value through identifying new patent opportunities Licensing IP-for-equity with VC backed firms provides an alternative strategy for IP owners who traditionally seek royalties
CONFIDENTIAL. Dr. Chris Donegan CEO Europe, EverEdgeIP Grafton Street, London W1S 4EW