Boom or bust A flight to quality for IP’s status as a steady, conservatively The developed world is slipping into valued and uncorrelated asset class. recession and established investment vehicles are crashing A new focus on IP portfolios C-suite executives have long tended to into disrepute. What will be the overlook the untapped financial value of knock-on effect for IP assets − and intangibles. But as market firestorms ebb those tasked with their management and smouldering recession takes hold, many and monetisation? industry professionals believe that this is set to change. John Squires, chief IP counsel at Goldman Sachs, explains: “Certainly, By Nigel Page where the financial crisis is concerned, we will see companies seeking to generate With the financial crisis continuing to wrap greater returns from their portfolios. If they its tentacles around the world, sparking a already have exclusivity, then it will be global liquidity crunch and massive risk incumbent on them to ensure that their aversion among investors, few patents can be relied upon to continue to commentators are prepared to make firm provide this.” Steve Lozan, VP of predictions about eventual outcomes. investments at Oppenheimer & Co, agrees: But there is no shortage of speculation. “Without doubt, some companies’ Calls for a new Bretton Woods-style valuations have been killed over the past agreement to reform global economic weeks. And so, if they can sell their IP or governance are seldom out of the press and a license it, then they may now be much more prospective maelstrom of financial and happy to do so.” capital markets regulation haunts banks, Fire sales of patents are widely hedge funds and private equity firms anticipated in the short term, as executives worldwide. Meanwhile, institutional in cash-strapped companies begin to view investors are taking stock of massive losses their IP as a source of operating capital − sustained from what were, until recently, capital that can usefully be deployed to considered to be safe havens for their capital. appease shareholders by compensating for Against this backdrop, the nascent IP dramatic drop-offs in revenues. Nir monetisation communities are seeking to Kossovsky, chief executive of Steel City Re establish themselves. Given what has LLC, believes that this could be the case: happened over the past few months, you “We should expect to see a lot more supply could be forgiven for thinking that than demand. The whole notion of selling IP intermediaries and financiers alike are is more widely accepted than it was, so feeling pretty depressed. But, in fact, that companies will seek to dispose of their IP does not seem to be the case. Although via the markets. But I can’t identify any real everyone acknowledges that these are driver of increased demand. At the same difficult and uncertain times, the general time, greater uncertainty over asset-based view is that IP and intangibles in general and cashflow-based valuations will likely may not only survive the storm, but may result in overall reductions in net present actually prosper. In fact, some predict this values of IP.” That said, Kossovsky could be the beginning of a brave new world continues: “The value of the intangible www.iam-magazine.com Intellectual Asset Management January/February 2009 41 Boom or bust Challenging for new entrants substantial realisations. Historically, IP exploitation has been counter-cyclical as IP assertions have increased in recessionary environments. In addition, a variety of models have emerged for investment in IP. Their emergence shows an increased awareness in the market of the standalone value of IP. However, during times of great dislocation, investors often flock to liquidity and perceived safety. Given the opaque nature of the asset class, IP will be challenging for new investors. The overall deleveraging of the financial system will result in the elimination of many hedge funds and other financial institutions’ tolerance for risk will be curtailed for the foreseeable future. Rather than invest in a new and illiquid asset class, with the public equity markets down approximately 40% year to date, investors may find liquid investments more attractive relative to other investment opportunities. At Altitude, we have positioned ourselves Though investment in IP as an asset class as a well-capitalised liquidity provider that can has grown meaningfully over the last five serve the needs of many different stakeholders years, it is still nascent in its evolution. in the IP ecosystem. In these uncertain times, Analysis of historical returns remains difficult, we expect to be more productive than ever given limited data. Therefore, it is challenging before. Our crystal ball suggests that in the to predict how the current financial crisis will next six to 12 months, capital formation will be impact on attitudes of institutional investors considerably more challenging for new and the development of the asset class. entrants. If it flows at all, it will be directed to IP is viewed as uncorrelated to the rest of players which have demonstrated their the financial market, making it an opportune capabilities and infrastructure to succeed in a area for investment by institutions that seek world that is changing daily. diversification and reduced volatility. In fact, over the last nine months – during the eye of Amar K Mehta, partner, Altitude Capital the storm − our fund has had three Partners asset ‘integrity’ will become hugely inflated. result of the financial crisis: “Derivatives So IP that has integrity will maintain and investors thought that by continually increase its value, being seen as less risky transferring risk they would be spreading it. and more secure. In many ways, this will be Instead, they hid it. There is now a better analogous to the way Treasuries are viewed awareness in the asset-backed markets that as less risky and more secure credit scrutiny of ownership is a good thing. instruments in a financial crisis.” Patents subject to sale or investment are Ron Laurie, managing director of highly scrutinised and conservatively Inflexion Point Strategy LLC in Silicon valued. This will translate into a new-found Valley, believes that demand for high quality respect for the in-depth analysis and patents will help to safeguard their value, caution that IP investors bring to bear.” but he is less sure about those further down Berman says he believes that prospects for the scale: “In the new financial the IP industry generally are good. “There’s environment, high quality patent properties no sense of panic that I’m aware of and IP as will continue to command eight figure an asset class is still very much in growth prices, while patents in the mid-range mode. As markets continue to plummet, portion of the quality spectrum will be investors will be forced to focus on heavily discounted and demand at the maintaining their holdings, not flipping bottom end of the market will likely them,” he explains. It will, he continues, be disappear altogether.” much less about income statements for the For his part, Bruce Berman, CEO of foreseeable future, and more about asset Brody Berman Associates in New York, values. “Although IP is still being swept believes that there will be deeper into ‘goodwill’ in the US, we may well see understanding and respect for IP assets as a this re-focus on asset stewardship leading 42 Intellectual Asset Management January/February 2009 www.iam-magazine.com Boom or bust No collapse in the market proving painful. And while this question There’s no sense remains, companies are asking how they can for ideas outperform competition, maintain value, of panic that I’m protect market share and generate a return on their investments. Unlike typical tangible aware of and IP as assets, patents, trademarks and know-how are the only form of true protection against a an asset class is drop in value. The collapse in tangible valuations leaves still very much in only one asset class available for a reliable collateral backstop – protectable intangible growth mode assets. Regardless of the path taken by the financial markets, there is no decline in the supply of, or demand for, ideas. Moreover, companies still need to borrow and investors still want to earn a return. Therefore, market demand will encourage monetisation strategies that include more IP-backed lending, licensing and auction and private sales than in the past. In addition to an increase and evolution in these strategies, there will also be revolutionary new strategies that investors What we are witnessing today is the popping will utilise. I believe we will see the rise of of an asset bubble and the associated such things as transparent trading platforms worldwide unwinding of highly levered for technology bundles and investment positions by entities across the investor vehicles focused on using intellectual spectrum. Banks, insurance companies and property as a signal of company value. investment funds built their businesses in Regardless of which strategies dominate part on the belief that many hard assets – in the future, it is clear that companies rich in most notably real estate, the ultimate intellectual property are best positioned to tangible asset – would never suffer a drop in take advantage of the changing financial pricing. Now that this faith has been broken landscape. the question on everyone’s mind is: what is the value of tangible assets? The market is Andy Carter, managing director, trying to find an answer, but doing so is Ocean Tomo to IP being shifted onto the balance sheet – invent has not fundamentally changed.” where it belongs,” Berman concludes. Licensing activity is set to pick up too, If predictions of increased patent sales many believe. “Companies that rely more on as a result of the crisis are proved right, a licensing model will want to work their then Ocean Tomo’s auctions should benefit.