Business Management

A New Asset Class Is Now Open For Business

To the casual observer the highly publicised deals that saw Nortel sell its patent portfolio for $4.5 billion to the Rockstar consortium, made up of Apple, EMC, Ericcson, Microsoft, RIM and Sony, and the sale by AOL to Microsoft of 800 patents for £1.1 billion – that’s £1.3 million per patent – serves to illustrate just how much money can be involved when trading patent portfolios.

But the value of patents is not confined to these headline grabbing deals.  In fact, conservative estimates suggest that 70% of enterprise value is tied up in intangible assets, of which patents form a significant element.  To put that in context, ten years ago 75% of British business investment was in fixed assets and 25% in intangibles. 

I believe this shift represents a tipping point – a crucial moment in the development of intellectual property, specifically patents, as a mainstream asset class.  That is, a decade ago, organisations seeking corporate finance, for instance, could routinely use fixed assets – plant, machinery, ‘real’ property and so on – as security.  Now they must increasingly find ways to monetise not tangible assets, but intangibles, like patents.  That is starting to happen, but not in ways anyone might have predicted. 

The emergence of non-practicing entities (NPEs) – or more pejoratively, patent trolls – represents, in essence, nascent markets for patent monetisation.  Equally, government initiatives, such as the UK’s Banking on IP report will help raise the profile of the asset class.

But progress has been glacially slow.  Why has it taken so long for patents to be recognised as a functional asset class? The main reason cited by bankers, valuation experts, insurers and patent professionals, is the inherent complexity of patents and the patent system. 

Unlike its intellectual property sibling, copyright, which is granted on creation, a patent will typically take four years to be granted, cost several thousand pounds in fees and may end up being judged invalid at some unspecified future date.  Against that backdrop, understanding the patent landscape and the nature of the asset has always seemed like hard work.

But there are a number of factors at play that are helping to tip patents towards fully functional asset status - 10 years ago if you had asked the Financial Director of a UK company how many patents it held they would have looked at you blankly.  Now with the tax breaks offered by the Patent Box tax scheme, they are fully aware. 

Indeed companies are looking for ways to establish themselves as UK entities precisely to take advantage of the tax breaks associated with patents – much to the chagrin of the European Commission. 

Meanwhile, bearing in mind the changing make-up of enterprise value I outlined above, insurers and financiers are slowly beginning to realise that if they secure debt only on tangible assets, their market will shrink.

That does not mean, sadly, that mainstream markets for IP-enhanced lending are on the immediate horizon.   Scott Bell, Head of UK Investment Banking at Deutsche Bank, recently outlined the issue that currently prevents banks from engaging with patents as security for corporate finance – data. 

He said: “Without data about value and risk, ownership, strategy and information allowing us to make market comparisons, it is hard to see how a functional and active market can be developed; and while data is not the only ingredient, transparency, visibility and understanding of the patent world has to be the starting point.”

Critically though times may be changing, with the arrival of big data and affordable, cloud computing the triggers.  We can now crunch through the millions of lines of data relating to patents and events surrounding patents, such as litigation, to aggregate patent information from multiple sources and present it in a format that can be digested not just by patent experts, but also by financiers and the wider business community.   

As a result, the wider business community can now make informed strategic decisions around IP that up until now have been practically impossible.

See the Trillion Dollar Tipping Point report for more information.


Nigel Swycher is CEO of AISTEMOS


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