“Intellectual property is a substantial chunk of business investment,” Tony Clayton, chief economist in the United Kingdom IP Office, told a side gathering at the recent World Intellectual Property Organization General Assembly. “It really does matter.”
The side event, a workshop entitled “IP as an Enabler for Innovation Finance in Business,” was held on 24 September. The annual WIPO Assembly was held from 22-30 September.
Clayton was joined on the panel by Simon Seow, group director of the Registry of Patents/Designs/Plant Varieties and executive director, international, at the IP Office of Singapore (IPOS). Also speaking was Lu Guoquiang, director of the Shanghai IP Authority.
But despite the importance of IPR to companies, financial companies have a hard time understanding it and how to value it, said Clayton, who added that the UKIPO has been working on the issue for about two years.
He referenced the 2013 UKIPO report, “Banking on IP,” [pdf] which found that:
“Company cash flow, perhaps the chief consideration in debt finance, is often closely connected to company IP assets. Despite this, and good evidence to show that high growth, IP-rich businesses are more resilient and perform better than others over time, the IP and intangibles which equity investors value highly are rarely considered in mainstream lending practice. This is unsurprising: balance sheets do not represent their value, and current regulations actively work against consideration of IP as an asset class but the result is a real and important disconnect between banking regulation and practice and the UK’s ambition for growth. Recent banking initiatives targeting growth businesses are finding that traditional fixed assets simply no longer exist. In the asset based lending market, too, many examples have emerged of transactions where control over intangibles is recognised as being important. IP and intangibles are, in effect, unbankable. Change seems inevitable: how can it be accelerated?”
The report made several recommendations, including the design and assembly of a resource toolkit and supporting services.
It said that when integrated, these will:
• help old and new economy businesses identify and communicate their IP and its relationship to cash flows
• help companies and lenders understand the business value of IP
• improve efficiency in due diligence on IP assets
• improve practice in obtaining reasonable and effective charges over IP
• make room for development of more effective IP markets, supported by a better information infrastructure
• enable risk to be reduced through insurance and other mechanisms
Businesses make knowledge investments with expectation of future returns in a range of areas, such as: software, creative works, R&D, designs, business processes, workplace skills, and reputation/brands, said Clayton. In the UK, investment in intangible assets rose from 35 percent in 1990 to about double that by 2011.
But most of this investment is detached from financial markets, he said, as it may not appear in company accounts and is hard to use as assets in seeking finance. There are some exceptions, such as copyright catalogues or licence income streams, he noted.
Companies needing credit have not been “telling the IP story,” he said. Given the risk involved, banks have not wanted to own IP assets, and he said they are not being asked to become venture capitalists. But now several banks and insurance companies are becoming interested.
A UKIPO action plan for 2014 published in March included: building awareness among both firms and financial institutions; building better tools for communicating and assessing IP; working on reducing risk (including examining insurance approaches and helping lending to get serviceability before collateral); and enabling markets.
On markets, Clayton said good data and analytics are needed, and it has been noticed that the first IP insurance products and first IP markets have emerged in the US where data on patents, ownership, charges and litigation are all on the line.
He described different types of lending in the market that IP rich firms are likely to want to access. These include: unsecured, secured, and asset-backed, and said an inventory must be obtained of what the company owns. For asset-backed finance, the finance provider acquires the IP and licenses back to the innovating firm, usually exclusively. This is probably the best-developed model in practice, he said.
With the secured model, the IP assets are insured and that value is used as collateral for a loan. In the US, the insurance premium is added to the load charge and the insurer manages risk, an arrangement that separates business risk taken by the lender from IP risk taken by the insurer, Clayton said. And for unsecured, the lender takes the risk but uses knowledge of the IP in the business to make decisions on terms and risks, he said.
On progress so far, he said there is a working group with industry partners and IP professionals on awareness, through industry associations and directly. He mentioned that tools are being developed, the insurance review on risk mitigation is complete, and initiatives are taking shape on information infrastructure. Also, they have spoken to most of the players in UK IP insurance and are likely to look more widely. They are supporting initiatives on open data in the UK to support insurance and markets.
In the next three months they will work on messages and partner roles for awareness building, and bringing tools and templates together in a common framework. In six months and beyond, they’ll offer support for information ecosystem developments, and market test of tools and templates in real time. The ongoing programme is to work with finance and IP professionals to embed and learn from successful models, he said.
They are expecting to have some output in January from their own work on awareness and tools. Data work should start next month and develop step by step, involving large IP owners and IP offices, he said. They are using a system of self-declaration. In early 2015, they aim to be in a position to see how these initiatives affect real businesses, and are talking to partners on how to do this.
“This is not going to be a short sprint,” he concluded, but it will be built by experience and changing attitudes.
Shanghai IP Pledges
Meanwhile, another project has been underway in Shanghai, China, which was discussed on the panel. A case on “IP pledges” was prepared by Lu Guoqiang, director of the Shanghai IP Office. It was noted that the Shanghai office is advancing rapidly to meet demand, and by the end of the year will establish an IP court.
In his prepared paper, he said Shanghai is home to more than 30,000 high-tech small and medium businesses, most of which lack adequate funding and have limited access to bank loans. To address such problems, policy initiatives were introduced in 2009 to boost financing through IP pledges.
A pilot project saw a pharmaceutical company secure a bank loan of RMB 2 million through the pledge of its patent rights, he said. By the end of 2013, more than 500 loans had been issued through this mechanism in Shanghai, to a total of RMB 1.8 billion.
Shanghai has 17 districts and there has been extensive piloting and incentives for banks, guarantee institutions and evaluation services. Contracts containing the pledge of patent rights have been registered in Beijing, but the China State IP Office (SIPO) introduced local registration of patent pledges in Shanghai to increase efficiency. In 2013, 90 patent pledges were registered there, accounting for about a quarter of the nation’s total.
Several bottlenecks were identified during the pilot stage of pledging and are being addressed. These include that: the pledge is highly limited to patent rights; the evaluation system needs improving to address imperfect IP valuation; greater efficiency is needed in the system by allowing other IP registration in Shanghai; and IP-backed financing is not widely offered due to the immature market, time-consuming operations and high costs.
Strategies for the next phase include improving policies by referring to international best practices, especially for detailed operational standards and eligibility of IP evaluators. Also the gap between IP and financial capital needs to be bridged by encouraging small businesses to “realize” their IP value through pledging, conversion into shares, licensing or transfer. Tailored financial derivatives need to be developed, such as IP insurance and trust transactions, he said.
Another strategy is to develop a market for the transfer of pledges, including creating an IP trading platform and rules regulating market behaviour. In addition, he said there should be a robust safeguarding mechanism to lower risks of IP-backed financing, and the social environment should be improved by promoting IP awareness and developing a sound credit reporting system.
Singapore
For his part, Seow described the effort in Singapore to address the issue. He said some 80 percent of assets are intangible now. “We’re going to be building IP-rich companies,” he said. “What are we going to do to support them?”
The objectives of the Singapore IP Financing Scheme are to assist asset-light, IP-rich companies to gain access to financing using granted patents as collateral, and to build IP financing capabilities with the local financial sector to accept IP as collateral, Seow said.
He described the IP financing scheme, such as underwriting the value of IP used as collateral, leading to secured loans. A panel does the IP valuation.
Companies that are more mature, with proven IP, are being sought, he said.Those with early stage IP tend to seek venture capital and private equity, moving toward IP loans by banks and into securitisation and bonds as they reach maturity. The Singapore scheme is for companies incorporated in the country, and the company’s own patent(s) must be part of the collateral.
For the moment, the participating financial institutions are the Development Bank of Singapore, Overseas Chinese Bank Corporation, and United Overseas Bank. The panel of valuers include: American Appraisal Singapore, Consor Intellectual Asset Management, and Deloitte & Touche. The office is in discussions with other institutions and more are coming on board.
The valuation of IP is “more art than science,” he said. Valuation costs are borne by the borrower, and a government subsidy is available for successful loan applicants. Borrowers must fully draw down the approved loan, and subsidies are capped at 50 percent of IP valuation cost, 2 percent of the value of the IP, or $25,000, whichever is lower.
Image Credits: Mark Tuminello
[…] “Intellectual property is a substantial chunk of business investment,” Tony Clayton, chief economist in the United Kingdom IP Office, told a side gathering at the recent World Intellectual Property… […]