Transcript Fraserburg - London IP Summit
IP as an Asset Class
The London IP Summit London Stock Exchange 13th – 14th October 2014
Auckland | San Diego | London
Valuation, value drivers and impact Asset class characteristics Beyond current mainstream investment strategies
Definition: what are we talking about?
Patents Copyrights Trademarks Brands Trade Secrets Know How
Intellectual Property is the intangible product of R&D spend
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
IP is Mispriced
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.
Traditional IP Investment Strategies
Purchase of future cash flows, structured deals now predominate Falling Yields due to weight of investor money
Financing patent disputes Costs of litigation in USA increasing and strategy lacks scale
Wide dispersion of returns as significant execution risk Secondary funds have best performance CONFIDENTIAL.
A Vast, Growing, Uncorrelated Market
WIPO valued the US market at the largest globally.
in annual income in 2011. Income is primarily generated by licensing, commercialisation and litigation. This market size makes IP the largest asset class in the US and one of IP filings in the USA have grown in excess of
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
as traditional asset classes and are also uncorrelated with the common forms of alternatives (hedge funds, private equity, real estate).
Illustrative Asset Class Comparison
IG Bonds LC Equities Hedge Funds Private Equity Real Estate IP Correlation
High High Moderate Moderate High Low
Low High High Low Moderate Low
High High Low Low Moderate Low
High Low High Low Low Moderate Low Moderate Moderate High Moderate High
Moderate Low Low Moderate High High CONFIDENTIAL.
9 Expanding beyond traditional investment strategies i.
IP lending 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.
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.
Distressed IP Activism Change of Control Patent Arbitrage IP Litigation Outcomes CONFIDENTIAL.
Nortel Auction Generates 3x Expected Price, Bonds Get Par + Accrued
Subs Turn Out to be an Even Better Bet
See Appendix 5 for analysis of a specific IP activist opportunity CONFIDENTIAL.
Change of Control
$2,500 $2,222 $2,000 $1,500 $1,000 $500 Coupling superior IP purchasing analysis with long-term capital permits the arbitrage of IP portfolio value Implied Price per Patent (000’s) $1,277 $1,146 $846 $750 $727 $652 $510 $376 $262 $221
$154 $133 $0
IP Litigation Outcomes
Liquid long/Short position based on IP analysis Illiquid PE investment in IP strategic play CONFIDENTIAL.
Illustration of a typical long/short portfolio
Market Neutral Book
• • • • • • 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 Expected Return Implied Vol (~ max) Exposure Positions Average Position size Position risk
10%+ annual 6 % <=10% market 20-30 paired off 400 bps -12.5%, -20% max
YTD – 7/14/14 CONFIDENTIAL.
LTBR MYGN MARA CODE IDCC DMRC UPIP MU IDTI BBRY SNDK RMBS IMMR TEVA COPY ROVI NVDA VRNG BRKR IPO TSRA DISH BSX QCOM SPX CCMP JIL ACTG BRCD TIVO AMSC RPXC MITL CEVA HTC BUR MSI MRVL NOK PTNT ERIC WIN TICC OLED MENT YHOO AOL CIEN PCO VIA TECH ALU ARMH CREE VHC PPRO ELNK IMN DSS ONE FNJN INVT PRKR SPEX
Fundamental Long/Short YTD %
(0.03) (1.42) (1.64) (1.70) (2.78) (3.10) (3.85) (4.13) (4.79) (5.27) (8.61) (10.34) (11.64) (12.76) (13.74) (15.67) (18.21) (19.43) (20.56) (20.87) (20.92) (22.97) (25.72) (27.14) (31.40) (33.33) (36.50) (43.94) (68.02) (80.27)
NOK YHOO ARMH CEVA TSRA CODE MRVL WIN BRCD DISH TEVA TIVO BSX BRKR SNDK RPXC NVDA MENT ERIC JIL QCOM BUR TICC MSI CCMP SPX
PPRO FNJN INVT PRKR ONE COPY LTBR DSS UPIP AMSC PCO BBRY VRNG DMRC OLED VHC MARA MYGN AOL MITL IMMR IDCC ALU IMN CIEN IPO ACTG PTNT IDTI ELNK HTC ROVI MU RMBS CREE VIA TECH
(22.97) (36.50) (43.94) (68.02) (33.33) 36.84
(8.61) (20.92) 83.33
(19.43) (27.14) (13.74) 15.21
(25.72) (1.42) 20.72
(20.87) (18.21) (3.10) (11.64) (20.56) (0.03) 14.53
(2.78) (4.79) 2.54
(10.34) (4.13) 6.13
(1.64) (5.27) (1.70) 6.40
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 11-14 Grafton Street, London W1S 4EW +44 7825 082 112 www.EverEdgeIP.com