According to recent reports, intangible assets represent ~90% of the S&P 500 market value compared to ~30% in 1985. Other studies estimate that intellectual property — a subset of the intangible asset class — represents more than a third of the market value of US publicly traded companies.
Intellectual property refers to creations of the mind, such as inventions, literary/artistic works, designs and symbols/names/images used in commerce. The primary forms of intellectual property are:
- Patents: protect inventions and discoveries
- Trade Secrets: protect valuable information that is intentionally kept secret
- Copyright: protect artistic works in a fixed medium of expression
- Trademarks: protect “signs” associating products and services to an owner
While each form of IP offers different protections, the value of each lies in its legally proscribed, exclusionary right that prohibits third parties from practicing or “infringing” the IP without permission. It is this exclusionary right that promotes a healthy competition and innovation ecosystem by, for instance, incentivizing R&D, encouraging investment, protecting market share, and allowing the licensing of these rights to either a) promote synergistic business relationships or b) stop unauthorized copying.
Several data points highlight the value attributable to IP licenses that are struck to promote synergistic business relationships or to resolve enforcement scenarios. The following statistics help contextualize the significance of the IP value proposition.
IP Value Creation
IP gains sufficient value to form the foundation for a financial transaction when third party commercial actors have either begun to use the IP or desire to use it in the future. When this situation occurs, IP rights can create value in several ways, including:
- IP rights can be licensed to third parties that wish to practice or produce the technology associated with the underlying IP;
- IP rights can be exploited to negotiate cross-licenses that allow IP owners access to sought-after technologies;
- IP rights can be sold to third parties that wish to practice or produce the technology associated with the underlying IP;
- IP rights can be enforced against third parties that are practicing the underlying IP without a license;
- IP rights can serve as the basis for significant insurance policies;
- IP rights can be the principal basis for an M&A transaction and are a key driver of M&A activity;
- IP rights can be central to value creation following a business separation or spin-off transaction;
- IP rights can facilitate the formations of JVs for co-development of new technologies, which increase enterprise value;
- IP rights can be monetized through the sale of all or part of contracted royalty payments associated with particular IP
In turn, IP owners and managers (e.g. companies, academic and research institutions, and law firms), can leverage these sources of IP value to raise debt and equity capital in several ways, including:
Although IP offers a unique and significant source of value, many owners and managers of IP experience difficulty when attempting to leverage their IP to achieve an appropriate risk-adjusted cost of capital due to the lack of IP expertise and/or transactional flexibility among the investing community. As such, the new genre of IP Private Credit funds may prove to be an important source of strategic capital available in IP-intensive sectors.