IP-backed finance

IP-backed finance is described as being a branch of intangible asset finance. The primary goal in this field of finance is to unlock the “hidden value” found in intangible IP assets.

Despite being an area lacking in large data sets, successful IP-backed lending models do exist. In recent years, businesses of all sizes have been investing more in intangible assets than in fixed or physical assets. In addition, the recent banking initiatives targeting growth businesses are evidence of the fact that traditional fixed assets simply no longer exist or are diminishing in value. In the asset-based lending market, many examples have emerged of transactions where control over IP and intangibles are recognised as being integral to a company’s overall bottom line.

A newer, though lesser-known option for IP-backed financing, called pension-led funding, is also beginning to emerge. It works by utilising pensions held by business owners, directors and senior executives as a means of providing cash injection into a business, usually via the business’s own IP. This can happen through either the purchase of a business’s IP assets, and subsequent licencing-back from the pension fund to the company, or by way of securing a loan against the IP assets themselves. IPR-backed finance was traditionally used by large corporations, however, the introduction of intermediaries and patent brokers such as ICAP – with whom Metis has recently worked – has opened up different funding mechanisms which can be used by SMEs.

In spite of this, IP-backed funding still presents a challenge to SMEs looking for fresh capital, as there remains a sense of unease over exit routes and the realisation of IP value for lenders, particularly in pre-revenue companies.

What are the attractions of IP-backed finance?

  • Improved security: at present, any charge placed over a business’s IP and intangibles tends to be floating rather than fixed, weakening its effect if the business gets into difficulties. Defining IP assets as part of a lending agreement puts a bank in a much stronger position with an administrator or insolvency practitioner.
  • Potential for value appreciation: the IP assets of a well-run business will increase in value over time, whereas most of their tangible assets will reduce in value.
  • A wider pool of assets: lenders often face situations where existing good customers want to borrow more than established asset lending ratios will allow. The value contained within core intangible assets provides a means to lend more, but with increased security.
  • Stronger repayment incentives: where intangibles are core to business activity, they provide a powerful incentive for borrowers to honour their repayment commitments.
  • Alternative to personal guarantees (PGs): lenders recognise the complications which arise from requesting PGs for business transactions. IP and intangibles provide an additional source of security and/or “comfort” which is directly related to the company, not an individual.

What are the challenges of IP-backed finance?

  • Visibility: despite its importance, and the amount invested in it by large and small businesses, internally generated IP is seldom represented on company balance sheets. It is, therefore, incumbent on a company’s Directors to understand and explain their IP and intangibles in language a lender will understand. If awareness is lacking in either or both parties, this acts as a hurdle.
  • Better informed lending decisions: obtaining insights into off-balance sheet assets (which generally include most, if not all, of a business’s IP and intangibles) provides lenders with a more representative picture of a company’s resources and value.
  • Value attribution: unquoted companies do not have access to a market mechanism to measure and demonstrate the intangible (off-balance sheet) value attributable to their businesses.
  • Value realisation: many tangible assets have a realisable disposal value, even if it is a fraction of the new (originally funded) cost. Markets for resale of IP and intangible assets exist, but are presently less formalised and offer less certainty on realisable values.
  • Value risk: some intangible assets, such as brands, can be subject to rapid value changes depending on the fortunes of the companies that own them.
  • Value understanding: lenders need to gain confidence in managing the particular risk profiles associated with these assets. This involves familiarisation, training, and the adoption of recognised standards for intangible asset value management.

Photo source: jDevaun