Photo of Christy Barwick, Intellectual Ventures.
The structure that Intellectual Ventures has created to securitise its royalty cash flows is innovative because it is the first offering of its kind in the debt capital markets dedicated solely to the monetisation of technology-related patent royalties.
Intellectual Ventures (IV) is the market leader in intellectual property licensing. Founded in 2000, IV is a privately-held invention capital company. They are building an active market for invention and innovation that allows buyers, sellers, and inventors to realise value for their ideas. With more than $6bn in committed capital and $3bn in licensing revenue, they own one of the world’s largest and fastest-growing intellectual property portfolios.
One of IV’s objectives is to put its balance sheets to work by improving the cash conversion cycle of its long-term royalty payment streams and to improve investor returns as a result. As the size of their accounts receivable grew, IV wanted to focus more on technology and intellectual property and less on managing credit counterparty risk. One solution was identified that would conform to both of these objectives. “In our experience”, Christy Barwick, Treasurer at Intellectual Ventures explains, “securitisation offers issuers the unique opportunity to manage balance sheets in a way that increases shareholder value by accelerating the return of cash to investors, reducing credit counterparty risk, and monetising assets at attractive rates when compared to other financing alternatives.”
As IV explored opportunities to monetise its balance sheet, they found that there was not an existing asset class within the securitisation markets for technology-related intellectual property, royalties, or licensing revenue payment streams. Recognising that the licensees in IV’s licensing portfolio are considered by many investors as marquee technology companies that previously had not been frequent issuers in the debt capital markets, IV believed that there was a significant, under-appreciated market opportunity emerging in structured finance and the securitisation of technology-related assets.
IV successfully pursued creation of a new asset class in the debt capital markets dedicated to the monetisation of technology-related patent royalties. This solution has already proved highly beneficial to the company, helping them to return cash to investors more quickly.
In addition, IV has also seen significant reductions in credit counterparty risk exposures by securitising their fixed cash flows. The company achieved this through “true-sale” transactions, which was a significant challenge as there was no established market in securitisation of technology-related intellectual property for comparison.
The monetisation of IV’s balance sheet through the creation of an asset class dedicated to technology-related patent royalties has proved very successful, says Barwick. “We have created an efficient structure from a tax, legal, and accounting perspective that is repeatable with new and existing license agreements as well as across our Funds,” she says. “We have also created an opportunity to educate investors in the debt capital markets on the value of invention, invention rights, and investing in invention through intellectual property and patent royalties.”
The structure that IV created to securitise its royalty cash flows is ground-breaking since it is the first offering in the debt capital markets dedicated solely to the monetisation of technology-related patent royalties. From IV’s perspective, it is a highly innovative structure because it is an off-balance sheet transaction that reduces credit counterparty risk while also accelerating the return of cash to its investors. The structure is also flexible in that it can be used by new and existing IV Funds to monetise patent license agreements.
Because licensees typically have non-exclusive licensing rights to thousands of patents within IV’s portfolio – unlike some other royalties securitisation programmes where there are typically only one or two licensed patents – IV provided transparency to investors by allowing them to search the company’s database of patents.
As this market matures, IV expects their patent license agreements and the structure to evolve as potential investors become more familiar with the company, their business model and with this emerging new asset class. “IV isn’t shy about taking risks; we’re innovators,” Barwick adds. “We’ve built the invention capital market from scratch and we continue to lead by example by being the first to create a new asset class in the debt capital markets dedicated to the monetisation of technology-related patent royalties.”
Improvements in the cash conversion cycle (CCC).
Satisfies evolving regulatory requirements eg Dodd-Frank.