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Friday, 27 December 2013

Banking on IP? Apparently not, UK Intellectual Property Office study finds

The AmeriKat getting her teeth into some banking
In November the UK Intellectual Property Office (IPO) published a study entitled "Banking on IP? The role of intellectual property and intangible assets in facilitating business finance". The IPKat's sister blog, IP Finance, alerted readers to the publication back in November, but there seems to have been little traction or publicity following the publication.

The study, commissioned by the Department of Business (BIS) and the IPO, reported the findings on how effectively SMEs (which account for 99% of the 4.8 million businesses in the UK) are able to use their IP assets to secure the finance they need for company growth and whether there was more that companies and financiers could do to leverage the IP assets. The context of the report was the findings of the 2012 Breedon Report which estimated that shortage of finance for SMEs was between £84 billion and £191 billion and that, according to recent research published by BIS:
"If the situation is not resolved, output, investment and employment will be lower than would otherwise be the case, with adverse effects on economic performance in the short and longer term."
The study found that IP is an "under-appreciated asset class" and is, in effect, "unbankable". Not a good start. However, the report noted that IP and intangibles are valued highly by equity investors and commercial lenders. A 2006 ACCA report stated that "intangible assets provide the basis of superior profits and enterprise value beyond that determined by competitive market conditions". However, IP was not considered the asset of first choice. Nevertheless, a high proportion of commercial lenders "felt more could be done with them - to improve control, inform appetite, or both".

The study recognized that the main obstacle to leveraging IP as an asset for financing was that IP is "generally regarded as too complex and asset class to finance within the constraints of normal lending margins". This difficulty is attributed to the parties not being able to identify what the IP actually is, how it is connected to cash and how its value can be realized. The report noted that the complexity perception needed to be challenged because it is the IP that accounts for a modern business's primary assets.

So what to do? Well for those who, like the AmeriKat, do not wish to read all 224 pages of the study, the report provides you with their top Ten Recommendations as follows:

1. IP and intangibles must be identified during the financing process - The first steps are to provide a means for companies to identify the assets they own, and to build information on IP and intangibles into the templates companies use when presenting information to prospective funders.

2. The value in IP needs to be taken into account - The obstacle that must be addressed here is to demonstrate, reliably and repeatedly, how an SME’s ‘real’ IP and intangibles may deliver value which bears no relation to anything that may be called an intangible on their balance sheet; this generally only shows a sunk cost

3. Due diligence guidelines can help to control costs - Guidelines will involve providing templates, training and/or access to professional advice at a cost lending margins can support, within a turnaround time that meets business requirements.

4. More effective charges should be part of the lending package - Legal templates and the resource toolkit will help lenders to achieve this at modest cost, firstly by providing appropriate wording for the instruments, and secondly by providing guidance on the procedures which must be followed when recording them to ensure their effectiveness.

5. IP markets and IP financing could be facilitated through infrastructure improvements -
This is not a job for government - but solutions will require the co-operation of official registries and the establishment of administrative protocols.

6. On-going management of IP and intangibles should also be supported -
The proposed toolkit needs to include measures to inform and encourage SMEs to adopt appropriate IP management practices.

7. Affordable risk mitigation strategies need to be encouraged - More detailed dialogue on the requirements of both lenders and insurers is urgently required, to ensure that commercial sector activity is able to provide workable and affordable solutions.

8. Asset-based finance techniques should be adapted for IP and intangibles - Alongside mainstream lending, where EFG is an obvious area of focus, asset-based and alternative financing methods should be prioritised for IP-backed finance interventions; these are the parts of the industry most accustomed to understanding and assessing individual assets and their value.

9. Steps to stimulate private investment need closer study - This work fell outside the scope of the current IP and finance project, but is clearly desirable as a follow-up stage.

10. IP demands joined-up thinking - The Intellectual Property Office exists “to promote innovation by providing a clear, accessible and widely understood IP system, which enables the economy and society to benefit from knowledge and ideas”. It therefore has an important role to play in scrutinizing Government and finance industry initiatives to boost lending, to ensure that the assets produced by knowledge receive appropriate consideration.
Business Secretary Vince Cable
With headlines last year in the States about US banks wishing to tap into the value of IP holdings of their borrowers so as to cut down on their capital requirements, the value of a business's IP is not lost on the finance sector. But as expressed in the report more can be done. So what's next?

In a speech at the Alliance for Intellectual Property Conference in London in October following the publication of the summary of the report, Business Secretary Vince Cable stated
"...Intellectual property is too important an asset to be undervalued by banks who are the main source of finance. That is why I commissioned a report to explore how we can improve SMEs’ access to capital. We will look carefully at its recommendations in order to better support this countries creators and IP-rich businesses"
The report, although fulsome in setting out the problems facing SMEs, does not propose any substantive guidelines for institutions to follow, a uniform system for assessing and valuing IP across the finance sector or means or a taskforce to implement any system.  The only recommendations are for a "resource toolkit" and "legal templates".

So what will Mr Cable and the IPO do next - will they pull together a taskforce who will start drafting and implementing sector-wide standards or will the report just languish in an uncertain purgatory? Merpel, who is spending the holiday season sharpening her claws thinks that if Government is serious about bridging the finance gap for SMEs, perhaps the time for commissioning reports and looking into recommendations is over, and some actions need to commence in the fast-approaching New Year.

7 comments:

Suleman said...

The central issue of how much IP is worth makes it difficult to do banking based on it. When a firm goes bankrupt and a bank inherits the patent portfolio, what happens next? Where do they sell it, and what happens if no one wants to buy it? Given that the value of patent can drop instantly to nothing after a ruling of invalidity (which happens often) how can banks use them as collateral? This report was useful in that it identified many pitfalls. Finding solutions won't be easy.

Anonymous said...

While litigated patent claims may often be found invalid, only a tiny fraction of all granted patents are ever ruled invalid. Meanwhile, they have value. Other assets can also experience rapid drops in value, such as land on which planning permission is refused, or cargo that's lost or damaged in transit, or a forward contract when the underlying asset price moves sharply. The challenge is to quantify the likelihood of an invalidity ruling. My suggestion would be for banks to start working a little more closely with patent attorneys.

Anonymous said...

I find it interesting that the naysayers immediately look to the negative of patent holdings (no value).

Look at some recent US sales of potfolios: the IP was sold in the mega millions.

graces7 said...

Peer-reviewed data exists directly linking the value of underlying intellectual property to economic value (see NYU's Baruch Lev in the Financial Analysts Journal, "Science and Technology as Predictors of Stock Performance"). This is only one example, but offers a reliable correlation between the number of citations a patent has and its stock value. IMHO, what needs to happen is a meeting of the minds between the financial and legal communities to translate this data into a medium the broader investment community can understand (i.e., prospectuses).

Anonymous said...

Taking the example given by graces7 of stock price being correlated with number of citations, such an analysis would not for example take into account scope of claim. So as claim scope changed how would that reflect in value of a patent/patent application? It would be dangerous to simply set up an artificial system of valuing and trading IP based on key parameters. Yes, you may bamboozle the banking world for a while, but it would inevitably collapse.

Grace said...

That's a valid point - I suppose in the instance of a prospectus, any changes to the scope of a patent would constitute a material change that would have to be disclosed to investors by way of the Annual Information Form. It's evident that significant hurdles remain to be surpassed in the context of intangible asset finance, but given that intangible assets now constitute close to 82% of market value, it occurs to me to be more important to address those shortcomings by way of ongoing reforms rather than forgoing that route altogether - in my opinion leaving the banking world without material facts on the underlying IP when it assumes a lion's share of the value of issued securities is closer to bamboozlement than cross-disciplinary best efforts to provide parameters of value.

Ian Goodyer said...

The IPO have now published their official response to Banking on IP. http://www.ipo.gov.uk/ipresearch-bankingip-2014.pdf

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