Fraserburg - London IP Summit

Report
IP as an Asset Class
The London IP Summit
London Stock Exchange
13th – 14th October 2014
CONFIDENTIAL.
Auckland | San Diego | London
Agenda:
 Valuation, value drivers and
impact
 Asset class characteristics
 Beyond current mainstream
investment strategies
CONFIDENTIAL.
3
Definition: what are we talking about?






Patents
Copyrights
Trademarks
Brands
Trade Secrets
Know How
Intellectual Property is the intangible product of R&D spend
CONFIDENTIAL.
4
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
CONFIDENTIAL.
5
IP is Mispriced
IP value 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.
CONFIDENTIAL.
6
Traditional IP Investment Strategies
Royalty Investing
 Purchase of future cash flows, structured deals now predominate
 Falling Yields due to weight of investor money
Litigation Finance
 Financing patent disputes
 Costs of litigation in USA increasing and strategy lacks scale
Venture Capital
 Wide dispersion of returns as significant execution risk
 Secondary funds have best performance
CONFIDENTIAL.
7
A Vast, Growing, Uncorrelated Market
 WIPO valued the US market at $8 trillion generating $180bn 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
the largest globally.
 IP filings in the USA have grown in excess of 15% pa 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
risks as traditional asset classes and are also uncorrelated with the common
forms of alternatives (hedge funds, private equity, real estate).
CONFIDENTIAL.
8
Illustrative Asset Class Comparison
Correlation
Volatility
Liquidity
Transparency
Yield/Return
Intrinsic
Value
IG Bonds
High
Low
High
High
Low
Moderate
LC Equities
High
High
High
High
Moderate
Low
Hedge
Funds
Moderate
High
Low
Low
Moderate
Low
Private
Equity
Moderate
Low
Low
Low
High
Moderate
Real Estate
High
Moderate
Moderate
Moderate
Moderate
High
IP
Low
Low
Low
Low
High
High
CONFIDENTIAL.
9
Expanding beyond traditional investment strategies
i.
IP lending
ii. 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.
CONFIDENTIAL.
10
IP lending
 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.
11
Special situations
 Distressed
 IP Activism
 Change of Control
 Patent Arbitrage
 IP Litigation Outcomes
CONFIDENTIAL.
12
Distressed
Nortel Auction Generates 3x Expected Price,
Bonds Get Par + Accrued
Subs Turn Out to be an Even Better Bet
CONFIDENTIAL.
13
IP Activism
See Appendix 5 for analysis of a specific IP activist opportunity
CONFIDENTIAL.
14
Change of Control
CONFIDENTIAL.
15
Patent Arbitrage
$2,500
Coupling superior IP purchasing analysis with long-term
capital permits the arbitrage of IP portfolio value
$2,222
$2,000
$1,500
$1,000
Implied
Price (000’s)
per Patent (000’s)
Implied Price
per Patent
Implied Price per Patent (000’s)
$1,277
Strategic
NPE
$1,146
$846
$750 $727
$652
$500
$510
$0
CPTN
CONFIDENTIAL.
$376
$262 $221
$154 $133
16
IP Litigation Outcomes
CONFIDENTIAL.
17
Direct investing
 Liquid long/Short position based on IP analysis
 Illiquid PE investment in IP strategic play
CONFIDENTIAL.
Illustration of a typical long/short portfolio
18
Fundamental Long/Short
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
Market Neutral Book
•
•
•
•
•
•
Expected Return
Implied Vol (~ max)
Exposure
Positions
Average Position size
Position risk
YTD –
7/14/14
10%+ annual
6%
<=10% market
20-30 paired off
400 bps
-12.5%, -20% max
CONFIDENTIAL.
Ticker
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
YTD %
99.99
89.42
83.33
59.68
58.02
55.61
55.07
54.78
54.13
53.49
50.18
48.15
38.14
36.93
36.84
20.72
20.19
19.26
18.39
15.21
14.53
13.76
9.48
7.31
7.05
6.40
6.13
4.33
2.54
2.44
1.83
0.71
0.00
(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)
V180
89.14
52.20
52.38
28.07
43.54
54.85
72.23
37.06
39.09
55.37
25.56
37.03
44.71
26.91
95.28
37.17
24.30
54.97
25.97
40.54
28.59
26.93
26.52
15.89
10.29
13.63
18.97
39.87
26.95
26.64
65.84
25.05
45.35
31.38
37.65
15.78
14.54
28.05
35.02
39.81
20.77
27.91
15.21
54.39
23.97
32.35
46.14
42.36
56.18
35.57
43.51
31.78
36.70
52.85
N/A
38.51
43.31
80.91
131.44
179.39
145.15
136.85
143.91
Ticker
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
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
YTD %
(22.97)
(36.50)
(43.94)
(68.02)
(33.33)
36.84
99.99
(31.40)
55.07
1.83
(15.67)
53.49
19.26
55.61
(8.61)
(20.92)
83.33
89.42
(12.76)
0.00
38.14
58.02
(19.43)
(27.14)
(13.74)
15.21
4.33
(3.85)
54.13
(25.72)
(1.42)
20.72
54.78
48.15
(20.87)
(18.21)
(3.10)
(11.64)
(20.56)
(0.03)
14.53
59.68
(2.78)
(4.79)
2.54
13.76
36.93
2.44
9.48
18.39
50.18
0.71
20.19
(10.34)
(4.13)
6.13
7.31
(1.64)
(5.27)
(1.70)
6.40
7.05
V180
N/A
179.39
145.15
136.85
131.44
95.28
89.14
80.91
72.23
65.84
56.18
55.37
54.97
54.85
54.39
52.85
52.38
52.20
46.14
45.35
44.71
43.54
43.51
43.31
42.36
40.54
39.87
39.81
39.09
38.51
37.65
37.17
37.06
37.03
36.70
35.57
35.02
32.35
31.78
31.38
28.59
28.07
28.05
27.91
26.95
26.93
26.91
26.64
26.52
25.97
25.56
25.05
24.30
23.97
20.77
18.97
15.89
15.78
15.21
14.54
13.63
10.29
19
Private Equity
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
CONFIDENTIAL.

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