«Research commissioned by the Intellectual Property Office, and carried out by: Martin Brassell, Kelvin King This is an independent report ...»
Banking on IP?
The role of intellectual property and intangible assets in
facilitating business finance
Research commissioned by the Intellectual Property Office, and carried out by:
Martin Brassell, Kelvin King
This is an independent report commissioned by the Intellectual Property Office (IPO). Findings and opinions are
those of the researchers, not necessarily the views of the IPO or the Government.
© Crown copyright 2013 Intellectual Property Office is an operating name of the Patent Office Banking on IP?
Purpose Small and Medium sized Enterprises, or SMEs, are the lifeblood of the UK economy. Their ability to grow is a key determinant of the nation’s future economic health. In recent years, businesses of all sizes have been investing more in intangible assets, in particular Intellectual Property (IP), than in fixed or physical assets. This study sought to examine how effectively SMEs are able to use these assets to secure the finance they need for company growth.
ISBN: 978-1-908908-86-5 IP: an under-appreciated asset class Banking and IP?: The role of intellectual property and intangible assets in facilitating business finance Company cash flow, perhaps the chief consideration in debt finance, is often Published by The Intellectual Property Office 6th November 2013 closely connected to company IP assets. Despite this, and good evidence to show that high growth, IP-rich businesses are more resilient and perform 1 2 3 4 5 6 7 8 9 10 better than others over time, the IP and intangibles which equity investors © Crown Copyright 2013 value highly are rarely considered in mainstream lending practice. This is unsurprising: balance sheets do not represent their value, and current You may re-use this information (excluding logos) regulations actively work against consideration of IP as an asset class but the free of charge in any format or medium, under the terms of the Open Government Licence. To view result is a real and important disconnect between banking regulation and this licence, visit http
• improve efficiency in due diligence on IP assets
• improve practice in obtaining reasonable and effective charges over IP
• make room for development of more effective IP markets, supported by a better information infrastructure
In 2007 Martin founded Inngot (www.inngot.com), a Swansea-based company providing online tools to help companies identify, value and promote their IP and intangible assets. These include ‘Sollomon’, the online indicative valuation tool for IP and intangibles, using a methodology developed with specialist input from Grant Thornton UK LLP.
Inngot provides IP support and services to a variety of organisations, including SMEs, large corporates, banks, investment networks, universities and government-backed business support initiatives including the GrowthAccelerator programme.
Kelvin King Kelvin joined the Government in 1970. His early career was spent with the Government’s Share Valuation team, which is responsible for all of the private company, business, intellectual property, and intangible asset valuation requirements of Government. He left the Government after 17 years to establish a valuation unit for a large accountancy practice and, before the founding of Valuation Consulting Co (www.valuationconsultingco.com), a dedicated intangible asset IP and business valuation practice, was managing director of a specialist valuation company within two major investment banks.
Valuation Consulting has performed hundreds of valuations of IP and IP-rich businesses worldwide to support debt and equity.
Kelvin is a contributor to many journals, television and radio. He is a contributor to books (RICS Red Book, Business Valuation Digest – Thomson, Intellectual Property Rights and Their Valuation – Gresham, Due Diligence Law and Practice – Sweet & Maxwell, The Trademark Handbook, amongst others). His book Valuation and Exploitation of Intellectual Property and Intangible Assets was published by EMIS Professional Publishing in May 2003.
Executive Summary Small and medium-sized enterprises, or SMEs, are the lifeblood of the UK economy.
Their ability to grow is a key determinant of the nation’s future economic health. In recent years, businesses of all sizes have been investing more in intangible assets, in particular intellectual property (IP), than in fixed or physical assets. This study sought to examine how effectively SMEs are able to use these assets to secure the finance they need for company growth.
Knowledge assets aren’t appreciated in mainstream UK lending
Cash flow, perhaps the key consideration in debt finance, is often very closely connected to a company’s IP and intangibles. Despite this, and good evidence to show that high growth, IPrich businesses are more resilient and perform better than others over time, IP and intangibles are rarely considered in mainstream lending practice.
This is unsurprising. Balance sheets do not represent the value of these assets, and current regulations actively work against consideration of IP and intangibles as an asset class. The result is a real and important disconnect between banking regulation and practice and the UK’s growth ambitions.
Recent banking initiatives targeting growth businesses are finding that traditional fixed assets simply no longer exist. In the asset-based lending market, too many examples have emerged of transactions where control over IP and intangibles is recognised as being important.
IP and intangibles are, in effect, unbankable. Change seems inevitable. How can it be accelerated?
Other countries are already beginning to make change happen… There are plenty of examples of faster growing economies taking steps to understand this issue and make knowledge assets bankable. Malaysia and Singapore are introducing guarantees to facilitate IP-backed lending; Denmark and India are supporting the development of IP marketplaces; Germany has sought to articulate the ‘Wissensbilanz’ to assist financial analysis of individual firms; Brazilian banks are experimenting with IP audits prior to lending.
China has publicly set out its policies to make the country a world leader in technology by 2050 which has included the establishment of targets for the creation of “indigenous IPR”, while neighbouring Hong Kong set up an Innovation and Technology Fund targeting IP-rich businesses with a $5bn injection as long ago as 1999.
… and in the UK, some funders are already making the IP link IP and intangibles represent part of the ‘skin in the game’ for SME owners and managers, who have often expended significant time and money on their creation, development and protection.
14 The role of intellectual property and intangible assets in facilitating business finance When equity investors (from business angels to venture capital companies) assess the quality and attractiveness of investment opportunities, they invariably include consideration of the underlying IP. They want to understand the extent to which it represents a barrier to entry, creates freedom to operate, and meets a real market need.
Certain types of lending such as venture debt and pension-led funding (which directly harnesses IP assets) already involve close scrutiny of the whole asset portfolio. So why are other routes to finance reluctant to look at IP and intangibles?
Whilst there are improvements needed to the practicalities (but not the rules) of registration, the basic step that is missing is a clear inventory of the IP and intangibles, without which a lender can never be certain that the assets which should be present are in fact to hand.
There is an underlying structural issue relating to value realisation in a distress situation, caused by the absence of mature marketplaces in which IP assets can be sold in the event of default.
However, this cannot mean that the IP assets of a company in distress are of no value. Rather, there is not yet the same tradition of disposal, or the same volume of transaction data, as that which has historically existed with tangible fixed assets.
The concern over value is partly intrinsic (because IP is unique rather than a commodity), and arises partly because of an assumption that if a company has failed, its IP was no good. This is a non-sequitur, since equity investors have plenty of ‘war stories’ that illustrate great IP failing due to management failings or chronic under-funding (which they sometimes attribute to a lack of bank support).
Global licensing activity leaves no doubt that IP is in fact an immensely valuable, highly tradable and very portable asset class. In individual cases, insolvency practitioners have no difficulty illustrating cases where IP has been central to recovery in a downside (distressed) situation.
Current practice simply reflects the fact that the markets to reach potential buyers of IP are immature.
imperfections, trading is less transparent, and demand never gets properly tested. This can, and must, change.
IP is a missed opportunity One of the most unhelpful aspects of the IP financing debate is the tendency to conflate the terms ‘technology’ and ‘IP’. There are millions of intangible business assets whose value is either not being leveraged at all, or only being leveraged inadvertently. Whilst it is true that technology and knowledge-based companies will own important IP, there are many thousands of UK businesses with IP (registered and unregistered) who would not think of themselves as being in the technology space, including many of the UK’s globally recognised creative brands and manufacturers.
The new data sources studied for this report demonstrate that while registered rights ownership among micro enterprises is generally low (in itself not a surprise), small and medium-sized businesses have much more IP to offer. Furthermore, IP audit data makes it clear that IP is under-registered (where registration is possible) and confirms the existence of many nonregistrable but value-additive assets – some covered by copyright, others not.
It is important to note that IP is not only the currency of the knowledge economy, as has often been observed, but also underpins the value of ‘old’ economy companies too. The more widely business is transacted with it, and the more visible it becomes in public accounts, the easier its value becomes to realise. This will lead to greater opportunities for lenders – and higher risks of inaction.
How will change be encouraged?
This study has interviewed finance professionals across a wide range of different sectors and disciplines. Whilst not all have provided their views ‘on the record’, most recognise and acknowledge that credit decisioning and account management can both benefit from better information on, and understanding of, IP and intangibles, even if regulations do not currently facilitate or encourage their actual business value to be harnessed independently for security purposes. A few have initiatives already under way which seek to address this particular aspect of ‘information asymmetry’.
What is clear, however, is that while specialist funds and some asset-based financiers may be able to generate sufficient margins for detailed due diligence, mainstream lending needs costeffective, standardised approaches in order to capture and process information on IP and intangibles (which is not currently being presented by SMEs). It also requires assistance to facilitate effective controls to be taken over the assets.
Initial activities may be best focused on cases where traditional security is known to be insufficient or unavailable. In these instances, it is important for a lender to capture as much as possible in its security envelope, since it does not have the comfort of ‘conventional’ assets as a fall-back.
Unsecured lending in general, and applications to the Enterprise Finance Guarantee (EFG) scheme in particular, are places for banks to start gathering experience in dealing with IP and intangible assets – in the case of EFG, they can do so with a ‘safety net’.
16 The role of intellectual property and intangible assets in facilitating business finance
The issues identified in this report represent a particular challenge for the development of the knowledge economy, but also place potentially serious constraints on the growth of companies
in traditional industries. There are two overarching recommendations of this report:
It is important to emphasise that this report does not advocate changes to the legislative framework, to policy priorities, or to accounting standards. The steps required to unlock the business value of IP are pragmatic measures that build on principles and practices which exist today. However, the recommendations, set out in more detail within Chapter 10 of the report (Conclusions), will need to be embraced by the market as a whole in order to achieve their
transformative potential. They are as follows:
Due diligence guidelines can help to control costs. Checks will be needed in order to 3.
create confidence that the ownership and quality of the IP and intangibles are understood, that they contribute to serviceability and cash flow (particularly in the case of debt finance), and that their maturity is in line with what it would be reasonable to expect, given the development stage of the business. This will require templates, training and/or access to professional advice, at a cost that lending margins can support, within a turnaround time that meets business requirements.
More effective charges should be part of the lending package. Once knowledge assets 4.
are captured and verified, it becomes possible to create a proper interest over them. 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.