Is intellectual property the next big alternative asset?
BY Benefit Canada's Martha Porado | November 27, 2018
Country music icon Dolly Parton has learned through her career the value of even a small piece of intellectual property. In 1974, when Elvis Presley wanted to cover her song I Will Always Love You, she turned down the deal because Presley’s manager insisted on 50 per cent of all future royalties for the tune.
Music rights and other intellectual properties are gaining traction as a standalone alternative asset class, says Salman Malik, vice-president and portfolio manager at Barometer Capital Management Inc. His firm is creating a fund that will allow investors to purchase a piece of a broad portfolio of song royalties. “It’s not correlated to any other asset class that we know about,” says Malik.
“For institutional investors, we see that as a big opportunity to continue to diversify their portfolio away from market conditions. We all lived through 2008, but this was the one asset in our analysis where revenues actually went up during and after the crash.”
One of the reasons for this development is the dramatic change in the past decade in the way a song’s owner gets paid, according to Malik. Traditionally, an artist would receive upfront capital as payment for an album, but the advent of streaming now creates a steady stream of royalties until the copyright expires. Some people may view subscriptions to services like Spotify as consumer discretionary spending, which would face downside risk in a recession, but Malik says the way younger people pay for music is more like a utility.
Drug patents have also grabbed the attention of some institutional investors, including the Canada Pension Plan Investment Board, which bought a partial stake in cancer treatment drug Venetoclax in July 2017. The investment was an opportunity to expand the pension fund’s global intellectual property program, noted John Graham, the CPPIB’s managing director and head of principal credit investments, in a press release at the time.
“With stable, long-term cash flows, alternative assets like intellectual property add diversification to the CPP fund as performance is generally uncorrelated to that of the broader capital markets.”
Keeping IP private
Intellectual property is also becoming a more popular consideration when purchasing private equity, says Tony Prenol, a partner at Blake Cassels & Graydon LLP. “[IP] is all part of what makes a company special, what allows it to have an advantage over its competitors, what allows it to increase its revenues year after year,” he says. “So in most transactions, the buyer would be taking a holistic approach and looking at the IP rights owned by the target, and seeing how important they are to the business’ ability to grow.”
For many companies, trademarks, are their most valuable assets, so investors enlist lawyers to ensure they’re protected, says Prenol. But quality is more important than quantity, he adds.
“A single patent might be worth hundreds of millions of dollars in one case, but in another case a company might have hundreds of patents that are worth next to nothing, because they’re outdated technology or they don’t give them much of a competitive advantage over other companies.”
As well, companies today hold much more of their inherent value in their intellectual property, especially following the technology boom of the past 20 years, says Lally Rementilla, president of Quantius Inc. Her firm underwrites company loans, assessing whether they’re suitable candidates, with an eye towards those companies’ intellectual property. The resulting private credit is then made available to investors. While the firm currently doesn’t work with institutional investors, it has started speaking with a few, according to Lally. “It’s something they really should be looking at because the future is in the intangible world.”
The federal government announced this year it plans to spend $83.5 million over the next five years to help Canadian innovators better understand how they can protect their intellectual property. Its plan includes certain amendments to current intellectual property legislation and several projects aimed at educating Canadian businesses on how to formulate a best-practices strategy for making the most of their ideas.
Lally believes this development is likely to result in more intellectual property registrations. “It creates more value for the entire ecosystem.”
This article originally appeared on CIR’s companion site, Benefitscanada.com. Read the full story here.