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Monetize intellectual property assets with securitization finance

Since the 1990s, the world of finance has seen a renaissance that has driven the economy to record heights. However, companies that are not monetizing their intangibles to raise capital likely are missing it.

Fundamentally, all enterprises create economic value by leveraging their assets in order to finance or capitalize their operations, and to fund their future needs for capital. During the last 25 years, the most valuable assets have shifted from predominantly tangible assets to predominantly intangible, knowledge-based, intellectual capital assets.

Prior to the 1990s, there was only one class of assets to leverage in enterprise strategy — the traditional tangible and financial assets of plant, property, equipment, and cash. Since that time, the value of an enterprise, or the market capitalization of public companies, is increasingly the result of the combined value of its tangible and intangible assets. Both classes of assets must be leveraged to their optimum in order to achieve enterprise success and the highest levels of monetary valuation.

However, if intangibles are not highly leveraged, competitive advantage is lost and money is left on the table.

Enterprises generally acquire investment through the sale of equity, and hence ownership. "Securitization finance," however, is a more recent form of capitalization available to enterprises with important knowledge-based, intellectual assets. It is a type of asset-backed leverage that pools income streams to form a financial instrument that can be sold in the capital markets. Since the 20th century, securitization has been used with many asset classes, and now it can be used to translate "intellectual property" and "brand equity" into capital.

Securitization finance can be ideal for companies with intellectual-property portfolios and strong brands to access the capital markets and obtain financing and capitalization through investment, rather than through becoming customers of banks and holders of debt, or by losing ownership through depleting equity. Securitization acts to monetize assets that are already owned but unrecognized as such.

It is attractive because it customarily costs less to obtain than other sources of capital. It attracts investors who understand that intangible assets are generating most of today's societal wealth.

Some examples

In 1997, pop star David Bowie bundled together the royalties of a music catalogue of his pre-1990 work to raise $55 million in capital. It became known as the "Bowie Bond." Bowie's copyright-based capitalization was followed by trademark securitizations, such as those accomplished by fashion designer Bill Blass, who did the first trademark securitization during 2000, when he bundled royalties received from trademark licenses to raise $25 million in capital.

In 2003, Guess? pooled its trademark licensing royalty streams to raise $75 million in capital. Also in 2003, Dreamworks issued a facility backed by the existing and future royalties of the film properties owned by the enterprise to raise $1 billion in capital!

The advantages

These examples show how intellectual-asset holdings such as brands and the intellectual property of copyrights and trademarks can be licensed and securitized to raise capital. The alternative, debt financing, comes with a high cost, creates no new assets and is burdensome to the spirit of the organisation. Venture capital, under certain circumstances, can be a viable option for capitalization, but venture capitalists want a large equity position and are frequently "built to flip," resulting in loss of ownership. Private placements are an option, but they are also a slippery slope that dilutes control. Similarly, a public offering can net substantial capital while entailing an even greater loss of control and ownership, likely never to be regained.

Monetizing intangibles offers a strategic solution. Because title is not transferred in licensing intangible assets, monetization ensures the continuing ownership and complete control of all intellectual assets, while concomitantly generating significant income from them at a low cost.

Under this strategic model, an enterprise can ride the rise of intellectual capital assets and use its natural core competencies to finance its own mission.

Lindsay Moore, Ph.D., is CEO of KLM, a management consultation firm in Boulder, Colo., and co-author of Intellectual Capital in Enterprise Success: Strategy Revisited, published by Wiley.

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