Intangibles-based lending: lessons from global experience

Transcription

1 Intangibles-based lending: lessons from global experience Martin Brassell FRSA CEO, Inngot Vienna Initiative: Working Group on Financing for Innovation June 2018

2 Our work at Inngot Our digital platform unlocks intangible asset value, facilitating financing, licensing, sale and purchase Standardised web tools to identify, rate and value intellectual property and other non-physical business assets Over 600m of hidden value found in SMEs to date We work with individual companies, lenders, insurers and governmental/non-governmental agencies Best known internationally for a string of publications addressing IP and intangibles-based finance and accounting Secured finance for IP assets (Oxford) Davies, 2006 Banking on IP? (UK IPO) Brassell & King, 2013 Innovation, intangibles and IR (ACCA) Brassell & Reid, 2015 Accounting for innovation (ACCA) Brassell & Reid, 2016 Latest work concerns the market for IP valuation (2017, UK IPO) and international policy initiatives and issues for IP financing (2018, OECD) Economic Approaches to IP (Oxford) Searle and Brassell, 2016 Hidden Value (UK IPO) Brassell & Maguire, 2017 Fostering the use of intangibles to strengthen SME access to finance (OECD) Brassell, 2017

3 Three promising directions in debt funding Unsecured lending Secured lending Asset-backed lending Use knowledge of the assets and their materiality to strengthen credit decisions and take appropriate controls Independently assess and underwrite the assets and back a minimum collateral value with a guarantee or insurance policy Purchase assets known to be business-critical and license them back to the company for an agreed period Used for certain copyright assets in the creative industries A common feature of venture debt funding Focus for Japanese activity Also applicable to general commercial lending Asia IP financing schemes (backed by guarantees of 50%-100%) Historical work on US loan portfolios where insurance rating was also leveraged Active in UK (asset and pension-led funding) and Korea Has some parallels with IP acquisition models (e.g. France Brevets)

4 Applicability by development stage Company financial performance Profit Loss 1. Commercial debt not generally a viable means of funding this stage Equity risk appetite only 3. If greater confidence can be generated, debt could be moved to here 2. However, debt funding normally not available until around here Debt available 4. Need to address collateral value concerns, in case trajectory goes here Early stage Growth Maturity Company development stage

5 IP valuation findings hold few surprises Comparatively few companies are concerned with IP value day-to-day Accounting rules obstruct companies in seeing IP and intangibles as valueproducing assets Most motivations for examining IP value are transactional in nature M&A, transfer pricing, litigation, insolvency, compliance Methods used by valuers are broadly consistent - cost, market and income Actual choice driven by data availability and valuation purpose; income approaches are the most popular Main concern in lending is recoverable asset value in liquidation A different focus from most other IP valuation exercises

6 OECD report studies international activity China s financing scheme is the largest and most diverse, focused on secured lending US $8bn financed for 2,000 companies in 2015: some devolved responsibility Japan s current scheme is focused on unsecured lending Historically, Development Bank lent directly: now focused on 530+ regional banks, funding valuation reports (150 per annum) Korea is most centralised, supporting secured and asset-backed approaches US $100m lent by Korea Development Bank to 80 firms in 2015 Malaysia & Singapore have both used guarantees to support secured finance Funding sources are different central vs. commercial European emphasis has been on tax credits, patent boxes and guarantee schemes Specific attention paid to IP/innovative capacity in France and Italy UK working on a formal scheme US market is informal, and regularly sees patents used as security However, it is not clear this is leveraging additional lending to SMEs

7 Why/where is intervention most needed? Lenders lack trust in realisable asset values Established IP valuation methods and standards exist, but value concepts vary; market validation is difficult due to a lack of transparency on sale values; even a correct value can be volatile Transaction costs are too high for the target audience A consequence of asset heterogeneity and the absence of lending at scale Enquiries need to be made into asset utilisation, ownership, status, validity/ enforceability, effectiveness and security The overall burden is the problem; lack of accounting visibility doesn t help A Catch 22 has to be tackled Intangibles financing lacks systems/infrastructure support This would drive down cost and enable data to be derived, to build confidence in part or all of the asset class

8 UK focus Task force established: British Business Bank, UK IP Office and Treasury Hypothesis: use a government guarantee in support of a commercially insured IP collateral value Working with lenders, insurers and private sector (e.g. Inngot) Standardised front-end assessment and valuation routines, and back-end monitoring and recovery processes Current emphasis is primarily on data The nature, role, extent and accounting of intangible asset investment Analysis of Enterprise Finance Guarantee portfolio (default/recovery) following matching exercise with IP database Market-derived data on asset recoveries and their characteristics Initial findings promising Companies with registered IP (especially patents, but also trade marks and designs) significantly less likely to default on loans The government will also work with businesses, lenders, insurers, the British Business Bank and the Intellectual Property Office to overcome the barriers to high growth, intellectual property-rich firms, such as those in the creative and digital sector, using their intellectual property to access growth funding. Trend evident regardless of amount, term and lender Budget statement available at

9 UK investment is large & widely distributed Programming Scientific R&D Architectural Financial Services ex. Insurance Publishing Retail Ex. Vehicles Media Wholesale Ex. Vehicles Telecoms Legal & Accounting Construction Security and Support Arts & Entertainment Other Prof & Scientific Aux Financial Services Manu. Machinery Manu. Computers, Optical, Electronic Manu. Chemicals Membership Manu. Furniture Manu. Fabricated Metals Machine Repair & Installation Other Services Sports Manu. Electrical Travel Recorded Media reproduction Manu. Textiles Software Research and development Artistic originals Design Branding Estimated annual company expenditure on fundable IP and intangibles, billions, by type (Source: RBS Group)

10 Martin Brassell CEO, Inngot (0) Vienna Initiative: Working Group on Financing for Innovation June 2018