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INTANGIBLE ASSET
FINANCE
CAPITAL FOR THE SERVICE ECONOMY
INTRODUCTION
MATTHEW HAGEN
Managing Partner of Leeward Capital Management, a specialty finance business focused on the
monetization of server-based intangible assets.
What I
Am Not
Former CEO &
Operator
Tech-enabled
Experience
Business:
Systems & Data
Expertise:
Intangible Asset
Strategy
I am not an audit,
tax, valuation, or
even a capital
markets professional
by training or
background.
I am 15-year CEO of
a family-owned
building products
business with 5,000
employees across 6
countries.
I transitioned our old
economy wholesale
and distribution
business into a tech-
enabled logistics
business.
My company’s
systems and data had
no value on the
balance sheet but
were essential to our
value proposition.
Understanding the
intersection of
systems and data
with the operations,
strategy, and value
of businesses.
CAPITAL FOR THE SERVICE ECONOMY
WHAT I HAVE LEARNED
My business
doesn’t have IP.
My data isn’t
valuable.
These are the key misconceptions I have found from my time focused in intangible assets.
▪ Every business has intangible asset value of one kind or
another. They are just largely misunderstood.
M I S C O N C E P T I O N S
My business isn’t
tech-enabled.
My intangibles
can’t be explained
or valued.
K E Y TA K E AWAY S
▪ But there are clear steps to maximize their value for a
financing or to simply drive shareholder value.
▪ Because they are difficult to describe and value, businesses are
not maximizing their strategic and financial value.
▪ Intangible value should show up in enterprise (share) value,
but it is likely understated there as well.
▪ Intangible value rarely shows up on the balance sheet and
when it does, it’s often understated.
CAPITAL FOR THE SERVICE ECONOMY
PRESENTATION TOPICS
The Rise of
Intangible
Assets
Intangible
Assets
Explained
Intangible
Asset Finance
Explained
Related
Topics
Strategic
and Financial
Value
▪ Why are
intangibles
important?
▪ Where can we
see them in the
broader
economy?
▪ Where do we see
them on the
balance sheet?
▪ What are the
different types and
how are they
valued?
▪ What are the
different types of IP
financing?
▪ What are the
advantages and
disadvantages of IP
finance?
▪ What is data
monetization?
▪ What is a Sale-
to-ServiceTM
▪ What is royalty
finance?
▪ How do you
improve the
financial and
strategic value
of your
intangible asset
and IP?
This presentation will provide a road map on how to find, value, and protect intangible assets and IP.
CAPITAL FOR THE SERVICE ECONOMY
THE RISE OF INTANGIBLE ASSETS
CAPITAL FOR THE SERVICE ECONOMY
THE RISE OF INTANGIBLE ASSETS
The U.S. has transitioned from an
asset-intensive industrial economy to
an asset-light service or knowledge-
based economy.
Ocean Tomo’s study on intangible
assets has been heavily quoted by
economists and academics covering
intangible assets.
17%
32%
68%
80% 87%
83%
68%
32%
20% 13%
199519851975 2005 2015*
Intangible AssetsTangible Assets
Physical assets
comprised more
than 80% of the
S&P Market Value.
The percentages
had reversed with
intangible assets
comprising 87%.
1975 2015
https://www.oceantomo.com/2015/03/04/2015-intangible-asset-market-value-study/
C O M P O N E N T S O F T H E S & P 5 0 0 M A R K E T VA L U E
CAPITAL FOR THE SERVICE ECONOMY
N O N R E S I D E N T I A L BU S I N E S S I N V E S T M E N T % O F G RO S S VA L U E A D D E D
https://internationaldirector.com/finance/the-tangible-problem-of-measuring-intangible-assets/
4%
6%
8%
10%
12%
14%
16%
18%
20%
1977 1982 1987 1992 1997 2002 2007 2012 2017
Tangible investment rate Intangible investment rate
THE RISE OF INTANGIBLE ASSETS
The rate of intangible investment as a percentage of U.S. private-sector GDP overtook
tangible investment in the mid-1990s. Since then, the percentage has only increased.
CAPITAL FOR THE SERVICE ECONOMY
THE RISE OF INTANGIBLE ASSETS
https://howmuch.net/articles/100-years-of-Americas-top-10-companies
https://forbes.com
So where do we ultimately see the value of investment in intangible assets and
intellectual property?
▪ There is a significant gap between the value
created by investment in intangible assets
and the value recorded on corporate
balance sheets.
▪ So where do we see this value? We see it in
equity or share value.
▪ Today’s most valuable companies are not
asset-intensive but instead comprised of
intangible assets which are largely reflected
in enterprise value.
T H E M O S T VA L UA B L E C O M PA N I E S OV E R T H E L A S T 1 0 0 Y E A R S
CAPITAL FOR THE SERVICE ECONOMY
ACCOUNTING FOR INTANGIBLES
CAPITAL FOR THE SERVICE ECONOMY
COMPONENTS OF VALUE
For many business, the assets that have the greatest contribution to enterprise value do not
generally show up on the balance sheet, and when they do, they are usually undervalued.
Goodwill
(Unidentifiable
Intangible
Value)
Tangible
Assets
Identifiable
Intangible Assets
(Balance Sheet)
Unidentifiable
Intangible Assets
(Enterprise Value)
C O M P O N E N T S O F VA L U E D E S C R I P T I O N S
Tangible Assets: Physical assets which can be quantified with
relative ease.
Goodwill: The premium paid over the fair value of assets in an
acquisition. Goodwill is inseparable from the business.
Identifiable Intangible Assets: They lack physical substance,
but they can be described, valued, and sometimes monetized.
Unidentifiable Intangible Assets: Assets that contribute to
enterprise value but do not show up on the balance sheet.
CAPITAL FOR THE SERVICE ECONOMY
INTANGIBLES & THE BALANCE SHEET
13.8%
3.1%
1.7%
1.0%
Goodwill Net Intangible Assets
Microsoft 10-K 6/18
Apple 10-K 9/17
https://blogs.cfainstitute.org/investor/2019/01/11/a-renaissance-in-intangible-valuation-five-methods/
https://finance.yahoo.com/quote/AMZN/key-statistics/
Additional
Equity
Value
Net
Tangible
Assets
Goodwill
Intangible
Assets
▪ Amazon’s intangible assets and goodwill account
for slightly more than 2% of the company’s $860
billion market value. By any reasonable estimate,
its brand and technology should contribute far
more than 2% of the company’s value.
▪ Net tangible assets is a small part of both
companies’ balance sheet, but Microsoft has
a higher percentage of goodwill due to the
company’s greater number of acquisitions.
The balance sheets of Amazon, Microsoft, and Apple offer helpful examples of intangible
assets and goodwill.
A M A Z O N M I C RO S O F T & A P P L E
CAPITAL FOR THE SERVICE ECONOMY
ACCOUNTING & COLLATERAL
https://internationaldirector.com/finance/the-tangible-problem-of-measuring-intangible-assets/
https://www.slideshare.net/aishwarykgupta/securitization-of-intangible-assets
▪ Intangible assets are most easily identified
and valued as part of an acquisition.
▪ But intangibles that are produced organically
are often valued based on expense.
▪ IFRS and GAAP have different rules
concerning intangibles, causing greater
confusion.
▪ Data does meet the technical definition of an
asset, but it is not counted as an asset on the
balance sheet largely because it is difficult to
value.
▪ For intangible assets to be effectively
securitized, they must have the following
characteristics:
- They can be identified from other intangibles;
- Legally protected (or isolated);
- Able to generate cash flows (income); and
- Can be valued buy a third-party valuation firm.
▪ These same securitization attributes can bring
value to your intangible assets even if a
financing is not the objective.
Accounting rules do not fully capture the value of intangibles because these rules were
built for tangible asset. This makes it difficult to utilize intangible assets as collateral.
AC C O U N T I N G RU L E S S E C U R I T I Z A B L E A S S E T S
CAPITAL FOR THE SERVICE ECONOMY
WHAT ARE INTANGIBLES &
INTELLECTUAL PROPERTY?
CAPITAL FOR THE SERVICE ECONOMY
FORMAL & INFORMAL IP
http://metispartners.com/ip-basics/
Formal Intellectual Property (“IP”) is the most well
understood intangible because it can be sold as an
asset in and of itself, but it is often undervalued.
Informal IP, sometimes referred to as intellectual
capital, is usually undervalued on a company’s
balance sheet, but it may show up in enterprise value.
Trademarks
CopyrightsDesign Rights
Patents Trade
Secrets
Organizational
Knowledge
Proprietary
Software
Brand &
Reputation
Critical
Suppliers &
Customers
Research &
Development
Strategy &
Market
Intelligence
Know-How
I N T E L L E C T UA L P RO P E R T Y I N T E L L E C T UA L C A P I TA L
CAPITAL FOR THE SERVICE ECONOMY
FORMAL INTELLECTUAL PROPERTY
Patents Trademarks CopyrightsDesign Rights
Ownership of a unique
technology or process
which covers how things
work, what they do and
how they do it, and how
they are made.
An image which can take
the form of words, logos,
and, pictures and gives
the owner legal rights to
stop the use of similar
images.
A design that applies to
the appearance of a
product and gives a legal
right to protect its use.
Provides an exclusive
right to the use and
distribution of an original
work, generally but not
always artistic.
There are four types of formal intellectual property that are legally protected,
and which are relatively well understood.
http://metispartners.com/ip-basics/
CAPITAL FOR THE SERVICE ECONOMY
INFORMAL INTELLECTUAL PROPERTY
http://metispartners.com/ip-basics/
These eight informal IP assets, also referred to as intellectual capital, can be further
categorized as human, relational, or structural capital.
Trade
Secrets
Organizational
Knowledge
Proprietary
Software
Brand &
Reputation
Critical
Suppliers &
Customers
Research &
Development
Strategy &
Market
Intelligence
Know-How
Segments of Intellectual Capital:
▪ Human Capital: Employees’
knowledge and know-how
▪ Relational Capital: A firm’s
relationships with employees,
customers, suppliers, regulators,
and other stakeholders
▪ Structural Capital: Systems,
data, trade secrets, business
process, and ability to innovate
I N T E L L E C T UA L P RO P E R T Y I N T E L L E C T UA L C A P I TA L
CAPITAL FOR THE SERVICE ECONOMY
Segments of Intellectual Capital:
▪ Human Capital: Employees’
knowledge and know-how
▪ Relational Capital: A firm’s
relationships with employees,
customers, suppliers, regulators
and other stakeholders
▪ Structural Capital: Systems,
data, trade secrets, business
process, and ability to innovate
HUMAN & RELATIONAL CAPITAL
http://metispartners.com/ip-basics/
These four assets fall within human and relational capital. However, if they have not been
documented and instead exist solely with a few employees, they are not assets of the business.
Trade
Secrets
Organizational
Knowledge
Proprietary
Software
Brand &
Reputation
Critical
Suppliers &
Customers
Research &
Development
Strategy &
Market
Intelligence
Know-How
I N T E L L E C T UA L P RO P E R T Y I N T E L L E C T UA L C A P I TA L
CAPITAL FOR THE SERVICE ECONOMY
Closely-held information,
and skills and experience
of a firm’s employees.
However, know-how held
by individuals is not an
asset of the company.
Know-How
A company’s “know-how”
which has been developed,
(documented) and shared
within a company, like
training programs,
procedures, or drawings.
Organizational
Knowledge
Understanding of the
industry, which may include
specific information on
competitors, new entrants,
or a broader approach to
strategic decision-making.
Strategy &
Market
Intelligence
Relationships that are
critical to the businesses,
are often a barrier to entry,
and primary reasons for a
strategic acquisition.
Critical Partners,
Suppliers &
Customers
HUMAN & RELATIONAL CAPITAL
http://metispartners.com/ip-basics/
These four informal IP assets fall within the notion of intellectual capital and, more
specifically, within human and relational capital.
CAPITAL FOR THE SERVICE ECONOMY
STRUCTURAL CAPITAL
These four informal intellectual property assets fall within the notion of structural
capital and offer the greatest opportunity for monetization and value creation.
Trademarks
CopyrightsDesign Rights
Patents Trade
Secrets
Organizational
Knowledge
Proprietary
Software
Brand &
Reputation
Critical
Suppliers &
Customers
Research &
Development
Strategy &
Market
Intelligence
Know-How
http://metispartners.com/ip-basics/
I N T E L L E C T UA L P RO P E R T Y I N T E L L E C T UA L C A P I TA L
CAPITAL FOR THE SERVICE ECONOMY
The most easily identified
informal IP, it enhances a
company’s reputation and
differentiates it from its
competitors.
Brand &
Reputation
A process of creating and
commercializing new
ideas that offer a short or
long-term competitive
advantage.
Research &
Development
A formula, practice, process,
or combination of items
which are generally unknown
and provide a company an
economic advantage.
Trade
Secrets
The source code is a
closely guarded secret,
but it does not have the
protections that
registered IP receives.
Proprietary
Software
STRUCTURAL CAPITAL
http://metispartners.com/ip-basics/
Structural capital has characteristics more similar to formal IP. These assets can be described,
isolated, and valued and, in most cases, can be monetized independent of the business.
CAPITAL FOR THE SERVICE ECONOMY
VALUATION OF INTANGIBLE ASSETS
CAPITAL FOR THE SERVICE ECONOMY
INTANGIBLE ASSET VALUATION
*American Institute of CPAs, CGMA TOOLS: Three approaches to valuing intangible assets
Uses estimates of future cash flows
and discounts them. However, it
can be hard to distinguish the IP’s
cash flows from the company’s
overall cash flows.
Uses recent transactions of
identical or similar assets.
Comparable transactions
are typically difficult to
obtain if available at all.
Based on the cost to develop or to
replace and usually ignores the
amount, timing, and duration of
future economic benefits, as well
as the risk of performance.
The Income
Approach
The Market
Approach
The Cost
Approach
While there can be a valuation approach for a specific intangible asset that is wrong,
there can be several that are right. These three approaches are the industry standards.
C O M P O N E N T S O F VA L U E
CAPITAL FOR THE SERVICE ECONOMY*American Institute of CPAs, CGMA TOOLS: Three approaches to valuing intangible assets
Two of the better-known methods for the income approach are the With & Without
and Relief From Royalty methods.
Estimates a value by calculating
the difference between two cash
flows: one that represents the
status quo with the asset in
place, and another without it.
The cash flows of the royalty
payments for which the company
is relieved due to its ownership of
the asset. This method is often
used for trade name valuations.
With &
Without
The Income
Approach
Relief from
Royalty
A P P ROAC HM E T H O D M E T H O D
INCOME APPROACH
CAPITAL FOR THE SERVICE ECONOMY
VALUATION STANDARDS
ASSET PRIMARY SECONDARY TERTIARY
Patents Income Market Cost
Trademarks Income Market Cost
Design Rights Income Market Cost
Copyrights Income Market Cost
Trade Secrets Income Market Cost
Proprietary Software Cost Market Income
Brand Income Market Cost
Research & Development Cost Income Market
Critical Customers & Suppliers Income Cost Market
Strategy & Market Intelligence Cost Income Market
Know-How & Organizational
Knowledge
Cost Income Market
There are numerous standards for valuation approaches, and proper selection
should be based on the fact and circumstances of the business and the assets.
VA L UAT I O N F I R M S
CAPITAL FOR THE SERVICE ECONOMY
PROPRIETARY SOFTWARE
ASSET PRIMARY SECONDARY TERTIARY
Patents Income Market Cost
Trademarks Income Market Cost
Design Rights Income Market Cost
Copyrights Income Market Cost
Trade Secrets Income Market Cost
Proprietary Software Cost Market Income
Brand Income Market Cost
Research & Development Cost Income Market
Critical Customers & Suppliers Income Cost Market
Strategy & Market Intelligence Cost Income Market
Know-How & Organizational
Knowledge
Cost Income Market
VA L UAT I O N F I R M S
Formal IP and a few informal IP categories have known and tested valuation
methods, but proprietary software offers a good case study on potential conflicts.
CAPITAL FOR THE SERVICE ECONOMY
Proprietary
Software
COST-BASED vs WITH & WITHOUT
http://metispartners.com/ip-basics/
Cost-
Based
With &
Without
Systems the company
has spent years
developing and for which
the company could not
easily replace, if at all.
Does the capital spent on
the systems accurately
reflect their value to the
business or value to an
acquirer of the business?
How would the loss of the
company’s systems or having to
replace them from the ground
up impact the company’s cash
flow and resulting value?
The most reasonable and commonsense approach to valuing intangible assets
is often not the most widely used method.
CAPITAL FOR THE SERVICE ECONOMY
INTANGIBLE ASSET FINANCE
CAPITAL FOR THE SERVICE ECONOMY
CAPITAL MARKETS & CASH
The broader transition to an intangible asset or knowledge-based economy has
impacted the lending market and companies’ cash management strategies.
▪ The economy’s shift toward intangible assets,
many of which cannot be pledged as “collateral,”
has decreased the debt capacity of firms and
encouraged them to hold more cash to preserve
financial flexibility.
▪ The increase in intangible assets has reduced
the proportion of overall investment financed
through bank debt and has increased the
amount of financing provided by private debt
and non-bank lenders.
https://blogs.cfainstitute.org/investor/2019/01/11/a-renaissance-in-intangible-valuation-five-methods/
https://www.spglobal.com/en/research-insights/articles/US-Corporate-Cash-Reaches-19-Trillion-But-Rising-Debt-and-Tax-Reform-Pose-Risk
0.74 0.79 0.83
1.02
1.24 1.19
1.29
1.61
1.71 1.75
1.92
7.6% 7.3%
7.5%
8.9%
9.6% 9.6%
9.7%
11.3% 11.1% 11.1%
11.8%
6%
7%
8%
9%
10%
11%
12%
13%
14%
0
0.5
1
1.5
2
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Cash and investments Cash/Assets (Right Scale)
(Tril.$)
0
100
200
300
400
500
600
700
800 Dry Powder ($bn) Unrealized Value ($bn)
AssetsunderManagement($bn)
P R I VAT E D E B T C A S H
https://www.federalreserve.gov/pubs/feds/2013/201367/index.html
https://www.theleadleft.com/private-debt-intelligence-7-30-2018/
CAPITAL FOR THE SERVICE ECONOMY
TYPES OF IP FINANCE
▪ Intangible asset finance, also described as IP finance, is almost
entirely focused on the four types of formal IP: patents, trademarks,
design rights, and copyrights.
IP-Backed Loan
IP Royalty
Securitization
IP Sale License-
Back
Intangible asset finance is a small but growing segment of non-bank lending and
includes IP-backed loans, IP royalty securitizations, and IP sale license-backs.
C H A R AC T E R I S T I C S T Y P E S O F I P L E N D I N G
▪ While intangible asset finance is associated with early stage or
capital-constrained businesses, it can be fit for later-stage businesses,
particularly if the company has documented and valued their assets.
▪ Intangible asset finance generally presents the greatest opportunity
for capital markets innovation, which has not kept pace with broader
business innovation.
CAPITAL FOR THE SERVICE ECONOMY
IP-BACKED LOAN
An early example…
Thomas Edison used his
patent on the
incandescent electric
light bulb as collateral to
secure financing to start
his company, the General
Electric Company.
https://www.stout.com/en/insights/article/financing-alternatives-companies-using-intellectual-property-collateral
▪ An IP-backed loan is similar to asset-backed loan. The borrower grants
a security interest in the asset and then borrows a percentage of the
asset value. The lender assesses risk in part based on liquidation value.
▪ While not limited to start-ups, IP-backed loans are useful for earlier-
stage asset-light businesses because these businesses often lack the
tangible assets or cash flow to support a traditional credit solution.
▪ Like traditional debt, IP-backed loans provide capital without dilution,
but they are often higher-cost and may have operational or financial
constraints due to covenants and other credit restrictions.
T H O M A S E D I S O N
Intellectual property loans are the largest segment of IP finance and the most familiar.
C H A R AC T E R I S T I C S
CAPITAL FOR THE SERVICE ECONOMY
IP ROYALTY SECURITIZATION
https://www.stout.com/en/insights/article/financing-alternatives-companies-using-intellectual-property-collateral
The primary difference
between a securitization and
an IP-backed loan is the
owner is not borrowing money
but is instead selling a stream
of future cash flows for a fixed
duration that would have
otherwise gone to the owner.
Another notable difference
between a royalty
securitization and an IP-
backed loan is the repayment
obligation is attached only to
the asset rather than the
owner, separating repayment
risk from the business.
For most securitizations, the
IP holder transfers the asset
to a special purpose vehicle
(“SPV”). This favors the lender
because the asset is
protected from creditors in
the event the owner files for
bankruptcy.
Royalty securitization offers an alternative to an IP loan with distinct tradeoffs.
R E C O U R S E O N I PF U T U R E C A S H F L OW S C R E D I T O R S P V
CAPITAL FOR THE SERVICE ECONOMY
IP SALE LICENSE-BACK
Sale
Lender
$
Borrower
License
Fees
https://www.stout.com/en/insights/article/financing-alternatives-companies-using-intellectual-property-collateral
An IP sale license-back offers a useful structure for both formal and informal IP assets
so long as right and title can be conveyed.
▪ An IP sale license-back is similar to a real estate sale-leaseback.
There a change of ownership and the seller pays a license or fee,
depending on the agreement type, to utilize the asset.
▪ Most IP sale license-back transactions have a repurchase option
allowing the seller the opportunity to buy back ownership
during or at the end of the contract period.
▪ The agreement may also allow the investor (buyer) to pursue
additional value through the monetization of the acquired asset
from third parties.
C H A R AC T E R I S T I C S I P S A L E L I C E N S E - BAC K
CAPITAL FOR THE SERVICE ECONOMY
IP COLLATERAL ENHANCEMENT
Did you know companies
value their intangible
assets 10% higher than
their tangible assets... but
only 16% of intangible
value is covered by
insurance while 60% of
PP&E is covered.
https://www.stout.com/en/insights/article/financing-alternatives-companies-using-intellectual-property-collateral
https://theonebrief.com/intellectual-property-learning-to-value-assets-you-cant-touch/
IP collateral enhancement insurance is most often used alongside an IP loan,
but it can also be used for other types of IP financing.
▪ IP collateral enhancement is the use of insurance or guarantees on the
value of the IP for the benefit of the lender to reduce credit and
foreclosure risk.
▪ IP collateral enhancement improves the overall credit profile of the
transaction, which may allow lower interest rates and increased
leverage for the borrower.
▪ The insured value acts as a “floor” or “stalking horse” bid as part of the
bankruptcy process. The lender is guaranteed to get no less than the
insured value while maintaining upside if the assets are worth more.
I N S U R A N C EC H A R AC T E R I S T I C S
CAPITAL FOR THE SERVICE ECONOMY
SALE-TO-SERVICE®
Sale
Leeward
$
Borrower
Services
Fees
https://www.stout.com/en/insights/article/financing-alternatives-companies-using-intellectual-property-collateral
A Sale-to-Service is an IP sale license-back of a company’s proprietary software and data.
▪ A Sale-to-Service (S2S) uses a “With and Without” valuation to
determine the value of a company’s proprietary software and data.
▪ The seller can pay a termination fee to exit the structure early and
can exercise a repurchase option to reacquire the assets.
▪ An S2S utilizes a 3 to 6-year service contract where all payments
are operating expense rather than interest and principal.
▪ For asset-light businesses with mission-critical systems and data,
this valuation can be up to 70% of enterprise value.
▪ Data can be valued and monetized as an asset separate from the
company’s systems and software.
S A L E - T O - S E RV I C E C H A R AC T E R I S T I C S
CAPITAL FOR THE SERVICE ECONOMY
ADVANTAGES OF IP FINANCE
https://www.stout.com/en/insights/article/financing-alternatives-companies-using-intellectual-property-collateral
Increase an owner’s
return through
additional leverage.
Provide capital that
might not otherwise
be available or
would cause dilution
to existing owners.
A lower cost of capital
if it is more attractive
to finance the IP
assets rather than the
creditworthiness of
the business.
Capital received can
be invested in
projects that are
expected to have a
higher return than
the cost of financing.
Lower risk profile if
the IP’s is moved
out of the business
and isolated from a
bankruptcy
proceeding.
IP finance offers businesses a source of financing specifically suited for the knowledge
and service economy, but businesses with tangible assets can be a fit as well.
Increased
Leverage
Non-
Dilutive
Lower Cost
of Capital
Capital
Allocation
Decrease
Risk
CAPITAL FOR THE SERVICE ECONOMY
DISADVANTAGES OF IP FINANCE
https://www.stout.com/en/insights/article/financing-alternatives-companies-using-intellectual-property-collateral
A default on the
loan could result in
the loss of the IP
and a liquidation of
the company.
Default
Risk
Valuation is more
difficult, resulting in
a more complex and
possibly higher risk
transaction.
Valuation
Tangible assets are
often easier to
liquidate than IP as
the market of
potential buyers is
smaller.
Liquidation
With a limited
number of lenders, IP
finance can be a
more expensive
alternative than
traditional financing.
Cost of
Capital
For an asset to have
value, it must be
able to be discretely
identified and
valued. For some IP,
this may be difficult.
Asset &
Value
The evolving nature of IP finance can make for higher cost and higher risk transactions.
CAPITAL FOR THE SERVICE ECONOMY
IP FINANCE – RELATED TOPICS
CAPITAL FOR THE SERVICE ECONOMY
DATA MONETIZATION
https://www.everedgeglobal.com/news/makingmoneyfromdata/
▪ Value is related to scarcity and more than 847 zettabytes of data will
be generated in 2021, so data is hardly scarce.
▪ Many companies are sitting on valuable data sets, but these assets
are often off-balance sheet, under-utilized and under-valued.
▪ Companies can make a business case around data monetization by
answering the following:
- What is the business case for leveraging the data?
- What is the likely value of your data?
- What are the risks associated with monetizing your data?
▪ The fundamental rules of business still apply. Companies need to
build a business case for each dataset end case and establish the
likely ROI and risks.
Data is only as useful and valuable as the decisions it helps businesses make.
DATA C H A R AC T E R I S T I C S
CAPITAL FOR THE SERVICE ECONOMY
ROYALTY FINANCE
https://www.stout.com/en/insights/article/financing-alternatives-companies-using-intellectual-property-collateral
Royalty finance is generally well understood and a well-developed debt capital
markets alternative.
▪ While it doesn't fit squarely inside of intangible asset finance, royalty
finance is another useful alternative to traditional debt and equity
capital.
▪ Businesses get money based on future revenue and investors get
their money back through royalties that are generally a percentage of
the company's revenue.
▪ Royalty finance is a compromise between debt and equity capital as
investors see greater returns than they would with a traditional loan
and companies do not have to give up equity.
ROYA LT Y F I R MC H A R AC T E R I S T I C S
CAPITAL FOR THE SERVICE ECONOMY
HOW TO PROTECT & MAXIMIZE
THE VALUE OF IP
CAPITAL FOR THE SERVICE ECONOMY
INTELLECTUAL PROPERTY STRATEGY
Businesses need to have a clear and documented IP and intangible asset strategy that
identifies value and addresses the costs, risks, and benefits of these assets.
What is our intangible strategy and are we actively managing
these assets?
What are our primary intangible asset risks?
Do our employees understand the importance of these
assets?
What processes do we have to manage and
mitigate these risks?
1
3
2
4
K E Y QU E S T I O N S I P A DV I S O R S
CAPITAL FOR THE SERVICE ECONOMY
MAXIMIZE THE VALUE OF IP
https://www.upcounsel.com/royalty-financing
Understanding and articulating a company’s IP and intangible strategy makes a
business more bankable, defensible, and valuable.
Describe
qualitatively why
the assets are
valuable and
quantitatively how
the assets drive
economic value.
Documentation
Using an SPV, execute a
related party service or license
agreement. The assets will be
reflected as an asset on the
SPV balance sheet and as
obligation on the operating
business balance sheet.
IP Holding
Company
Pursue even modest
sources of third-party
revenue from the assets
through license or
service fees, whichever
is appropriate for the
asset.
Commercialize
the IP
Implement policies to
protect and monitor
these assets, with an
emphasis on employee
education, and ensure
the assets are properly
insured.
Protection
CAPITAL FOR THE SERVICE ECONOMY
SUMMARY
Non-bank lenders are seeking innovative solutions in order to deploy capital, and their
ability to do so is dependent on finding new security and sources of value and collateral.
Expanding
Source
of Collateral
Intangible
Asset
Financing
Key Questions
for an IP
Financing
Strategic &
Financial
Value
The expansion of
intangible assets and
their contribution to
value offers investors a
growing source of
collateral.
There are specific steps
to increase a company’s
intangible asset
borrowing capacity and
the probability of a
successful financing.
How do our intangibles
drive value? How much
are they worth and is the
value captured? Can we
unlock additional value
from them?
The steps for an IP
financing can also enhance
firm value. Documentation,
valuation, and isolation are
critical for these strategic
and financial goals.
CAPITAL FOR THE SERVICE ECONOMY
LEEWARD CAPITAL MANAGEMENT
Matt’s fifteen-year tenure as the CEO of a large data and
technology-enabled logistics business led him to
recognize the untapped value of a company’s systems,
processes, and data. Matt implemented the first Sales-to-
Service® transaction for his family’s logistics business,
American Forest Products, and started Leeward to deliver
a similar capital solution for other closely held businesses.
Matthew received a BA and BS from the University of
Southern California and an MBA from Harvard Business
School and has been a member of the Young Presidents
Organization for over 16 years.
mhagen@leewardcapitalmgt.com I (469) 718-7333
Leeward Capital Management is a specialty finance
business located in Dallas, Texas. Leeward’s Sale-to-Service
(“S2S”) investment structure monetizes the know-how
found in a company’s mission-critical systems, processes,
or data. Leeward provides capital between $10 and $100M
for liquidity events, management & shareholder buyouts,
family ownership transitions, independent sponsor
transactions, M&A and growth. Leeward is focused on
businesses in Financial, Healthcare, Business & Education
Services, Media & Telecom, Transportation & Logistics, and
E-commerce & Digital Marketing, but companies with
mission-critical systems and data can be found in all
sectors .
www.leewardcapitalmgt.com
ABOUT LEEWARD CAPITAL MANAGEMENT, LLC ABOUT MATTHEW HAGEN

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An Introduction to Intangible Asset Finance

  • 2. CAPITAL FOR THE SERVICE ECONOMY INTRODUCTION MATTHEW HAGEN Managing Partner of Leeward Capital Management, a specialty finance business focused on the monetization of server-based intangible assets. What I Am Not Former CEO & Operator Tech-enabled Experience Business: Systems & Data Expertise: Intangible Asset Strategy I am not an audit, tax, valuation, or even a capital markets professional by training or background. I am 15-year CEO of a family-owned building products business with 5,000 employees across 6 countries. I transitioned our old economy wholesale and distribution business into a tech- enabled logistics business. My company’s systems and data had no value on the balance sheet but were essential to our value proposition. Understanding the intersection of systems and data with the operations, strategy, and value of businesses.
  • 3. CAPITAL FOR THE SERVICE ECONOMY WHAT I HAVE LEARNED My business doesn’t have IP. My data isn’t valuable. These are the key misconceptions I have found from my time focused in intangible assets. ▪ Every business has intangible asset value of one kind or another. They are just largely misunderstood. M I S C O N C E P T I O N S My business isn’t tech-enabled. My intangibles can’t be explained or valued. K E Y TA K E AWAY S ▪ But there are clear steps to maximize their value for a financing or to simply drive shareholder value. ▪ Because they are difficult to describe and value, businesses are not maximizing their strategic and financial value. ▪ Intangible value should show up in enterprise (share) value, but it is likely understated there as well. ▪ Intangible value rarely shows up on the balance sheet and when it does, it’s often understated.
  • 4. CAPITAL FOR THE SERVICE ECONOMY PRESENTATION TOPICS The Rise of Intangible Assets Intangible Assets Explained Intangible Asset Finance Explained Related Topics Strategic and Financial Value ▪ Why are intangibles important? ▪ Where can we see them in the broader economy? ▪ Where do we see them on the balance sheet? ▪ What are the different types and how are they valued? ▪ What are the different types of IP financing? ▪ What are the advantages and disadvantages of IP finance? ▪ What is data monetization? ▪ What is a Sale- to-ServiceTM ▪ What is royalty finance? ▪ How do you improve the financial and strategic value of your intangible asset and IP? This presentation will provide a road map on how to find, value, and protect intangible assets and IP.
  • 5. CAPITAL FOR THE SERVICE ECONOMY THE RISE OF INTANGIBLE ASSETS
  • 6. CAPITAL FOR THE SERVICE ECONOMY THE RISE OF INTANGIBLE ASSETS The U.S. has transitioned from an asset-intensive industrial economy to an asset-light service or knowledge- based economy. Ocean Tomo’s study on intangible assets has been heavily quoted by economists and academics covering intangible assets. 17% 32% 68% 80% 87% 83% 68% 32% 20% 13% 199519851975 2005 2015* Intangible AssetsTangible Assets Physical assets comprised more than 80% of the S&P Market Value. The percentages had reversed with intangible assets comprising 87%. 1975 2015 https://www.oceantomo.com/2015/03/04/2015-intangible-asset-market-value-study/ C O M P O N E N T S O F T H E S & P 5 0 0 M A R K E T VA L U E
  • 7. CAPITAL FOR THE SERVICE ECONOMY N O N R E S I D E N T I A L BU S I N E S S I N V E S T M E N T % O F G RO S S VA L U E A D D E D https://internationaldirector.com/finance/the-tangible-problem-of-measuring-intangible-assets/ 4% 6% 8% 10% 12% 14% 16% 18% 20% 1977 1982 1987 1992 1997 2002 2007 2012 2017 Tangible investment rate Intangible investment rate THE RISE OF INTANGIBLE ASSETS The rate of intangible investment as a percentage of U.S. private-sector GDP overtook tangible investment in the mid-1990s. Since then, the percentage has only increased.
  • 8. CAPITAL FOR THE SERVICE ECONOMY THE RISE OF INTANGIBLE ASSETS https://howmuch.net/articles/100-years-of-Americas-top-10-companies https://forbes.com So where do we ultimately see the value of investment in intangible assets and intellectual property? ▪ There is a significant gap between the value created by investment in intangible assets and the value recorded on corporate balance sheets. ▪ So where do we see this value? We see it in equity or share value. ▪ Today’s most valuable companies are not asset-intensive but instead comprised of intangible assets which are largely reflected in enterprise value. T H E M O S T VA L UA B L E C O M PA N I E S OV E R T H E L A S T 1 0 0 Y E A R S
  • 9. CAPITAL FOR THE SERVICE ECONOMY ACCOUNTING FOR INTANGIBLES
  • 10. CAPITAL FOR THE SERVICE ECONOMY COMPONENTS OF VALUE For many business, the assets that have the greatest contribution to enterprise value do not generally show up on the balance sheet, and when they do, they are usually undervalued. Goodwill (Unidentifiable Intangible Value) Tangible Assets Identifiable Intangible Assets (Balance Sheet) Unidentifiable Intangible Assets (Enterprise Value) C O M P O N E N T S O F VA L U E D E S C R I P T I O N S Tangible Assets: Physical assets which can be quantified with relative ease. Goodwill: The premium paid over the fair value of assets in an acquisition. Goodwill is inseparable from the business. Identifiable Intangible Assets: They lack physical substance, but they can be described, valued, and sometimes monetized. Unidentifiable Intangible Assets: Assets that contribute to enterprise value but do not show up on the balance sheet.
  • 11. CAPITAL FOR THE SERVICE ECONOMY INTANGIBLES & THE BALANCE SHEET 13.8% 3.1% 1.7% 1.0% Goodwill Net Intangible Assets Microsoft 10-K 6/18 Apple 10-K 9/17 https://blogs.cfainstitute.org/investor/2019/01/11/a-renaissance-in-intangible-valuation-five-methods/ https://finance.yahoo.com/quote/AMZN/key-statistics/ Additional Equity Value Net Tangible Assets Goodwill Intangible Assets ▪ Amazon’s intangible assets and goodwill account for slightly more than 2% of the company’s $860 billion market value. By any reasonable estimate, its brand and technology should contribute far more than 2% of the company’s value. ▪ Net tangible assets is a small part of both companies’ balance sheet, but Microsoft has a higher percentage of goodwill due to the company’s greater number of acquisitions. The balance sheets of Amazon, Microsoft, and Apple offer helpful examples of intangible assets and goodwill. A M A Z O N M I C RO S O F T & A P P L E
  • 12. CAPITAL FOR THE SERVICE ECONOMY ACCOUNTING & COLLATERAL https://internationaldirector.com/finance/the-tangible-problem-of-measuring-intangible-assets/ https://www.slideshare.net/aishwarykgupta/securitization-of-intangible-assets ▪ Intangible assets are most easily identified and valued as part of an acquisition. ▪ But intangibles that are produced organically are often valued based on expense. ▪ IFRS and GAAP have different rules concerning intangibles, causing greater confusion. ▪ Data does meet the technical definition of an asset, but it is not counted as an asset on the balance sheet largely because it is difficult to value. ▪ For intangible assets to be effectively securitized, they must have the following characteristics: - They can be identified from other intangibles; - Legally protected (or isolated); - Able to generate cash flows (income); and - Can be valued buy a third-party valuation firm. ▪ These same securitization attributes can bring value to your intangible assets even if a financing is not the objective. Accounting rules do not fully capture the value of intangibles because these rules were built for tangible asset. This makes it difficult to utilize intangible assets as collateral. AC C O U N T I N G RU L E S S E C U R I T I Z A B L E A S S E T S
  • 13. CAPITAL FOR THE SERVICE ECONOMY WHAT ARE INTANGIBLES & INTELLECTUAL PROPERTY?
  • 14. CAPITAL FOR THE SERVICE ECONOMY FORMAL & INFORMAL IP http://metispartners.com/ip-basics/ Formal Intellectual Property (“IP”) is the most well understood intangible because it can be sold as an asset in and of itself, but it is often undervalued. Informal IP, sometimes referred to as intellectual capital, is usually undervalued on a company’s balance sheet, but it may show up in enterprise value. Trademarks CopyrightsDesign Rights Patents Trade Secrets Organizational Knowledge Proprietary Software Brand & Reputation Critical Suppliers & Customers Research & Development Strategy & Market Intelligence Know-How I N T E L L E C T UA L P RO P E R T Y I N T E L L E C T UA L C A P I TA L
  • 15. CAPITAL FOR THE SERVICE ECONOMY FORMAL INTELLECTUAL PROPERTY Patents Trademarks CopyrightsDesign Rights Ownership of a unique technology or process which covers how things work, what they do and how they do it, and how they are made. An image which can take the form of words, logos, and, pictures and gives the owner legal rights to stop the use of similar images. A design that applies to the appearance of a product and gives a legal right to protect its use. Provides an exclusive right to the use and distribution of an original work, generally but not always artistic. There are four types of formal intellectual property that are legally protected, and which are relatively well understood. http://metispartners.com/ip-basics/
  • 16. CAPITAL FOR THE SERVICE ECONOMY INFORMAL INTELLECTUAL PROPERTY http://metispartners.com/ip-basics/ These eight informal IP assets, also referred to as intellectual capital, can be further categorized as human, relational, or structural capital. Trade Secrets Organizational Knowledge Proprietary Software Brand & Reputation Critical Suppliers & Customers Research & Development Strategy & Market Intelligence Know-How Segments of Intellectual Capital: ▪ Human Capital: Employees’ knowledge and know-how ▪ Relational Capital: A firm’s relationships with employees, customers, suppliers, regulators, and other stakeholders ▪ Structural Capital: Systems, data, trade secrets, business process, and ability to innovate I N T E L L E C T UA L P RO P E R T Y I N T E L L E C T UA L C A P I TA L
  • 17. CAPITAL FOR THE SERVICE ECONOMY Segments of Intellectual Capital: ▪ Human Capital: Employees’ knowledge and know-how ▪ Relational Capital: A firm’s relationships with employees, customers, suppliers, regulators and other stakeholders ▪ Structural Capital: Systems, data, trade secrets, business process, and ability to innovate HUMAN & RELATIONAL CAPITAL http://metispartners.com/ip-basics/ These four assets fall within human and relational capital. However, if they have not been documented and instead exist solely with a few employees, they are not assets of the business. Trade Secrets Organizational Knowledge Proprietary Software Brand & Reputation Critical Suppliers & Customers Research & Development Strategy & Market Intelligence Know-How I N T E L L E C T UA L P RO P E R T Y I N T E L L E C T UA L C A P I TA L
  • 18. CAPITAL FOR THE SERVICE ECONOMY Closely-held information, and skills and experience of a firm’s employees. However, know-how held by individuals is not an asset of the company. Know-How A company’s “know-how” which has been developed, (documented) and shared within a company, like training programs, procedures, or drawings. Organizational Knowledge Understanding of the industry, which may include specific information on competitors, new entrants, or a broader approach to strategic decision-making. Strategy & Market Intelligence Relationships that are critical to the businesses, are often a barrier to entry, and primary reasons for a strategic acquisition. Critical Partners, Suppliers & Customers HUMAN & RELATIONAL CAPITAL http://metispartners.com/ip-basics/ These four informal IP assets fall within the notion of intellectual capital and, more specifically, within human and relational capital.
  • 19. CAPITAL FOR THE SERVICE ECONOMY STRUCTURAL CAPITAL These four informal intellectual property assets fall within the notion of structural capital and offer the greatest opportunity for monetization and value creation. Trademarks CopyrightsDesign Rights Patents Trade Secrets Organizational Knowledge Proprietary Software Brand & Reputation Critical Suppliers & Customers Research & Development Strategy & Market Intelligence Know-How http://metispartners.com/ip-basics/ I N T E L L E C T UA L P RO P E R T Y I N T E L L E C T UA L C A P I TA L
  • 20. CAPITAL FOR THE SERVICE ECONOMY The most easily identified informal IP, it enhances a company’s reputation and differentiates it from its competitors. Brand & Reputation A process of creating and commercializing new ideas that offer a short or long-term competitive advantage. Research & Development A formula, practice, process, or combination of items which are generally unknown and provide a company an economic advantage. Trade Secrets The source code is a closely guarded secret, but it does not have the protections that registered IP receives. Proprietary Software STRUCTURAL CAPITAL http://metispartners.com/ip-basics/ Structural capital has characteristics more similar to formal IP. These assets can be described, isolated, and valued and, in most cases, can be monetized independent of the business.
  • 21. CAPITAL FOR THE SERVICE ECONOMY VALUATION OF INTANGIBLE ASSETS
  • 22. CAPITAL FOR THE SERVICE ECONOMY INTANGIBLE ASSET VALUATION *American Institute of CPAs, CGMA TOOLS: Three approaches to valuing intangible assets Uses estimates of future cash flows and discounts them. However, it can be hard to distinguish the IP’s cash flows from the company’s overall cash flows. Uses recent transactions of identical or similar assets. Comparable transactions are typically difficult to obtain if available at all. Based on the cost to develop or to replace and usually ignores the amount, timing, and duration of future economic benefits, as well as the risk of performance. The Income Approach The Market Approach The Cost Approach While there can be a valuation approach for a specific intangible asset that is wrong, there can be several that are right. These three approaches are the industry standards. C O M P O N E N T S O F VA L U E
  • 23. CAPITAL FOR THE SERVICE ECONOMY*American Institute of CPAs, CGMA TOOLS: Three approaches to valuing intangible assets Two of the better-known methods for the income approach are the With & Without and Relief From Royalty methods. Estimates a value by calculating the difference between two cash flows: one that represents the status quo with the asset in place, and another without it. The cash flows of the royalty payments for which the company is relieved due to its ownership of the asset. This method is often used for trade name valuations. With & Without The Income Approach Relief from Royalty A P P ROAC HM E T H O D M E T H O D INCOME APPROACH
  • 24. CAPITAL FOR THE SERVICE ECONOMY VALUATION STANDARDS ASSET PRIMARY SECONDARY TERTIARY Patents Income Market Cost Trademarks Income Market Cost Design Rights Income Market Cost Copyrights Income Market Cost Trade Secrets Income Market Cost Proprietary Software Cost Market Income Brand Income Market Cost Research & Development Cost Income Market Critical Customers & Suppliers Income Cost Market Strategy & Market Intelligence Cost Income Market Know-How & Organizational Knowledge Cost Income Market There are numerous standards for valuation approaches, and proper selection should be based on the fact and circumstances of the business and the assets. VA L UAT I O N F I R M S
  • 25. CAPITAL FOR THE SERVICE ECONOMY PROPRIETARY SOFTWARE ASSET PRIMARY SECONDARY TERTIARY Patents Income Market Cost Trademarks Income Market Cost Design Rights Income Market Cost Copyrights Income Market Cost Trade Secrets Income Market Cost Proprietary Software Cost Market Income Brand Income Market Cost Research & Development Cost Income Market Critical Customers & Suppliers Income Cost Market Strategy & Market Intelligence Cost Income Market Know-How & Organizational Knowledge Cost Income Market VA L UAT I O N F I R M S Formal IP and a few informal IP categories have known and tested valuation methods, but proprietary software offers a good case study on potential conflicts.
  • 26. CAPITAL FOR THE SERVICE ECONOMY Proprietary Software COST-BASED vs WITH & WITHOUT http://metispartners.com/ip-basics/ Cost- Based With & Without Systems the company has spent years developing and for which the company could not easily replace, if at all. Does the capital spent on the systems accurately reflect their value to the business or value to an acquirer of the business? How would the loss of the company’s systems or having to replace them from the ground up impact the company’s cash flow and resulting value? The most reasonable and commonsense approach to valuing intangible assets is often not the most widely used method.
  • 27. CAPITAL FOR THE SERVICE ECONOMY INTANGIBLE ASSET FINANCE
  • 28. CAPITAL FOR THE SERVICE ECONOMY CAPITAL MARKETS & CASH The broader transition to an intangible asset or knowledge-based economy has impacted the lending market and companies’ cash management strategies. ▪ The economy’s shift toward intangible assets, many of which cannot be pledged as “collateral,” has decreased the debt capacity of firms and encouraged them to hold more cash to preserve financial flexibility. ▪ The increase in intangible assets has reduced the proportion of overall investment financed through bank debt and has increased the amount of financing provided by private debt and non-bank lenders. https://blogs.cfainstitute.org/investor/2019/01/11/a-renaissance-in-intangible-valuation-five-methods/ https://www.spglobal.com/en/research-insights/articles/US-Corporate-Cash-Reaches-19-Trillion-But-Rising-Debt-and-Tax-Reform-Pose-Risk 0.74 0.79 0.83 1.02 1.24 1.19 1.29 1.61 1.71 1.75 1.92 7.6% 7.3% 7.5% 8.9% 9.6% 9.6% 9.7% 11.3% 11.1% 11.1% 11.8% 6% 7% 8% 9% 10% 11% 12% 13% 14% 0 0.5 1 1.5 2 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Cash and investments Cash/Assets (Right Scale) (Tril.$) 0 100 200 300 400 500 600 700 800 Dry Powder ($bn) Unrealized Value ($bn) AssetsunderManagement($bn) P R I VAT E D E B T C A S H https://www.federalreserve.gov/pubs/feds/2013/201367/index.html https://www.theleadleft.com/private-debt-intelligence-7-30-2018/
  • 29. CAPITAL FOR THE SERVICE ECONOMY TYPES OF IP FINANCE ▪ Intangible asset finance, also described as IP finance, is almost entirely focused on the four types of formal IP: patents, trademarks, design rights, and copyrights. IP-Backed Loan IP Royalty Securitization IP Sale License- Back Intangible asset finance is a small but growing segment of non-bank lending and includes IP-backed loans, IP royalty securitizations, and IP sale license-backs. C H A R AC T E R I S T I C S T Y P E S O F I P L E N D I N G ▪ While intangible asset finance is associated with early stage or capital-constrained businesses, it can be fit for later-stage businesses, particularly if the company has documented and valued their assets. ▪ Intangible asset finance generally presents the greatest opportunity for capital markets innovation, which has not kept pace with broader business innovation.
  • 30. CAPITAL FOR THE SERVICE ECONOMY IP-BACKED LOAN An early example… Thomas Edison used his patent on the incandescent electric light bulb as collateral to secure financing to start his company, the General Electric Company. https://www.stout.com/en/insights/article/financing-alternatives-companies-using-intellectual-property-collateral ▪ An IP-backed loan is similar to asset-backed loan. The borrower grants a security interest in the asset and then borrows a percentage of the asset value. The lender assesses risk in part based on liquidation value. ▪ While not limited to start-ups, IP-backed loans are useful for earlier- stage asset-light businesses because these businesses often lack the tangible assets or cash flow to support a traditional credit solution. ▪ Like traditional debt, IP-backed loans provide capital without dilution, but they are often higher-cost and may have operational or financial constraints due to covenants and other credit restrictions. T H O M A S E D I S O N Intellectual property loans are the largest segment of IP finance and the most familiar. C H A R AC T E R I S T I C S
  • 31. CAPITAL FOR THE SERVICE ECONOMY IP ROYALTY SECURITIZATION https://www.stout.com/en/insights/article/financing-alternatives-companies-using-intellectual-property-collateral The primary difference between a securitization and an IP-backed loan is the owner is not borrowing money but is instead selling a stream of future cash flows for a fixed duration that would have otherwise gone to the owner. Another notable difference between a royalty securitization and an IP- backed loan is the repayment obligation is attached only to the asset rather than the owner, separating repayment risk from the business. For most securitizations, the IP holder transfers the asset to a special purpose vehicle (“SPV”). This favors the lender because the asset is protected from creditors in the event the owner files for bankruptcy. Royalty securitization offers an alternative to an IP loan with distinct tradeoffs. R E C O U R S E O N I PF U T U R E C A S H F L OW S C R E D I T O R S P V
  • 32. CAPITAL FOR THE SERVICE ECONOMY IP SALE LICENSE-BACK Sale Lender $ Borrower License Fees https://www.stout.com/en/insights/article/financing-alternatives-companies-using-intellectual-property-collateral An IP sale license-back offers a useful structure for both formal and informal IP assets so long as right and title can be conveyed. ▪ An IP sale license-back is similar to a real estate sale-leaseback. There a change of ownership and the seller pays a license or fee, depending on the agreement type, to utilize the asset. ▪ Most IP sale license-back transactions have a repurchase option allowing the seller the opportunity to buy back ownership during or at the end of the contract period. ▪ The agreement may also allow the investor (buyer) to pursue additional value through the monetization of the acquired asset from third parties. C H A R AC T E R I S T I C S I P S A L E L I C E N S E - BAC K
  • 33. CAPITAL FOR THE SERVICE ECONOMY IP COLLATERAL ENHANCEMENT Did you know companies value their intangible assets 10% higher than their tangible assets... but only 16% of intangible value is covered by insurance while 60% of PP&E is covered. https://www.stout.com/en/insights/article/financing-alternatives-companies-using-intellectual-property-collateral https://theonebrief.com/intellectual-property-learning-to-value-assets-you-cant-touch/ IP collateral enhancement insurance is most often used alongside an IP loan, but it can also be used for other types of IP financing. ▪ IP collateral enhancement is the use of insurance or guarantees on the value of the IP for the benefit of the lender to reduce credit and foreclosure risk. ▪ IP collateral enhancement improves the overall credit profile of the transaction, which may allow lower interest rates and increased leverage for the borrower. ▪ The insured value acts as a “floor” or “stalking horse” bid as part of the bankruptcy process. The lender is guaranteed to get no less than the insured value while maintaining upside if the assets are worth more. I N S U R A N C EC H A R AC T E R I S T I C S
  • 34. CAPITAL FOR THE SERVICE ECONOMY SALE-TO-SERVICE® Sale Leeward $ Borrower Services Fees https://www.stout.com/en/insights/article/financing-alternatives-companies-using-intellectual-property-collateral A Sale-to-Service is an IP sale license-back of a company’s proprietary software and data. ▪ A Sale-to-Service (S2S) uses a “With and Without” valuation to determine the value of a company’s proprietary software and data. ▪ The seller can pay a termination fee to exit the structure early and can exercise a repurchase option to reacquire the assets. ▪ An S2S utilizes a 3 to 6-year service contract where all payments are operating expense rather than interest and principal. ▪ For asset-light businesses with mission-critical systems and data, this valuation can be up to 70% of enterprise value. ▪ Data can be valued and monetized as an asset separate from the company’s systems and software. S A L E - T O - S E RV I C E C H A R AC T E R I S T I C S
  • 35. CAPITAL FOR THE SERVICE ECONOMY ADVANTAGES OF IP FINANCE https://www.stout.com/en/insights/article/financing-alternatives-companies-using-intellectual-property-collateral Increase an owner’s return through additional leverage. Provide capital that might not otherwise be available or would cause dilution to existing owners. A lower cost of capital if it is more attractive to finance the IP assets rather than the creditworthiness of the business. Capital received can be invested in projects that are expected to have a higher return than the cost of financing. Lower risk profile if the IP’s is moved out of the business and isolated from a bankruptcy proceeding. IP finance offers businesses a source of financing specifically suited for the knowledge and service economy, but businesses with tangible assets can be a fit as well. Increased Leverage Non- Dilutive Lower Cost of Capital Capital Allocation Decrease Risk
  • 36. CAPITAL FOR THE SERVICE ECONOMY DISADVANTAGES OF IP FINANCE https://www.stout.com/en/insights/article/financing-alternatives-companies-using-intellectual-property-collateral A default on the loan could result in the loss of the IP and a liquidation of the company. Default Risk Valuation is more difficult, resulting in a more complex and possibly higher risk transaction. Valuation Tangible assets are often easier to liquidate than IP as the market of potential buyers is smaller. Liquidation With a limited number of lenders, IP finance can be a more expensive alternative than traditional financing. Cost of Capital For an asset to have value, it must be able to be discretely identified and valued. For some IP, this may be difficult. Asset & Value The evolving nature of IP finance can make for higher cost and higher risk transactions.
  • 37. CAPITAL FOR THE SERVICE ECONOMY IP FINANCE – RELATED TOPICS
  • 38. CAPITAL FOR THE SERVICE ECONOMY DATA MONETIZATION https://www.everedgeglobal.com/news/makingmoneyfromdata/ ▪ Value is related to scarcity and more than 847 zettabytes of data will be generated in 2021, so data is hardly scarce. ▪ Many companies are sitting on valuable data sets, but these assets are often off-balance sheet, under-utilized and under-valued. ▪ Companies can make a business case around data monetization by answering the following: - What is the business case for leveraging the data? - What is the likely value of your data? - What are the risks associated with monetizing your data? ▪ The fundamental rules of business still apply. Companies need to build a business case for each dataset end case and establish the likely ROI and risks. Data is only as useful and valuable as the decisions it helps businesses make. DATA C H A R AC T E R I S T I C S
  • 39. CAPITAL FOR THE SERVICE ECONOMY ROYALTY FINANCE https://www.stout.com/en/insights/article/financing-alternatives-companies-using-intellectual-property-collateral Royalty finance is generally well understood and a well-developed debt capital markets alternative. ▪ While it doesn't fit squarely inside of intangible asset finance, royalty finance is another useful alternative to traditional debt and equity capital. ▪ Businesses get money based on future revenue and investors get their money back through royalties that are generally a percentage of the company's revenue. ▪ Royalty finance is a compromise between debt and equity capital as investors see greater returns than they would with a traditional loan and companies do not have to give up equity. ROYA LT Y F I R MC H A R AC T E R I S T I C S
  • 40. CAPITAL FOR THE SERVICE ECONOMY HOW TO PROTECT & MAXIMIZE THE VALUE OF IP
  • 41. CAPITAL FOR THE SERVICE ECONOMY INTELLECTUAL PROPERTY STRATEGY Businesses need to have a clear and documented IP and intangible asset strategy that identifies value and addresses the costs, risks, and benefits of these assets. What is our intangible strategy and are we actively managing these assets? What are our primary intangible asset risks? Do our employees understand the importance of these assets? What processes do we have to manage and mitigate these risks? 1 3 2 4 K E Y QU E S T I O N S I P A DV I S O R S
  • 42. CAPITAL FOR THE SERVICE ECONOMY MAXIMIZE THE VALUE OF IP https://www.upcounsel.com/royalty-financing Understanding and articulating a company’s IP and intangible strategy makes a business more bankable, defensible, and valuable. Describe qualitatively why the assets are valuable and quantitatively how the assets drive economic value. Documentation Using an SPV, execute a related party service or license agreement. The assets will be reflected as an asset on the SPV balance sheet and as obligation on the operating business balance sheet. IP Holding Company Pursue even modest sources of third-party revenue from the assets through license or service fees, whichever is appropriate for the asset. Commercialize the IP Implement policies to protect and monitor these assets, with an emphasis on employee education, and ensure the assets are properly insured. Protection
  • 43. CAPITAL FOR THE SERVICE ECONOMY SUMMARY Non-bank lenders are seeking innovative solutions in order to deploy capital, and their ability to do so is dependent on finding new security and sources of value and collateral. Expanding Source of Collateral Intangible Asset Financing Key Questions for an IP Financing Strategic & Financial Value The expansion of intangible assets and their contribution to value offers investors a growing source of collateral. There are specific steps to increase a company’s intangible asset borrowing capacity and the probability of a successful financing. How do our intangibles drive value? How much are they worth and is the value captured? Can we unlock additional value from them? The steps for an IP financing can also enhance firm value. Documentation, valuation, and isolation are critical for these strategic and financial goals.
  • 44. CAPITAL FOR THE SERVICE ECONOMY LEEWARD CAPITAL MANAGEMENT Matt’s fifteen-year tenure as the CEO of a large data and technology-enabled logistics business led him to recognize the untapped value of a company’s systems, processes, and data. Matt implemented the first Sales-to- Service® transaction for his family’s logistics business, American Forest Products, and started Leeward to deliver a similar capital solution for other closely held businesses. Matthew received a BA and BS from the University of Southern California and an MBA from Harvard Business School and has been a member of the Young Presidents Organization for over 16 years. mhagen@leewardcapitalmgt.com I (469) 718-7333 Leeward Capital Management is a specialty finance business located in Dallas, Texas. Leeward’s Sale-to-Service (“S2S”) investment structure monetizes the know-how found in a company’s mission-critical systems, processes, or data. Leeward provides capital between $10 and $100M for liquidity events, management & shareholder buyouts, family ownership transitions, independent sponsor transactions, M&A and growth. Leeward is focused on businesses in Financial, Healthcare, Business & Education Services, Media & Telecom, Transportation & Logistics, and E-commerce & Digital Marketing, but companies with mission-critical systems and data can be found in all sectors . www.leewardcapitalmgt.com ABOUT LEEWARD CAPITAL MANAGEMENT, LLC ABOUT MATTHEW HAGEN