IA/IP-Backed Financing & Loan Performance: A Project Management Journey
For the past two years, the World Intellectual Property Organization (WIPO) has been releasing its Country Perspectives on IP-Backed Financing. IP-backed financing is a relatively new financing vehicle, wherein intangible assets (IA), including intellectual property rights (IPR) can be used to secure financing, either by pledging them or transferring rights to cash flows derived from these assets. A core component of IA is intellectual property (IP), such as patents, designs, trademarks and copyright, and can further include know-how, data and branding.
As mentioned in our prior blog, IP-backed financing enables IP savvy businesses “holding promising IP portfolios and generating revenue, to grow. In a nutshell, “intellectual property rights can be used to secure financing, either by pledging them or transferring rights to cash flows derived from these assets. Alternatively, a company's intellectual property can provide an indicator of a firm's value and support financing decisions”.” It Is key to have your IA/IP house in order where IA/IP are clearly identified and managed so that the business can put its best foot forward when securing funds. Contact us about how we can project manage these processes.
The WIPO reports provide a country specific synopsis on IP-backed financing performance and efforts, for example:
Singapore (2023), which “piloted the IP Financing Scheme (IPFS) initiative. Under the IPFS, enterprises were able to access financing by pledging their IP as collateral to the lending bank. Beyond the IPFS, the Enterprise Financing Scheme-Venture Debt Program (EFS-VDP) launched by Enterprise Singapore (ESG) is another program for innovative enterprises to access financing through their intangible assets”;
Jamaica (2023), which established “a conducive regulatory environment through the passing of the Security Interests in Personal Property Act, 2013, which makes it easier for businesses to use IP assets as collateral for a loan.” Moreover, “The Development Bank of Jamaica (DBJ) has introduced initiatives to provide funding for high-potential entrepreneurs and for the innovations that startups and SMEs could leverage in order to monetize their IP.”
Switzerland (2023), ranked as the world’s most innovative economy in the Global Innovation Index (GII), which noted that “besides VC [venture capital], debt finance instruments, including venture debt (VD), have started to grow in popularity. VD, however, currently plays only a minor role in Switzerland.” The Swiss report further notes that “[w]hile all forms of intangible assets contribute to these investments and collaborations, patents and software stand out. These assets provide substantial input into decision making for investment, but typically do not serve as standalone collateral.”
The United Kingdom (2023), which recognized that “UK lenders are starting to engage more actively with consideration of IP assets”, and that “there are some encouraging signs that debt is beginning to become available at an earlier stage to these growth businesses who need it most. This movement has been helped by research which, while not conclusive, strongly indicates a positive correlation between IP assets and better loan performance”. The 2018 UK-IPO BBB report is available here. The WIPO UK Country Perspectives report also states that: “[d]espite this recent progress, the IP finance market remains underdeveloped in the United Kingdom. Regulatory and non-regulatory obstacles hinder the mainstream use of IP to raise business finance. For example, the treatment of IP in accounting standards and financial regulations both present complexities. The biggest hurdles remain attitudinal; the unique characteristics of IP that make it valuable are unfamiliar to financiers, and hard to verify using external sources. As IP always delivers value in a particular context, lenders in particular are understandably wary of how reliably future asset value can be estimated. However, there are signs that market-led solutions are emerging that can address the issues of complexity, confidence and cost.” Further information regarding the benefits of reporting intellectual property on balance sheets and financial statements is available on our blog. It is also worth mentioning that the UK IPO just launched a Report into the UK's IP-backed finance landscape on March 19, 2024, available here.
China (2024), which impressively recognized that: “In the first three quarters of 2023, China’s patent and trademark pledge financing reached CNY 495.0 billion, an increase of 52.9 percent year-on-year. At least 18,000 businesses benefited from this form of financing in 2022, each receiving loans of no more than CNY 10 million.” “As of September 2023, the People’s Insurance Company of China (PICC) has been providing an IP assets insurance business in 99 third-tier cities in 22 provinces, providing risk coverage of over CNY 130 billion for the more than 50,000 patents, trademarks and geographical indications held by almost 31,000 businesses” “With the growth of the IP lending industry, 119 IP-backed security products had been issued on the Shanghai and Shenzhen stock markets by September 2023. The amount financed reached CNY 26.8 billion. The value of intangible assets in Chinese firms continues to rise, reaching CNY 4.48 trillion in A-share companies in 2021, up 17.7 percent year-on-year. Among these firms, 94.6 percent disclosed IP assets in their financial reports. The reports disclosed IP assets valued at CNY 964.2 billion, accounting for 15.7 percent of the total intangible assets disclosed by these companies.”
Lending in North America, in particular Canada
Though country perspectives on Canada and the United States have not been published by WIPO, IP-backed financing is active in North America. For instance, Lally Rementilla, managing partner of the Business Development Bank of Canada (BDC) has actively discussed and written about IP backed financing from a Canadian perspective. See also this article appearing in WIPO Magazine.
Also, Ms. Kiriakoula Hatzikiriakos, lawyer at the National Bank of Canada and author, has both published and been interviewed (CIPO IP Voices) on the topic of secured lending in IP, including the acquisition of “the Canadian commercial loan portfolio of S.V.B. as part of a broader strategy to expand its [National Bank of Canada] footprint in the nation's tech sector.” (CIPO IP Voices and article). Particularly interesting in this interview are the other types of financing available to businesses, including recurring revenue-based financing, wherein “the lender finances growth-stage companies that have low or negative EBITDAs. Companies that use this type of financing generate positive cash flow but prefer to reinvest their revenues in the business.”
Role of IP insurance in IP-Backed Financing-Lending
Of course, insurance companies and/or underwriters, such as Marsh, AON, have their role in these transactions as they may be called upon to insure lenders on behalf of growth-stage companies. These policies can protect lenders’ exposures (i.e., full or partial amount of a credit facility) and can allow for competitive financing terms with potentially higher loan limits.
It's Complex, but a Worthy Journey that Needs to be Project Managed
From the above, it is clear that IP-backed financing transaction require project management for several reasons:
Complexity: These deals involve multiple parties with potentially conflicting interests (borrower, lender, IP valuator, insurer/underwriter). Project management keeps everyone on the same page and ensures a smooth workflow through the various stages.
Risk Mitigation: IP valuation can be subjective, and the success of the financing hinges on the quality of the IP. Project management helps identify and address potential risks early on, such as ensuring proper IP due diligence and documentation.
Moving Parts: There are numerous steps involved, from initial valuation and negotiation to legal agreements and disbursement of funds. A project manager keeps track of deadlines, dependencies, and resource allocation to ensure everything progresses efficiently.
Communication & Transparency: Project management fosters clear communication between all parties. This is crucial as due diligence reports, legal documents, and valuation details are exchanged.
Reduced Delays: A well-defined project plan with milestones and checkpoints helps identify and address potential roadblocks before they cause significant delays. This can save time and money for everyone involved.
In short, project management brings structure and organization to a complex financial transaction, mitigating risks, ensuring efficient execution, and increasing the chances of a successful outcome for all parties involved.
Contact us for more information.
