Investing in Intellectual Property

Intellectual property (IP) is an intangible and valuable creation of the mind that is investable. Investors have long recognised the worth and importance of intellectual capital as a driver of firm value. For example, the high market value of many high-tech companies, relative to the balance sheet values of their tangible assets, indicates the critical role played by IP in creating value for the firm.

Traditional investing can capture exposure to IP through investments in public equities whose assets include substantial IP. High levels of IP compared with tangible assets are typically associated with growth companies, or companies who are still relatively young and engaged in the technology sector. Drawing on an example from the local sector, RS2 Software plc would be a typical example of a company whose main value is in the form of IP.

As companies modernise their operating procedures, it has become almost inevitable that a by-product of this transformation is the creation of IP. Investors can access exposures to a broader range of IP through IP assets that exist outside publicly traded corporations. These include copyrights on video (e.g., films), copyrights on audio (e.g., music), patents, trademarks, service marks, and trade secrets. On the extreme end of the IP ladder, even some popular Instagram accounts are recognised as IP nowadays.

These are often viewed as being “Alternative Investments”, which provide diversification and possible enhanced returns to an individual’s overall wealth. These investments, typically targeted towards larger portfolios, can be accessed through private funds or can be purchased on secondary markets. Focusing on the film industry for example, most of the 8 or 10 largest film producers in the United States are subsidiaries of massive publicly traded conglomerates whose assets cover diverse industries. One of the more common ways to gain pure exposure to film industry is through co-investing deals arranged by financial intermediaries that invest in a slate of films.

Within each category of IP are subclasses that offer diverse risk exposures. For example, the risk exposures of film production differ by genre and budget. Diversifying the film investment by type and other characteristics is considered to be a good strategy because profits on films have been shown to be highly positively skewed, similar to venture capital.

Diversification increases the chances of attaining what most motivates investors to consider film investing, that is the prospect of being an investor in the select few films that go on to create a franchise of stackable sequels that take on the enviable characteristics of low risk and very high returns. Thus, the life cycle of the most successful film investment begins resembling a venture deal and ends with a mature IP investment that generates reliable licensing, royalty, and patent-based income.

The opportunities for investing in IP take many shapes and forms and vary along the risk spectrum. Research has shown that the low to near zero correlation with traditional equities implies that adding one or more of these classes of real assets to a portfolio of traditional assets can build more efficient portfolios by diversifying non-systematic risk.