Patents as financial assets
Trolls demanding tolls
Sep 10th 2009
From The Economist print edition
Intellectual property comes of age as an alternative investment
Alamy
FOR those who got burned investing in bricks and mortar, it may be time for a punt on property of a more intellectual kind. Patents have traditionally been the domain of wild-haired inventors and computer geeks. These days they are just as likely to attract the interest of slick investors, from hedge funds and private-equity firms to venture capitalists and even distressed-debt funds. What was once viewed as a stodgy legal asset is fast becoming a sought-after financial one.
The market is still small but it is growing quickly—by perhaps 20-30% a year, reckons Coller Capital, an investment firm that has snapped up, among other prizes, IBM’s portfolio of medical-device and health-care patents. Intellectual Ventures, based near Seattle, has spent a large chunk of the $5 billion it has raised from investors on buying patents; at the last count it had 27,000. Fortress, a big hedge-fund and private-equity group, is also active. Ron Epstein of iPotential, a patent-brokerage firm, says he is getting an ever-increasing volume of calls from hedge funds looking for patents related to mobile telecoms, medical equipment, biotechnology and the internet. He estimates that $4 billion-worth were bought and sold last year overall.
There are several kinds of seller. Some are inventors and universities that lack the resources to chase infringers or to develop their intellectual property (IP) while it still has value (patents expire 20 years after filing). Then there are distressed technology minnows, selling patents in the recession to raise the cash to survive. Administrators of bankrupt firms, alerted to the potential value of their charges’ patents by the growth in trading, are increasingly looking to sell them. Another source of supply is large technology providers that are trying to manage their IP more actively. The majority of a typical firm’s patents are of little or no use to its core businesses. Well-timed patent sales are also a way for public technology firms to meet quarterly profit targets, says Coller’s Peter Holden.
Buyers also come in different shades, both industrial and financial. Of the financial ones, some hope to profit from the market’s relative youth and illiquidity, seeking out undervalued patents and taking advantage of pricing inefficiencies (and the difficulty of valuing such a complex asset) to sell them at a hefty mark-up.
Others are longer-term holders, pejoratively referred to as “patent trolls”, who are looking for an income stream from collecting royalties. Ugly they may be to those they harass, but lazy they are not. Such investors typically undertake exhaustive analysis of the relevant technologies and the firms that may be using them. Negotiations with those they deem to have breached a patent can be tortuous. Even by the standards of alternative investors, this is esoteric stuff. But the returns can be handsome and, with a broad enough portfolio, fairly predictable.
As the market evolves, its supporting infrastructure grows more sophisticated. New brokers are popping up. Like estate agents, they package together information—on the patent’s validity, infringement by others and so on—and try to maximise proceeds for clients. iPotential has helped some clients get more than ten times the initial asking price. ICAP Ocean Tomo, another broker, began running patent auctions in 2006, and this year an affiliate set up an IP exchange. Its index of patent-rich shares is tracked by several exchange-traded funds. IP is moving out of the lab and into the financial mainstream.
AI
