2012 marked an important stage in the evolution of the intellectual property industry and the recognition of IP as a catalyst for economic growth. In the coming year, we expect IP’s value as an asset class to be even further revealed, monetized, and extracted. Michael Friedman, a Managing Director overseeing Ocean Tomo’s Investments practice, reports his top predictions for IP-Investing in 2013.
Liquid IP-collateralized debt
ALU announced two weeks ago that they will be bringing to market a $2 bln. senior note secured by their IP. The IP has been valued at $5 bln. The offering is being underwritten by Goldman Sachs and Credit Suisse. Ocean Tomo believes this could be a watershed event in IP finance. For the first time, the liquid debt investment community will have to consider investing in paper secured by IP. IP collateral valuations will have to be understood by the buy and sell sides and, equally importantly, capital markets bankers will now pitch to their clients IP collateralized debt. Hopefully, this will be the first of many similar transactions.
Trends in the smart phone wars
The smart phone wars are like buying back spreads (option term for long call and put of the same strike). Very hard to call the direction, but you know there will be volatility. Some fundamental questions: Will AAPL and Samsung continue to consolidate the market and, if yes, what will become of the second tier players? Will the ITC better define its “domestic industry” requirement and what will be its effect on injunctions? Will the EU continue with its antitrust actions around FRAND pricing?
Dedicated IP investment funds – public and private
After Nortel, Kodak, MSD and other IP based special situations transactions, we know that the hedge fund and private equity communities will continue to put their toe into the water around this “new, novel” asset class, IP. The trickle of IP rights enforcement funds and their investors may start taking seriously the other ways to exploit IP alpha in the investing market. Granted there are high barriers to entry and the unwary will be burned, but there is not a segment of the investment ecosystem will consistently better risk-adjusted returns.
Continued growth of IP activism – monetization response
After MIPS and AOL, will traditional activists continue to assert boards are breaching their duty to shareholders by not implementing an IP strategy or otherwise monetizing their non-essential IP. Both of those activist campaigns created significant value for shareholders. Given the number of public companies that do not make IP value creation a high corporate priority, we believe it is almost a certainty that IP-based activism will continue to grow.
IP-themed long/short trading
Fundamental stock selection based on IP value is hard, but is a strategy rich in edge. It has extremely high barriers to entry because the tenants of IP valuation cannot be learned studying a GAAP text book. IP is a long-term signal that can be exploited by the patient investor who understands the forward looking investment insight that can be derived from understanding the signals embedded in IP portfolios and how they change over time. IP value driven stocks have greater dispersion and volatility than the broad market. Understanding sector based winners and losers can help one build a long/short portfolio insulated from systematic risk with better returns than the broad market. This may prove too early a call on this trend. Most investors we talk to just can’t comprehend the edge.
Ocean Tomo offers a variety of IP related investing services including Investment Banking, Asset Management and Investment Research. For more information on our investment practice, click here. For additional IP Insight, visit our YouTube channel and follow us on Twitter @OTInsights.