Patent Place – Patents as Financial Instruments

Traditionally, patents were the purview of inventors, geeks and  lawyers.  Not anymore.   These days, well-funded hedge funds and private equity firms would be just as  likely to be studying patent filings. Patents, also known as intellectual property (IP), are now considered part of the Alternative Investment (AI) asset class alongside derivatives, distressed debt and hedge funds.  Similar to other assets, patents are now being bundled, marketed and traded with increased frequency between a greater number of brokers, financial and technology companies. 

Although the market is in its infancy, it is enjoying rapid growth in terms of transaction value and the number of industry players.  According to the Economist Magazine, the patent market is growing 20-30% per annum. iPotential, a patent-brokerage firm, estimates that $4B worth of patents were bought and sold last year.  And, some of the largest capital pools have gotten into the game.  Intellectual Ventures, an invention creation and licensing company, has spent the better part of a $5B capital raise buying patents.  Fortress, a large hedge fund, is said to own over 27,000 patents. Not surprisingly, the most sought after patents are those that are found in high growth, venture capital-rich markets such as bio-technology, telecom, medical devices, and software. 

Patent sellers are technology developers like IBM who seek to monetize their non-core IP in order to focus on other technologies or generate short term profits.  In other cases, universities, inventors and hospitals sell patents when they lack the resources and expertise to commercialize it themselves.  Some firms, who find themselves in financial turmoil, often shed non-performing assets like IP.  Finally, bankruptcy administrators look to sell IP in the hope of recovering some cash for creditors. 

Patent buyers range from strategic corporate acquirers who want to enter new businesses to investment firms who seek to flip assets in a young and relatively imperfect market.  One of the more controversial groups of IP buyers are pejoratively known as “ patent trolls.”   These companies seek to generate long term income streams by buying up all the patents they can find in target technology sectors.   When these firms believe their patents have been breached, they typically defend them aggressively, especially when the potential returns are lucrative and the defendants are well-heeled, as was the case with RIM in 2008.

Although IP is poised to become another high return AI, there will be challenges to growth.  The relative illiquidity of the market, the lack of market information and the esoteric nature of much of the technology makes valuing IP, especially portfolios of patents, fraught with difficulty.  Furthermore, given the large amount of litigation and time associated with establishing IP ownership rights, it is very likely lawyers will play as important a role as inventors and traders, adding cost and uncertainty.

However, likely the greatest impetus for growth will be the emerging ecosystem of research firms, brokers and consultants that will help value, categorize and track IP buying and selling.  For example, a newly launched IP exchange enables an index of patent-focused shares to be tracked by exchange-traded funds.  Increasingly, it looks like IP is moving out of the basement lab and into the financial mainstream.

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5 comments so far

  1. Reseller Hosting on

    Your blog keeps getting better and better! Your older articles are not as good as newer ones you have a lot more creativity and originality now keep it up!

    • mitchellosak on

      Thank you for your kind words

  2. Me on

    Good points, I think I will definitely subscribe! I’ll go and read some more! What do you see the future of this being?

    • mitchellosak on

      Thank you for your comment. I’m not sure a fully liquid market for patents will evolve in the short term, particularly given the current economic climate and some of the challenges around valuing new, alternative assets with few comparables.

  3. […] patents or inventions from other companies, individuals or research institutes. At the same time, technology not being used in a firm’s business can be offered outside the company.  OI is not only about big science projects.  One of the most common applications is problem […]

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