Unlocking bank finance for intangible assets: New models of support
Intangible assets, particularly intellectual property (IP), are widely regarded as ‘the currency of the knowledge economy’.
For more than a decade, companies across Europe have been spending more on R&D, software, designs and copyright materials, process engineering and training than they do on ‘hard’ assets.
However, the small businesses that are vital to economic growth face particular challenges in funding the investment they require to innovate and stay competitive. This work generally has to be financed from retained profits or equity investment, which act as constraints on development; profits may not be large enough, and equity dilutes ownership and therefore returns to founders.
Can bank debt provide a solution to this problem?
The principle of using IP and intangible assets as security for borrowing is not new
Famously, Thomas Edison used his patent on the incandescent light bulb as security to borrow the money needed to launch the General Electric Company back in the 1880s.
Today, many US lenders do take security over patent families when lending to large companies. However, this is a precautionary measure; it doesn’t unlock new value. The problem is that assets like patents and copyright are not recognised under capital adequacy rules (such as Basel III), and neither regulators nor individual banks have enough risk data to rate them with confidence.
At the heart of the issue is the asset itself. Intangibles do not exhibit the same ‘behaviour’ as tangible ones. Hard assets like real estate can be traded on transparent and liquid markets, and the value at which they can be sold can generally be predicted with a degree of confidence; also, there is usually a wide range of possible buyers for them.
IP is much more specific to a company’s operations and it can be vulnerable to challenge; its value is seldom visible in company accounts, and due diligence on intangibles can be expensive and complex.
This situation has to change. To tackle it, a number of governments around the world have targeted SME intangibles lending with special initiatives. Asia has been a particular focus of activity, with China, Japan, South Korea, Malaysia and Singapore all having state-backed support schemes in place. What can these tell us?
In our session at IGL2017 we will be looking at the evidence of IP value, and the different approaches that have been employed to unlock it via debt finance. We will explore the lessons learned, and seek to understand how these might be taken forward in a model that can generate real private sector engagement.
Martin Brassell will be taking part in a panel discussion at the Innovation Growth Lab's annual conference in Barcelona. Get tickets, and join the conversation on Twitter #IGL2017