As our financial markets and economies become ever more sophisticated and reliant on the transmission of information and technology, the level of investment in intangible assets, as part of a company’s portfolio of assets, has become pervasive. Food and beverage industries consider brands as being the “life blood of the business” whereas technology and pharmaceutical companies consider patents as a central component which allows them to exploit their own innovation. Other illiquid intangibles such as trade secrets and firm reputation are also considered to be of equal importance to the mechanics of modern day commerce.
Even whilst companies operating in financial services are heavily invested in intangibles (due to the knowledge based sphere within which they operate), companies operating in the manufacturing and construction sectors, traditionally and literally associated with ‘brick and mortar’ type investment, have invested heavily in research and development, brand building and reputational value.
However, the prevalence of intangible assets in a knowledge-based economy has been conducive to an impediment in a firm’s ability to raise capital in the credit markets. Asymmetric information, unknown liquidation value and the hardship involved in redeploying these assets are considered to be the main causes for the restriction of their effective use as loan collateral.
This challenge most likely relates to the fact that the banking system is ill-equipped to efficiently utilise intangible assets in financing operations. Common as it may be, for banks to secure all assets of a company through a general hypothec (or a floating charge), intangible assets are not specifically counted as collateral and banks seldom know how to make effective use thereof.
However, much in the same way that a company’s equity value can be significantly improved by quantifying the intangible asset, a firm’s ability to access credit can be significantly improved where the intangible assets can be viably pledged or somehow secured in favour of the financier.
The advent of capital market technology and advances in the sophistication of our legal and accounting minds have managed to secure intellectual property through a number of methods, most famously ‘Bowie Bonds’, a benchmark debt issuance secured by the music portfolio of none other than David Bowie. Recent discussions have also employed the concept of risk participation, whereby an insurer would insure a portfolio of intangible assets so as to secure a financier’s security over the assets. Naturally, there is still some way to go before we can effectively monetise and transfer intangible assets and risk participation, but this does underline the importance of having procedures and techniques in place to maximise as well as protect one’s investment in research and brand building.