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We all know that IP is a valuable commodity, but how can you truly put a price on your intangible assets? Fresh from his US$50m agreement to finance fashion icon Betsey Johnson, Keith Bergelt explains how

When, IP private equity firm Paradox Capital, closed its financing deal in support of Castanea Partners’ acquisition of fashion icon Betsey Johnson in July 2007, few IP specialists batted an eyelash. And, yet, the thought of putting a value of US$50m on an untested brand name would appear ridiculous to anyone who didn’t work in the IP industry.

However, such has been the growth in the ‘securitisation’ of IP (the practice of lending capital based on IP value) in the US, that such deals are becoming increasingly commonplace. And yet for many, the financing of IP remains a market shrouded in mystery. How do you assess the current or future worth of a brand – or is it just a question of making a stab in the dark?

What is securitisation?
The idea of using IP as a financing vehicle first took off in 1997, when David Bowie decided to sell bonds to fans in return for a share in his future royalties (the so-called ‘Bowie’s Bonds’). Although these Bonds are now considered relatively worthless, at the time, they earned Bowie millions of dollars from creditors who were keen to take a slice of his future income. And, unsurprisingly, businesses with sellable copyrights (particularly those associated with music and film) and trademarks (or brand names) wanted a slice of the action and soon followed suit.

The rise of IP financing has been growing ever since, as new models and methods of valuation emerge. As Keith Bergelt, president and CEO of Paradox Capital, explains ‘non-royalty and royalty generating IP can now be financed using a wide variety of credit structures, including loans and securitisations. That may sound like a risky proposition to some, but IP securitisation – along with other methods of valuation, such as OceanTomo’s patent auctions – is the future of business. After all, what is the point of building up a strong IP portfolio, if you are not able to leverage that value to provide capital for your business?’

'For securitisation to be successful, the value of the royalty stream in question must be predictable and the risk that may undermine its future business success must be understood.'
- Keith Bergelt

The deal with Castanea Partners is a case in point. Based on Betsey Johnson’s perceived brand worth, Paradox Capital were able to provide Castanea with the financial backing it needed to acquire the company and fund its future growth.

But how exactly did they measure the value of that brand and how can they be sure that they will get a return on their investment?

‘That’s the million-dollar question,’ laughs Keith. ‘But it’s not as difficult as it may sound. Essentially, you need to go back to basics. For securitisation to be successful, the value of the royalty stream in question must be predictable and the risk that may undermine its future business success must be understood. There is significant value embedded in all brands and their associated trademarks. Our job is to value their current and potential market share.

‘In the case of Betsey Johnson, it was easier than it may appear. This is a sophisticated brand and trademark-driven company. Such is its heritage and brand worth that we are able to predict relatively accurately how much revenue the company will create in the coming years. That market worth provides the security we need to guarantee returns on our investment.’

Funding the future
Of course, the more predictable the revenue generated by an IP royalty portfolio, the greater the opportunities for securitisation. But no-one can really predict how industry changes may affect the IP that is being financed.

Bowie’s Bonds are a case in point, as much of their drop in value came as a result of the rise in digital file-sharing; something that was little expected back in 1997. Nonetheless, the difficult art of IP valuation still remains the main legal and business method of structuring IP valuation, and Keith does not expect this to change: ‘With appropriate due diligence precautions, cautious asset identifications and careful valuations in hand, securitisation and other forms of IP financing are viable methods of monetising IP,’ he concludes.

This article first appeared in IP Review, issue 20

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