The ability to value and package intangible assets (IP) opens the door to using intellectual property as collateral to fund growth, says Will Kier, Head of IP Solutions EMEA, Aon, and Rita Baal-Taxa, Chief Insurance Markets at Vesttoo.
Access to capital is one of the most pressing needs for any business. Traditionally, organisations have relied on their tangible assets – plant, property and equipment – to use as collateral when turning to banks and other alternative finance providers to secure that capital. In recent times, however, the growing value of intangible assets – such as intellectual property (IP), data, computer systems and other digital assets – has challenged that thinking.
A recent Aon/Ponemon Institute report, for example, valued the average value of tangible assets for businesses in the EMEA region at $1,035 million, while on the intangible asset side, the average value of information assets was greater at $1,168 million. According to Ocean Tomo1, intangible assets now account for 90 percent of the value of the S&P 500 and 90 percent of the value of Fortune 500 companies.
Despite this swing in value, the use of IP assets to help secure funding has been met with some resistance from lenders unwilling to provide such financing due to a lack of comfort and experience with IP, and the punitive capital treatment provided to intangible assets. IP value is largely not understood in the capital markets and while IP may be the most valuable asset a company owns, current accounting standards typically do not allow internally developed IP to be explicitly valued as part of a company's balance sheet. This accounting treatment, and historic lack of creditable valuation methodologies, results in most growth companies turning to dilutive equity to finance their growth.
Change of Tack
There are signs, however, that there has been a change of tack with a recent growth in both the frequency and size of IP financing transactions. Aon has been involved in over $1 billion worth of IP deals in the last two years, working with banks globally – not just in the U.S. but also in the U.K. and throughout Europe. Insurers and capital markets insurance investors are also becoming increasingly involved, attracted to the ability to access an uncorrelated asset class with structures that are diverse in terms of geography, industry segment, and technology type. With equity markets tightening, Vesttoo has also seen growing demand to support such insurance-enhanced growth capital transactions.
IP Valuation is Key
The key to unlocking this value, and the creation of IP as an asset class, is the ability to place a value on a company’s IP portfolio. Aon uses machine learning and proprietary technology to value an organisation’s IP assets; a methodology now recognised by a diverse range of traditional insurers willing to insure the value of IP in a lending transaction. Collaborating with Vesttoo has helped secure additional capital commitment for the insurance through institutional investors, content to take on the risk for the opportunity to obtain diversified returns.
The Growth Potential of Insurance Solutions
Collateral Protection Insurance (CPI) allows a lender to invest in IP-rich companies with greater confidence by “wrapping” the intangible assets of a borrower in an insurance policy that responds in the event of a default on the loan and a devaluation of the underlying collateral. This type of insurance has two triggers, with the main one being the possibility of the intangible collateral not covering the principle in case of a default. This second trigger differentiates the insurance from credit risk, opening the door for institutional investors to step in and take on what is effectively an orthogonal risk.
Vesttoo’s methodology allows it to package the risk carried by the insurer as an investment asset, so if the policy is triggered, it is essentially covered by an investor, who also receives a share of the CPI premiums. The resulting asset also has the distinct advantage of being uncorrelated to market trends, making them an excellent option for portfolio diversification.
Protect and Maximise Value
Intangible assets are the foundation of today’s global economy and helping companies both protect and maximise the value of these important assets is vital. CPI demonstrates the insurance community’s ability to act as a meaningful contributor to the growth companies of today, and as a strategic partner for financing providers looking to deploy capital. The ability to engage capital market investors is also expected to enhance the availability of reinsurance coverage within the ecosystem, which will further drive the product by improving the number of different potential insurers that can contribute. It’s a fast-moving market in terms of the capacity available and the opportunities – for insurers and institutional investors – that exist to take part and better realise the value of intangible assets.
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Vesttoo connects the insurance industry and the capital markets by combining AI-powered technology with expertise in data science, insurance, and finance. We provide insurers with the capacity they need and investors with opportunities to diversify with uncorrelated, low volatility insurance-linked assets. Among the company’s partners are well-established global insurers, financial institutions, and large multinational brokers.
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