Wall Street Take Aim at IP Markets
Private Equity is no stranger to Intellectual Property. From 2000 to 2012, PE firms invested over $10B in Patent Aggregating Entities (PAEs). These companies raise money to buy or license patents they believe are being infringed by operating companies. If potential infringers refuse to pay licensing royalties, PAEs pursue legal action.
Private equity may be revisiting its flirtation with patent trolls. The move last week by Brevet Capital to acquire PanOptis – owner of over 400 patent families - comes as many fund managers have expressed renewed interest in IP as an asset class.
There is a vibrant debate around the value of PAEs. Proponents frame them as a vital way to appropriate the returns on innovation to inventors and provide a check on large companies that otherwise would infringe on IP. Critics claim PAEs create a tax on invention that disincentivizes innovation.
Instead of wading into the debate, we look at why PE invests in PAEs, and what it means for the broader economy.
PE’s model is predicated on the deployment of capital. However, deal values for PE investments have reached historic heights, as competition builds across most traditional asset classes. The result is a significant amount of dry power (unallocated investment capital) looking for deals in a seller’s market.
At the same time, growing macroeconomic uncertainty driven by sustained trade tensions and faltering international growth outlooks is motivating investors to look for alternative assets.
This is where IP begins to look interesting. Because IP litigation often focuses on damages from previous sales, returns on IP investments are not directly tied to future economic growth. In other words, IP is a counter-cyclical asset. Additionally, it is a buyer’s market, with transaction values bottoming out in 2018. Finally, the Trump Administration has made notable changes to USPTO policy that improve the positions of patent holders vis-à-vis potential infringers.
What does this mean for investors and companies?
Despite the intuitive appeal of PAEs, investors should take a long look at historic performance before diving headfirst again into the world of IP litigation. Since 2000, PAEs have recorded nearly $3.1B in losses. This includes Intellectual Ventures, which averages a -20% IRR across its two funds.
PAEs have largely underperformed public markets.
Interdigital, the top performing PAE stock, grew 16% year over year since 2016, whereas the NASDAQ recorded 25% growth over that same period. wiLAN, Parkervision, and Rambus, fell nearly 20% over the past 3 years. Even Intellectual Ventures recorded significant losses (-20% IRR over 10 years).
While PAE investments have led to short-term gains, they have, to date, failed to deliver long-term shareholder value in public or private markets.
For companies, increased cashflow into PAEs should hammer home the importance of IP strategy. A thorough understanding of the IP landscape will become even more important for companies seeking to defend their freedom to operate in core markets. Additionally, IP landscape should be an important factor in making decisions about where to make new technology investments.
Whether you consider PAEs a driver or a threat to innovation, one thing is clear. PAEs exist because of a lack of visibility and connectivity between IP generators and operating companies. While in influx of money may bring more attention to inefficiencies in IP markets, there remains a critical need for platforms that add visibility to the market and break down barriers to meaningful technology transfer and commercialization. At Tradespace, we are committed to building this platform and providing IP generators and operating companies the tools they need to make IP decisions that get new technologies into the market.