Global intellectual property consultancy EverEdge is on a quest to convince the banks to overcome their aversion to lending on new-age intangible assets such as patents, trademarks and -increasingly- data and coding.
EverEdge chief executive and founder Paul Adams says the New Zealand based firm is working with an unnamed big four bank on a $20m tranche of funding to be secured against intangibles, rather than the staple security of hard property.
"We are in discussions with all the big four banks,'' Adams says.
"In short, they are all at various stages of recognizing the game is changing and that intangibles are likely to be the dominant form of security in the long run.''
Adams says that 40 years ago intangible assets accounted for 16 per cent of all assets of the top 500 global companies, whereas today it is 84 per cent.
Among prominent examples, Uber does not own any cars and Airbnb has no real estate, while Facebook creates none of its own content.
The Facebook-owned Instagram, which is valued for nothing more than its photos and its "amazing customer base'', last year was valued by Merrill Lynchanalysts at $US37bn ($50bn).
The trouble is so many IT-related intangibles are not valued correctly in the first place. Accounting standards, steeped in the industrial world of factories and depreciation and goodwill, are of little help.
"Balance sheets bear no relationship to how the company generates revenue,'' Adams says. "That presents huge risks and huge opportunities.
"Where there are misplaced assets there are opportunities to buy and sell below value. The implications ripple through the economy, from operating companies to investors to banks who take security over assets.''
With a history of wheeling and dealing in IP assets, Adams offers up plenty of evidence of deals that have radically undervalued a company's real intrinsic worth.
Sometimes it's the "Rembrandt in the Attic" syndrome, with the real worth of a patent "masterpiece" discovered in the nick of time.
While SME-oriented banks claim to offer cash flow-based lending, overwhelmingly they demand property security. When they do lend against cash flow, banks are unwittingly exposed to intangibles because the revenue is supported by an intangible such as a manufacturing process.
"They think they have one form of security but are exposed to a lot of risk.''
NAB executive general manager for business lending Howard Silby says "understanding intangibles is a growing area of importance, particularly with respect to technology firms and high-value added manufacturing''.
As the biggest trans-Tasman business lender, Silby says NAB has a sound grasp of the issues, especially in relation to mid-sized companies with $5m of annual turnover or more. But in practical terms, the knowledge was difficult to apply to smaller customers because of the labour-intensive effort involved in appraising non-standard assets.
Adams says: "Today's value of a steel mill is the ability to run it and manage it effectively. You would rather have the knowledge of how to run it (than the physical assets).
"The recipe is more valuable than the cake'.
Four years ago, activist investor Carl Icahn forced AOL to sell its patent portfolio. When the internet provider finally acquiesced, the portfolio was worth $US 1.1bn, rivalling the value of AOL itself.
Despite being under administration, telco Nortel in 2011 sold its patent portfolio for $US4.5bn.
Article originally published in The Australian, on November 7th 2016. Subscribe here for access to more interesting News and Articles.