One of the smartest people to ever live surprisingly thought alchemy was a good idea. Had Isaac Newton spent more time on physics, maybe we’d be flying to the stars by now.
It’s easy to scoff at Newton’s obsession with alchemy (the idea that base metals, like lead, can be turned into “higher” metals, like gold), but when a person with an IQ at least two or three standard deviations above the average concentrates on something, it’s worth paying attention.
Sadly, Newton couldn’t crack alchemy, but there’s a lesson for the rest of us in his meanderings: it doesn’t need to glitter for it to be gold.
Businesses love to count their gold. So do investors. Everyone wants to know the revenue, the P&Ls, the EBITDA and the return on invested capital. If a company isn’t glittering, it is often easily dismissed as weighed down by lead.
But what if you could turn lead into gold? In fact, what if your company’s “lead” held far greater value than the gold ever could?
In the business world, David Pullman was a smart guy. Not nearly in the same league as Isaac Newton, but let’s be honest, no one is (except maybe John von Neumann). But like Newton, Pullman’s contribution to business was his own form of alchemy that created a new source of financial securitisation based on intangible assets.
Back in the good old days of 1997, Pullman worked closely with singer David Bowie and the Prudential Insurance Company to convert the artist’s future royalties on his 25 most popular albums into securities. The package ended up raising $US55 million and the idea was so successful that Pullman even put a trade mark on both “Bowie Bonds” and “Pullman Bonds” in case someone else tried to claim the idea.
Pullman’s strategy made a lot of sense in an era of physical records and when listening to music was constrained to radio or television. Today, internet piracy would probably make it tough to convince a financial institution of the surety of future music royalties.
Nevertheless, Pullman’s alchemical reframing of intangible assets as securities has turned into a successful way to raise billions of dollars in real cash for companies in many sectors and industries.
For example, two years after the birth of Bowie Bonds, the Formula 1 Grand Prix moved to securitise the future licensing revenues from the portfolio of its contracts which formed the basis of a $US1.4 billion capital raise (that’s billion with a “B”).
Then Royalty Pharma AG raised a whopping $US225 million in a AAA-rated deal by securitising expected licensing revenue from its portfolio of 13 different drugs.
Speaking of strong investment ratings, the famous fashion designer Bill Blass also securitised the future revenue streams from his trade mark. Those securities received a rating of Baa3 by Moody’s, a significantly higher rating than the credit rating for Blass’ entire fashion house.
What about closer to the present day?
During the Covid-19 pandemic, the fleets of every major carrier were grounded since the lockdowns meant no one was allowed to travel. United Airlines had to think quickly, so it came up with a Pullman-esque plan to securitise its impressive, decades-long collection of data on its MileagePlus loyalty programme.
The data was incredibly useful for UA’s operations, but as an intangible asset it was also a huge part of the carrier’s enterprise value. The resulting financing deal for the company raised $US6.8 billion in a mix of bonds and loans against the value of the programme (which was valued at about $US20 billion pre-Covid).
The securitisation of MileagePlus was the first of its kind in that it allowed UA to retain full ownership and stay in control of the loyalty programme while providing the airline with the liquidity it needed.
Clearly, someone at UA was thinking like an alchemist. Newton would be proud.
When data sits inside a company doing not much of anything, it looks a lot like lead. Even if the data is informing daily decision-making, just like any other asset it cannot reach its full potential until it is valued in a transaction (if it is ever valued at all, since many accountants completely miss intangible assets).
Since Pullman’s initial alchemy with Bowie Bonds, many lenders have warmed to securitising intangible assets. Data is just one of these assets. But consider the examples of brand and licensing outlined above. There’s really no limit to the variety of intangible assets that could be securitised with the right framing. Your company may be brimming with untapped wealth.
If one intangible asset is too weak to stand on its own, it is still possible to pool intangible assets and create investment packages that can be mortgaged, charged, hypothecated or assigned. The options for unlocking latent value – and still retaining control of your intangible assets – are theoretically endless.
Newton never discovered a formula for turning lead into gold. But if he was a businessman, he might have noticed that lead doesn’t need to become gold to be valuable.
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