NEW YORK - There was a familiar refrain heard throughout the first day of the World Research Group's third annual conference dedicated to advancing IP structured finance held here last week - where are the deals?
"Securitization is the sexiest, but the [least likely] avenue to monetize your IP portfolio," said Elliot Fishman, president of venture capital advisor Astrina Capital, during a panel discussion.
Most IP revenue streams don't lend themselves to a securitization, Fishman said, and issuers are more likely to choose a simpler structure along the lines of a sale-leaseback transaction. Additionally, several panelists reported a recent surge in interest among second lien lenders in IP collateral, creating more competition for these cashflows.
Indeed, despite its relative sex appeal, deal flow in the securitization arena has been slow moving. The $229 million pharmaceutical royalty backed transaction from private equity firm Paul Capital Partners provided most of the excitement in the sector in 2004, and market sources are skeptical about what lies ahead in 2005. While there is currently a $250 million franchise fee transaction from Quiznos Corp. making the rounds via Lehman Brothers, the pipeline going forward is murky.
Panelists blamed the usual bugbears for the lack of completed deals, including the comparative cost of a securitization, valuation issues, unreceptive investors and uneducated issuers. "There is a very high level of due diligence on both the borrower and the IP, and there tends to be a lot of structure relative to the size," added Marc Lucier, a director at ICMB Ocean Tomo.
Moreover, some bankers are turned off by the prolonged lead times. A $100 million IP transaction would not offer sufficient profit or league table impact to warrant a year spent wooing the relevant parties, said one banker in attendance. "I could do a $1 billion auto deal and be done in a month; and that would not be the only deal I was working on," the banker said.
Nonetheless, the true believers are undeterred. "The U.S. is becoming an economy of ideas, outsourcing a lot of its manufacturing and hard capital," said Harris Nesbitt managing director Pete Walsh. "If you believe that IP is going to continue to be the driving force behind more developed countries, I don't know how you could believe that this sector is not going to grow."
Technology bellwethers such as Microsoft Corp. are starting to pay out huge dividends, Walsh noted, signaling a ripe opportunity, as these companies will be looking for ways to maximize their capital structures.
Walsh is looking to hedge funds, private equity firms and corporate entities rated double A or higher to drive activity in the sector. "I am hoping to see more first loss players coming in to replicate what Paul Capital did," Walsh said.
Meanwhile, bankruptcies and workouts offer companies a neat and novel way to leverage IP in the near term. "The advantage in a bankruptcy is that when the courts are involved, it is easier to separate the IP and get clean titles by court order," said ICMB's Lucier.
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