Timothy Bryant, a McDermott, Will &
Emery partner and new Deal contributor, weighs in on a growing trend of private
equity firms and hedge funds investing in healthcare royalty streams in the
latest issue of The Deal newsweekly, including why they're for sale and why
financial buyers are interested.
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These institutional investors are attracted by the large market of royalty
cash flows and the noncorrelated absolute returns of these investments. This
trend is international, as Big Pharma is equally a U.S. and European
market.
Simply put, royalty investing is just buying the right to a future revenue
stream. Companies, universities and investors sell them in order to monetize
they're royalty streams. Buyers, he explains, may pick up an undivided interest
in license revenue from a product that is already licensed, interests in future
revenue from some technology or product that has been identified, or some
combination of the two.
So what's driving it? Several broad trends, Bryant notes:
- more competitive pressure for investments that meet PE investing and return
expectations
- the adoption of traditional structured financing techniques to the basic PE
model
- more specialization among PE investors who can understand the market and the
IP
Companies are increasingly recognizing the inherent value of intellectual property assets, which have historically been under-represented on balance sheets. This undervaluing often occurs at firms that have technical expertise about a particular technology but lack the resources or the financial or business expertise to commercially exploit and realize that value.
These financing techniques include transferring the subject IP to a bankruptcy remote vehicle; taking collateral interests in the IP assets and related revenue; instituting cash management collateral regimes; structuring the investment as a purchase with prophylactic steps taken in case it is recharacterized as debt (the preferred fallback); and negotiating early termination triggers (typically put-call options) with returns to the private equity investors targeted to acceptable benchmarks. The goal of these techniques is to insulate the product or idea, and the related revenue streams, from the credit risks of the IP owner.
See full story on TheDeal.com. - Carolyn Murphy
