Richard Lloyd

Last week it was announced that investment bank Houlihan Lokey had acquired Black Stone IP in another sign that financial giants are taking a closer look at the patent space. The deal will see Black Stone’s US-based staff of 12 join Houlihan, including CEO Elvir Causevic and managing director Edmund Fish who will co-head the group at their new home. A Bosnian-based operation is not part of the deal, but will retain connections with Houlihan.

The tie-up comes just months after Marquis IP, home of much of the former Rockstar team, joined forces with former Ocean Tomo dealmaker Michael Friedman to form a new IP merchant bank at global financial services giant Hilco Global. Like that deal, Houlihan’s acquisition has taken a niche but respected IP advisory business and plugged it into a leading global financial institution. As the patent market continues to mature and dealmaking conditions show signs of improving, both of these tie-ups may be a sign of things to come as the financial sector continues to eye-up the sector.

To hear a little more about the deal I caught up with Causevic and Fish at the end of last week. According to Causevic one of the attractions of the deal was that his team specialises in advising on areas in IP – M&A, valuations and restructuring – that mirror Houlihan’s strengths in a broad range of sectors. “Their pitch was that we can give you a global platform and opportunity to grow the business,” he explained.

Although Black Stone has already been doing deals in Europe and Asia as those markets become far more active in IP terms, the tie-up will allow them to capitalise even more on opportunities in rapidly maturing markets like China.

The fact that Houlihan has done this deal also represents a milestone, Causevic claimed. “They’re not just taking an interest but making a serious commitment to the healthy side of the IP market,” he said. That “healthy side” means corporate to corporate deals that are less about asserting through litigation and much more about companies looking to do deals in advance of or together with their own R&D activities.

Causevic also drew parallels with the commercial real estate sector, where many companies have engaged in sale and leaseback agreements with property investors so that they no longer own their office buildings. The same principles, Causevic argued, may now cause companies to consider doing something more proactive with their IP assets as they ask themselves: “Why are we sitting on 30,000 patents when we don’t need that many.” 

Most recently Black Stone was in the headlines for advising on the sale of the Excalibur IP portfolio – the stockpile of patents owned by Yahoo. That portfolio remains on the market, more than six months after it was put up for sale, in a sign of just how tough the going remains for big-ticket patent deals.

The Excalibur sale process has attracted attention not just because of Yahoo’s broader problems and the size of the portfolio (around 2,700 assets are up for grabs), but also due to the wide disparity in the expected price tag, with some putting it in the billions and others insisting it’s somewhere in the low hundreds of millions of dollars.

On our call and in a later follow-up email Fish enthused that the legacy Black Stone team would now be able to tap into Houlihan’s extensive network of advisers and funds to help put a possible deal together. “What’s new with Houlihan Lokey is their strong relationships in the financial sponsor markets (in global private equity and hedge funds), capital formation, experience in selling other illiquid assets and traditional M&A experience and relationships that we now have access to,” he explained.  Fish also claimed that resolving the future interests of Yahoo’s acquirer Verizon in the portfolio – the communications giant will receive a non-exclusive, royalty free licence to the assets - had given potential buyers greater clarity.

That may all be true, but it’s hard not to think that, given the wide coverage that this sale has received, if anyone were in the market for a big slug of tech patents and was happy with the price, then something would have happened by now. Instead, it could just be that the biggest impetus for a completed sale now may not be the network that Causevic and his team can tap into, but an improvement in market conditions in the US with lingering uncertainty over validity dissipating. There maybe signs that the environment is getting better, but it will surely be some time before buyers are happy to hand over more than a billion bucks for a portfolio.

Perhaps the biggest opportunity in the short to medium term for Houlihan’s new IP arm will come in another area. Last year Black Stone was retained to advise on the Avaya restructuring to determine which of the telecoms company’s patents were necessary for specific business lines and whether there was any value in the remaining portfolio. Adding Houlihan’s undoubted restructuring expertise should give the former Black Stone team further opportunities like this ongoing mandate (Avaya filed for chapter 11 earlier in the month).

This could be particularly significant if, as expected, interest rates in the US continue to rise and some businesses struggle to manage their debt loads and look at their patents as a potential revenue stream. The principal competition for that kind of work could prove to be the new team at Hilco led by Friedman and John Veschi.

The market has seen large financial institutions take an interest patents before, but largely around one-off deals like the Nortel and Kodak bankruptcies. Hilco’s and now Houlihan’s moves into the space, in contrast, are about a much longer-term commitment; even though they’re not doing exactly the same things: Houlihan’s is a pure advisory play while Hilco is also looking to raise capital to invest alongside its clients.