Analysis Mixed views on German patent investment funds 27 May 08

RE: Mixed views on German patent investment funds

Germany, being a leading force in the patent industry, receives over 60.000 patent applications a year. IPB believes there is a highly unexploited and uncommercialised potential within those patents. They are not worth just laying around in a dark closet of the patent office.

Patent value funds are a great way to invest with a focus purely on patent potential. Even though this is a quite newfound way to invest, different types of funds already exist in the market. The first type is called “Trading Funds” which acquire patents, search for the right counterparty and are sold perhaps in a different industrial sector. These funds focus on many patents from which partially a few hundred patents can be chosen for the placement, which means the “Trading Funds” buy in the broad range of the market with a probability in mind that a certain percentage can be commercialised.

The second type is known as “Incubating Funds” and acquires patent protected technologies, invests in incubation and commercialises those. These funds pursue an “asset picking”-approach with an intention to concentrate on few, but high qualitative and promising patents and technologies and are therefore rather categorised in the field of private equity.

All funds, which are offered in cooperation by the “Deutsche Bank”, are incubating funds with an incubating period of 24 to 36 months. Having in mind that the first fund started January 1st 2007, it is obvious that the commercialisation phase could not be reached as of yet. Nevertheless, as Joff stated, the industrial feedback is very positive and the first licensing agreements are signed.

The inventor is in fact very much attracted by the described model, because the inventor has an option to commercialise the IP, the patent and the know-how. The industry partner is also very drawn to the incubating model since the industry partner has the option to license or buy a matured and incubated technology consisting of a professional patent portfolio and the know-how of the inventor. The investor finds the incubating model appealing, because one can invest in a preselected technology portfolio. In comparison to alternative VCs, investments are made in the core of the technology, in the patent and the inventor’s know-how. In most cases, when it comes to trading funds, commercialisation of just the patent without any assorted know-how will only be successful with an obvious stick licensing opportunity.

Having this opportunity, interested parties will only need a trading platform dealing with patents. If these characteristics exist, IP auctions can be one of the platforms. In the US market, numerous of professional investors, mostly known as non productive strategic patent investors, are using platforms like the “Ocean Tomo” auctions.

These investors are still rare in Europe. If strategic patent investors from the US are not present, buyers and sellers would need to be acquired if an auction in Europe were to be run, which is very cost intensive. An auction like that will be held next month by Ocean Tomo in Amsterdam.

Regarding Joff’s statement, the correct numbers for the first successful European Auction bring in 500 TEUR revenue during the auction and 1.200 TEUR in the after auction business.

IP Auction has an optimistic and positive view on the developing market.

RE: Mixed views on German patent investment funds

I would simply like to remind that for economic reasons I thoroughly embrace the existence of these funds. The initiators deserve our tribute for their pioneering work. I would be very happy to see them be successful. In case they are, I will congratulate personally. My major concern is that a hype and too much money may prevent them from being successful.

Malte Köllner

RE: Mixed views on German patent investment funds

Traditional Investment Funds and Patent Asset Strategies

As with most Investment funds the Patent Fund manager will be presented with an array of diverse investment strategies and to a large extent these serve to differentiate that funds performance relative to its peers and alternative asset classes.

The two mentioned above are perhaps the most obvious strategies but are typical of funds in the nascent stages of funds development and would serve to limit the manager and his access to assets at profitable spreads.

Limiting the fund to these would also substantially limit the market to pure “long” asset plays. Whilst the inefficiencies of the IP and patent landscape do not allow for pure short positions, there are a number of alternatives which should be considered even in today’s market.(especially given the current credit conditions).

The most obvious would seem to be the partial asset or shared “position”. Here the fund would buy into a portion of the assets risk and development potential or assume a “right” to its market extension possibilities. Hear the risk is lowered for both parties and the benefits shared commensurate with exposure.

But arguably the real benefit of this stratagem is that the asset is still tied to the innovator. With the inherent difficulties in absolute valuation and in order to avoid prohibitive ask/bid spreads, the valuation is tied to the purchase price and profit share. This allows for a reasonable return for both parties and a stable investment proposition. It also facilitates increased development funding and access to specialised markets for both markets.

Long term relationships will most likely develop between asset holder and fund manager with even greater long term benefit. The advantages to innovation, market growth and efficient patent systems would thus also justify government support for local funds and increase the systematic support for invention and the social good.

Arguably the key ingredient to the successful development of Patent funds is the collaboration between Patent asset specialists (such as IPB or Ocean Tomo) and experienced funds managers underscored by established financial market networks and access to innovation sources. Even more that I traditional asset funds a sound knowledge of legal technical and strategic implications of patent assets is essential for optimised fund performances.

RE: Mixed views on German patent investment funds

I am following the development of the patent funds in Germany and I've noticed that Alpha Patent Funds have opened two new funds(Alpha Patentfonds 2&3). These funds seems to be doing well in Europe but are there any examples of patent funds outside of Germany? Ocean Tomo Capital Fund invests in companies with valuable IP and not the IP per se?

RE: Mixed views on German patent investment funds

The Alpha Patent Funds are now basically run by US-based CRA (Charles River Associates), namely by David E. Yurkerwich. The German management team was mainly dismissed. As far as I am informed, only two Germans out of about three dozens remained on board.

Looks like the funds did not deliver as expected.

It remains to be seen whether CRA can turn the situation around.

RE: Mixed views on German patent investment funds

See the interesting follow up news on the German funds in this blog on August 22 and 26, 2010.