Stocks, Drugs, Rock 'n' Roll
By JULIE STEINBERG
Looking for a new investing idea? Consider investing in ideas.
Some investors are tapping the emerging field of intellectual property, which encompasses patents, trademarks, copyrights and trade secrets, in hopes of finding better returns—and diversification—than ordinary fixed-income investments offer.
There are many ways to invest in intellectual property, from buying shares of publicly traded companies to putting money into private-equity-like funds and even bankrolling lawsuits over patent infringement. Intellectual-property funds generate annualized returns between 10% and 20%, according to industry estimates.
But be warned: This is tricky terrain best navigated with the help of a professional.
Many funds that invest in intellectual property can lock up money for as long as 10 years, and charge steep fees—typically 2% of assets plus 20% of any profits.
The funds also typically require investors to have at least $5 million in investible assets. And if investors put money in a fund whose sole purpose is to litigate, their returns will depend on whether lawsuits are resolved in the fund's favor.
Tim Speiss, partner-in-charge of EisnerAmper's personal-wealth advisers practice, says these negatives mean investors need to be careful. He recommends investors consult a professional who understands how the different types of intellectual property are valued.
The U.S. intellectual-property market was valued at $9.2 trillion in 2011, up from $5.5 trillion in 2005, according to the most recent research from Kevin Hassett, an economist at the American Enterprise Institute, and Robert Shapiro, chairman of economic-advisory firm Sonecon in Washington. The figures, which include the value of patents, copyrights and licensing fees, have continued to grow since then, the researchers say.
Publicly traded companies such as Acacia Research, InterDigital IDCC -2.03% and VirnetX Holding VHC -15.26% own baskets of patents, earning money from licensing and from settlements and damages related to patent-infringement suits. But the stocks can be highly volatile. Acacia, for example, has had an average annual return of 38% over the past three years, but is down 31% over the past 12 months.
G2 Investment Group, a New York investment firm that manages capital for families and institutions, has advised family offices on investing in music royalty funds and is actively looking at health-care royalty funds, says David Conrod, a G2 managing partner.
The strategies are attractive because they provide regular distributions of income from predictable revenue streams, Mr. Conrod says. He adds that he is seeing demand because investors are hungry for yield in today's low-interest rate environment, which he predicts will continue for at least another 18 months.
If you are comfortable locking up your money, you can invest in patent funds or royalty funds, of which there are at least several dozen, says Raymond Millien, an intellectual-property lawyer at PCT Law Group in Washington.
Here is how the funds work.
Patent funds. Patent-licensing funds acquire patents and license them to users. Techquity Capital Management, an intellectual-property investment firm in Austin, Texas, focuses on the communications, media and computer industries. The firm's fund distributes profits to its investors as soon as it receives licensing fees. The firm declined to disclose its returns.
Intellectual Ventures, based in Bellevue, Wash., also has a fund dedicated to acquiring and licensing patents. The firm declined to disclose its returns.
Such funds can be risky. Some resort to litigation to get companies to pay licensing fees, since few companies voluntarily pay them, says Michael Friedman, a managing director at Ocean Tomo, an intellectual-property investment bank in Chicago.
Another option: patent-rights enforcement funds, which focus on winning lawsuits against patent infringers.
Rembrandt IP Management, a firm based in Bala Cynwyd, Pa., acquires patents it believes to be infringed. Rembrandt then sues alleged violators of the patent. Investors in the firm receive a distribution from a settlement or a lawsuit. The firm declined to disclose its returns.
The strategy can be risky because investors get paid only if the lawsuit goes their way. It can take up to four years for the case to get to trial, says Paul Schneck, the firm's chairman.
Royalty funds. These funds acquire the rights to future royalties paid to a copyright or patent owner or inventor. The funds collect a percentage of the sales of, say, a cancer-fighting drug, medical device or each performance of a musical work.
Round Hill Music Royalty Partners, a music-royalty firm in New York, has copyrights or partial copyrights to about 5,000 songs, including the Beatles' "I Saw Her Standing There" and Bruno Mars's "Billionaire." Diversification is integral to the fund's investing strategy, says Josh Gruss, the firm's CEO, because it allows for evolving listener taste. The firm declined to disclose its returns.
Music-publishing revenues, or money generated from performance, distribution and "synchronization," or whenever music is used in films and television shows, among others, are projected to reach $6.1 billion in 2016, up from $5.6 billion in 2012, according to Enders Analysis, a London research firm.
Investors also can invest in a fund that acquires royalty streams for patented drugs, molecules or compounds.
Drug prices and prescription patterns tend to be stable from year to year, says Todd Davis, managing director of HealthCare Royalty Partners, a royalty fund in Stamford, Conn., that has accepted investor money from Credit Suisse's CSGN.VX +0.11% private banking unit.
Risks include competitor drugs, the possibility of the patent being overturned and safety issues.
Other firms include New York-based OrbiMed Advisors, whose royalty fund has been available to clients at Bank of America BAC +3.80% Merrill Lynch, and Royalty Pharma, a New York firm that has worked with family offices.
Announced royalty deals for 2012 totaled $2.5 billion, up from $180 million in 2000, according to HealthCare Royalty Partners.
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