Did you know that there are currently at least five active patent funds in Germany managing a total of around €300 million ($470 million)? One of these is run by Credit Suisse (Patent Invest 1), another by a bank based in Luxembourg whose name I have not been able to find out (Alpha Patent Fund) and three by Deutsche Bank (Patent Select 1, Patent Select 2 and Patent Portfolio 1). The aim of these funds is to buy patents and to leverage them so that they generate returns for investors. Presumably, this is supposed to be done through, among other things, assertion, technology transfer and resale. I say presumably because although they have been around for a couple of years or so, they do not seem to have done many deals.
In fact, in the next issue of IAM, our man on the ground in Germany Malte Köllner writes in his regular IP VC column that many in the country are coming to the conclusion that these funds are little more than a triumph of hype over reality, and that they stand very little chance of ever being successful. Malte points out that it is hard enough to find patents that can be monetised, let alone patents that can be monetised to the extent that they bring returns substantial enough to satisfy investors – especially when you bear in mind that many patents such funds buy will not turn out to be winners. “Grandparents are literally putting money into these funds to finance the future of their grandchildren. A very experienced and renowned colleague said to me that he has been in the IP business for 20 years and that putting money into these funds for his grandchildren is the last thing he would do. I have serious doubts that the bankers who helped to set them up and sell them really knew what they were doing,” Malte writes.
However, things may not be as bleak as Malte fears. Last week when I was in Berlin for the INTA meeting I met up with Guido von Scheffer, who is a director of IP Bewertungs AG (IPB), the firm that runs the Deutsche Bank funds. Their business model is based on the acquisition of patent rights which it believes underpin technologies that industry is looking for – primarily in areas such as biotechnology, renewables, electronics and medical devices.
Once a patent portfolio is acquired it then goes into development. Essentially, this means that before and during any commercialisation process there is an incubation process through which the technology is further developed. This is done in conjunction with the previous patent owner, who gets a cut of any final deals that are done, and with industry players, who pay to get exclusive access and, therefore, a say in how development takes place. It is during this period, Guido explained, that the tailoring process takes place – so giving the patents more chance of being attractive to industry players. He told me that, by contrast, the other funds do not do this and instead look to license or sell on what they have acquired without the development stage. Furthermore, Guido said, IPB bears the costs of all due diligences that do not end in the purchase of a patent, while the other funds make charges regardless of whether they end in an acquisition or not. Obviously, if this is not correct I will be happy to make a correction.
While Guido concedes that there are worries over the patent funds’ performance, he remains optimistic that the IPB-run ones at least have a chance of delivering. They have just closed their first licensing deal and apparently at least 80% of the projects they are working on have attracted industry interest. “There is no indication that the business model will not be successful,” he told me. Investors also seem to retain their optimism: when the Patent Portfolio 1 fund was launched it reached its minimum placement target within eight days; it is now closed and is worth a total of €130 million. However, the people entrusting their money to the likes of IPB are going to want to see serious returns at some stage in the not too distant future. Soon it will be time for German patent funds to start delivering.
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.Guido von Scheffer, IP Bewertungs AG (IPB) on 28 May 2008
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 KöllnerMalte Köllner, Dennemeyer & Associates SA on 28 May 2008
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.Paul G Fairhurst, Fairhurst Menuhin and Co on 08 Jan 2009 @ 13:25
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?Edward Dahllöf, KTH on 11 Feb 2009 @ 15:36
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.Malte Köllner, Dennemeyer & Associates SA on 26 Aug 2010 @ 12:19
See the interesting follow up news on the German funds in this blog on August 22 and 26, 2010.Malte Köllner, Dennemeyer & Associates SA on 26 Aug 2010 @ 12:21