Joff Wild

Slowly but surely IPXI is heading towards the day that it opens for business. Earlier this week I caught up with Ian McClure, who heads up IPXI’s transaction and business development team, at the LES meeting in Toronto, where the exchange was demonstrating how its trading screen will appear and operate. McClure told me that after a 60 day process over the summer, the IPXI selection committee had preliminarily approved nine portfolios that were ready to take to market, with three being selected to be the first; he was not able to give details about who owns them or what they cover.

Under IPXI rules, company founding members have to offer portfolios within a year of joining, while universities have three years. In May 2012, we revealed that IPXI had 13 full members and since then Palo Alto Research Centre (PARC), JP Morgan and Columbia University have signed up. Total membership, including associate members, now stands at 35. 

With the three portfolios selected, the pre-marketing operation – involving the compilation and packaging of detailed disclosures about them – is now underway. Talks have also begun with potential purchasers of the Unit Licence Rights (ULRs) into which the portfolios will be divided. One ULR will be the equivalent of a licence to use the relevant patent in one specific product, thus potential licensees will need to buy as many ULRs as they believe they will require to roll out an entire line without infringing. Those ULRs they do not end up using can be sold on in the secondary market.

There is also potential for institutional investors to purchase ULRs and then trade them, and McClure stated that over the coming weeks the IPXI team will be making presentations to trading desks at banks and to hedge funds in both Chicago and New York. He said that IPXI expects significant institutional interest as for the first time the ULR offers the opportunity to invest specifically in technology, rather than in companies which own technology, with all the baggage – such as poor management – that they can bring to the table. What IPXI has going for it, of course, is that interest in IP among investors has never been greater, so an attentive hearing, at the very least, ought to be guaranteed.

Following pre-marketing, the full marketing operation will begin. At that stage ULRs will be offered for sale, with the first tranches likely to be made available to the banks and funds, before further tranches are offered to a wider community of buyers, all of whom will have been registered in advance. There will be complete transparency on this front – no buyer will be able to hide behind a holding company. Once the first sales have taken place the exchange will open for business and ULR trading will begin. Sellers can set limits as to what percentage of a portfolio can be purchased by a certain type of entity (such as an NPE) in a primary offering, but they have no control over what happens in the secondary market.

In terms of size of offering, McClure explained that anything below $10 million would not make economic sense. The decisions about the number of ULRs a portfolio should be split into, and their pricing, are clearly absolutely crucial: getting them wrong would prove disastrous for the credibility of the exchange; a fact that McClure acknowledged. A lot of time and effort, he explained, has been put into developing sophisticated forecasting models to ensure that there would be no mistakes.

Given that founding corporate members have to offer portfolios for sale within 12 months and that the first of these (Philips and Com-Pac) signed up last December, we can expect trading to get underway by the end of this year. Then we will get a much better idea about just how significant a player IPXI is likely to become. If portfolios are snapped up and there is brisk buying and selling of ULRs on the exchange, then we could be looking at a game changer. But, of course, “if” is a very big word. At this stage, finding buyers is absolutely crucial and turning expressions of interest into dollars and cents will be a challenging task, as the tendency is always for people to sit on their money and wait for others to make the first move. With that in mind, the first portfolios put out there may be very competitively priced.

Whichever way you look at it, though, you have to admire the tenacity of the IPXI team and the vision of those at OceanTomo who conceived of this project in the first place. There are many people in the IP community that talk a good game, but time after time – whether it be auctions, indexes or trading platforms – it is OceanTomo that has walked the walk. As the IP market develops, we all owe them a debt of gratitude for having the courage of their convictions.

McDonnell Boehnen Hulbert & Berghoff has produced an overview of IPXI, which is well worth a read.

UPDATE - On 23rd October, IPXI announced that Hewlett Packard had become the latest company to sign up as a founding member. As a result, we can expect HP portfolios to be offered via the exchange within a year.