Making IP pay

The new head of strategic alliances and private equity at Intellectual Ventures, Vincent Pluvinage, knows a lot about making money from a company’s patent portfolio. Before joining Intellectual Ventures, he spent five years as the chief executive officer of intellectual property consultancy IPValue, which was launched in 2001 by private equity giants Goldman Sachs and General Atlantic Partners.
In his new role at Intellectual Ventures, the company founded by former Microsoft tech guru Nathan Myhrvold, Pluvinage says he will continue to do what he says he does best: evaluate companies’ unused intellectual property, determine which IP is valuable, and recommend ways for companies to effectively monetize their best assets.
Often the recommendation he makes involves a sale to Intellectual Ventures, or a partnership with the Bellevue, Washington-based firm.
The private equity market is a natural hunting ground for Pluvinage. This industry is home to vast portfolios of private companies, each of which in turn often possess vast portfolios of under-appreciated IP portfolios.
“We purchase patents from a large number of places, whether it’s inventors, whether it’s universities, large companies or small companies,” says Pluvinage. “But in addition to that, we have been very aware that there is a greater amount of investment by private equity in the high-tech sectors than in prior decades.”
The casual observer can see this trend in recent and well publicized acquisitions by private equity firms of technology-sector companies, including Philips Semiconductors by Silver Lake Partners, Kohlberg Kravis Roberts and AlpInvest Partners, and in the acquisition of Freescale Semiconductor by the private equity consortium led by The Blackstone Group.
“And as this flow of capital into high-tech sectors increases, the private equity firms are faced with companies that they want to maximize the value of,” says Pluvinage.
High-tech companies in particular tend to have much larger patent portfolios than is typically found in other areas of the economy.
These portfolios are often made up of a large number of patents that are underexploited, and with which the new private equity owners may not have much expertise, according to Pluvinage. As frequent deal doers, he also says that private equity firms should be interested in hearing about any method for turning the assets they own into cash.
Pluvinage wants GPs to know, as they contemplate high-tech acquisitions, that they don’t have to do it alone – particularly private equity firms that do not already have expertise in such areas. His company, Intellectual Ventures, he says, has the skill and the capital to quickly analyze IP portfolios. More importantly, he notes, his firm also has the ability to buy those patents, which can provide additional liquidity to private equity firms.
In most instances, private equity firms don’t buy companies merely to exploit the IP assets. “There are exceptional circumstances where the IP may be more valuable than the rest of the operation,” says Pluvinage. “But by and large, this is simply a way to boost the returns. Most companies have too many IP assets, and are not well positioned to exploit them properly.”
He continues: “Traditional licensing programs are lengthy, expensive and unpredictable. People are waking up to the fact that, instead of trying yourself to monetize the assets, if there is an entity like Intellectual Ventures that has the expertise and the capital…we are better placed to license things effectively, with less risk and less cost. Then it becomes attractive.”

Extracting value
For many private equity firms, performing due diligence on the IP portfolio can be daunting. “The problem with IP assets is that they’re not properly recorded on the financial statements,” says Pluvinage. “So if you analyze the P&L [profit and loss] on the balance sheet of a company, very seldom do you find any kind of accounting entry that shows the true value, the realizable cash value, of the IP assets.”
Pluvinage argues that IP can become a crucial part of a private equity transaction. “During the bidding process, [it helps] if the private equity firm is aware that there are a lot of assets in the form of IP assets that could be sold in order to create additional cash. In a sense, it unlocks some unseen value in the financial statement, and allows them to be more competitive. They need to know not just the value of the assets that they can spin out – what is more important to them is that they need to know the value that can be realized; that they can get the cash for the assets if they do decide to sell them.”
In some cases, Pluvinage says, instead of buying a company’s patent portfolio outright, Intellectual Ventures acts as an exclusive licensee with full rights to sub-license. “In that case, the ownership of the patents may not be transferred, but we have unfettered licensing capabilities.” The firm, he says, will also arrange a deal in which just a portion of a portfolio is bought or licensed.
Pluvinage points out that some portfolio companies derive a substantial amount of their EBITDA from patent licensing, of which can be used to service debt. “One of the things that private equity firms have to ask themselves is, ‘Can that cash flow be increased, and can that cash flow be protected?’” says Pluvinage.
Often private equity firms own strong IP assets, and they will have established some licensing program that brings some cash flow. But it may not be possible or easy for the private equity firm, or for the corporation that they’ve acquired, to extract more value because of already existing commercial entanglements.
“The assets, to be more fully exploited, should be in a more neutral setting,” says Pluvinage. “Insofar as [Intellectual Ventures] has the ability to license that very broadly, across many ecosystems of companies, it may be good for them to consider selling us the assets – for either upfront cash, or cash plus a revenue share of the licensing programs that we establish.”
Another important element in private equity deals, Pluvinage says, is speed. “During the bidding process, for example, they’re often under the gun to go from zero to an offer in weeks, or in a few months, so having the ability to have a large team that can move very quickly [to calculate] what is the reasonable value, and work together with the other service providers to a private equity firm, is quite important.”

IP options
Pluvinage says that Intellectual Ventures deals with two main segments of private equity, each with its own IP monetization strategies.
“The first segment is for those transactions that are less than $1 billion, in which you can imagine that the equity check is anywhere between $50 million and $250 million, and there is debt on top of that. In that case, if the portfolio is worth, $10 to $40 million, you can imagine that if you buy the company and you can receive very quickly thereafter, $10 to $40 million back, that has a material impact on the equity return for a private equity firm, because it’s a significant percentage of the equity check.”
The second segment consists of much larger transactions, worth many billions of dollars, in which the IP portfolios are very large. “In that segment we can, of course, write a significant check for the IP portfolio portion that is spun out,” says Pluvinage. “But in addition, many of those larger transactions represent a platform for future consolidation of an industry. And as those companies were purchased to generate a source of consolidation and future M&A transactions, we find that we can be a very good partner, because as new companies are acquired by the first company that the private equity firm purchased, the IP gets consolidated.
He continues: “And often when the IP gets consolidated, for all sorts of cross-licensing reasons, if you do not do something about spinning out a portion of the IP, some of the patents lose their value immediately. They lose their value because the patent portfolio of the acquiree falls suddenly under the cross-licensing agreement of the acquirer. If that’s the case, having the ability to spin out assets quickly, and get cash for it before the assets lose value may be attractive.”
The partners of Intellectual Ventures are working hard to see that intellectual property emerges as an asset class in its own right, with the firm itself as the dominant player therein.