Royalty fund

Closed-end fund Open-end fund Royalty payment

A royalty fund (also known as royalty funding) is a category of private equity fund that specializes in purchasing consistent revenue streams deriving from the payment of royalties. One growing subset of this category is the healthcare royalty fund, in which a private equity fund manager purchases a royalty stream paid by a pharmaceutical company to a patent holder. The patent holder can be another company, an individual inventor, or some sort of institution, such as a research university.[1]

Royalties are a usage-based payment from one individual or entity to another individual or entity, giving the right to the use of an asset, product, service or idea.[2]

Structure of Royalty Investments

Royalty funds are a specific type of income trust, used for special-purpose finance, created to hold investments or cash flow in operating companies. These funds aren’t stocks or bonds but a form of investment fund. A royalty fund raises capital in order to purchase the right to a royalty of a product or service. However, unlike many other corporate entities, the profits derived from the royalties aren’t taxed on a corporate level. These profits are distributed to shareholders in the form of a dividend, which is taxed on the personal income level. By doing so it avoids double taxation, enabling higher returns on dividends. Thus making royalty funds an attractive investment.[3]

Royalty funds are structured in a number of ways. A fund can purchase a royalty or a percentage of a royalty from researchers at a university or a corporate entity for examples a Biotech firm, therefore exchanging capital for ownership of the royalty. Alternatively, the fund can act as a private equity vehicle, extending debt or making loans, in exchange for a proportion of the royalty or securing other assets from the institution as collateral. Usually, investments make go to fund a research project or cover costs of a research project.[3] Royalty funds invest in a range of business areas, including, commodities, energy, entertainment, franchise, patents and IP, pharmaceuticals, and other trademark royalties.

An example would be a company making an investment into a pharmaceutical company through the acquisition of a healthcare product or service royalty. The operation of the pharmaceutical company continues, as usual, manufacturing and distribution of the products or services. But once the product has been sold a proportion of the profits will go to the fund that purchased the royalty (the amount or percentage will vary between companies based on the acquisition/investment terms).[4][5]

Another example would be the purchase of royalties in the oil and gas industry, where the rights oil wells, oil mines or oil fields are owned by a royalty fund or also known as royalty trust. Other companies perform the operational aspect of extracting the minerals, paying a “royalty” in order to extract them.[6]

Funds vs. Investment Trust

Investing in composite funds gives an investor the opportunity to gain exposure into foreign markets that they wouldn't be able to do on their own. By investing in a fund and not one particular stock, an investor is able to reduce their level of risk, by spreading their investment over an average number of 50 assets. This increases an investors diversity and reduces the level of risk. This is possible due to the pooling of capital from multiple investors. Fund managers represent the investors and meet with executives and conduct deals.[6]

There are two main decisions an investor can make;

Open-end Funds

By making an investment into an open-end fund, you are essentially buying ownership stake into a range of investments managed by the fund manager. The fund manager combines all the investors capital and aims is to increase its value. The share prices will be dependent on the value of the assets held by the fund, divided by the number of outstanding shares. Shares outstanding are all the shares authorized, issued and purchased by investors.

However, this sort of fund can cause liquidity issues, if a lot of shareholders decide to withdraw their funds, resulting in a negative effect on the performance of the fund. This also makes open-end funds less suitable for certain assets. For example, in 2007-2008 during the financial crisis, investors lost a lot of capital, because the fund managers weren't able to sell off assets quick enough. The investors capital was stuck in the funds for months.[6]

Closed-end Funds

Like an open-end fund, closed-end funds pool capital from a variety of investors and has a fund manager make investments on their part. Closed-end funds also have a board of directors to provide another level of oversight of the investments made.

Fees and charges tend to be lower than open-end funds, which means that;

However, since assets are being bought and sold between investors in the fund prices can be undervalued or overvalued. Meaning that investors could be at an advantage or disadvantage when buying or selling shares. A final overall drawback is that investment funds aren't offered by many platforms, meaning investors would have a hard time finding them.[6]

Benefits & Disadvantages

Benefits

This includes:

Disadvantages

This includes:

Examples in Intangible Asset Finance

Intangible asset finance deals with the financing of intangible assets such as patents, trademarks, intellectual property, reputations, etc. In 2003, the intangible assets economy of the U.S. was estimated at $5 trillion.

History and Significant transactions

References

  1. ^ Joseph Haas (2013). "DRI Capital To Pursue Phase III Assets With Some Of Its Third Royalty Fund". The Pink Sheet Daily.
  2. ^ "Definition Royalty". Investopedia. Investopedia. 2014. Retrieved 30 October 2014.
  3. ^ a b "Royalty Income Trust". Investopedia. Investopedia. 2014. Retrieved 30 October 2014.
  4. ^ Milburn, Robert (2014). "Funds that buy medical patents". barrons.com. Retrieved 30 October 2014.
  5. ^ "Canada DRI Capital". PE HUB. 2013. Retrieved 30 October 2014.
  6. ^ a b c d e f "Funds vs. Investment Trust". Morningstar. 2014. Retrieved 30 October 2014.
  7. ^ "Building and Income Portfolio using Close-end funds". Seeking Alpha. 2014. Retrieved 30 October 2014.
  8. ^ a b "Royalty and Income Fund". Cushing Close-end Funds. 2014. Retrieved 30 October 2014.
  9. ^ "Royalty Pharma". Royalty Pharma. 2014. Retrieved 30 October 2014.
  10. ^ "PDL BioPharma". PDL. 2014. Retrieved 30 October 2014.
  11. ^ "Who's Who in Bowie Bonds". Projects.Exeter.ac.uk. 2007. Retrieved 30 October 2014.
  12. ^ "Alder BioPharma Hits IPO". xconomy. 2000. Retrieved 30 October 2014.
  13. ^ "Ocean Tomo" (PDF). Ocean Tomo. 2005. Retrieved 30 October 2014.
  14. ^ Andrew Pollack for the New York Times. Nov 19, 2014 Deal by Cystic Fibrosis Foundation Raises Cash and Some Concern
  15. ^ Lauren Arcuri Ware for the Robb Report. April 1, 2014 Venture Philanthropy: A New Driver for Research