DEPUTY Prime Minister Teo Chee Hean (above in photo) recently announced that a new intellectual property (IP) financing scheme would allow local companies to use their IP as collateral when applying for bank loans.
The scheme, to be launched next year, is a step in the right direction for the Singapore financial system and economy.
Despite Singapore's sophistication as a leading financial centre in the region, both local and foreign banks here have traditionally been reluctant to lend money based solely on the security of intangible assets such as patented technology or copyrighted animated feature films.
The reason? Unlike land or equipment that can be easily sold off, IP often lacks ready buyers. In financial market parlance, the market for IP is less liquid.
Imagine a start-up that creates a unique software-based technology for movie subtitling that is of great interest to movie distributors. If the company raises $1 million in the form of bank borrowings and is unable to repay the loan, can the bank sell off the asset in the event of a foreclosure?
Another challenge is valuation.
Banks and financial institutions typically finance up to 60 to 70 per cent of the value of the security or collateral. This is the buffer they need to protect their financial interests. While it may be easy to value land based on market data and trends, how do you value subtitling software for the movie industry?
Sure, the financial industry has evolved a range of methodologies to value intangible assets such as the cost, market or income approach that takes into account the value contribution of intangibles such as IP and brand value.
But the use of such valuation methodologies really depends on the types of IP, the complexity of the technology and the marketplace that is being evaluated as part of the entire system.
Under the new financing scheme, the Government will partially underwrite the value of companies' IP to be used as collateral for bank loans.
Back in 2010, Prime Minister Lee Hsien Loong announced that the Singapore Government will spend $16.1 billion over 2011-2015 on research, innovation and enterprise.
This new IP-based financing will complement and further enhance the Government's strategic investment into R&D and IP creation.
If we can learn from the lessons of Silicon Valley and Wall Street, intangible assets such as patents, copyrights, trademarks and trade secrets, along with brand value and corporate reputation, have played and will continue to play a key part in driving financial value. IP can provide enterprises with a unique competitive edge.
Over the past few decades, IP has emerged as a valuable asset class in financial markets, along with real estate, equities, fixed income, cash equivalents or money market instruments and commodities.
According to studies by Ocean Tomo, a US intellectual capital investment banking firm, the market value of the components of the S&P 500 in 2010 comprised 80 per cent intangible assets and 20 per cent tangible assets. The corresponding figure in 1975 was 17 per cent intangible assets and 83 per cent tangible assets.
With the emergence of IP as the new asset class, capital markets and the financial systems have responded to this shift in an attempt to capture the new value of IP and other intangible assets.
The challenge is to create innovative funding mechanisms that can ensure the flow of capital to spur business growth and investment in enterprises that are truly driving value in today's economy.
Companies, in turn, will be able to access capital in new ways to finance innovation and expand their businesses.
As Singapore strives to be the centre for innovation in Asia and the Government steps up its plan to accelerate the move up the innovation value chain, this move to promote IP-based financing could have major strategic impact, not just on the Singapore financial system but also on the economy in general.
In its early years, the Singapore economy depended upon entrepot trade. In the seventies and early eighties, we ramped up manufacturing to become the preferred centre for multinational companies. In the 21st century, we are seeking to position our economy as a productivity-led and innovation-driven one.
In this next phase, IP will clearly be one of our key strategic national assets. As a nation used to not having any natural resources, this new intangible asset will be the source of a new competitive advantage.
But if IP is going to be the new value driver in our economy, the banking and financial infrastructure must also be aligned both strategically as well as operationally.
The new IP financing scheme will strengthen not just Singapore's innovation ecosystem, but also its banking and financial system. After all, the two sides of the equation are inextricably linked. Strengthen both, and the whole economy will benefit.
Only time will tell how effective the new financing scheme will be.
If the lessons of Silicon Valley and Wall Street are anything to go by, we should get it right so long as the screening process is tight and we are financing quality IPs with high commercial value.
There is tremendous potential for Singapore to take the lead in this new emerging area of intangible asset financing, particularly in developing related financial tools and products.
According to Mr Francis Gurry, director-general of the World Intellectual Property Organisation, the geography of innovation has shifted to Asia, with China, Japan and South Korea now contributing to more than 25 per cent of all international patent applications. This compares with only 7 per cent in the 1990s.
We have the potential to service the whole of Asia, if we want to. If Singapore is to become the innovation capital of Asia, then the suite of financial and banking products and services must cater to the Asian market.
The writer is an IP investment counsel and director of Intellectual Futures, which specialises in intellectual capital management.
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