IP's role as a funding source

UK

Maura O'Malley

IP and pensions seem unlikely bedfellows, but businesses are harnessing their synergistic power to provide a number of funding solutions for businesses, Maura O'Malley reports

Using IP to plug the gaping holes in defined pension schemes has garnered much interest. In May 2011, Tui Travel PLC announced that it was using its brands Thomson and First Choice as collateral to help finance their defined benefit pension scheme deficit. Furthermore, engineering company GKN has used trademarks and property in an asset-backed contribution structure.

There are other examples emerging of IP and pension funds being used in creative and elegant ways to solve other funding requirements. Enter pension-led business funding, which offers an alternative to traditional business funding options, such as bank loans or overdrafts.

Clifton Asset Management provides such a scheme and uses IP as an asset class.

Clifton's chairman Adam Tavener says it tends to work with owner-managed businesses, "In some cases, the banks don't want to lend to SMEs anymore, or alternatively they do not have any appetite for that particular sector." Clifton uses independent IP valuation specialists to value the business's IP, the business owner's pension pot is then used to buy the value of that IP, and the value of the IP is released back into the business.

Using IP in such a way was enabled by the introduction of the Finance Act 2004, which introduced a new list of assets that pensions could invest in, of which one was intangible assets.

There is one proviso - business owners must have sufficient pension funds accrued to invest in their own companies. Tavener says, "If they don't have current or accumulated pensions from current or previous occupations, we are a total waste of time."

He says the cut off value for the pension pot is about £50,000 after that "we become very expensive". "A lot of people leave this little comet trail of pension pots behind them, when you add it all together it is a substantial amount of money", he says.

The next thing to consider is whether the business is any good and how to go about identifying the business's IP and then valuing it.

Tavener takes the example of a recruitment company, that say needs to raise £100,000 and has a pension pot of £170,000. How do we get £100,000 worth of IP out of the company that quite obviously does not have any articulated or recognised IP?

The most common types of IP Clifton examines and values are trademarks, brands and company logos, on top of domain names and website content. It regularly registers trademarks with the UK's Intellectual Property Office. "We now have created something that exists in law and has a value."

The next stage is attaching a number to that IP. Clifton works with leading IP valuation expert Valuation Consulting's Kelvin King who was closely involved in the Tui deal and IP consultants, Coller IP.

Generally, they begin with a "relief from royalty" valuation methodology. The valuers analyse the historical data relating to the company, the business plan, stating what return the investment will produce, the brands and trademarks. Ultimately seeing whether they can reach the target value from the business's IP.

As Tavener points out "the valuers are not going to compromise their professional integrity and standing with HMRC by overvaluing assets." However, "they intrinsically understand the value of IP therefore that is a very different conversation to a banking conversation."

So, if the official valuation comes to £100,000, it has now created an intangible asset with a value that did not exist before. Tavener notes that "we have created something that is outside all the normal banking covenants."

It then does a "sale and lease back", which means that ownership of say, the trademark, is transferred to the pension fund for £100,000. The company bank accounts gets £100,000 from the pension pot of £170,000 and legal ownership of the IP is simultaneously transferred to the pension scheme.

The company gets £100,000 in cash, the pension fund owns the trademark, domain name, whatever it may be.

Tavener says there are really good reasons for doing this. "A pension is a credit protected environment, if anything happens to your business and your IP is in your pension, no one can touch it." The second point is that the pension operates in a tax-free environment.

The business pays the pension fund a licence fee or a lease payment to use the IP, so the pension scheme will be making a profit from the investment for effectively lending it to the business to use.

If you invest your pension money in anything, HMRC expects it to be a commercial arrangement, says Tavener, that is the money must be invested for the purposes of making a realistic profit. This is generated through the licence fee or lease payment. "So 100% of that licence fee or payment is treated as corporation tax deductable in the hands of the company and is tax free in your pension. You are paying yourself all that return, instead of paying the bank."

The biggest difference with deals like Tui is that Clifton is using the pension funds of the business owners, Tui is dealing with final salary pension schemes, which belong to all its members.

Tavener says about 40% of the businesses that come to them have the appropriately sized pension arrangements to make this a possibility. The average size of the funding deals is about £125,000 and the average pension pot is about £250,000.

Of course, every deal comes with risk. The business might fail ultimately, you are risking some of your pension fund in backing your own business, says Tavener. Clifton will not allow business owners to invest the whole of their pension pot in this type of fund. Sometimes there might be a mismatch - we have £250,000 in the pension scheme, but we can only get £40,000 valuation on the IP.

Furthermore, if the IP needs to be sold, an external buyer might not be prepared to pay a similar amount to that paid by the pension scheme in the original transaction. And there could be increased complexity if the business is sold or a pension scheme member retires.

But Tavener says, "The world of pension-led funding is a much more benign environment than say bank lending."

Maura O'Malley is the editor of Intellectual Property Magazine.