The last frontier for inefficient markets might very well be the intellectual property market. Intellectual Property is a huge asset market that is financially very inefficient. It is estimated that in 2012 the replacement value is over $7 Trillion for US patents alone. Owners of patents, trademarks and copyrights have a difficult time carving out this property for re-sale or to pledge because, for the most part, the business information about intellectual property is buried in the intangibles line of their balance sheets or is simply set at zero.
Believers in the efficient market hypothesis accept the fact that the only thing that moves the price of a security or a property is new information. The principal behind the efficient market hypothesis is that when there is new and actionable information that impacts a company, a government or an industry, the news is immediately transmitted all over the world. To beat market averages, securities analysts want investors to believe that somehow they can front run this new information. Otherwise, new information becomes a market commodity and investor returns are driven to average returns by the efficient market hypothesis. But information has to be understood by markets for them to act on it.
When there is inefficiency in financial markets there is an opportunity to make out size returns. Generally this is a result of asymmetrical knowledge about a market. If one obtains actionable knowledge before there marketplace perceives it, the investor can invest while demand is low (and so is pricing). This is the case with intellectual property today. Twenty years ago commercial real estate was another market where there was significant inefficiency of information dissemination.
Commercial real estate had investment inefficiency because the details of pending transactions are not public. A savvy developer can move zoning codes, have favorable credit lines established and be negotiating with potential anchor tenants all under the radar of the rest of the market. The potential seller of the property may not have the advantage of knowing this information. The seller therefore has a lower threshold price in his/her head and is willing to sell at that point. Twenty years ago large REIT’s (real estate investment trusts) formed to exploit these inefficiencies for their investors’ benefit. One result is that the commercial real estate market has become more efficient; more and more institutional money has moved into the commercial real estate market. But early investors in REIT’s have made tremendous returns by exploiting the historical information imbalance.
Intellectual property is unique in several ways; the Founding Fathers thought it was important enough to mention it in the US Constitution and give it special rights. The US Patent and Trademark Office provides a definitive clearing and titling function, and the resulting intellectual properties either create or defend existing cash flows. And while much of the USPTO information is public, there is profound inefficiency in understanding the asset value of IP. There are as yet few pundits which understand how to guide the investor community to these opportunities. Carthage Intellectual Capital Management is dedicated to making family offices and institutional Investors aware of the opportunities that exist in acquiring existing intellectual properties and entering into license back agreements with their present owners. Savvy enterprises will realize that, like real estate, it does not require them to own the intellectual property to benefit from its use.