In yesterday’s Wall Street Journal, I read the following in an article by Jennifer Smith and Ashby Jones:
The embattled New York law firm Dewey & LeBoeuf LLP has filed for bankruptcy protection, a move that effectively ends what had been at its height a 1,300-lawyer global enterprise and marks one of the largest law-firm failures in U.S. history.
Should we be surprised? America produces more lawyers than the rest of the world combined. In fact our recurring bumper crop of barristers is leading some institutions to offer subsidies for law students to not complete their legal education. And sadly, it’s led other US law firms besides Dewey & LeBoeuf to liquidate their partnerships. In the current soft economy the over-supply of billable hours is depressing the price per billable hour. The free market is at work in the business of law.
So what’s a lawyer to do? Perhaps emigration could work for some of the surplus. After all, the rule of law is essential for the orderly creation, preservation and transfer of wealth and property in free markets. Places like Brazil, Russia, Indonesia and China really could use more law and order to protect their burgeoning capitalist class from the predations of criminals, swindlers and politicians (but bring a gun just in case). It would certainly pave the way to more amicable dealings with the USA via the common language of law. Much of the greatness of America today was built by past generations of immigrants. Perhaps American lawyers are the vanguard of the next emigration cycle. But I doubt that many American lawyers will find solace in this option.
That leaves two other choices- quit lawyering or find something that is under-lawyered. There are many that would applaud the former option but I am not one of them. Instead what this army of disenfranchised lawyers can do is help to turn the universe of intellectual property assets (IP) into new investments. This is the mission of Carthage Intellectual Capital Management. We can show lawyers through the principles of contracts and licensing how to turn IP- patents trademarks and copyrights- into cash for IP owners and royalty revenues for investors, bankers and financial institutions. There’s a real shortage of knowledgeable lawyers for IP based transactions. The money will be quite good and much safer than guns.
Everyone is talking about the need for consumer demand to pull the global economy out of the tank. On this there even appears to be political consensus. The only issues are taxes and government spending. Some want more taxes and more government spending to fund the demand that the unemployed consumers can’t afford. Others want to cut taxes and government spending to leave money in the hands of the remaining employed and encourage them to purchase more things that they don’t need. Is it me, or are the current strategies just a choice of economic suicide by poison or drowning?
As a capitalist I believe in supply and demand, free markets, and rule of law. So if demand isn’t working maybe it’s time to check out the supply source. Is there a demand for better means to supply our markets? You bet- it’s called innovation. And the asset that fuels innovation is intellectual property. So far, it is untouched by the credit markets. More importantly, it is already an existing group of assets.
Innovation is about doing something better. It can be a bucket, a light bulb, a car, solar collector or a shoe. Or it can be a better way to furnish an existing good or service. Innovation builds the demand for new means to supply the innovation. Intellectual property like patents is a first means to build the structure needed to furnish the new means of supply. The investment in structure is usually a multiple of the existing market. The key is to access secure asset based credit to build the new means. Let me again suggest- patents. They are an under recognized and non-capitalized resource representing trillions of dollars in assets. We can access this credit reservoir through the sale and lease mechanics of real property. It’s called the sale license-back of intellectual property. This is not phony demand or stupid consumerism. It’s time to stop being crazy and start being innovative. Really.
If you have been following our blog, you will have noticed that for the last several weeks we have been introducing a new transaction type–sale/license-back of intellectual property. We’ve concentrated on the property type more than the transaction, which is really quite familiar in another context.
Everyone is familiar with a sale/lease-back of real estate or equipment or software–a company sells property in return for cash and executes a lease (or for software, a license). The lease gives the company continued use of the property in return for periodic payments of rent.
As a property class, intellectual property is treated a little differently than a tangible asset when it comes to valuation and legal status. However, a sale/license-back of patents, trademarks, or copyrights is really just the sale/lease-back we all understand for a new class of property.
Carthage Intellectual Capital Management has introduced this new business process. We are looking for deals now. If your company has intellectual property and could benefit from new capital, we’re at firstname.lastname@example.org.
Jamie Dimon and Mark Zuckerberg have both made a lot of news recently. Dimon is taking heat for presiding over a series of bad hedges that cost JP Morgan US $5 Billion of its capital. Zuckerberg’s fame and infamy is the Facebook IPO which created US $100 Billion in new stock equity and then proceeded to lose US $16 Billion of it in a week’s worth of public trading. There is a difference however. Facebook (FB trading symbol) is still up around US $85 Billion in new and liquid financial equity. JP Morgan is still down around $US 5 billion in capital losses while some hedging counter parties are up $US 5 Billion for a zero sum change in global equity. This is the difference between derivative finance and origination finance. The former is a zero sum game; the latter is the creation of new capital from un-capitalized assets. The latter is what economies need to grow their way to recovery. So where are those un-capitalized assets yearning to be liquid?
Don’t expect it to be another Facebook any time soon. Because of the poor trading performance of FB social media stocks are taking a real hit and those waiting in the IPO queue will likely have to wait longer- perhaps much longer. But there are other assets that are ready to become liquid now and they are called intellectual properties or IP for short. The IP I am referring to are the millions of patents, trademarks and copyrights that have already been made by businesses, inventors and entrepreneurs with cash invested in the past. Many of these assets have added to the cash spent to create them by the fact that they are helping enterprises make new revenues or by saving the costs to make recurring sales. What we are doing at Carthage Intellectual Capital Management is helping IP owners to originate the cash value of their IP through valuation, monetization and management of IP. The core of our system is the sale license-back of IP. In our world, original thinking is the origin of new capital.
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.