Overview
Traditional lenders prefer hard assets and hard cash. However, as society has progressed, the less tangible assets have in many cases become more valuable than the tangible ones. For example, Apple makes few of its products itself (i.e., it has minimal manufacturing facilities), rarely owns its retail locations, and maintains minimal inventory and receivables. Nonetheless, it has become one of the most valuable global firms. Similar arguments could be made about Alphabet(the parent of Google), and Meta (the parent of Facebook). In the aforementioned cases, the intangible assets (i.e., brand name, copyrights, and market position) are far more valuable than their hard assets. This installment addresses some of the considerations related to financing intangibles and other esoteric assets.
I. Unique Features - While viewing supermarket tabloids over the past couple of decades, it was not unusual to see headlines to the effect that “Elvis Still Alive” despite the fact that Elvis passed away several decades ago (i.e., in 1977).
Nonetheless, from the perspective of a funding source, Elvis and his work are very much alive. According to Forbes Magazine, in 2023, Elvis Presley earned $100M, placing him near the top of the leaderboards among deceased artists.¹
Hence, from a lending perspective, intangibles can be considered a sound undertaking, depending on the asset, manager, and structure.
II. Eligible Improvements - Defining the scope of intangible and esoteric assets is difficult as new technologies and changing conditions create a variety of classes that previously did not exist. For example, 20 years ago, internet-delivered podcasts effectively did not exist. However, there are now a variety of regular productions that create substantial revenue from advertisements and related revenue sources. Likewise, although Robert Ludlum passed away in 2001, new books continue to be published under his name via ghostwriters (no pun intended).
To be considered an eligible investment, lenders need a reasonable expectation of being repaid either from cash generated by the asset, the value of the asset, or both. A non-exhaustive list of investments include:
- Air rights
- Art
- Brands
- Carbon credits
- Collectibles
- Copyrights
- Genetic resource licenses
- Intellectual property
- IP addresses
- Liquor or commercial licenses
- Mineral rights
- Royalty payments
- Spectrum licenses
III. Typical Considerations - Given the fact that many of the assets in this category are unique, the evaluation process is also unique. Nonetheless, the analysis is typically focused on a determination of the likely cashflow emanating from the asset and the asset value. Below is a short summary:
Historical Cash Generation – Have the assets been regular, stable generators of cash?
Likely Sustainability of Cash Generation – Are the historical cash generation levels likely to persist, and for how long?
Value in the Case of Liquidation – If the assets were sold, what are reasonable values?
Breadth and Depth of the Resale Market – How easily can the assets be sold, who are the likely buyers, and what have been the trends in values?
Expenditures Needed to Maintain Value – What, if any, investments are needed to maintain the value of the assets?
Experience and Quality of Manager – Is the manager of the assets experienced in this asset class, and what has been their experience? If additional cash is needed to address operational issues, what is the source of that cash?
Diversification – If the assets are a part of a portfolio, what is the diversification level?
IV. Subsequent Maintenance/ Support - After the program has been established and initial payments are made, diligence is required to ensure that the assets are performing as expected and all parties remain engaged. Failure to properly maintain the assets can turn an attractive project into a drain on time and resources.