Investors look to IP to test investment risk

Investors are increasingly concerned with a company’s intellectual property, but many lack the tools to analyse it accurately in their due diligence.

According to research carried out by law firm Howrey Simon Arnold & White, one in four UK investors – more than 100 VCs, private equity firms and buy-side analysts were surveyed – would turn down an investment opportunity if the company’s intellectual property (IP) strategy proved to be inadequate.

Nearly all the investors that were polled believed that IP protects a company’s market position, enhances profitability and influences a company’s share price. 65 per cent of the investors said that during an economic downturn, the IP strategy was a key factor in determining whether a company would survive.

Nevertheless a third of the investors felt that the majority of businesses did not have an effective IP strategy in place, and agreed that more companies had to build a comprehensive and ongoing strategy to build investor confidence. In the report, investors praised companies such as ARM Holdings, Glaxo Smith Kline and AstraZeneca for their efforts in this area, but condemned British Telecom.

Koos Rasser, managing partner at Howrey Simon Arnold & White pointed out that forewarned is forearmed. “The key is to establish whether a prospective company has an IP strategy, more importantly whether it actively exploits that strategy and whether its results match promised performance.”

However it was also widely held that accurately assessing a company’s IP strategy remained an inexact science. Only one in three investors could say they formally analysed a company’s IP on a regular basis. 56 per cent allowed that IP could not be measured accurately, and that they had to rely on subjective assessments made from annual reports, industry journals or from the company’s management.

The report also found that many investors had a difficult time identifying an IP strategy beyond the well-known entities such as patents, copyrights, and trademarks. This meant most companies assets were only measured by R&D pipeline and spend, the average time taken for competitors to match a new product, return on capital or the simple number of patents held.