Intellectual property rights worth trillions of dollars are being increasingly used around the world as collateral to raise capital and fledgling Hong Kong firms have joined the trend by pledging IPs derived from their technology or inventions to win financing essential to their operations.
Global IPs including trademarks, patents, copyrights and design rights, are estimated to be worth US$65 trillion (HK$507 trillion), more than the value of the US and Chinese economies combined, according to the World Intellectual Property Organization.
Hong Kong, meanwhile, has seen a good number of innovators use IP rights for financing in the absence of tangible assets.
The overall number of start-ups in the city reached a record high of 3,755 last year, up 12 percent from 2020 and 68 percent from 2017, according to InvestHK.
Of these, 123 firms had as many as 860 IP rights, while 164 had secured financing worth HK$800 million based on their intellectual property.
KEY ANALYSIS
IPs used for financing can range from artificial intelligence to pharmaceuticals to agricultural technology and quantitative and qualitative analyses are used to determine if they are suitable for raising capital.
Quantitative analysis is used to analyze the borrower's revenue and financial status while qualitative analysis is used to evaluate IP assets and whether they can support the borrower's development.
Insurance consultancy Aon helps evaluate IPs and assists a lender with collateral protection insurance to share the loan default risk, while monitoring the IP situation over the credit timeline.
Senior managing director and head of Asia for Aon IP Solutions Poh Chua said corporations have to transform themselves into innovative ones to secure more intellectual property rights.
Aon's biggest project to date is for American agricultural technology firm Indigo Ag, a distributor of laboratory equipment and scientific instruments, which received more than US$100 million in funding on the back of its intellectual property.
Global investors and the growing innovation and technology ecosystem have enabled Hong Kong to become an international hub for IP financing, said Chen Siyuan, the chief public mission officer of Cyberport in a webinar titled Intellectual Property Financing Solutions for New Economy Companies.
Traditional microcredit financing provides extremely small loans for firms which lack a steady source of collateral and income or any credit history and usually incur high interest rates of 30 percent or more, placing a heavy burden on a startup's development.
Startups can also raise funds from venture capital but investors usually will have controlling rights over them.
However, private equity has become popular in the Asia-Pacific region and is suitable for high-growth new economy and innovation and technology firms as they can access different types of investors for financing, said Alicia Liu, head of lending and executive director of Greater China at Nomura International (Hong Kong).
Edward Sit, the chief financial officer of IPification, a startup providing security authentication and fraud prevention solutions in mobile apps and online services, said the readiness and the usage flexibility of the borrowed funds are major considerations for startups to choose their financing method.
To attract investors and insurers and use IPs to obtain loans, startups must build their credibility by disclosing transparent and concrete development plans, experts said, adding that they should also demonstrate their potential, such as new technology and products that are innovative and unique, to win investments.
