CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

CHAPTER 22

Investing in Intellectual Property*

A substantial portion of gross domestic product (GDP) is now generated by and comprised of so-called intangible assets, such as intellectual property (IP). Like tangible assets, these assets are important ingredients in the production of goods. This chapter provides an overview of IP and details three categories of IP: film production and distribution, artwork, and research and development (R&D).

22.1 CHARACTERISTICS OF INTELLECTUAL PROPERTY

Historically, most intangible assets were bundled with other corporate assets and available for investment through traditional means, such as an equity investment in a software company. However, in recent years, there has been an increased interest in unbundling and isolating intangible assets, IP in particular, for stand-alone investment purposes. Examples of such assets include patent portfolios, film copyrights, art, music or other media, research and development (R&D), and brands.

Unbundled intellectual property is IP that may be owned or traded on a stand-alone basis. Unbundled IP may be acquired or financed at various stages in its development and exploitation. Ex ante, newly created IP may have widely varying value and use. The value of property such as exploratory research, new film production, new music production, or pending patents will typically be widely uncertain prior to production or implementation. Similar to venture capital investments, many of these types of IP may fail to recapture ...