Risks to Consider When Purchasing Technology-Based IP for Securitization

Abstract

This article focuses on the risks associated with technology-based intellectual property (“IP”). Transaction evaluators and originators will find a working list of risk-influenced items to consider when reviewing opportunities involving the purchase of IP for securitization, specifically in cases where the source of the asset's value is derived from commercialization, re-commercialization, and assertion. It is intended to assist practitioners identify and assess these risks, make better-informed investment decisions, and achieve their transaction goals. A simplified framework of transaction underperformance and failure, or what can go wrong, has three risk components: amount, volatility, and duration. A review of past transaction experience yields the following categories of risk as most significant: macroeconomic and demand risk, technology risk, collateral risk, illiquidity risk, credit risk, and structural risk. While each underperforming transaction underperforms in its own unique way, there are broad categories of ways in which transactions fail. A checklist can help identify and quantify the specific risk elements within categories so they can be understood and priced. More importantly, a checklist can prompt additional questions and highlight interconnections that otherwise would not be visible.

TOPICS: Credit risk management, credit default swaps, legal and regulatory issues for structured finance