In the first part of this two-part series, the relatively nascent asset class of Intellectual Property Private Credit (“IP Credit”) was introduced. That article explored the basic premise of the asset class, discussed some of the financiers in the space and reviewed some of the nuances inherent in the asset class. In this part, we take all of the knowledge gained in part one and apply it to a specific example by exploring a publicly traded company, which used IP Credit on a couple of different occasions with great success.

One of the areas in which I am intrigued, is the application of credit to intellectual property (“IP”) and using the value of patents (amongst other forms of intellectual property) as security for the loan, the so-called Intellectual Property Private Credit (“IP Credit”) asset class. While this is strictly speaking a credit asset class as you will see from this article, it sits adjacent to and sometimes crosses over with commercial litigation finance.

In the past, I have written about the importance of diversification, the applicability of portfolio theory (articles one, two & three), and the perils of fund concentration; but I also believe that investors in the asset class should understand the perils of relying on outliers to drive fund performance.

I recently moderated Litigation Finance Journal’s digital conference entitled Investor Insights into Litigation Funding, and the panelists delivered a clear message that the asset class needs to be more transparent.  Accordingly, I decided to pen this article to explore the more opaque aspects of the asset class and the reasons underlying that opacity, and what this means for investors, as well as provide some “watch-outs” for those looking to invest in the industry. 

In Part 1 of this two-part series, I compared litigation finance to private equity (i.e. leveraged buy-out) and the deployment problem endemic to litigation finance and the impact it has on the effective cost of management fees. In Part 2, I drill deeper into the operating costs inherent in running a litigation finance strategy.

Any fund operating model needs to be designed taking into consideration all of the operating costs inherent in the manager’s operational model in the context of expected returns and timing thereof.