The securitization of intellectual property assets

By Maria-Louiza Laopodi

MyCreative Ventures is a national initiative that aims to drive investment towards Malaysia’s creative industry by providing avenues for intellectual property financing.

Dialogue with Johan Ishak, Chief Executive Officer of MyCreative Ventures Sdn Bhd, Malaysia and Maria-Louiza Laopodi of Cultinet.

Unlike other types of businesses, entrepreneurs in the creative industry often have nothing solid to show for all their time, hard work and effort invested. Often, this makes it difficult if not impossible for them to obtain adequate funding in order to expand their operations.

This is mainly because of the reluctance of banks or financial institutions to recognize or accept intellectual property (IP) as a form of loan collateral, in part due to the lack of certified IP valuers who are able to place definitive monetary values on the IP assets involved.

MyCreative Ventures Sdn Bhd, a government investment arm for the Malaysian creative industry was incorporated by the Minister of Finance on April 20, 2012 in order to overcome this valuation lacuna. Its aim is to spur development in the creative industry by providing avenues for IP financing.

Johan Ishak, a Chartered Accountant by profession, has served as Chief Executive Officer of MyCreative Ventures since May 2012. He explains that the creative industry in Malaysia “has generated an abundance of IP which could be turned into valuable assets…MyCreative Venture’s mission is to bring the Malaysian creative industry to the next level by achieving a sustainable future that is rewarding from social, cultural and economic perspectives”.

It is easy to see why the Malaysian government decided in 2012 to allocate RM200 million to the Malaysian creative industry via MyCreative Ventures. According to Johan, “The creative industry in Malaysia only contributes about 1.3% of GDP. This is very low. Malaysia traditionally relies on oil & gas, electronics and plantations for its economy. In order to reduce that dependency, a secondary level of economic commodity should be nourished to cushion any economic downturn that affects the primary economic dependencies mentioned earlier”.

Recently, the governments of several countries that have been hit by economic crisis have started paying more attention to the creative industries. It didn’t take much for the Malaysian government to conclude that the country’s creative industry was significant to the national economy. Johan explains, “Malaysia has thousands of years of culture and art and this is not being monetized as well as some other countries like Korea, Indonesia, Canada, Japan. These other countries have at least 5% to 7% of creative industry contribution to their overall economy”.

MyCreative Ventures will invest via equities or loans from allocated funds in potential viable Malaysian creative businesses and is expected to boost the attractiveness of Malaysia’s creative industry measurable by job creation, increase gross income from Malaysia’s creative industry to significantly contribute to the country’s GDP and elevate the status of Malaysia’s creative industry via public awareness and social impact.

The notion of recognizing Intellectual Property (IP) as loan collateral for funding creative entrepreneurs is relatively new and has been described by MyCreative Ventures as “strategic and innovative funding in the form of equity or debt investments”.

Johan reminds prospective applicants that “…we do not give out grants…we only give business loans in term loan format or revolving credits. We also invest via equity in preference shares format. Our investee companies or our clients who borrow money from us need to meet key criteria”. Applicants must, as he clarified, be:

  1. a Malaysian incorporated company;
  2. at least 51% owned by Malaysians; and
  3. involved in businesses that fall within the creative industry, including:
    • Visual Arts (e.g. Paintings & Sculptures)
    • Performing Arts (e.g. Theatre & Dancing)
    • Music (e.g. Recording Studios & Music Academy)
    • Literature (e.g. Book Publisher)
    • Content Creation (e.g. Cinematic and TV Content)
    • Fashion and Design (e.g. Couture & Fashion Academy)
    • Traditional and Cultural Arts (e.g. Songket & Crafts)

When asked for some examples of companies having received MyCreative Ventures’ support, Johan revealed that some of the recipients that have benefited from MyCreative Ventures’ involvement include fashion designers Khoon Hooi and Melinda Looi, game developer “Accurve”, art gallery “Art Cube”, film producer “Dragon Slate” and theatre production management company “Mypaa”.

Very often, artists fail to understand the value of their IP, let alone its commercial attributes. When asked how MyCreative Ventures recognizes IP as loan collateral, Johan alluded that “we require them [creative companies] to register their IP with the relevant authorities”, which in Malaysia would be the Malaysian Intellectual Property Office (MyIPO).

In trying to give a better understanding on the role of both IP valuers and MyCreative Ventures in placing a monetary value on the IP assets concerned, Johan said that “At this juncture for MyCreative, we do not need valuers for IP as we will look at the business as a whole to see whether the cash flow model is adequate to sustain recoveries of our loans or investments. The valuers are mainly for the existing commercial banks to work out how much the IP value is so that they can figure out how much, out of the loans to be given, can be secured with the IP as collateral”.

This makes clear the distinction between a traditional bank and MyCreative Ventures’ overall assessment of the financial status of a creative enterprise. As for examples of an artist’s IP that has been valued as loan collateral in Malaysia or elsewhere, Johan said that “so far, no valuation has been done for creative industry IP in Malaysia yet. It has just begun and this is still in progress because the only financiers in Malaysia that take IP as collateral are MyCreative Ventures and Malaysian Debt Ventures under their IP financing fund”. He added that “perhaps the most famous one that is close to this concept of IP collateralisation, would be the singer David Bowie who issued bonds to raise money from the public. The bond is back to back to his IP assets”.

The Bowie Bonds are asset-backed securities of current and future revenues of David Bowie’s first 25 albums recorded before 1990, containing 287 songs. The bonds were issued by him in 1997,and were purchased by the Prudential Insurance Company for $55 million. The songs also acted as collateral to insure the bond. The bonds were a ten-year issue, after which the royalties of the songs would return to David Bowie. By forfeiting ten years worth of royalties, Bowie was able to receive $55 million up front, which allowed him to buy out the rights to the David Bowie songs owned by a former manager. David Bowie now owns the rights to every one of his songs.

The Bowie Bond was perhaps the first example of the securitization of intellectual property rights. The securitization of the collections of other legendary artists, including James Brown, the Isley Brothers and Ashford & Simpson later followed.

About the author

Maria-Louiza Laopodi
Maria-Louiza is a co-founder of Cultinet, a startup that aims to bridge the creative and executive gap by providing an online matchmaking platform for connecting managers and artists. She can be reached at info[@]mlaopodi.gr.