Extracting value from intangible assets
Traditional lending models make it hard for firms with primarily non-physical resources to secure funding
12 Apr 2021 | Tom King

Traditionally, a company’s market value is linked to its physical assets. But in today’s big data-driven business environment, intangible assets (IA) can easily account for the bigger portion of a company’s value, says Tyler Capson, managing director for Asia at IA advisory, valuation and transaction specialist EverEdge Global.

Examples of IA, or non-physical resources with a financial value, are data, content, software, brand, copyrights, patents, trademarks, customer and supplier relationships, confidential information, industrial know-how, plant varietal rights, design rights, and regulatory approvals. Intangible assets can be either developed internally or acquired.

“Every business has IA. In today’s knowledge-based economy, it is estimated that these critical assets make up over 90% of the value of companies in the S&P500. Even companies that look highly physical and tangible are in fact full of intangible assets,” Capson tells The Asset in an interview.

“Take for example a small manufacturer in any industrial zone in any city around the world. Its business might look only tangible, but you will find IA in its product designs, customer data, supplier relationships, regulatory approvals, brands, and a variety of other intangible assets.”

Core of the business

Capson suggests a simple thought experiment: try to imagine that your business is not using any IA for 24 hours. That means you won’t use your brand, software, product designs, your company’s customer and supplier relationships, or even your regulatory approvals, content or customer data. That will show that intangible assets are at the heart of any business, and without them there is hardly any business at all.

In order to use these assets more effectively, and monetize them, a company must first identify its IA. “The first step for any company when it comes to monetizing their IA is to identify what IA it has, the strength of its IA position, and the value of its assets – either to the company itself, or in the hands of another organization,” Capson says.

“Addressing these questions will help companies take a more measured view of how to manage and utilize their IA and work out which strategy will provide the best return on investment.”

Currently, Asian financial institutions are still heavily focused on asset-backed lending and such a model makes it difficult to offer debt financing to companies with primarily intangible assets.

“Even lending based on cash flows can be difficult with so many business models now starting off with ‘freemium’ pricing or growth plans to obtain users, customers or market share,” Capson notes.

Opportunities and risks

While most governments actively look for ways to better support small and medium-scale enterprises to drive growth and innovation, previous programmes had seen slow or no uptake as many firms felt constrained by banking regulations, particularly on lending ratios to IA over fixed assets.

“This leaves an area of opportunity for some of the smaller and more aggressive financial institutions to lead the way in this sector and create new lending products,” he says.

As with any tangible assets, there are also risks with IAs. Among the main IA risks companies need to address are the leakage or theft of critical confidential information, risky use of open-source code software, not owning the brand or brand infringement, and being threatened with intellectual property litigation.

“The number one intangible asset risk that companies face today is that they are constantly leaking key intangible assets, with the primary sources of those leaks being customers, suppliers or employees,” Capson says.