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July 25, 2014 5:37 pm
Universities are engines of innovation, where promising ideas that start in the classroom or laboratory evolve into highly profitable businesses.
Most intellectual property may never achieve such commercial success, however, the potential for spectacular returns from early investments can be compelling for investors.
The UK has a renowned research base, with 18 of the world’s top 100 universities, according to the most recent QS World University Rankings. Compared to the US, however, academic excellence has generated far fewer global business successes.
“Historically, there has been criticism that strong university research in the UK has been very poor and very slow at getting to market,” says Neil Crabb, chief executive of Frontier IP, the Aim-listed IP commercialisation company. “Commercialisation was seen as potentially corrupting research . . . It is now seen as a strong obligation for research to be developed and applied.”
For retail investors looking to tap into university knowhow, there are a number of ways to invest.
Buy into commercialisation specialists
Universities receive only limited government funding for IP commercialisation, so many have developed partnerships with the private sector.
Specialists such as listed companies IP Group and Imperial Innovations provide early-stage commercial and financial support in return for shares. They look to profit from long-term stakes in their portfolio companies, as well as their final sale.
Imperial, itself a spinout from Imperial College London, has commercialisation rights over IP developed at the London university and also collaborates with Cambridge, Oxford and University College London.
Following the acquisition of smaller rival Fusion IP in January, IP Group now partners with 15 UK universities, including Manchester and Nottingham. It has also launched pilot projects with a handful of US universities, including Columbia and Princeton.
Another IP commercialisation specialist, Allied Minds, floated in London this June. Its focus is on the US, where it has options to take forward new technologies developed at 33 US universities and 26 federal government institutions.
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Mark Pritchard, Allied Mind’s president, says: “We are looking for transformative technologies that either create a new market or revolutionise an existing one.”
IP Group pocketed £15.4m – a return of 35 times on its investment – on the £357m sale of drugmaker Proximagen in 2012, and Imperial received £9.5m for the sale of its stake in respiratory specialist RespiVert in 2010.
“We’re very aware that some of the companies will fail and therefore take a portfolio approach,” says Greg Smith, chief financial officer at IP Group.
Despite diverse portfolios – IP Group invests in about 90 companies, for example – individual constituents can have great bearing. Oxford Nanopore, a DNA technology company, accounts for one-third of IP Group’s portfolio by value, according to Mr Smith.
Choose a fund
Conspicuous among major investors in IP commercialisation specialists are Invesco Perpetual and Woodford Investment Management, run by fund manager Neil Woodford, formerly head of UK equities at Invesco.
Invesco holds a 30 per cent stake in Imperial, 27 per cent of IP Group, and held 43 per cent of Allied Minds before its IPO announcement.
IP commercialisation accounts for more than 7 per cent of the Woodford Equity Income Fund, launched in June. The fund also includes a number of recently listed spinout companies, including Revolymer, the maker of nicotine gum, and respiratory drugmaker Retroscreen Virology.
In addition to Invesco’s UK Equities fund, other UK small company funds – such as those offered by Schroders and Standard Life – also offer some exposure to young IP-driven companies.
Purchase individual shares
Aim is awash with new listings of IP-led companies, such as Abzena, that have floated to raise further funding to develop their products.
Although these companies are at a more mature stage, and in many cases have revenues, their prospects can fluctuate and their shares are often highly volatile. Xeros, for example, lost 30 per cent of its value in the first two months after listing.
“You really need to understand that this is at the riskier end of investing,” says Paul Marriage, a fund manager at Schroders. “There’s quite a lot of ‘jam tomorrow’.”
Consider the tax reliefs
To reflect the inherently higher risks of failure, very early stage investments in companies qualify for tax reliefs.
Among VCT managers that invest in young IP-led companies are Albion Ventures – whose investments include UCL spinout Abcodia – and Oxford Technology, whose tax-efficient status was threatened this year after a breach of investment rules.
The long investment cycle, however, arguably lends itself better to enterprise investment schemes which, unlike VCTs, do not pay dividends.
Unlike VCTs, EISs allow direct investment in businesses and offers even greater tax reliefs including CGT deferral. Even more generous reliefs apply for investments qualifying for seed EIS, which applies for investments at the start-up phase.
Parkwalk Advisors manages EIS-qualifying funds dedicated to university spinouts from Cambridge and Oxford. The University of Oxford Isis fund, launched in February, is offered in partnership with the latter’s research commercialisation arm.
Other EIS managers to invest in spinouts include Oxford Capital – whose investments include Oxitec, a biotech company spun out of the city’s university – and Mercia Fund Management. About half of Mercia’s portfolio are spinouts from its eight university partners, which include Birmingham and Warwick.
Mark Payton, managing director of Mercia Fund Management, notes that there are a number of new entrants in this space, and so investors must look carefully at the credibility of management teams, particularly whether they have had a successful exit. “The focus of some funds on one area is a concern, because of the importance of a balanced portfolio.”
Alastair Kilgour, chief investment officer at Parkwalk, warns that EIS investments should not be made solely for the tax benefits. “We have an investment strategy that happens to qualify for tax breaks . . . this is not for people who do not understand the risks.”
Be patient . . . and realistic
“University IP has led to the creation of some of the world’s best companies, but it’s quite a patient process for investors,” says Mr Marriage.
He cites the example of microchip designer Arm Holdings – “a reason why you want to get invest in IP companies” – which only paid its first dividend in 2003, having been founded in 1990.
Russ Cummings, chief executive of Imperial Innovations, warns that investors should not expect IP-led companies to grow in a straight line. “Recognise that this is a risky business, and don’t be fazed by seeing companies fail.”
“Spinout companies need only be a small part of any portfolio,” says Mr Crabb. “The tax advantages can underwrite a significant portion of the risk . . . but it is important that investors do not overcommit at the outset.”
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