IP fund: What about the risks?

By Kumaran Pillai

Singapore-based companies can now collateralise their Intellectual Properties to gain access to debt financing from the three local banks here.

At an event organised by the Intellectual Property Office of Singapore on April 8,  the government unveiled the new scheme with the setting up of a new $100 million fund to assist companies leverage their existing patents to gain access to debt financing.

The new scheme was quickly welcomed by industry watchers and they felt that SMEs and start-ups will gain the most. While there are benefits for start-ups and SMEs, we see these structures to be problematic in the event of default, foreclosure and disposal of assets.

The panacea seems to come in the form of government sharing the risk: “Under the IP Financing Scheme, S$100 million of funds will be made available for debt financing in the next few years, with patents used as collateral. The risk will be shared between the participating financial institutions and the government.”

A similar programme was introduced in the US in 2012 and the authorities there were less sanguine as they were concerned about the default risk of companies and that it could lead to an asset bubble akin to that of the sub-prime crises.

Barbara Ridpath, chief executive of the International Centre for Financial Regulation in the US, warned about such structures. “While this innovation appears to actually pledge something of real value, as in most innovation, it is not the first use that is worrisome, but rather the likelihood of lenders bounding into the product in such volumes that they distort the original value proposition of the product.”

If providing loans based on IP is going to be problematic for US banks and regulators, shouldn’t that be the case for the Monetary Authority of Singapore?

This is an area of concern and it definitely merits a broader discussion, especially in Parliament.