We have presented revenue royalties as being a superior means for private company investors to benefit from the growth of a company’s revenues. The investor benefits from only needing to be concerned with the company’s ability to grow revenues, without having to be concerned about the company’s reported profitability or market valuation. We believe that it is easier to predict and measure a company’s ability to create customer benefit than it is to forecast a company’s profitability.
Given the current market volatility and economic uncertainty, it has become even more difficult and expensive for privately held and unlisted companies to raise growth capital. This also means that investors are less likely to derive financial benefit for themselves or their clients by investing in privately owned companies due to the increased possibility of loss.
Therefore, we will now focus our attention on a fund-raising approach for established, revenue generating, privately owned companies that involves providing investor loss protection which will encourage investors to provide capital for business expansion on more favorable terms due to the capital risk mitigation of the approach.
In many cases we believe that our suggested approach will result in the companies having a lower cost of growth capital than previously was the case. We also believe that a larger segment of the investment community will be attracted to the risk reduced returns available from royalties issued by companies to use the capital acquired from the sale of these independently guaranteed royalties to significantly grow their revenues.
As with many really good ideas, it’s surprisingly simple. The idea is to guarantee investors that they will have the benefit of a guaranteed capital return and a believed to be probable, but not guaranteed, significant subsequent return from the continuing royalty payments. Royalty payment guarantors will be paid and indemnified by royalty issuing companies to guarantee investors that they will be independently guaranteed of receiving a full return of the amount invested in the royalty.
The guarantor will also receive a royalty commencing when the royalty investor has received a full return of their investment principal, after which they will receive the agreed revenue participation for the balance of the royalty payment period. Of course, the liability of the guarantor is reduced with each royalty payment made to the royalty investors.
If, without the royalty payment guarantee, investors sought a minimum Internal Rate of Return (IRR) of 15% on a 20-year royalty, would not investors be pleased to earn, a risk-mitigated return of a 10% IRR, leaving a 5% percent IRR to pay the guarantor? We believe that guarantors would be attracted to such a transaction. Indeed, the royalty payment guarantors’ concept could well be attractive for financial institutions, particularly those having a goal of assisting in business formation in specific geographic or targeted sectors.
While it is easy to hypothesize the development of royalty payment assurance for royalty issuing companies that have existing revenues, it is also possible that more aggressive investors will employ their leveraging capability that they gain from there being guaranteed investment capital to fund additional royalty issuing companies.
There are many details to be worked out and a range of combinations of potential contractual terms, taking into consideration the fact that companies issuing royalties will always be interested in the opportunity to terminate the royalties once they have available cash flow, are the subject of a takeover, wish to go public, or arrange a new financing.
Reducing risk is necessary to attract capital investment by fiduciaries. Royalties that are independently guaranteed could offer an alternative financing approach to the normally required personally guaranteed, high interest rate loans for privately owned companies. This might open a virgin area of investment opportunity for institutions, for the benefit of many.
Arthur Lipper, Chairman
British Far East Holdings Ltd.
+1 858 793 7100
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