The objective of investing is to preserve and enhance capital. The essence of investment management is making decisions as to future events which will impact the value of the investments which are being considered or have been made.
Investment decision-making relating to publicly traded companies is two-part, the first part being factors which relate to the company and the second part, the market’s reaction to the factors impacting the company. It is the market’s reaction to the company’s change in EPS which will determine the change in valuation of the investment, not the change in EPS.
Therefore, the investor must have a view as to both the factors influencing the specific company’s EPS, as well as conditions impacting that company’s competitors, and the broad range of other stocks, to reach a decision regarding investing in the company.
An alternative for the investor is to invest in revenue growth, rather than the companies which are generating the revenues. The revenue investor is most concerned about the relative competitive value of the product or service being sold by the company to its customers, and the economic outlook for those companies. There is no consideration of company profits or market valuation. The only investment consideration is the growth of the company’s revenues.
Revenue royalty investment is based on royalty rate and maturity, the percentage of revenues and the payment period. Therefore, royalty issuing company sustainability and royalty terms are of concern. Generally, as would be reasonable, the longer the royalty payment period, the lesser will be the royalty rate. Also, the higher the risk of achieving and maintaining significant revenue growth, the higher the royalty rate. Royalty terms tend to be straight forward and logical. Therefore, the attraction of a royalty is based on the investor’s view of the risk of receiving a return of how much and for how long.
Our area of expertise is the structuring of revenue royalties to meet the needs of investors and the founders and controlling shareholders of royalty issuing companies.
Arthur Lipper, Chairman arthurlipper@gmail.com
British Far East Holdings Ltd.