Determining Fairness and Attraction In Royalty Risk of Loss Mitigation

In a recent posting we present the possibility of some investors being interested in “Seeking Risk Taking and Profit Making Assurers” by assuring royalty investors in specific royalties that they will receive from the issuers at least the amount invested in royalty payments.

The concept presented intends to provide conservative investors with a rationale for buying a royalty from a company seeking non-equity dilutive growth capital, without fearing the loss of money invested, while still having the possibility of receiving a satisfactory return.

Of course, the royalty issuing company is a beneficiary of the process and will pay a fee to the assurer who is assuring the investor that the royalty payments will be at least the amount invested in the royalty.

If that which is generally believed to be a risk-free investment were to be government obligations, then the interest rate return for government obligations of a specific period is the market’s assessment of a fair return. Then what is a fair return for a purportedly risk-free commercial obligation, which has neither capital risk, nor iminium return, but has the potential for significant return?

The easy answer is; whatever is agreed in negotiation between the investor and the royalty issuer. Specifically, could the fair return be a premium over the rate of interest charged by banks in loans to their prime accounts or some market measure like LIBOR? Would a fixed rate of 150% of prime or LIBOR be both fair and attractive to the conservative investor?

However, though a fixed rate might meet the needs of the royalty issuer, the royalty investor wants to benefit from the growth of the royalty issuer. Therefore, royalty terms calling for a minimum payment of say, 120% of prime or LIBOR, plus 2% of revenues might produce a satisfactory result, especially as the royalty will be redeemable.

This process is similar to our In which case the investor lends the company funds at an interest rate premium to bank rates, for a maximum of 5-years and then, on repayment, receives a modest 15-year royalty.

It is likely the assurer will also need to be paid a royalty as a fee in addition to the initial fee paid by the issuer at the closing of the transaction. The assurer’s risk is reduced by each royalty payment. The standard royalty investor protections need to be modified because the assurer is the party initially at capital risk.

I believe the use of an assurer approach meets the needs of many conservative investors and growing companies.



Arthur Lipper, Chairman
British Far East Holdings Ltd.
+1 858 793 7100

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