The current volatility of securities markets prompts me to remind all investors that it is not necessary to expose capital to the volatility of securities markets, if the money managed in stock or bond funds is invested alternatively in royalty income funds.
It is highly unlikely that diversified portfolios of royalties which are issued by established, revenue-generating, companies will lose money, if they follow the advice below. There is no reason for royalty income funds to experience significant volatility if investing in a diversified portfolio of established and growing companies.
Only buy royalties with maturities of 10 to 20 years.
Only purchase royalties structured to have minimum cumulative royalty payments sufficient to pay the purchaser the amount paid for the royalty in a maximum of 6 years.
Do not invest more than 5% of a fund’s assets in any single royalty issuing company.
Only invest in companies which have had a history of increasing annual revenues and which will be able to expand their revenues by the use of the funds received from the sale of the royalty.
Royalty payments should be made to the investor at the time the royalty issuing company receives revenues.
Royalty payment terms should be secured by covenants relating to the royalty issuing company’s critical assets.
Only invest in companies which have a healthy profit margin and which do not use excessive leverage.
Allow royalty issuing companies to have royalty redemption rights contingent on the payment of multiples of the cost of the royalty sufficient to produce satisfactory returns for the investors.
Of course, there are many ways of structuring royalties which meet the needs of both issuers and investors, and the terms can be as flexible as the parties agree.
The overall return expectations of the royalty income funds which use our patented approach should be a minimum of a 15% Internal Rate of Return, over the course of the royalty payment periods of the royalties held in the fund’s portfolio.
Arthur Lipper, Chairman
British Far East Holdings Ltd.
+1 858 793 7100
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