IP valuation and finance in Asia: where are we at?

For years, various governments across Asia have been launching initiatives to jumpstart their respective IP finance markets. Their efforts are finally paying, writes IAM Senior Reporter Olivia Rafferty

Today’s IP valuation landscape in Asia looks significantly different to what it looked like even as little as two years ago. A severe lack of dedicated service providers, which made it costly for firms to have their portfolios valued, has transformed into a huge take-up in some of Asia’s key economies, and government initiatives motivating that transformation are also now budding in some of the continent’s smaller countries.

China, which has always been miles ahead of its neighbours in this space, is now home to an IP financing market worth 486.9 billion Chinese yuan, with an average annual growth rate of 28.4%. But it would be unfair to say that nearby countries have not made substantive progress.

South Korea’s IP financing market, which grew from $1.9 billion in 2021 to $2.2 billion in 2022, is now shooting for $14.5 billion in value by 2026. In Japan, several companies have been leveraging the country’s corporate governance code amendments to attract investment, while the government will be welcoming a reform to its tax system that would allow for a 30% deduction from income earned through patents and other IP in 2025. Finally, perhaps inspired by their East Asian peers, the governments of India, Indonesia and Singapore have now embarked on journeys to bring IP valuation services to their domestic businesses.

China

China has established a sophisticated ecosystem of IP offices, financial institutions, IP valuers and insurance companies, enabling the leveraging of IP as collateral to reach 309.8 billion Chinese yuan in 2021, according to the CNIPA. To put this into perspective, Korea’s IP finance market was worth 3.5% of China’s that same year, KIPO estimated. This activity has so far covered 17,000 projects and benefitted 15,000 enterprises.

With China’s IP financing market worth 486.9 billion Chinese yuan by the end of 2022, how did China get so ahead of its Asian counterparts?

According to Xinming Ma, general manager of Chinese valuation company Beijing Zhongjinhao Assets Appraisal Co, there are four main reasons:

• Chinese government departments, including the CNIPA, Science and Technology Bureau, Ministry of Industry and Information Technology, and Financial Supervision Bureau, give strong support to SMEs in terms of IP financial policies, including but not limited to IP pledge financing and IP securitisation.
• Financial institutions, guarantee companies, insurance companies, IP evaluation agencies and IP service agencies have spawned several innovative models conducive to the development of the IP financing market, striving to promote it to achieve inclusive, large-scale and regular development, covering and reaching more technology-based SMEs.
• Assessment and service agencies strive to develop intelligent risk control and assessment tools and models to achieve the effective transmission and exchange of intellectual property financing information, focusing on the difficulty of risk control and assessment in the development of IP financing.
• Finally, the total amount of IP in China and the total market covered by it are huge, which means that China’s IP market contains great value – and the awareness around that value has been moving up companies’ agendas, promoting the gradual improvement of the relevant norms and standards system for the value assessment of IP.

Andre Toh, who leads the valuation, modelling and economics teams for Asia Pacific at Ernst & Young, echoes Mai’s views. He emphasises that the China market has scale and this economic advantage increases the probability of success when rolling out innovation and test-bedding intangibles.

In December 2018, China welcomed its first IP-backed securities after both the Shanghai Stock Exchange and Shenzhen Stock Exchange piloted IP securitisation and they each approved a securitisation product, issuing 1.2 billion Chinese yuan in total. Ma, whose firm has been deeply involved in most of China’s IP securitisation innovation projects, says that the implementation of these schemes has been “undoubtedly successful”, with his firm announcing in January that IP securitisation has become the “crown jewel” of China’s IP financial system.

By the end of 2023, a total of 150 IP securitisation products were issued nationwide and the cumulative finance issued reached 33 billion Chinese yuan, he notes. This, according to Ma, is due to three main factors:

• The characteristics of packaging and dispersing risks in IP securitisation is an effective remedy for intellectual property pledge financing and an effective tool to activate other types of financial capital.
• China has explored many innovative operation paths in the way of both asset construction and credit enhancement, providing a new sample for IP financial innovation.
• The securitisation of IP rights has played a certain role in promoting the further expansion of financing channels and the further reduction of financing costs for SMEs based on science and technology.

“It has been a consistent policy [priority] for the Chinese government to support science and technology SMEs by providing inclusive support for innovation finance and intellectual property finance,” Ma emphasises. But the country’s public initiatives are not the only things boosting China’s IP market.

In 2021, Alibaba rolled out a new tool aimed at helping insolvency professionals price their patent lots to sell. Intangio, a product co-developed by IP valuations specialists Inngot and IP services firm Rouse, provides valuation guidance for assets based on a combination of patent analysis and transaction data. As well as using its own database of historical patent sales to calculate a likely value, Intangio provides scoring on the patent’s inherent quality. This considers whether:

• it has characteristics that suggest that the patent itself is high quality; and
• it is in a technology area that has seen a lot of sales, licensing or litigation relative to other areas.

When asked what other countries in the region could implement China’s approach, Ma said they should consider implementing a national unified model to adopt a diversified method to promote the intellectual property financing market. Governments and the private sector alike should have a greater degree of tolerance for the uncertainties and risks that intellectual property finance faces.

EY’s Toh suggests governments could consider creating a regulated exchange for intangibles which will encourage “trust, efficiency and value validation”. “The reduction of barriers between markets so that innovative businesses in countries that do not have a naturally large hinterland can lay claim to a sizable market that will increase their probability of success,” he adds.

South Korea

Perhaps the market that has seen the biggest take-up of IP finance services in Asia and outside of China, South Korea is aiming to increase the size of its IP financing market by 12.2 trillion Korean won by 2026. This would mean taking a market valued at $5.9 billion, up from $1.9 billion in 2021 to a whopping $14.7 billion.

According to a government-backed organisation, the Korea Invention Promotion Association (KIPA), the total IP financing balance issued between 2018 and 2021 amounted to 6.9 trillion Korean won. The sectors that saw the heaviest investment based on their patents were automotive, semiconductors and biotechnology, representing 55.2% of the total.

These results are largely thanks to efforts by the government and Korea’s Intellectual Property Office (KIPO), which revealed in an interview with sister publication WTR earlier this year that the growth plan is focused on patents and inventions, but KIPO is laying the groundwork to include other types of IP by carrying out a study on a trademark valuation model. KIPO also recently launched an IP Valuation Management Centre, which surveys a sample from a list of valuation results for randomly selected IP to diagnose their quality, as well as investigating whether a specific valuation has been reasonably conducted according to accepted standards. Firms also use KIPA’s ‘SMART 3’ patent rating tool and will soon have access to a KIPO AI-based valuation system.

KIPO’s success so far is in stark contrast to the country’s wider financial market, which is currently experiencing an unfavourable turn caused by high-interest rates. “IP financing gaining more vitality in this circumstance shows it has become a reliable source for innovative companies to secure funds,” KIPO’s former commissioner told IAM last year.

In fact, top private lenders, supported by the government, including Woori Venture Partners, Shinhan and KEB Hana, are helping drive this market growth. Crucially, though, the country is also home to KIPA, which houses hundreds of experts, including engineers, patent attorneys, and accountants, who carry out tech valuations for SME companies and serve as a conduit to connect businesses with potential lenders, encouraging them to take advantage of IP financing. If a company does so but then defaults on an IP-backed loan, KIPA purchases that loan through a partially government-funded recovery support agency, which reduces the risk financial institutions are taking on.

In 2022, over 80% of IP-secured loans in South Korea were extended to businesses with low credit ratings. This means companies with valuable IP assets but limited creditworthiness are successfully raising capital, employing their high-quality IP rights as valuable financial assets.

Shi-Hyeong Kim, the acting commissioner at KIPO, re-emphasised the office’s IP valuation ambitions at IPBC Korea in February. He noted that alongside the AI-based evaluation system, KIPO recently hired a new transaction specialist to speed up the processes.

Comments by some market sources in September 2023 cast some doubt over the sustainability of a market that is so heavily government driven. The growth may not continue if policy or leadership changes occur and may be misused by companies with good government relationships, Hayoun Chun, a partner at Lee&Ko in Seoul, told IAM at the time.

However, according to senior patent attorney Chul-Hwan Jung at Kim & Chang in Seoul, there is an equally “burgeoning trend” where financial institutions, motivated by the government-backed initiative, form IP investment funds without a government intermediary. This approach has garnered substantial attention from investors, with substantial capital inflows into this sector, he noted, adding that as this grows, the private sector will become ever more involved in private funds for IP, which would minimise the risk of misuse.

Japan

Japan’s IP valuation market has also seen some ‘oomph’ in recent years after the country became the first in the world to require publicly listed businesses to reflect the value of their IP on their balance sheets. Several companies across Japan, including Asics Corp, Kyocera, Asahi Kasei, NEC, NTT, and Bridgestone, told IAM last year how they are using the disclosure requirement as an opportunity to attract investment. Asics’ Koji Saito commented that “the hope” is that the revised code will strengthen the country’s transition to focusing on intangible assets.

In fact, that development led to new momentum in the valuation market, where Deloitte Tohmatsu Financial Advisory and IPwe Japan launched patent valuation advisory services to listed companies across the country. Unfortunately, that initiative folded after IPwe entered bankruptcy proceedings in March. It is a “pity” that this initiative has had to be shelved, Satoshi Watanabe, a managing director at IPwe Japan, notes. “But Deloitte may have a plan B,” he says, adding that there is a need for IP valuation in Japan and hopefully someone will come up with an even better solution.

The progress hasn’t come to a complete stop though, with Japan’s government also announcing in December 2023 that it is looking to reform its tax system (effective April 2025) to allow for a 30% deduction from income earned through patents and other IP. The country is also mulling allowing financing secured by the value of the company’s business – the entire business, not just its IP.

But to catch up with China, which moves quickly as a system when it decides on policy, a process to speed up decision-making and implementation should be considered, Watanabe suggests. “Japanese companies also conduct their business according to the government’s policy when it is announced but both the government and companies lack a sense of speed,” he notes.

Looking ahead, Watanabe adds that he hopes the corporate governance code and the innovation box tax system will encourage many companies to invest in and use IP more proactively. “Patents should be associated with specific products and businesses, and access to the IP trading market needs to be facilitated through transparency,” he says. “It would also be good to create a mindset where companies pay reasonable royalties for other companies’ existing patented technologies and use their resources to develop new technologies, rather than spending resources to avoid other companies’ IP,” he notes.

India

Take-up of IP valuation services and IP-backed lending in India have been very minimal so far. According to LexOrbis managing partner Manisha Singh, this is because it is an “extremely niche product” in what is mostly a “traditional” Indian loan market. “We do believe it will have a sluggish start and may face initial hiccups during its launch, but it will steadily pick up,” she says.

Her view is that it is unfair to compare India with China in this space because, despite them being dominant economies, the genetics of each political system and the composition of growth sectors differ so much. The Indian agriculture sector, for example, is still the primary growth impetus for GDP. But India can learn a few lessons from China, including how the state-backed banks or private financial institutions examine the innovation capability, commercialisation capacity and IP ownership of the businesses.

Singh believes the biggest change required to boost India’s IP financing market is in the mindset of institutional lenders towards treating intangibles as collateral. This is something the government is already working on: in August 2023, it launched a tender for consultancy services for intellectual property financing – its first step in a draft action plan to promote and institutionalise IP financing in India. The tender could take up to three months to be awarded, while the institutionalising of IP financing in India could take another two and half years, she predicts.

It would also be useful for the government to mandate publicly listed companies to publish any transaction that involved IP, thereby providing a certain degree of assurance to the Indian financial institutions that such transactions are prevalent and risk-averse, Singh suggests.

Other initiatives in the ASEAN region

Singapore’s government also recently set out a blueprint in the Singapore IP Strategy 2030, which includes one point on “attracting innovative businesses with enablement programs and [building] trust and credibility in valuations”.

One example was the launch of the world’s first Intangible Disclosure Framework by the Intellectual Property Office of Singapore and the Accounting and Corporate Regulatory Authority of Singapore in September 2023, which aims to promote consistent and comparable information on intangibles, facilitating financing and transaction opportunities.

EY’s Andre Toh also reveals that Singapore plans to develop a standardised set of valuation guidelines to help stakeholders better understand and build confidence in the valuation of intangibles. The government has noted that, in turn, this will facilitate information transparency relating to the value of IP in financial reporting, transfer pricing in secondary markets, and acceptance of IP as collateral in the IP financing process for innovation driven businesses.

Meanwhile, Indonesia’s government brought a new IP financing regulation into force in July 2023, allowing businesses to use their IP as security to obtain financing from banks and non-bank financial institutions.

However, a report published by Padjadjaran University in Indonesia in November 2023, comparing Indonesia’s IP financing market with those in China and South Korea, revealed that Indonesia is still in the regulatory stage. It emphasised that there is still “much to be conducted” by the Indonesian government, including policies related to funding sources and implementation, such as post-loan provisions, as well as policies in the form of guarantor companies.

Indeed, there has not been any visible take up since the passing of the regulation, says Kin Wah Chow at Suryomurcito & Co and principal at Rouse in Jakarta. “Banks are concerned in realising the IP type collaterals in the event of default as there is no developed IP market place in Indonesia,” he says. “Without a thorough grasp of the economic value of the collateral, determining the amount of credit that can be extended becomes more challenging,” he adds.

Chow believes the regulation alone will not be enough to kickstart this market. Changes that need to be brought in include having local companies better educated in overseas filing, getting the government to strengthen the enforcement framework in courts so that potential buyers have more faith in the strength of the IP acquired, and allowing for valuation professionals to practice cross border – acknowledging that the local sector still need time to be developed, he suggests.