Newlight is staffed with seasoned professionals experienced in structuring innovative capital solutions for companies that own quality intellectual property. Whether seeking debt alternatives to venture capital or looking for cost-effective financing not readily accessible in the traditional market, Newlight is dedicated to helping a company meet its liquidity needs by leveraging their intellectual property to the fullest.
Newlight’s structured debt instrument is designed for earlier stage companies that own intellectual property with a clear path to commercialization. Qualifying elements of the program include:
Intellectual property rights which are valid, enforceable and unencumbered;
Specific and verifiable interest expressed by a qualified licensee;
Potential licensee has the technological and economic resources in place
to commercialize the intellectual property;
Third party verification that the intellectual property has technical merit;
Independent economic valuation supporting the existence of a large and
addressable global market;
The program allows for intellectual property to be leveraged below the cost of equity financing on a minimally dilutive basis, due to a structural risk profile not readily available to the investment community. This instrument’s attractiveness to investors is based on its ability to:
Generate equity-like returns to the investor without the risk associated with private equity
and venture capital investments;
Provide a high coupon that bears current cash flow;
Yield additional cash returns through structural considerations;
Offer a level of equity participation through warrant coverage;
Limit capacity commitment to no more than five years;
Enhance portfolio diversification by adding a unique asset that is uncorrelated to the market;
Furnish a level of over-collateralization that mitigates non-performance events.
IP Venture Debt
For those companies whose lending profile encompasses a slightly different capital structure and exit horizon than that appropriate for our runway debt product, Newlight offers an attractive IP focused venture debt alternative.
Venture debt, broadly defined, provides venture-backed companies with the growth capital needed to fund their development, but without the dilution associated with an additional round of equity financing. Candidates for venture debt transactions are typically revenue producing companies that have taken in at least one round of capital from a venture capital fund but are still cash flow negative. In need of additional funds to help achieve financial milestones, but with a credit profile that does not meet traditional lending standards, such companies are often faced with the unpleasant prospect of a down round of financing.
A venture debt structure, however, can provide the additional capital needed until profitability is achieved or, at the very least, until the company’s valuation is improved for the next fundraising. While such debt is usually secured by whatever asset base is available (accounts receivable, machinery, inventory, contractual payments, etc.), intellectual property is often an undervalued component.
Newlight, however, ensures that a company’s intellectual property is appropriately valued and that the debt structure is designed to meet their cash flow requirements. Transactions can be patterned attaching the intellectual property exclusively, or for a more cost effective execution, using a broader security package. In exchange for a term loan (amortizing or bullet) the lender receives a secured lien with interest and warrants.
Not only is this venture debt product viewed by the borrower as a favourable option to equity, but investors also find it attractive based on the combined elements of down-side protection with access to an upside participation through warrants.
Mezzanine/Subordinated Secured Debt
For companies that are negotiating a new or replacement credit facility, Newlight can facilitate the process by positioning a subordinated debt tranche tied to the borrower’s intellectual property portfolio.
In certain instances when companies are putting together a secured credit arrangement there may be a gap between what the conventional market is willing to advance and the financing needs of the borrower. In other cases there is a disconnect between the terms presented by the lender and the borrower’s expectations. Rather than accessing liquidity from equity investors, these gaps can often be bridged with the introduction of a mezzanine layer that carves out a security interest in the firm’s intellectual property portfolio that is fully subordinated to all other funded debt. In exchange for closing this structural gap and for taking a second priority interest, the mezzanine layer earns an interest rate commensurate with the risk and is awarded warrants.
Newlight’s ability to develop a mezzanine program that accurately assesses the collateral value of the intellectual property may be the difference between whether or not a deal closes.
Blended Second Lien Debt
Newlight believes that an effective way for a company to meet its capital needs often rests in the form of a blended second lien debt structure. Ideal for companies that are cash-flow positive and have un-leveraged intellectual property, this debt product quantifies the excess asset value not realized in the conventional secured lending market.
Traditional lenders normally discount the value of the borrower’s asset base, thereby leaving residual collateral that is not being fully employed. In many cases, a company’s intellectual property is left out of the asset calculation entirely, or is discounted so heavily that it has a negligible impact on the loan to value determinants. Newlight’s appreciation of the economic value of this untapped asset has led to the formation of a blended debt structure that introduces a first lien on the intellectual property and a second lien on all other collateral. Importantly, the second lien is lien subordinated rather than payment subordinated, providing the lender with a stronger interest on unencumbered assets.
The dynamics of the security package yields a more flexible product at a cost of funds less than that which may be achieved in the mezzanine market, where the lender is more deeply subordinated.
Senior Secured Debt
Senior secured debt is generally the preferred choice for most borrowers as it is the least expensive form of capital. However, while many operating companies owe their success to valuable intellectual property portfolios, traditional lenders often only concentrate on a firm’s tangible assets when making credit assessments. With an undervalued collateral package, many such borrowers are faced with the choice of either seeking more expensive supplemental options (i.e. second lien, mezzanine or additional equity) or downsizing their capital needs.
Newlight, however, offers a third option – the ability to stretch senior debt by introducing sophisticated lenders that fully appreciate the value of intellectual property and are willing to fund at more appropriate advance rates. This stretch loan incorporates features common to both asset based and cash flow loans, thereby generating greater liquidity at more competitive pricing.
An option available to companies seeking to leverage their patents, copyrights or trademarks rests in the securitization market. Unlike an IP based loan, where the intellectual property serves as the primary collateral, an IP securitization is supported by either the guaranteed payments under a license agreement, or by future cash flows generated by projected royalty streams.
With the total annual value of patents in the U.S. estimated to be in the billions of dollars, there is a tremendous opportunity for both issuers and investors to exploit the untapped capacity inherent in this asset class. From an issuer’s perspective, such structures allow for a lower cost of capital, as the securitized assets are legally separated from the credit structure of the sponsor. Investors are attracted to these vehicles as it obviates ancillary management and operational risks, narrowing the credit decision largely to one centered on the commercial/technological viability of the secured IP asset.