An interview with Arthur Lipper
Host, Pimm Fox:
Investing through royalties. What should investors who may be used to dealing with stocks and bonds be on the lookout for? Well my next guest is an expert in royalty investment, Arthur Lipper is the chairman for British Far East holding and he’s played a role in the international financial community for decades. Hi Arthur, good to have you with us on Bloomberg.
What exactly is a royalty investment, explain the difference between that and let’s say buying a share of a company?
Arthur Lipper:
When you buy a share of a company you are purchasing an ownership interest in that company and effectively what you are buying is a piece of the profitability of that company. When you buy a royalty from that company you are buying a share of their revenue stream and you have no direct interest in their profitability. There are hundreds of thousands of companies around the world — successful, established, doing well, who still would like to have additional capital, but who have no interest in the sharing of ownership. That is where royalties will come in to an increasing degree.
Host:
From your perspective why would a royalty investment be, let’s say, better than investing in the stock of a company?
Lipper:
I think that the essence of successful investment management is the ability to predict future events. In most cases, in an efficient market, a stock is worth what it’s selling for today based upon known values and the predictions being made by the market as evidenced by price-to- earnings ratios and yields. However, what is easier, I ask you? To predict the future trend of revenues? Or specific levels of per share earnings in the future?
I think it’s easier to predict — and I think most people would agree — future trends of revenues. Therefore my question is, why not own a piece of the revenues and leave the more difficult prediction to the owners of the business, who indeed, are those who are impacting the profitability.
Host:
Well Arthur, how is it possible now, to implement this strategy? Can you buy royalty streams? Can you buy royalty rights from a lot of companies? How do you negotiate those specific investments?
Lipper:
That’s a very good question. At the present time, when companies come to me, both early stage companies and mostly technology oriented, for financing they, of course, are used to the concept of, let’s say, giving up forty percent of their equity for funds that they believe will be sufficient to get them to a cash flow, break-even point.
However, if we go the royalty route, they retain all of their equity and everybody is, I believe, happier in the long run. At the present time the problem with royalties, is that there is no secondary market for them.
My long term objective ( and I’m in discussion with a number of stock exchanges now) is to create a secondary market in royalties, and if indeed the royalty had a liquidity, which it does not now, I believe that the purchaser of royalties would accept a significantly lower percentage of revenues because they would be able to sell the royalty at a significant profit, once the trend of revenue increases was established and well recognized.
Host:
Arthur, last question for you. How far are you to getting this trading system up and running?
Lipper:
Well, the trading system could be turned on tomorrow. The issue is getting people, institutional buyers, underwriters, to understand it. The first step will undoubtedly be the creation of royalty income funds and there are three that I know of in formation in Wall Street now.