Capitalization Of IP Must Become The Norm To Avoid Investor Misinformation

Jul. 06, 2017 4:20 AM ET1 Comment
Jeremy Josse profile picture
Jeremy Josse


  • The writing down of intangible intellectual property (IP), and ultimately modern innovation itself, is creating an increasing distortion in modern valuation and investment theory.  It can no longer be ignored.
  • The methods for capitalizing and valuing IP are not straightforward and inevitably require future views. (This scares most accountants).
  • But a multi-faceted approach to IP valuation, rather than, the search for a single solution may be the way to start taking this issue forward.

Recently I have worked on a number of financing for mid-market fintech companies that had substantial EBITDA and profitability, but the bulk of their assets were intangible. When many banks and financiers looked at these businesses, they wanted to write-down the intangible assets to get to a tangible asset figure. Well, in doing so, you often ended up with negative tangible assets and therefore, on this basis, the ROE was negative. The result of the write down of the intangibles was clearly producing accounting nonsense and misleading investor information.

This might be all well and good if it was just an isolated problem, but in fact as we enter the tech age, IP is becoming one of the most dominant items on many company’s balance sheets – not to mention Amazon (AMZN), Google (GOOGL), Twitter (TWTR), pharma cos and increasingly many other sectors where technology or biotechnology is becoming a key driver of value. We are dealing here with the very essence of the valuation of innovation, one of the key drivers of value in our modern economies.

It, in other words, is just another step in the economic revolution that I wrote about in one of my previous Seeking Alpha articles on the need for a new macro-economic and investment textbook (see: Fed Policy - Does The Tech Age Indicate It's Time To Re-Write The Whole Economic Textbook?). It is a part of the work of the think tank and other academic finance writers (Sullivan P. 2000, Scicluna 2002, et al), as well as noted economists at MIT such as McAfee and Brynjolfsson. But the problem is just no longer an academic one as it was 10+ years ago. The prevalence of IP in our corporate balance sheets is now so significant that both macro-economic policy making and investment analysis is simply misleading in many cases

This article was written by

Jeremy Josse profile picture
Jeremy Josse is managing director and head of the financial institutions group at Brock Capital in New York. He has spent the last twenty five years of his career working as an executive in some of the world's leading financial institutions, including Schroders, Citigroup, and N M Rothschild. He has specialized in complex restructurings and corporate finance issues in the banking, financial institutions and fin tech sectors. He has worked with banks, corporations and Governments throughout the U.S. and Europe. He studied philosophy and economics as an undergraduate at both Trinity College, Oxford University and as a graduate at London University. He also qualified as a banking attorney. He is the author of the Wiley published book "Dinosaur Derivatives and Other Trades" and has published numerous other articles on a wide range of financial subjects including the credit crisis, bank restructurings and financial engineering. Josse is a visiting researcher in finance at Sy Syms business school in New York. He lives with his wife, Muriel, and three kids in New York City.

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