A royalty fund (also known as royalty funding) is a category of private equity fund that specializes in purchasing consistent revenue streams deriving from the payment of royalties. Royalties are a usage-based payment from one individual or entity to another individual or entity, giving the right to use an asset, product, service or idea.[1]
One growing subset of this category is the healthcare royalty fund, in which a private equity fund manager purchases a royalty stream paid by a pharmaceutical company to a patent holder. The patent holder can be another company, an individual inventor, or some sort of institution, such as a research university.[2]
Royalty funds are a specific type of income trust, used for special-purpose finance, created to hold investments or cash flow in operating companies. These funds are not stocks or bonds but a form of investment fund. A royalty fund raises capital in order to purchase the right to a royalty of a product or service. However, unlike many other corporate entities, the profits derived from royalties are not taxed on a corporate level, but are distributed to shareholders in the form of a dividend, which is taxed on the personal income level. By doing so it avoids double taxation, enabling higher returns on dividends, thus making royalty funds an attractive investment.[3]
Royalty funds are structured in a number of ways. A fund can purchase a royalty or a percentage of a royalty from researchers at a university or a corporate entity for examples a biotech firm, therefore exchanging capital for ownership of the royalty. Alternatively, the fund can act as a private equity vehicle, extending debt or making loans, in exchange for a proportion of the royalty or securing other assets from the institution as collateral. Investments may go to fund a research project or cover costs of a research project.[3] Royalty funds invest in a range of business areas, including, mining, commodities, energy, entertainment, franchise, patents and IP, pharmaceuticals, and other trademark royalties.
An example would be a company making an investment into a pharmaceutical company through the acquisition of a healthcare product or service royalty. The operation of the pharmaceutical company continues, as usual, manufacturing and distribution of the products or services. But once the product has been sold a proportion of the profits will go to the fund that purchased the royalty (the amount or percentage will vary between companies based on the acquisition/investment terms).[4] [5]
Another example would be the purchase of royalties in the oil and gas industry, where the rights oil wells, oil mines or oil fields are owned by a royalty fund or also known as royalty trust. Other companies perform the operational aspect of extracting the minerals, paying a “royalty” in order to extract them.[6]
Intangible asset finance deals with the financing of intangible assets such as patents, trademarks, intellectual property, reputations, etc. In 2003, the intangible assets economy of the U.S. was estimated at $5 trillion.
(investing mainly in antibody humanization patents and license agreements in different biotechnology and pharmaceutical companies.)[8]
(leading royalty trust in oil and natural gas, with a market cap of US $790,000,000).