13 minute read
Risk management: Priceless
Underestimating the value of intangible assets is a costly route to irreversible
POSSESSIONS
On average, some 80% of the value of companies now arises directly from intangible assets, including intellectual property (IP). As with any asset, when intangible assets are not eff ectively and consistently safeguarded and their risks not managed, they become vulnerable to competitive threats and so much less valuable.
Interest in intellectual property management and securing value from intangible assets has grown considerably over the past decade with the recognition of their contribution to company value and of the growing threat from counterfeiting.
With economic uncertainty and regulation increasing in the fi nancial services industry, organisations in this sector need to use every tool at their disposal. Leading fi nancial services fi rms are aware that IP can be helpful in diff erentiating themselves and that intangible assets are invaluable in raising funds and fi nance.
According to the United States Patent and Trademark Offi ce, the number of patent applications in the fi nancial services sector increased to 17,213 in 2010. The number of insurance patents has increased from around 25 per year between 2000 and 2005 to about 275 per year in 2010 and 2011. Those in fi nance have increased by around 20 times during the same period.
Any company keen to protect its intangible assets needs to consider what these are, what they are not, and how they can be developed to create contributory value, sources of revenue and competitive advantage. All directors should understand the increasingly sophisticated threats to intangible assets, the various ways they can materialise and what tools are eff ective to protect the assets.
However, the challenges of establishing eff ective IP management within a business, fi nancial reporting constraints and working out where responsibilities lie between functions mean that intangible assets are often misunderstood and consequently undervalued. Research from The Intellectual Property Crime Group has revealed that 40% of businesses surveyed took no practical action such as trademark registration or employee training to protect their IP. Business Action to Stop Counterfeiting and Piracy claims that the total global economic value of counterfeit and pirated products is as much as $650 billion every year.
What are intangible assets?
Businesses often think that intangible assets are just about ensuring that trademarks are in place. In fact, it is about a lot more than that. IP is an important piece in the intangible asset jigsaw, encompassing the whole way in which a company does business.
Intellectual property means protecting your brand name and your products and services by patents, trademarks, copyright, designs and trade secrets. Intellectual assets are associated with the people-based assets of a company – for example, key skills, knowhow and processes: the way your people do business. The wider intellectual capital encompasses the other intangible assets of a company, including relationships, branding, reputation and contracts, which off er a route to commercialisation. All these have a value.
Identifying the intangible assets within the business may not be straightforward. You may need an audit to identify them and assess which may be of signifi cant value.
A question of value
It is only recently that organisations have tried seriously to put a value on intangible assets. Valuing intellectual property accurately and putting a monetary value on it can be contentious, but is possible – and essential. Just like other assets, IP can be valued – and bought, sold or leased.
Anyone involved in selling or acquiring a company or portfolio should establish what intangible assets the target company or portfolio owns, whether they are live and valid, their value, and whether they are fully protected in all jurisdictions.
The fi nancial approaches used in the valuation process are similar to those used to value many tangible assets. Examples include the cost approach, the market approach, the income approach or a combination of these.
reputational damage, warns Jackie Maguire
However, even if the assets have been included on a balance sheet, IP is often not valued accurately, and the information provided may not be suffi ciently detailed to be useful. Valuation needs to rely upon sound data, information and expertise, which are sometimes diffi cult to obtain.
The Brand Finance Institute says that brand valuation should be looked at in three parts: ● trademark valuation — the logo and associated visual elements, including trade names and symbols; ● brand valuation — a larger bundle of trademark and associated IP rights, such as domain names, product design rights, packaging and copyrights in colour, sound or smell, and advertising visuals; ● branded business valuation — a holistic company or organisational brand that is a combination of the legal rights as well as the culture and people.
IP valuation specialists use a number of ways to evaluate the robustness of IP. This includes assessing the company’s unique position relative to existing or potential competitors, while identifying opportunities for exploiting IP further.
The value of assets is subject to how the protection for them has been secured. It is important that it is as robust and watertight as possible.
Protection game
Solid patents fi lings and registering trademarks and designs are certainly part of this, but a company’s value is also contained in its wider intangible assets. Written materials, customer contact lists and bespoke materials can all form part of the intangible assets and need to be fully protected in each signifi cant country where they may be at risk.
It is important to consider whether all relevant trademarks are covered. This can include words, logos, sounds, colours, gestures, brand names and slogans — any distinctive feature that can be represented on paper and distinguish the goods or services of one business from another. They can even consist of the 3D shape of goods or packaging.
LEGAL UNDERPINNING INTELLECTUAL PROPERTY INTELLECTUAL ASSETS INTELLECTUAL CAPITAL PEOPLE–BASED
Obtaining robust patents for innovative developments provides rights to stop others from making, selling, licensing, distributing or otherwise profi ting from that invention. Patents that protect the functionality of new inventions – including processes or devices – can add value. Companies should not forget the important role that copyright, registered designs, database rights and trade secrets can also play.
Use it or lose it
Intellectual property is a powerful business asset, and like other assets it needs to be looked after, protected, reviewed regularly and applied eff ectively.
Senior managers, including those involved in fi nance, risk management and, of course, IP, need to combine expertise to ensure that intangible assets are consistently and eff ectively safeguarded and positioned for competitive advantage. In most situations, loss of intangible assets will undermine value and frequently lead to irreversible reputational damage. a Figure 1: The intangible asset jigsaw © COLLER IP MANAGEMENT 2009
ASSETS ROUTES TO
MARKET Patents Trade marks Designs Copyright Databases Trade secrets Unrecorded inventions Key skills Know-how Processes Market data Information Positioning Reputation Branding Relationships Contracts
With ever-growing demand and the push for green energy, Tom Porterassesses the risks and opportunities within the UK electricity market Keeping the lights on
Barely a week goes by without the appearance of front-page headlines highlighting the relentless rise in electricity bills, or the latest protests at the plans for wind farms or nuclear power stations.
The UK electricity market is going through a period of signifi cant change. Environmental challenges require us to move away from the use of fossil fuels, which have been our primary source of energy for the past 100 years. By 2020, the UK has a target to meet 30% of its power generation from renewable sources. In 2011, the proportion of our power from such sources was just 10%.
During the next decade we expect to lose around a quarter of our existing generation capacity as old or polluting power stations close, thus threatening our ability to keep the lights on. To meet these challenges it has been estimated that £110bn of new investment is needed by the end of the decade. This is more than double the current rate of investment.
Uncertain outlook
Energy infrastructure investments are subject to a wide range of risks, including market prices, construction risk, consumer demand, plant failure, legislative change, fuel prices, wind intermittency and even cloud cover.
Many of these risks are changing. For example, long-term demand for electricity has, to date, been driven mainly by economic growth. In the future, it will also be driven by the development of new technologies such as electric cars. The eff ect of this could be huge and demand for electricity could double by 2050.
This poses a real challenge for investors looking to understand and manage risks over a long time horizon, which for many new investments could be more than 50 years. The market now needs new ways to model and analyse the uncertainties ahead.
Understanding these risks is an issue not only for investors but also for government, regulators and network operators. The draft energy bill published in November 2012 announced a range of government policy measures designed to attract investors and reduce their risks in an attempt to bring forward the £110bn of investment required in a green and aff ordable way.
Opportunities for actuaries
Although analysing the risks in the energy market has not generally been carried out within the actuarial domain, the type of problem is not an unfamiliar one. Long-term fi nancial investment that is subject to a wide range of risks poses a dilemma that actuaries are well placed to answer. There may also be opportunities closer to our traditional areas. The mechanisms used to raise the £110bn needed are likely to lead to the creation of new fi nancial instruments.
The planned ‘contracts for diff erence’ – which off er stable, infl ation-linked and long-term cash fl ows – may be packaged into an investment that is attractive to pension schemes and insurers.
Investors will also be looking to pass on or pool some of the risks they face, giving issuers the opportunity to develop innovative solutions.
A recent study by Lane Clark & Peacock collaborated with the system operator (National Grid), the government (Department of Energy and Climate Change – DECC),
Government policies to support investment Contracts for diff erence
Providing investors a guaranteed income per unit of electricity and reducing their exposure to the wholesale market.
Capacity mechanism
A new market for ensuring there is suffi cient capacity available, in addition to simply rewarding generators based on the amount of power generated.
Carbon price fl oor
Imposing a minimum price per tonne of CO 2 to encourage investment away from fossil fuels.
Figure 1 Spare power capacity at peak winter demand
0% 4% 6% 2% 8% 10% 12% 14% 16% 2012/13 2013/14 2014/15 2015/16 2016/17 Low demand Base case High demand De-rated capacity margin (%)
SOURCE: OFGEM MODELLING RESULTS 2012
the regulator (the Offi ce of Gas and Electricity Markets – Ofgem) and academic institutions to investigate the increasing likelihood of power shortages in the UK during the next few years.
Historically, the standard measure of system security has been the ‘de-rated capacity margin’, which is the expected percentage of spare power capacity available at peak winter demand. Figure 1 shows the Ofgem modelling results from 2012, highlighting a sharp reduction in available margins by 2015/16.
This deterministic metric of system security works reasonably well when there are a large number of independent power plants whose behaviour is independent of one another in the statistical sense.
However, generators of wind power, as well as other sources of power that are driven by weather, have correlated output. Understanding the correlations between energy generators is therefore becoming increasingly important, and this requires a statistical approach.
There are three main risks that contribute to the possibility of supply shortage in the short term: ● power plant outages – mainly driven by the risk of large power plants failing; ● extreme demand – mainly driven by periods of low temperatures; ● wind generation levels – mainly driven by complex geographical and temporal wind dynamics.
Generation availability Demand Blackout risk
While the fi rst two factors are reasonably well understood based on historical experience, wind generation is much more challenging to understand and model. Wind farms in operation in the UK currently produce around 8 gigawatts (GW), compared to the system-wide total of 70-80GW. But projections from the ‘Gone Green’ scenario in the National Grid’s UK Future Energy Scenarios document (http://ngrid. com/1816mCd) indicate that by 2030 this could rise to as much as 47GW.
The new wind farms will be located in areas where there is currently little or no experience or data, such as far out into the North Sea or the Thames Estuary.
The only way to understand the potential generation of these future wind farms, and how this will be correlated with the output of other generators, is therefore through the modelling of wind itself. Fortunately this is made possible through Nasa’s Merra dataset, which contains spatial data on wind speed and direction for every single hour since 1979. In principle, this dataset can be used to construct the distribution of wind generation for any theoretical future fl eet of wind farms.
Figure 2 shows an example of the probability distribution of demand and the generation from power plants and wind farms over a given time period. Between 50GW and 60GW, the righthand tail of the demand distribution overlaps with the lefthand tail of the generation distribution and so we can see that there is a non-zero probability of demand exceeding supply. Using this analysis, we can begin to quantify the probability and severity of any ‘unserved energy’ event in a tangible way.
The results from this analysis will be used to inform government decisions on the amount of capacity we need to ensure a secure electricity system, and thus the operation of the ‘capacity mechanism’ policy instrument.
This is just one example of the growing need for statistical analysis of uncertainty within the energy markets – which actuaries are well placed to support. a
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GW
TOM PORTER works in Lane Clark & Peacock’s energy analytics practice, specialising in modelling of electricity markets
