Royalty fund

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]

Structure of Royalty Investments

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

Examples

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.

• Royalty Pharma: (investing in top therapeutics, typically billion dollar blockbusters products.)[7]
• PDL BioPharma: (investing mainly in antibody humanization patents and license agreements in different biotechnology and pharmaceutical companies.)[8]
• Permian Basin Royalty Trust: (leading royalty trust in oil and natural gas, with a market cap of US $790,000,000).