Applicability of Private Equity Fund Structure in the Furtherance of Intellectual Property Securitizations

Tuesday, January 1st, 2002 at 12:00 am by Jay C. Klear
Jay C. Klear, Applicability of Private Equity Fund Structure in the Furtherance of Intellectual Property Securitizations, 2002 Colum. Bus. L. Rev. 796

Intellectual property securitizations (commonly referred to as ‘Bowie Bonds,‘ infra Part II) were supposed to bring about a securitization revolution. So far, such securitizations have not brought about such a revolution, and many asset-backed securitization industry participants are doubtful that these securitizations will live up to their purported potential. A number of intellectual property securitization transactions were consummated after the initial Bowie Bond issuance; however, the popularity of these issues has not lived up to the initial excitement of the investing and entertainment worlds. Originally, there were claims that music royalty securitizations alone would reach $400 million per year, but as of mid-2001, all such transactions (including the initial Bowie offering) totaled only $250 million. The industry has simply not managed to meet the claim of Bowie Bond originator David Pullman that intellectual property ‘will ultimately be the single biggest asset category, larger than the mortgage industry.‘

Some claim that the lack of broad applicability of this securitization technique is due to the dearth of artists who have portfolios with sufficiently secure royalty streams to allow for an asset-backed securitization. One proposed solution to this problem would be to bundle a number of artists’ portfolios, which combined would meet a sufficient degree of royalty certainty to allow a marketable degree of risk for the bond payments, thus allowing for a marketable bond rating. The argument has also been made that the artists who have strong royalty-producing portfolios, the types that are attractive for securitization, often have no need for such money up front, and thus have no incentive to engage in such issues. Furthermore, even if such artists in good standing needed money, they could receive interest-free advances from their record labels.

What does this mean for the future of securitization techniques in the world of entertainment? Will our legal system be able to keep up with the new needs of this emerging field? Is there a next step to involve the capital markets in the future potential of intellectual property or is the Bowie Bond just a passing fad? These questions are just a few of the troubling concerns of those at the forefront of this field. This analysis will try to address the needs of the various parties involved in securitizations and propose improvements that can make intellectual property securitization a more attractive field for the capital markets.

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