A subset of Intangibles, pharmaceutical royalties present a particularly compelling investment opportunity. Barings’ Jon Rotolo and David Jin explain why.
Can you start by giving us a sense of the types of assets your group invests in? And within that, why do intangibles present a particularly attractive opportunity?
Jon Rotolo (JR): There are essentially three legs to the Barings Private Equity/Real Assets stool. The first is infrastructure investments—which could be telecommunication assets like fiber optic networks and cell phone towers, or logistics and transportation assets like commercial airplanes and railroad shipping containers. The second is intangible assets—which includes a range of intellectual property-based investments like music copyrights, film and television copyrights, and pharmaceutical and technology patents. The third is natural resources—like water, timber, agriculture assets, and metals and mining.
With intangible assets specifically, we like that the opportunity set is diversified across a wide range of sectors and geographies. Within the same subset, investors can gain access to the media and entertainment, technology and health care industries. We also like that these assets may exist in different parts of their life cycle—which results in some opportunities that are lower risk and lower return, with others that are higher risk and higher return. This diversity allows Barings to customize portfolios and deliver the risk-return profile sought by a specific investor.
In a world with increasingly digital economies, more and more value exists in the intangible space.1 In many cases, the return drivers for these assets are basic, everyday things—whether that’s streaming music, which drives royalties to a music copyright, or taking a prescription drug, which drives royalties on a pharmaceutical patent.
When we invest, we always want to find things that are essential to the economy. This is easy to see in the infrastructure space—with investments like bridges, roads, and the electricity grid. But in today’s digital economy, a lot of intellectual property assets are also essential to making our economy work. This is where we see a particular opportunity in intangible assets, a space which is generally under-invested by institutional investors on a direct basis.
Considering that these investments seem to be unrelated, are there any common characteristics that link them?
JR: There's a subset of characteristics that creates the connective tissue among these assets—primarily: 1) their limited exposure to the everyday movements of public capital markets and, to some degree, even the ups and downs of economic cycles, and 2) their potential to generate current income.
1. Chart Source: Intangible Asset Market Value Study. As of 2017.