When an investor saves money, it becomes an asset. That asset can be useful and productive, for the owner and for society — or it can be stagnant and non-productive.
Funds deposited in a bank earn a small amount of income as interest, but the interest rate will always be lower than the bank receives from other bank customers, to whom the bank lends the depositors’ funds. The spread between a bank’s cost of money and the price charged others for use of the money is how the banking business makes a profit. Such investments, if insured, may have the benefit of protecting the principal for a depositor, but they cannot be a long-term source of wealth increase, and they do not produce significant benefits for society, for industry and broad employment. They do not increase productivity for society as a whole.
So there must be productive means of investing savings, in order for the economy to grow and for productivity to increase. China’s economy today is a prime example of this need — significant private savings are being held in banks, seeking productive deployment as investment.
One option for conservative investment, with the potential to produce significant wealth increase, is royalties. Royalties are an agreement between a company needing new capital to fuel its growth, and the royalty purchaser. The agreement is for a percentage of the company’s revenues, for an agreed period of time, to be paid to the royalty owner.
The royalty owner receives a percentage of the company’s revenues, but does not own any part of the company. Therefore, the royalty owner does not have a vote in how the company is managed, nor does the royalty owner have a direct interest in the company’s profits or losses.
Successful companies with growing profits typically also have increasing revenues. But they can also experience profit margin pressures, which can cause disruption in profitability. Since equity investors receive much of their profit from reported profitability, and from market perception, (sometimes with a short time horizon), equity investors are subject to fluctuation in their returns that may not fully reflect the underlying value of the business. This gap can be detrimental to both the company and its investors.
As an alternative, royalties issued by established companies can provide a steadily growing stream of royalty payments. Royalties can be paid at any agreed interval; daily, weekly, monthly, quarterly or annually. There can be minimum royalty payments, and the agreement can provide the owners of the royalties with assurance that the royalty issuer will meet their contractual obligations.
In the case of early-stage, fast-growing companies, the amount of royalty payments can grow quickly, as revenues increase. This immediate return on investment is far less subject to fluctuation than reported profitability or market perception. When revenues are received, they are immediately reported — ideally through a trusted public intermediary like the proposed China Royalty Exchange. The royalty holders are paid immediately, and automatically, on the agreed schedule.
The value of a royalty contract is determined by estimating the revenues which will be generated during the remaining period of the royalty payment agreement, based on the original cost of the royalty. This cost may be what was paid by the original owner of the royalty, or by a subsequent owner, should the original owner decide to sell the royalty. A Royalty Exchange can facilitate liquidity, and the open, transparent establishment of price for both buyer and seller.
Royalties provide a method for investors to use their savings constructively — for themselves, for growing companies and for the national economy.
Arthur Lipper, Chairman
British Far East Holdings, Ltd.
March 23, 2013
with the assistance of Michael North
English 
简体中文 