Lipper presents idea for investors

Method based on ‘revenue participation’

Arthur Lipper III got the attention of Torrey Pines Rotary Club members last week when he told them they probably had made a mistake if they were traditional investors in privately owned companies.

A Del Mar resident, Lipper has been affiliated with the financial community since 1954 in a variety of roles, from investment banker to author and inventor. He created the Lipper Mutual Fund Performance Analysis service and is a former editor and publisher of Venture Magazine. He also has served on the boards or as adviser to a number of companies as well as the Mid-America Commodity Exchange and the Bourse de Beyrouth.

His presentation keyed in on his latest proposal that he said is built on the “basic premise that there is an inherent conflict of interest” between investors and owner-managers of businesses.

“As an investor in a company, I suggest that you only take a position with an eye to selling at a profit,” he said. “You are a transient … and don’t intend to stay involved with the business.”

Instead, he suggests — and is seeking a patent for — a new method of investing that is based on royalties, or “revenue participation.” While the concept of royalties is well known in the entertainment business or industries such as mining and oil production, he said, it is rarely applied to investing in early stage companies.

He said investors and business owners stand to benefit from his plan.

“As a royalty holder, you don’t care about profitability,” he said, only revenues.

Under his plan, investors agree to take a set portion of the revenue as it is deposited in the bank — say 3 percent to 5 percent. In addition, the owner agrees to sign over intellectual property rights, or “critical assets,” to the investor under the watch of a trustee. The owner has the right to use them for free, and once the term of the agreement is up, the property reverts to the company.

That, Lipper said, protects the investment should the company go under.

“If anyone wants to reorganize, they have to come to us to get the assets,” he explained.

He said he seeks generally a 20-year pledge because “shorter to intermediate returns have to be higher and place an unfair burden on the company.”

His concept applies particularly well to technology companies with prospects for significant earnings growth as opposed to a supermarket with small profit margins.

Lipper said the key to investing is “a four-letter word: fair,” adding “deals that aren’t fair don’t work over the long term.”

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