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22 October 2014

Investment Unit of the Year: IP Group

The UK-based investor wins this year's investment award.

Author: James Mawson, editor-in-chief

There might be talk that the heady days of the 1990s dot.com boom could be returning for some venture investors and entrepreneurs but turning an afternoon’s work of raising £20m into an international success often takes more time. 

One of those success stories is IP Group, a London-listed intellectual property (IP) investment firm backing startups from US and UK-based universities, and winner of this year’s Global University Venturing Investment Group of the Year Award. 

The company has seen a near 50% increase in its share price over the past 12 months to 199p per share on 14 October, giving it a market capitalisation of £954m ($1.5bn). And investment bank analysts at Numis have estimated IP Group could reach 273p per share as results come in for its portfolio.

Last year, IP Group posted a portfolio value up nearly 50% from the year before at £285.9m. In its Buy note, Numis said IP Group’s acquisition of peer Fusion IP, completed in March for £88m, was "begin[ning] to deliver" as portfolio company Diurnal, a medical spin-out from the University of Sheffield, passed a clinical trial and could be worth about five- to 10-times the £4.8m it was held on IP Group’s accounts under net asset value.

In the past 12 months, IP Group has floated four companies on London’s Alternative Investment Market: Medaphor Group (a spin-out from University of Cardiff), Xeros Technology Group (from University of Leeds), Actual Experience (Queen Mary, University of London) and Applied Graphene Materials (Durham University).

The group has also broken into the US after signing pilot IP commercialisation agreements in the US with University of Pennsylvania and Columbia University’s technology transfer and company formation offices.

The UK, however, remains IP Group’s primary centre of operations and in October last year it committed £5m for an 8% stake in Cambridge Innovation Capital, a long-term equity finance vehicle to help spin outs from the UK’s University of Cambridge’s commercial development. IP invested alongside the University of Cambridge Endowment Fund, chip maker Arm, mutual fund manager Invesco Perpetual and hedge fund Lansdowne Partners.

Such activity is a far cry from the original plan for IP Group, or Beeson Gregory University Investments as it was originally known in late-2000 before it morphed into a separate subsidiary, IP2IPO, under what is now the investment bank called Evolution. (In April 2006, three years after listing and a year after Evolution sold its final 18% stake, IP2IPO changed its name to IP Group and carried out a five-for-one share split.)

Back in late 2000, a former director at Beeson Gregory said the plan had been to raise £20m to gain the right to back spin-outs from one department at University of Oxford. The market was then so hot for venture investing that it took one afternoon and a handful of calls to raise the money, he added.

In return for the £20m signed in November 2000, and until November 2015, IP Group receives 50% of the university's equity in companies spun out of its Chemistry Department, and 50% of the university's revenue arising from the licensing of the department's IP. 

Graham Richards, then-head of Oxford’s Chemistry Department and subsequently also a chairman of IP Group, recorded much of the details of the agreement in his book, Spin-outs: Creating Businesses from University Intellectual Property. By phone, Richards, who also helped found the university’s tech transfer office, Isis, and startup Oxford Molecular added this deal had done “very well” for all parties.

He said the university had so-far earned about £100m from its share in the 14 spin-outs and licenses from his department and could try to carry on the partnership after it ends next November.

Tom Hockaday, managing director of Isis Innovation since 2006 after joining Oxford’s TTO in 2000, said Richards and David Norwood from Beeson Gregory had been the architects behind the deal, which laid the foundations for most of the other similar licensing and spin-out partnerships struck with other universities.

Hockaday said: “Dave [Norwood, a former chess grandmaster who sold his IndexIT business to Beeson Gregory for £34m earlier in 2000, a few months after launch,] was a genius and with the vision to see what was possible while Graham had the unusual ability to push it through the university.

“What was really important in the deal was it raised £20m for the chemistry department to build a new laboratory and unlocked the other £40m required.  This gave the facilities to support Oxford’s world-class culture of research and was a factor in attracting new professors, such as Hagan Bayley, founder of Oxford Nanopore, to the department as well as stimulating spin-outs.”

IP Group, however, could do financially even better as it could reinvest in deals to maintain its stake while the university’s interest is usually diluted in subsequent rounds raised by its portfolio companies – a “foolish” thing to allow, Richards noted, although Hockaday said the university in 2008 set up just such a follow-on fund, Oxford Spin-Out Equity Management, that has enabled the university to reap $50m from the sale of Natural Motion to Zynga and maintain its weighting in those from the chemistry lab, such as Oxford Catalyst.

The most notable recent deal to have emerged from Oxford’s chemistry department has been Oxford Nanopore (previously Oxford Nanolabs) in 2005. In August, Oxford Nanopore, raised £35m to take its total to £180m over nine years. IP Group purchased £5m of ordinary shares to hold an undiluted 19.9% worth £128.3m, while the university owns about 1%, Richards said.

Ironically, IP Group had first planned on investing just once in these chemistry spin-outs. Richards said: “The original concept was not to provide follow-on money but after the [dot.com] crash [from 2001] this was revised as no one else was prepared to invest.”

The importance of following winners has become clear and so universities, such as Cambridge, are setting up dedicated funds to retain their interests, as well as mulling options such as holding so-called golden shares that mean their stakes cannot be diluted.

But a long-term mindset and scale are equally important in an asset class where portfolio companies might have to be held for more than a decade – after all IP Group’s first spin-out from the chemistry department, Inhibox, is still listed as a portfolio company.

 

Other nominations: Cambridge Innovation Capital, Osage University Partners

Copyright Mawsonia Limited 2010. Please don´t cut articles from www.globaluniversityventuring.com or the PDF and redistribute by email or post to the web without written permission.

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