Some 10 years ago, Nathan Myhrvold, the former chief technology officer of Microsoft, raised nearly $3 billion for two private equity funds from financial investors and tech companies. These were not your typical funds. They were designed to invest in patents and innovations, not companies or their securities, over a lifespan of 20 years, as opposed to the usual 10 to 13 years. Halfway through their run, the funds are deep in the red.
Invention Investment Fund II was the bigger fund that Myhrvold’s firm, Intellectual Ventures, raised in 2008. It has generated a -15.44% internal rate of return, according to data provided by the University of Texas Investment Management Co., one of Intellectual Ventures’ investors.
The other fund, Invention Development Fund, has posted an IRR of -24.7%. The Standard & Poor’s 500 index has over the same period, which included the stock market crash of the Great Recession, produced an annualized return of 8.42%.
Intellectual Ventures has always maintained that “traditional accounting rules don’t accurately reflect the value of our patent portfolio.” But the cash-on-cash returns of the funds also remain bleak. After 10 years, Invention Investment Fund II has returned 37 cents of each dollar it has invested. Invention Development Fund has returned 2 cents on each dollar invested. Neither fund has returned a penny to investors in the last two years.
“We continue to work diligently to generate returns for investors across all our funds through patent licensing, assets sales, joint ventures, and the creation of new companies,” Intellectual Ventures said in a statement. “We’ve created nearly 20 new businesses which have raised more than $700 million in venture funding of their own, inventions from our Global Good fund are being used in the fight against Ebola, and we have reached patent licensing agreements with many of the world’s largest companies.”
Nevertheless, Myhrvold has washed his hands of Invention Development Fund. It is now being managed by a new firm, Allied Inventors Management, which was set up solely to run Invention Development Fund outside of Intellectual Ventures. The fund has been renamed Allied Investors Fund. “The terms of the arrangement are subject to confidentiality agreement,” said DG Kim, Allied’s chief financial officer. “As far as internal fund matters, I am bound and can’t say anything really.”
Invention Development Fund’s capital was initially deployed at Intellectual Ventures by Andre Lee, who played a central role in bringing down one of Asia’s best known investment banks, Peregrine, in 1998. Lee was running Invention Development Fund while at the same time being barred by a Hong Kong court from being a director of a Hong Kong company.This post was originally published here