Royalty financing beyond the mining sector

A form of alternative finance is facing a reputational revival in the UK. Royalty financing, where capital is provided to a business in return for a cut of that company’s revenue, is typically associated with mining, particularly with development projects.

That sector has benefited from upfront payments from royalty partners, which facilitate ongoing exploration and construction. And, if the project is a success, the royalty company can enjoy a share of revenues potentially for the whole life of a mine.

Mining businesses also look to royalty firms because they took on some level of project risk, without a potentially extreme equity dilution or punitive lending restrictions.

However, in the wake of the 2008 financial crisis, other industries and sectors have found it difficult to raise capital and new scepticism has taken hold around traditional forms of finance.

Royalty financing is also attractive in and of itself – owners and top management don’t see their control diluted, while repayment rates can be slowed if a company sees its sales drop. Plus, because the monthly repayments to the royalty partner cover both the interest and the capital, there is no refinancing risk.

As such, the sector is worth more than £50 billion in North America as royalty finance has expanded beyond commodities.

Canadian-listed Alaris Royalty, for instance, has partnered with communications, transport and construction businesses. Diversified Royalty, another Canadian-based financier, has partnerships with a car maintenance firm and a residential brokerage business.

These examples are just a slice of what is happening in North America and what is beginning to happen in the UK and the rest of Europe. And, importantly, there is a growing market for this approach to finance.

A survey from the Federation of Small Businesses (FSB) in 2017 found there was a “sharp fall” in successful credit applications, with only 63% of small firms securing external finance. However, at the same time, only one in 10 small firms were applying for external finance.

The data seems to be painting a picture where banks and small business have both become more cautious. But it should not be this way, particularly if a company has many years of visible revenue growth and a good track-record of meeting their targets.

These types of businesses, companies which Duke Royalty looks to invest in, should be getting capital to expand, growth and create jobs. The main issue royalty financing faces is education.

That is to say, as previously discussed, the model is well understood in North America but is new to the UK and Europe. What business leaders need to know, then, is that their ownership of the business is preserved, they will gain access to public investors indirectly without the need to IPO themselves, and the royalty firm’s return will be aligned to their financial results – they truly are partners.

Duke Royalty as a publicly quoted UK company demonstrates royalty financing is not just a one-trick-pony. Mining may have helped the model grow, but there is enormous potential beyond the darkened pits of North America.

Neil Johnson is the CEO and founder of Duke Royalty, the London-listed royalty company.

A form of alternative finance is facing a reputational revival in the UK. Royalty financing, where capital is provided to a business in return for a cut of that company’s revenue, is typically associated with mining, particularly with development projects.

That sector has benefited from upfront payments from royalty partners, which facilitate ongoing exploration and construction. And, if the project is a success, the royalty company can enjoy a share of revenues potentially for the whole life of a mine.

Mining businesses also look to royalty firms because they took on some level of project risk, without a potentially extreme equity dilution or punitive lending restrictions.

However, in the wake of the 2008 financial crisis, other industries and sectors have found it difficult to raise capital and new scepticism has taken hold around traditional forms of finance.

Royalty financing is also attractive in and of itself – owners and top management don’t see their control diluted, while repayment rates can be slowed if a company sees its sales drop. Plus, because the monthly repayments to the royalty partner cover both the interest and the capital, there is no refinancing risk.

As such, the sector is worth more than £50 billion in North America as royalty finance has expanded beyond commodities.

Canadian-listed Alaris Royalty, for instance, has partnered with communications, transport and construction businesses. Diversified Royalty, another Canadian-based financier, has partnerships with a car maintenance firm and a residential brokerage business.

These examples are just a slice of what is happening in North America and what is beginning to happen in the UK and the rest of Europe. And, importantly, there is a growing market for this approach to finance.

A survey from the Federation of Small Businesses (FSB) in 2017 found there was a “sharp fall” in successful credit applications, with only 63% of small firms securing external finance. However, at the same time, only one in 10 small firms were applying for external finance.

The data seems to be painting a picture where banks and small business have both become more cautious. But it should not be this way, particularly if a company has many years of visible revenue growth and a good track-record of meeting their targets.

These types of businesses, companies which Duke Royalty looks to invest in, should be getting capital to expand, growth and create jobs. The main issue royalty financing faces is education.

That is to say, as previously discussed, the model is well understood in North America but is new to the UK and Europe. What business leaders need to know, then, is that their ownership of the business is preserved, they will gain access to public investors indirectly without the need to IPO themselves, and the royalty firm’s return will be aligned to their financial results – they truly are partners.

Duke Royalty as a publicly quoted UK company demonstrates royalty financing is not just a one-trick-pony. Mining may have helped the model grow, but there is enormous potential beyond the darkened pits of North America.

Neil Johnson is the CEO and founder of Duke Royalty, the London-listed royalty company.