Dr. Tamir Agmon is an invited contributor to The Business Thinker. He is a Professor of Financial Economics at the School of Business, Economics and Law at Gothenburg University in Sweden.
Much of the value in the world today is generated from intellectual capital (or intellectual assets). Intellectual capital is human made, based on ideas and is expressed as capabilities, systems, organizations, and other non-physical and intangible structures within firms that generate future cash flows. The growing industry of private equity funds and venture capital funds is one place where specific intellectual capital owned by the general partners is applied to generate value. The difference between physical (tangible) assets and intellectual (intangible) assets can be observed and measured in two dimensions; the past, how the asset was built using primary factors and labor, and the future, how the market evaluates the future stream of cash flows from an asset. The discussion of the difference between intellectual and physical assets is done in the paper in the context of an incomplete market with imperfect competition. Where the general partners of a private equity fund add intellectual capital to the existing assets in place in a target company, they do so in the expectations of generating additional value. The process by which additional value is generated by employing specific intellectual capital is demonstrated in the context of valuation model as practiced by private equity funds. Continue reading