Nathan Myhrvold, chief of Intellectual Ventures
One of the most notorious bankers of the Asian financial crisis recently stopped running a major fund at Intellectual Ventures, Nathan Myhrvold’s $5 billion investment firm, after posting some poor financial returns.
Andre Lee was a managing director of Invention Development Fund, an approximately $590 million fund he claims to have co-founded and set up to partner with inventors to develop inventions with an emphasis on a technology transfer program in Asia. Lee was widely blamed for almost single-handedly bringing down one of Asia’s best known investment banks, Peregrine, in 1998, by lending a large part of its capital base to a troubled Indonesian taxi company with links to the then ruling Suharto family. It was one of the big bank failures of the Asian financial crisis.
According to a judgment issued by a judge in Hong Kong in 2009, Lee was disqualified from being a director of a Hong Kong company for 4.5 years. The disqualification order was made as part of proceedings started in 2002 by Peregrine’s official receiver, who claimed that Lee’s “failings were so serious as to make him unfit to be concerned in the management of a company,” according to a court document. Justice Susan Kwan said in the same document that Lee had “a significant share of the responsibility for the failures and flaws in the business” and that his “conduct had fallen below the standards of probity and competence appropriate for persons fit to be directors.” The disqualification banned Lee from taking part in the management of any Hong Kong company and all companies that carry on business in Hong Kong, says Godfrey Lam, the lawyer who represented the official receiver in the case, potentially putting a fund with operations in Asia in a precarious position.
Lee continued to run Invention Development Fund while the Hong Kong ban remained in effect. The highly unorthodox fund would give money to inventors in places like Japan and China to work on ideas that were still in the early stages of development, says a person familiar with its operations. The fund was separate from other funds at Intellectual Ventures that were established by Myhrvold to purchase patents. Intellectual Ventures claims to own 30,000 IP assets and its investors include operating companies like Apple, Cisco Systems, Microsoft and Nokia, and financial investors like Cornell University and Charles River Ventures. Lee, 48, abruptly left Intellectual Ventures a few months ago and is now living in Vancouver, Canada.
According to the public records of one of its investors, the University of Texas Investment Management Co., Invention Development Fund has not returned a single penny to investors in four years and posted an internal rate of return of -74.01% as of the end of May. UTIMCO has committed $50 million to this fund and handed over $18.3 million--an investment currently valued at $3.86 million. UTIMCO records suggest the fund raised $590 million.
In a statement, Intellectual Ventures, or IV, says investors of Invention Development Fund were aware that it was "created to achieve long-term growth goals rather than quick returns given the lengthy development period prior to generating revenue for a business based on generating inventions rather than acquiring them." IV also said "Mr. Lee was hired because of his operational experience in Asia. Our IDF investors were aware of his experience and background before they joined the fund. Mr. Lee left IV to start his own business."
According to IV, the numbers on the balance sheet reflect how Generally Accepted Accounting Principles require it to account for illiquid assets and do not provide an appropriate measure of its funds' financial performance. “This is very similar to what you see in biotech—when you invent something, you have to write off all the R&D costs. That doesn’t mean your invention has no value,” IV says. IV also points out that based on GAAP it is required to immediately expense R&D costs and amortize its assets, leading to decreasing values on the balance sheet. IV adds that "the appropriate measure of financial performance for our funds is cash returns," but the cash return to investors in Invention Development Fund has been 0, at least according to UTIMCO.
In a statement, a person close to Lee said: “Andre really appreciated the time he spent with IV, it was a challenging experience and it opened his eyes to the many opportunities and market needs in the innovation market. He believes that the management team of IDF is top notch and that IDF will ultimately claim success, though it is still early days for the fund. Whatever one wants to make of IV, the fact is that IV is the pioneer in creating an invention market and like all pioneering efforts, the path is never a straight line or easy.”
