Investment

The wonderful world of music royalties and why family offices are getting interested

Michael Jackson and his lawyers pulled off a steal of a deal in 1985 by paying a meagre $47.5 million for the Beatles’ entire back catalogue. Its worth was estimated at $1 billion when ex-Beatle Paul McCartney finally wrested it back in a 2017 court battle. 

Most bands have been outwitted by their managers or record companies over the years, often because they fail to put enough a high enough financial value on their work. After losing his early songs to his manager, David Bowie, an unusually savvy rock star, took the advice of an investment banker to put together a ten-year $55 million 7.9% bond secured on his later songs and buy them back.

Family offices may be tempted to buy individual songs because they like musicians or want to meet them. The income from much-loved songs can be excellent, particularly if they appear in advertisements

Today’s bands are more switched on, following a sharp rise in the value of royalties. An unprecedented number of musicians like Paul Simon are selling their back catalogues to publishers or investment companies for $250 million a pop. Investors are attracted by yields which (in theory) are significantly higher than bonds. The big music publishers are keen to gain market share.

Family offices sometimes use them to diversify their portfolios. Barometer Capital Management manages $1.1 billion for 400 families in North America.  It is tapping the royalties market via a $200 million Canadian royalties fund.

According to one industry source: “The collection of royalties has become more professional.  Streaming offers a reliable, and growing, source of income.” 

Goldman Sachs says global streaming revenues will grow from $8.9 billion in 2018 to $37.2 billion in 2030, helped by demand from Millennials and Generation Z.  

It says overall music revenues could double to $131 billion in less than a decade. Globalisation is increasing overall sales, as Spotify opens emerging markets and mobile phones offer hi-fi. This represents quite a turnaround from ten years ago, when physical CD sales collapsed and pirates distributed songs for nothing prior to the arrival of streaming. 

Jack Dorsey’s Square fintech business is the latest to enter the streaming business after buying control of Jay-Z’s Tidal operation for $300 million. Jay-Z bought into the business for $56 million in 2015. It struggled for mass acceptance, as disputes over royalties developed. 

But that hasn’t put off Dorsey.  In effect, the steady rise in fortunes for the music business has bailed Jay-Z out. 

According to Merck Mercuriadis, chief executive of song investor Hipgnosis, music is becoming a utility, rather than a discretionary purchase. 

He argues music royalties are a better bet than oil or gold because their performance isn’t as volatile, although others would say royalty trades are thin on the ground.

Royalty Exchange is a platform where investors buy and sell songs. It says the average yield on its transactions is 10%, or twice the return from a junk bond.

This figure needs to be treated with care, however. New songs, in particular, tend to lose their royalty income fairly quickly.  Royalties can also be cut and diced in a confusing fashion: buyers need to check the small print. They are more packaged into ten-year royalties, rather than a lifetime of seventy years.  A bewildering network of participants can want a slice of the buy. Buying and selling costs can be significant. 

However, Royalty Exchange confirm high net-worth investors figure strongly in its trades. A Royalty Exchange auction of interests in Eminem’s catalogue by his producers led to its eventual purchase by Roy Disney’s family office, Shamrock Holdings.

The platform has arranged wealthy syndicates to purchase catalogues, including a $3.3 million package of Dire Straits songs bought by high net worth investors.

Family offices may be tempted to buy individual songs because they like musicians or want to meet them. The income from much-loved songs can be excellent, particularly if they appear in advertisements.

But advisers say participation in a well-managed fund makes more sense. For its royalties fund, Barometer Capital of Canada has joined forces with administration firm Apex Group and Kilometre Music, led by Michael McCarty, a former EMI executive and a former collaborator with Neil Young and Bryan Adams.

Hipgnosis Songs is a UK-based investment trust, whose shares yield close to 4.5%, which has raised £1 billion to buy rights to 60,000 songs. It recently bought royalties for Neil Young and Lindsey Buckingham of Fleetwood Mac. 

Mercuriadis used to manage Elton John and Iron Maiden, and once ran independent record label Sanctuary.  Hipgnosis extracts value out of its royalties through adverts, cover versions and re-releases. It is offering licences for NFT applications.

Round Hill Music raised $291 million for its third music royalty fund in November and acquired songs from the likes of Black Sabbath and Bruno Mars. 

It is led by Josh Gruss, a rock guitarist, who entered the music business from Gruss Capital, his family’s merger arbitrage hedge fund. Like Hipgnosis, it aims to yield 4.5% and shares in its third fund are also at a slight premium to assets. 

This year, however, well-known musicians have often sold large back catalogues to a big music distributor, which can represent them in older age. Paul Simon has sold his music catalogue to Sony for an estimated $250 million. Sony is also buying a parcel of interests from music group Kobalt for $430 million. Bob Dylan sold his rights to Universal for $300 million in late 2020. 

Independents have often struggled to fund deals. But Concord, an owner of songs by Pink Floyd and Daft Punk, recently raised $680m of debt.

It has just paid $400 million for a song portfolio from Downtown. It helps that Concord’s owner is Michigan Retirement Systems which has supplied $1 billion of finance.

Starting in 2006 with rights to Nirvana’s catalogue and MGM publishing, Primary Wave is another active buyer of royalties and talent management opportunities.

This May it bought a majority share of Rihanna’s biggest hits. It has also bought a share of royalties created by the late rock star Prince, whose will is heavily contested by various parties, including the taxman. 

Some things in the music business never change. 

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