London-listed fund Hipgnosis Songs (LSE: SONG) has raised over £1bn from investors looking to buy into a new, diversified asset class: music rights and royalties. The fund boasts a yield of 4.5% with the shares trading on a 4.4% premium to net asset value (NAV). Hipgnosis has been constantly raising fresh equity, in part to pay for new acquisitions. It has just announced the purchase of 42 catalogues from music major Kobalt Music Copyrights for $322.9m.
Each of the compositions comes with a regular yearly stream of payments from a variety of rights. Some of those are performance royalties; others are mechanical royalties (streaming comes into this category). Sync rights cover using music in broadcasts, while there is also a catch-all category called a master rights agreement, which gives the owner all rights. The Hipgnosis portfolio now comprises 117 catalogues and 57,000 songs with a total acquisition value of £1.18bn. The valuation multiple across the whole portfolio is now around 15 times income.
A new kid on the block
Friday 13 November saw a potential rival make its debut: the Round Hill Music Royalty Fund (LSE: RHM), which has been targeting a $375m fund-raising. The target yield is also 4.5%, with an estimated total return of 9% to 11% per annum based on a portfolio of over 40 catalogues and 120,000 songs.
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Round Hill will provide some much-needed competition for the Hipgnosis fund. On paper it actually appears the safer bet. Round Hill has been in the music-publishing business as an investor for ten years now and is already the seventh-largest music-publishing firm globally.
It manages three funds with over $700m in assets under management and has a long record. Its first fund has, according to Round Hill, produced a gross investment return of 17% per annum. Crucially Round Hill has also tended to focus more on older, pre-1990 songs, with rock music tracks representing 32% of the portfolio and country 24%. Hipgnosis has not stood still, however, and recently bought an outfit called Big Deal Music. It provides in-house song administration expertise, which will apply across the US portfolio. In-house management is crucial.
Buying the rights to music is not just a passive exercise, and investors need to know that their music investments won’t suffer from diminishing returns over time as hits become forgotten. At Round Hill, its in-house Zync agency has been involved in this proactive management for many years and the real test for both Round Hill and Hipgnosis will be how they can add value to their vast catalogues. Most songs fade away but some classics can keep producing revenues. Round Hill points to Celine Dion’s version of Eric Carmen’s All By Myself, which produced $1m last year, 44 years after the original was first released. Crucially, Round Hill owns 100% of all rights to many of its classic tracks.
Putting a price on pop
Another big question for investors is how to value these music rights assets. There are some transactions to base calculations on, and both funds have independent valuers – but putting a value on some lesser-known tracks is more art than science. Given the high valuations being ascribed to music rights by tech firms (who are waking up to the potential value of music libraries at the likes of Warner Music Group and Universal Music Group), this might seem irrelevant, but bear in mind that this is still a small, illiquid market dominated by large institutions.
Still, given Round Hill’s track record and focus on classics, its shares will probably command at least the same premium as Hipgnosis’. The bigger question is whether music rights can keep producing solid, non-correlated (to the economic and market cycle) returns without pushing valuations too high.
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