Under the swashbuckling leadership of its founder Merck Mercuriadis, Hipgnosis was one of the dazzling successes of the London stockmarket over the last decade, and proof, if you wished to look at it that way, that for all its current problems, the City was still good at financial innovation.
A hugely successful former music industry executive, Mercuriadis teamed up with songwriter and performer Nile Rodgers – one of the leaders of Chic, and a collaborator with David Bowie and Madonna – to raise a fund that would acquire the rights to song catalogues.
With an initial £300m, over the next few years, Hipgnosis raised more than £1bn from investors and used the money to buy the catalogues of Fleetwood Mac stars Mick Fleetwood and Christine McVie, Blondie, 10cc, the Red Hot Chilli Peppers and many more. Along the way, it created a whole new asset class, with several rival music funds competing with each other to snap up the most valuable catalogues. Bruce Springsteen seems to have called the top of the market when he sold his songs to Sony for a reported $500m. It seems they don’t call him “The Boss” for nothing.
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True, there was always an intriguing case to be made for the idea. Especially with the development of streaming, back catalogues of songs were more valuable than ever. Consumers on Spotify and Apple Music could dip in and out of decades of music far more easily than they ever could when it was only available on vinyl or CDs, and each time a song was played it generated a little bit of money. Catalogues that generated only a few CD sales a year, or that may even have disappeared completely, were worth something online. Even better, Hipgnosis argued that its marketing savvy could significantly increase the value of each track, either by generating more streams or by licensing it out for use in films, TV or video games.
The catalogues might have cost a lot to acquire, just like any asset, but once they were inside the portfolio they could generate a steady and rising income. That was always going to be worth something to investors.
So, why is Hipgnosis in trouble?
And yet right now Hipgnosis is imploding. A plan to sell a big chunk of its catalogue to Blackstone was blocked by shareholders. Its founder has now launched legal action against the fund. It is searching for new auditors after PwC refused to reapply for the role, a development that hardly inspires confidence in the state of its accounts. There are questions about the way that Hipgnosis royalties are calculated. The shares are down by 21% so far this year as investors steadily lose confidence in the entire market.
True, there are always individual businesses within any sector that run into trouble, and Hipgnosis may well be able to get itself back on track over the next year. And yet the very survival of the asset class is now open to question.
There were two big problems with the song funds. First, they relied on very low interest rates. When rates were at 0.5%, or even lower, as they were for most of the last decade, investors were desperate for income. Generating 5% or 6% on a collection of old songs looked pretty good. Now that you can get 5% just by parking your money in the bank, or buying government bonds, it looks a lot less attractive. Second, the funds depended critically on the idea that revenues would keep on growing. That turned out not to be the case. The music streaming market is now more or less saturated, and the likes of Spotify are finding it very hard to force through price rises, even with high rates of inflation. And there are only so many TV shows that want the rights to old Fleetwood Mac songs.
In a bull market, financial engineers are always looking for clever new ways to make money. In the 1980s and 1990s, it was junk bonds. In the 2000s it was subprime mortgages. We may well have seen it in the 2010s with the idea that old music catalogues were an asset that could be traded and monetised on an industrial scale.
There are never really any new ways of making lots of easy money. It always blows up eventually – it is just a question of when.
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