Investments in Music Royalties: What’s been going on and where is it heading?
Seemingly every day we read about another well-known artist selling his or her music rights to a larger investment firm or music fund. Songs from old guard performers like Bob Dylan, Fleetwood Mac and Stevie Wonder; and also those from newer artists like Dua Lipa, Justin Bieber and Vitamin String Quartet. What’s going on here and where is it heading?
Music Royalty transactions have increased in number and value since Digital Streaming began several years ago, particularly in the last 18 months, and especially with non-traditional sources of debt and equity capital.
On the Demand Side, royalty cash flows have become more predictable, have increased steadily year-over-year, and together with the positive outlook on the future of streaming industry, have attracted more non-traditional investors into the space. Prices paid on publishing revenue streams have doubled by some estimates over the last few years and some industry professionals feel they’ve reached “bubble” proportions. But the characteristics of recorded music streaming has extended the expected payout on these royalties meaningfully, and this “evergreen effect” of increased investment duration has brought a number of new investors into this asset class, such as insurance companies, endowments and pension funds.
On the Supply Side, the increasing value of these diverse catalogs has allowed artists and producers to “cash out” at values much greater than ever before, or to borrow against their portfolios, bridging cash flow needs but retaining future rights ownership. Certainly 2020 was a tough year for live performance revenues, and with anticipated capital gains taxes expected to increase, this has added to the rationale for selling valuable royalty streams now. And if the asset class becomes more liquid over time, as we believe, might not further investment supply come from investors monetizing their investment gains, creating a trade-able market in the not-too-distant future?
Investment in Music IP continues to look attractive in a world with record low interest rates and high equity multiples, and the lower correlation of music royalty cash flows to other asset classes is a compelling portfolio attribute. The investment game is often a “relative value” bet, and even while prices have increased, music royalties still compare favorably to other investment asset classes. With the 10 year U.S. Treasury Note yielding only 1.70% and S&P at historical highs with a trailing price/earnings at 30x, or a 3.5% yield, music publishing catalogues at 17.5x trailing net income look pretty attractive for those willing to bet on the future of music streaming, seemingly a decent bet. If investment banks Morgan Stanley and Goldman Sachs are correct and streaming grows at a ~13% per annum for the next few years, that’s easily a 10%+ return on capital and potentially a lot more.
While music rights have been bought and sold for decades by music publishers, new investment vehicles have increased the velocity of these transactions. The ability to digitally track and verify the formerly opaque economics of investing in Music IP has shed light on the attractiveness of music as an investable asset class to sophisticated institutional investors. And to reiterate, the power of digital streaming to extend the life of these royalties meaningfully into the future, particularly those from master recordings, has added to their monetary value.
What kind of investment examples are out there?
Lots of fanfare around the acquisition of Taylor Swift’s master recordings in August of 2019 by Scooter Braun, CEO of Ithaca Holdings, but what really happened? Well, some of the $300 million in capital for that 6 album purchase, which more specifically was owned by indie label “Big Machine”, came from Private Equity heavy-weight Carlyle Capital. And to raise additional funds for the acquisition, Ithaca hired investment bank Credit Suisse to syndicate a $225 million loan. And to further spread the risk, Lloyds of London guaranteed a portion of the risk, up to $100 million. And that’s not all…but you get the picture. So the transactions have quickly become pretty complicated, but efficient in pricing the catalogs fairly — tough to see below the surface unless you dig a little bit. (PS, Ithaca sold itself last week to South Korean music publisher HYBE for just over $1bln — validation of Scooter’s vision?)
Another good example of new-found capital in this space is the listing of music royalty investment firm Hipgnosis Songs Fund on the London Stock Exchange in 2018. Under the leadership of CEO and founder Merck Mercuriadis, Hipgnosis initially raised $265 million to buy music rights catalogs from various artists, including The-Dream, Beyonce and Rihanna. Over time, the funds committed to these purchases have increased to well over $1 billion in value and expectations are that this could double or triple by the end of this year. Hipgnosis is easily the largest pool of capital committed to purchasing music royalties, and the ability to buy or sell the stock on a daily basis creates previously inaccessible liquidity for investors and speculators alike. Complicated? Not really….but the investment landscape for music continues to get more sophisticated.
And lastly, an example of a creative yet sophisticated investment in Music IP is the KKR acquisition of the 500 song Ryan Tedder catalogue at the beginning of 2021 for $200mm. Leveraging their credit skills, securitization acumen and breadth of investors in the insurance and private equity space, KKR was able to carve Tedder’s royalty streams into separate but attractive investments. Initially KKR hired a rating agency (like Kroll or Egan Jones) to rate a senior loan against these royalties “BBB”, achieving an attractive return on capital for their recently acquired insurance subsidiary, Global Atlantic. In a world where “BBB” corporate bonds yield only 2.50%, KKR could achieve a return north of 5% on only 5 years of risk. And based on this, the residual or equity portion of this investment would result in longer-dated double digit returns for their private credit/private equity clients. Smart.
And then what?
So how big is the market currently? Well, if we’re looking at royalty stream investments that have been made by investors and investment funds, not including traditional publishers, that number might currently be as high as $5bln. But at Verifi Media we think it’s still early days and there is a lot more growth to come. So how big is the market potential? If we take the total amount of recorded music revenues globally in 2020, which was $21.6bln, and we put a conservative multiple on it of 10x, it scales up to over $200bln. Perhaps it’s a stretch to say that the investable music royalty market could be as large as the entire global music industry itself, but even if you assume only 1/2 of music assets can be monetized, that’s still over $100bln in growth potential from here. And that’s not including the expansion of the streaming market, which is expected to grow by over 10% per annum well into the 2030s.
And with all that in mind, it is logical to extrapolate the investment in music royalties to other, similar asset classes such as Non-Fungible Tokens (NFTs), video and other cash flow producing media streams. Dare to dream? We don’t think so.
Ultimately, Verifi Media believes that the data-set that comprises these potential cash flows will gradually become easier to understand and trust and, as a result, will attract further investment dollars. And similar to other emerging asset classes, the growth of investment dollars will further enhance liquidity, decreasing friction costs in future investment transactions — a virtuous circle that will foster even more growth down the road. The bottom line is that music royalties should continue to grow and soon become a dependable investment staple in most institutional portfolios.
