We recently introduced Fixed Return Advances to the Royalty Exchange marketplace as part of an effort to expand the options and opportunities available to both creators and investors on our platform.
This format is notably different from the traditional catalog sales featured on the marketplace, which benefits creators and investors in different ways. For creators, it allows us to expand support to artists with younger catalogs, as well as to creators of different types of content—like YouTube celebrities. For investors, it provides a low-risk opportunity to invest in growing catalogs with potential upside
So we’d like to take a moment to outline exactly how they work and what new opportunities they can provide buyers and sellers alike.
In a sale, a buyer acquires a royalty stream from a creator for either the life of the copyright or for a limited term of 10 or more years. The sale only applies to the creator’s existing catalog, meaning the buyer has no claim on royalties from any new music the seller creates in the future.
This means the buyer has to evaluate how likely it is that the existing catalog will continue to earn royalties, which benefits older catalogs at the expense of younger catalogs with less of an earnings history.
Fixed Return Advances are designed to lower the risks associated with younger catalogs. This gives newer artists an opportunity to participate in the marketplace and raise money without forcing them to give away their rights like they would in a traditional label deal. And it gives investors more assets to review, along with portfolio diversity through exposure to newer catalogs at lower risk.
A Fixed Return Advance is just that… an advance against future income with a fixed total return listed up front. The buyer knows exactly how much of a return to expect, with the unknown only being the time it will take to collect that total. And unlike back catalog sales, buyers can collect income generated from new releases as well.
This means investors have to evaluate Fixed Return Advances differently than the typical catalog sale.
Evaluating Fixed-Return Listings
Knowing the exact dollar value of the return allows investors to take on more risk with younger catalogs than they would with a sale. The fixed return provides a firm goal against which to measure the price paid.
The key variable in this decision is the time it will take for the advance to be repaid. The shorter the payback period, the higher effective return, which can then be reinvested more quickly. On the flip side, the longer it takes to collect the Total Return, the longer capital is tied up and unavailable to other investments.
In each Fixed Return Advance listing, we provide three potential timeframe scenarios based on catalog performance.
- Optimistic: A “best case” scenario under which the catalog outperforms expectations
- Baseline: A “most likely” scenario that indicates the expected performance based on a three-year repayment period.
- Conservative: A “worst case” scenario under which the catalog underperforms
Using this information, investors can determine their bidding strategy based on their desired return. For instance, if aiming for an 8% annualized ROI on a fixed return advance listing a total repayment of $100,000, the price target would be as follows based on the different scenarios:
- $79,000 on a 3-year expected timeline (total profit: $21,000)
- $73,000 on a 4-year expected timeline (total profit: $27,000)
- $68,000 on a 5-year expected timeline (total profit: $32,000)
The equation is simply subtracting the acquisition price from the total return amount to get your total profit, then annualizing that over the expected timeframe.
Upside for Creators
The simplicity and predictability of the fixed return gives buyers more confidence to invest in younger catalogs, opening the Royalty Exchange marketplace to a wider range of creators and content.
By de-risking younger, unproven catalogs, active creators with early success can now access major-label sized advance checks without giving up their rights or submitting to outdated repayment terms that leave many artists unrecouped for years.
As for content, we can now support sound recording royalties paid by digital distributors, as well as any creator income from YouTube advertising… neither of which was possible under our traditional sales format.
The health of the Royalty Exchange marketplace remains our primary responsibility. A healthy marketplace provides benefits to both buyers and sellers equally, and increases the value of royalties for everyone.
We do this by continually looking for frictions between buyers and sellers, and removing them in a systematic way. The Fixed Return Advance is the latest effort to remove another friction between our users, but it is in no way our last.