This past March, we introduced fixed-term royalty investment opportunity to the Royalty Exchange marketplace. Until then, every listing on our site offered only permanent royalty sales, where auction winners would enjoy royalty payments for the duration of the underlying copyright (in the music industry, that means the lifetime of the creator plus 70 years).
Introducing fixed-term listings, starting with 10-years, offered a new twist. Instead of owning a royalty stream permanently, investors that win term based auctions own the rights to collect royalty income for 10 years, after which the royalties reverted back to the seller.
Nearly 10 months later, we’re just now beginning to realize the benefits this new feature has brought investors.
More Investment Opportunities:
The No. 1 request we get from investors is the ability to access more royalty investment opportunities. Simply put… more listings, more dealflow, more opportunities to diversify their royalty portfolios.
Simultaneously, the No. 1 request we received from royalty owners interested in selling was the ability to regain their royalties after a certain period of time. Few of the rightsholders we speak are willing to give up even just a portion of their royalties permanently.
Enter the fixed-term option. Giving sellers the ability to regain their royalty stream after 10 years pulled many off the fence and into the marketplace who were resistant to selling previously.
Look at the numbers. In 2017, we conducted a total of 136 auctions. Through October of this year, we’ve already conducted 151. About half of these were fixed-term listings, which increases to two-thirds if you narrow the timeframe to when the fixed-term option became available.
Simply put, the fixed-term option creates more royalty investing opportunities.
More Diverse and Higher-Quality Opportunities:
The main reason many royalty owners don’t want to sell a royalty stream for life, even if it is just a portion, is because they know they own premium assets. The better the royalty stream, the more reluctant they are to permanently part with it.
As a result, prior to the fixed-term option, many of the best catalogs we analyzed never made it to the auction platform simply because we didn’t have a suitable option for the seller to work with us. But now, we’re able to bring investors more diverse, higher-quality royalty opportunities.
This includes four Grammy-winning catalogs, and twice as many catalogs in the R&B, Dance/EDM, Rock, and Latin genres than were available in Life of Rights auctions. And only 16% of the listings available as Term Advances were for production music (compared to 21% of Life of Rights listings). Just look at some of the 10-Year Term listings we’ve made available in the last few months:
Bargain Opportunities with Less Competition:
By definition, fixed-term listings have a finite investment window. After 10 years, the asset will stop delivering returns. So naturally, these will cost less to acquire compared to Life of Rights assets, as measured by the closing multiple over the its last 12 months earnings.
We ran an analysis of the closing multiples for fixed-term deals against Life of Rights deals since we first began offering new option. We found that the average Life of Rights closing multiple was 7x last 12 months earnings, while the average fixed-term closing multiple was 4.5.
These Life of Rights listings didn’t necessarily have better underlying financials than the fixed-term listings. It’s simply a matter of scarcity. With fewer and fewer Life of Rights options coming to the marketplace, Life of Rights assets become more expensive. The average closing multiple for Life of Rights assets rose from 5.4x at the end of 2016, to 6.2x at the end of 2017, to now 7x since the fixed-term option was introduced this year.
One could argue that the fixed-term listings are being undervalued as a result, presenting a prime bargain opportunity for savvy investors. What’s more, there’s less competition to acquire them. The average fixed-term listing gets 4.5 bidders, 12 bids, and 2.6 bids per bidder. Life of Rights listings, meanwhile, attract on average 7.6 bidders, receive an average of 32.5 bids, and feature 4 bids per bidder.
Forecasting future cash flows for any investment beyond 10 years can be challenging. So how do you determine the “right” price to pay for an asset that for all intents and purposes will last forever?
The shorter investment window of fixed-term listings (typically 10 years) makes it easier to project cash flows and overall returns. That’s why each term-based listing features a Theoretical Internal Rate of Return. (At this time, we do not list a Theoretical Internal Rate of Return on Life of Rights auctions.)
This TIRR is not a projection or an estimation. It’s designed to give investors better insight into the relationship between the bidding price and the potential return on assets that will expire in 10 years based on projected cash flows.
It’s important to note that this figure takes into consideration the original purchase price and return of investment. (Read more about IRR here.)
Of the 43 term-based auctions that featured commercial music that we’ve conducted through October, the average TIRR was 15.75%
Putting aside the investment term difference, both fixed-term and Life of Rights investment opportunities share the same advantages as an alternative investment.
Both are still uncorrelated with public markets.
Both carry the potential for double-digit yields in an otherwise low-return investment landscape.
Both pay consistently and predictably.
Royalty Exchange remains committed to offering investors more options, not less. The addition of fixed-term assets was our first effort to expand the types of royalty listings available to you. And we have more on the horizon, so Stay Tuned!