By Matthew Smith, CEO, Royalty Exchange
Despite the natural culture clash between investors and the music industry, the music and financial worlds have a long history of working hand in hand. While there’s certainly been a few missed notes, their duet has largely proven quite harmonious.
Whether it’s Sheryl Crow selling her publishing catalog to the asset-management arm of a large Australian Bank, to Nashville banks granting artists loans using royalties as collateral, smart money has been chasing music royalties for years.
Here are a few examples:
Ironically, one of the more oft-cited examples of how investing in music can be risky is actually a case study in success—Bowie Bonds. In 1997, rock legend David Bowie issued a bond backed by the royalties from his 25 albums. Bowie forfeited his royalties for the 10-year lifetime of the bond, and in return paid 7.9% interest.
Shortly after Prudential Life Insurance bought the bond for $55 million, the music business started its Napster-induced funk. And while that caused ratings agencies to downgrade the bond to Baa3, the bond never defaulted. That means bondholders got every cent they were promised, a successful investment by any standard.
(What’s more, Bowie reportedly used the proceeds of the bond offering to buy back his rights from a former manager, and better profit from them going forward. A shrewd move.)
Pensions and Publishing
Smart investing is a staple of pension funds, and several have turned to music publishing as a way to diversify their holdings in assets that generate regular returns.
Music publisher Imagem was created in 2008 after Dutch pension fund Stichting Pensioenfolds ABP acquired music publisher/manufacturer Boosey & Hawkes for $250 billion. After collecting returns for nearly 10 years, the fund cashed out with Imagem’s sale to Concord Bicycle Music for $600 million.
It’s not alone. Canadian publishing and rights administration outfit Ole is backed primarily by the Ontario Teachers Pension Plan, “whose track record and revolutionary approach to investing have set benchmarks for just about anyone who manages a major endowment or pension fund,” according to Fortune Magazine. The teacher’s fund is now looking to cash out as well, and Ole is seeking bids for $650 million.
Emboldened by these successes, a new wave of private equity is entering the music space as well. While it’s too early to name winners and losers just yet, the momentum behind them is building.
In 2011, Russian investor Len Blavatnik’s Access Industries paid $3.3 billion for Warner Music Group. Since then, Music Business Worldwide estimates the private company’s total and digital-specific revenues are growing at double digits, with income from streaming alone increasing 59% in the first quarter. The publication, which called Blavatnik’s acquisition “a shrewd bet,” figures WMG is raking in $2 million a DAY from streaming.
Round Hill Music is another private-equity backed publishing company that has successfully invested in and acquired publishing and recording assets for five years now. It raised an initial fund of over $200 million in 2012, and used in to acquire such assets as Lennon & McCartney, Bruno Mars, The Supremes, and Frank Sinatra, among many others. It’s reportedly raising a second fund, and reportedly is in talks to buy an interest in Elvis Presley, AC/DC, Billie Holiday, and others.
Earlier this year, Blackstone’s Core Equity Partners fund acquired a majority stake in private PRO SESAC in a deal reported to be around $1 billion. The company said it intends to retain SESAC with “long-term investment horizon of about 10 years” according to Billboard (which called the investment “downright reasonable”).
Others include Alignment Artist Capital (which invests more directly in artists backed by asset manager BlackRock Inc.), Hearts Bluff Music (backed by “tens of millions” in private equity), and countless of family offices that provide financing to scores of smaller independent labels and publishers.
Terra Firma’s $8.4 billion acquisition of EMI is one of the few really notable failures of private equity in the music business. Not only did the firm overpay, but it did so just months before the financial crisis shook up everything. Using that as a warning against music business investing is like cautioning against investing in Internet companies because the AOL/Time Warner merger failed.
The fact is, private equity, banks, and asset management groups have a long history of investing in music catalogs. That’s because music royalties are largely unaffected by the stock market. Sure, they’re affected by other things that might cause fluctuations in returns. But for investors seeking an alternative asset that diversifies their portfolio in ways that protect them from stock market volatility, royalties become quite attractive.
We’ve actually been approached by many private equity firms and hedge funds just itching to acquire music assets. However like most of the examples we’ve cited above, they’re interested in acquiring complete catalogs and owning rights fully.
That’s not our business. Royalty Exchange seeks to create a market for music and other media assets. We believe the industry is best served by introducing transparency and liquidity to music assets. In fact, it’s the lack of both that makes music assets less understood, and that lack of understanding is the root cause of past failures.
And for those holding music assets, such a marketplace allows them to make only a portion of their holdings available to investors, rather than give up their entire stake. And it gives rightsholders working behind the scenes more financial options than ever before.
Our Royalty Flow subsidiary, for instance, seeks to buy either 15% or 25% of the FBT Productions’ stake in the pre-2013 catalog of hip-hop superstar Eminem. (Producers Jeff and Mark Bass will retain the rest through their company FBT.)
Introducing private investment into an asset class like music where institutional investors have profited for years is a natural next step in the ongoing dance between finance and music.