Trusted Advisor, an online news site and newsletter for business managers and advisors of high net worth individuals in the entertainment space, invited Royalty Exchange to give a presentation at its Royalties Summit on May 6.
The topic was a peek behind the forces driving what’s being called “The Music Royalty Gold Rush.” Since we’ve been at the center of the action for over five years, with over 1,000 transactions under our belt, we were happy to provide a little insight into what’s driving this trend.
Below is a summary of the presentation, in which we examined
- the forces driving music catalog acquisitions
- how all creators can take advantage of the demand for music royalties
- what’s behinds investor demand for music royalties
- what’s the financial benefit to creators
In the last 18 months, artists the likes of Bob Dylan, Neil Young, David Crosby, and many others have sold their music catalogs. But they’re just the tip of a very large iceberg. In the last five years, more than $9 billions as spent on music catalogs by investors worldwide. About $4 billion of that was in 2019 alone.
The fund getting the most attention is newcomer Hipgnosis Songs Fund, who has bought some $TK billion worth of music rights in the last few years. Hipgnosis raises capital from UK public markets to fund its shopping spree, augmented by debt and other financial models.
But Hipgnosis is not the only entity buying songs. Primary Wave is an investment-focused publishing company also making big moves in the space. Others include Round Hill Music, KKR, Blackstone, Concord, Influence Media, and legendary manager Irving Azoff’s Iconic Artists Group.
What’s more, new funds are popping up with hundreds of millions of capital raised to get into the acquisition spree. But most, if not all, of this competition is centralized at the very top of the market… the multi-million dollar catalogs owned by the biggest of superstars.
Royalty Exchange overlaps that high end of the market, but provides a solution for artists who don’t make millions of dollars a year from their music.
Royalty Exchange is not a buyer or a seller of music catalogs, but rather a marketplace where sales take place. That puts us in a neutral position to offer unbiased data that both buyers and sellers alike can learn from.
As the slide above shows, we’ve facilitated over 1,000 catalog transactions worth more than $92 million for rightsholders. While the average sale of the big funds is in the multi-millions, our is around $70,000.
With that many data points to examine, we’ve found some interesting trends worth sharing.
Why are investors interested in music royalties suddenly?
Well first of all, it’s not sudden. Pension funds and large investment groups have taken large positions in music royalty generating assets for years, usually publishing companies. What’s new is not only the direct acquisition of individual artists’ catalogs, but the scale at which these deals are taking place.
Second, music royalties are very attractive investments for the following reasons:
- First, royalties generate yield, which is an investor way of saying income. Investors are not buying royalties for low prices and hoping their value will increase. They’re buying royalties because they generate paychecks regardless of their value.
- Second, that yield is not affected by public markets. Stock market crashes? Royalty rates and usage largely stay the same.
- Finally, streaming has given the music industry a great deal of momentum, with global revenues increasing year over year. And investors like a tailwind.
If investor activity on Royalty Exchange is any indication, demand for music royalties is at an all-time high. New investor accounts on Royalty Exchange grew 70% in 2020 over 2019, and the price they’re paying has increased about 20% over what was expected.
What kind of investor buys royalties? Royalty Exchange serves not only the bigger funs, but also family offices and individual high-net-worth investors. They’re the kind of investor that’s primarily interested in alternative assets with the potential to deliver uncorrelated yield.
What’s really interesting to them is that owning royalties directly puts them closest to the revenue stream in the music biz. Unlike public funds, like Hipgnosis, where investors must wait for a dividend, the size of which is determined by the company after everyone else involved gets paid, Royalty Exchange investors get paid first… a “cut off the top” before anyone else takes their share.
WHAT ARE CATALOGS WORTH?
Another common question is “How do investors value royalties?” There’s all sorts of speculation about how much these deals are going for, and at what multiples. (A “multiple” is the number of times over a catalogs annual earnings a buyer pays for music royalties).
The assumption is that these catalogs trade at name value alone, but that’s not necessarily the case. Investors look for these factors when buying music catalogs:
- Age: The older the music, the better the price because the longer something has been generating revenue, the more likely investors feel that it will continue to generate revenue.
- Source of Royalties: Investors want to see that the catalog is earning from sources that are sustainable, like streaming, over less predictable sources (like sync).
- Name: Music performed by a recognized artist will typically sell higher if all other factors are equal.
- Earning Trend: Most catalogs have a decay rate. Royalty earnings shrink over time. What investors look for is how fast (or slow) that decline is happening. The slower the decline, the better the offer.
How much buyers pay for music catalogs go beyond a simple dollar figure. That dollar amount is based on what’s called a “Multiple”—which is how many times over a catalog’s last 12 months income a buyer will pay for it. The multiple is applied to the annual earnings, so the higher the multiple, the higher the price.
Despite what you may read, there is no “going rate” for music catalogs. The multiple changes based on the characteristics of the catalog, like age, source of earnings and so on.
The chart above shows the range of multiples paid for catalogs group by age. Take the yellow bar for instance. That represents catalogs seven years or older. Many have sold in the 8-10x multiple range, but some go as high as 20. Why? Again… age, source of earnings, trend rate.
WHY SELL ROYALTIES?
Why would any artist consider selling their catalog? There are many good reasons, including:
- Putting money to use now. A large lump sum of cash can make a big difference in anyone’s life if used properly, so that makes a dollar collected today much more valuable than a dollar expected tomorrow.
- Risk Protection: Most catalog earnings decay over time. How much it will fall is an unknown, so selling future royalties today protects artists from the potential of diminishing earnings in the future.
- Taxes: Simply put, the proceeds from selling your catalog are taxes at the lower Capital Gains tax rate, while collecting royalties month-to-month is taxed at the higher Ordinary Income rate.
An analysis by Nashville wealth management firm Alliance Bernstein found that when factoring in taxes and likely decay rates, artists would benefit over the long term (20 years) more by selling and investing their back catalog than hanging onto it.
The chart above outlines the scenarios:
A catalog making $570k/year would earn:
A: $15.4 million over 20 years if sold for 14x @ $8 million, paying capital gains, and reinvesting in a balanced portfolio.
B: $12.3m over 20 years (not adjusted for inflation) if retained earning $570,000 a year.
C: $10.7 million if kept but royalty income decays at a conservative 2% a year over 20 years.
Raising money from catalog sales also has advantages over the traditional advance:
- Rights aren’t sold, meaning artists selling their royalty income can keep their copyrights, giving them more control over their income and music.
- Shared Risk, meaning if a buyer pays more for the catalog than it ultimately earns, the artist selling doesn’t owe anything. There’s nothing to recoup.
- Catalog buyers only want the income a catalog creates. And because they’re only buying royalties from music already released, there’s no interference in how you make music in the future.
For more information about how to use the Royalty Exchange marketplace to sell music catalogs, read our complete guide: