Spirit Music Group, the music publishing company owned by private equity fund Pegasus Capital Advisors, just made a big bet on an often-overlooked segment of the music business—production music.
It did so by acquiring the production music libraries and staff of AECG, which will form the foundation of an entirely new division—Spirit Production Music.
That’s an aggressive move into an area of the music business that, while growing, is considered less “sexy” than the more recognizable commercial music catalog it’s dealt in to date. And in doing so, raises some interesting questions for owners of production music catalogs on how to best value, and leverage, their holdings.
Production music refers to music created not as songs to play on the radio, but as background or transition music you hear during shows and commercials on TV or the radio.
It rarely features high-profile superstars. Fans don’t buy it. There are no charts to measure it. And few production music “tracks” become classics... for every Seinfeld theme song, there are million of forgettable ditties.
But what production music lacks in sex appeal it makes up for in volume. The category is one of the fastest growing segments in music thanks to an explosion of demand created by the unprecedented volume of original TV shows, reality TV, and online video activity that defines today's on demand lifestyle.
That's likely what brought Spirit to this point, and why investors continue to eye production music as a viable strategy. About 40% of the music auctions conducted on the Royalty Exchange marketplace concern production music catalogs. So it’s a common asset investors are familiar with.
The question, then, is what its worth? As is typical in the music business, the price Spirit paid for the production music division was not disclosed. This lack of transparency is rampant in the music business, and makes it nearly impossible to create valuation estimates.
Royalty Exchange, however, is an open marketplace. A quick review of the last 12 months shows that production music catalogs sell for an average multiple of five times its past 12 month's earnings.
That's likely a better price than what most production music catalogs go for in private sale (although it's slightly less than the average 6x multiple we see for commercial music).
It will be interesting to see whether Spirit’s move into production music affects these valuations. Spirit Music Group is a portfolio company of Pegasus Capital Advisors, which has positions in a number of different industries, from alternative energy to pet food. Investors tend to look for how other investors find success, and Pegasus is a proven winner worth following.
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