The National - Why music royalties are hitting the right note for investors

Vijay Valecha, Special to The National June 29, 2021

Swedish pop legends ABBA sang Money, Money, Money, then there was UK 1980s pop duo Dollar and rapper 50 Cent.

Cash and music have long been inexorably linked, whether inspiring band names, lyrics, powering record label coffers or bringing riches to the likes of U2, Madonna and friends.

Increasingly, however, music industry outsiders have been securing some of those returns as an alternative asset class untainted by stock market fluctuations.

A handful of platforms enable investors to buy into copyrighted artist catalogues – and earn royalty income from sales, radio play, streaming and licensing for advertising, movies and even social media use.

Technology entrepreneur Sean Peace pioneered the first marketplace, SongVest, in the US after a friend mentioned she might one day sell her catalogue.

“That led me to ask how and who she would sell it to … the light bulb went off that people outside of music might pay for the opportunity to own a song,” Mr Peace, the platform's chief executive, tells The National.

SongVest, essentially a stock market for music, was initially launched as a more fan-orientated platform in 2008 amid less “effective social media” and the financial crisis.

It re-emerged last year as more investor-dedicated after Mr Peace left Royalty Exchange, which he co-founded with Grammy-nominated songwriter Reggie Calloway and former band manager Wilson Owens.

People seeking alternative investments can review music royalty opportunities on the SongVest site and, once registered, bid when one goes live at auction.

“The offerings include all of the due diligence and financial analysis they need to make an educated buying decision,” says Mr Peace.

SongVest provides the closing paperwork and notifies royalty-paying organisations, he says.

While its auctions are geographically open to all, most buyers are high-net-worth individuals, family offices and music industry-related organisations. That is about to change, Mr Peace says.

“We will open a new model where multiple investors can participate via royalty shares at starting prices as low as $20."

And there is no shortage of stars availing their catalogues to new owners.

After the Covid-19 pandemic stalled lucrative touring schedules last year, several artists cashed out. Well-publicised sell-offs last year included Blondie and Shakira, Bob Dylan for a reported $300 million and Fleetwood Mac’s Stevie Nicks, who reportedly sold a majority slice of her music catalogue for $100m.

Meanwhile, Calvin Harris sold his catalogue last year to Vine Alternative Investments for an estimated $90m to $110m, Imagine Dragons cashed in their catalogue with Concord Music Group for a reported nine figures and Las Vegas rock band The Killers sold the rights to their first five albums to US-based investment company Eldridge.

The UK-based music investment and song management company Hipgnosis Song Fund owns stakes in songs by Maroon 5, Mark Ronson, Shakira and more, banking royalties from streaming, cover versions and even placements on mobile ringtones and video games.

Hipgnosis also invested in Ed Sheeran’s 2017 hit Shape Of You, which reportedly made $2.6m in sales – and continues to secure rewarding radio play.

Investor revenue can be influenced by the act, track and timeline, says Mr Peace says.

“It depends on what you are purchasing. If it is a popular song from five-plus years ago, that audience is already baked in, so the artist doesn’t have a huge impact on that song anymore,” he says.

“If it is a newer song, where the artist is still growing, that might have a positive impact.”

With stock and bond markets unpredictable and susceptible to macro events, music royalties appeal to investors looking to diversify.

Advocates highlight soaring streaming traffic via platforms such as Spotify and the UAE’s Anghami, and say music will always be consumed somewhere, somehow and usually be paid for, regardless of economic or political conditions.

That suggests dependable earnings for investors buying into time-tested hits, as well as trending new music.

“Our goal is to bring somewhat predictable long-term, non-[stock market] correlated income to our buyers and maximum sales prices to our sellers,” says Mr Peace.

“Our biggest success is yet to come as a company, but will happen when we turn on royalty shares for the masses.”

Matt Caudill, 43, who purchased his first catalogue in 2018, says investors should not always look for the obvious.

“One is naturally drawn to famous artists and there is a trophy premium for those deals,” he says.

“To date, I have actually received more than my initial purchase price from the distributions received over less than three years and am very happy with the performance.”

Mr Caudill, a Chicago-based consultant in operational due diligence for institutional investors, manages his family office and previously practised law in corporate/investment management and intellectual property.

He became intrigued by the royalties concept after working on larger label music deals while at an investment bank.

“One of the many interesting aspects of investing in music royalties is that it is really data driven, at least for proven assets,” he says.

“Reviewing years’ worth of detailed royalty data – directly sourced from a PRO [performance rights organisation] or record company – cuts through the noise.

“What I really enjoy is detecting trends, growth, outliers and uncovering the real value of the asset.”

Mr Caudill, a SongVest client, has invested across a range of genres, including rap, Christian and punk rock.

“With the tremendous growth in streaming subscribers globally, I have seen increased royalties from sources such as Tencent, Spotify, Apple … and have benefitted from the emergence of new payment sources on royalty statements such as Peloton, Netease, Audiomack, Facebook, Instagram,” he says.

Demand is at “an all-time high” for Royalty Exchange, with the platform's number of new investors increasing by 70 per cent last year compared with 2019, says chief executive Anthony Martini.

However, Mr Martini says investors do not own a song or have the rights to pitch it to TV and movie industry or other channels.

“It is a purely passive investment,” he says.

“What you are buying is the right to receive revenue generated by the royalties made available.”

He cites average returns across all investing formats and assets as more than 10 per cent on a 12-month return basis, with anecdotal evidence pointing to some investors achieving far higher.

Some have sold catalogues they acquired which, alongside revenue accrued during ownership, delivered returns of 70 per cent or more.

Anyone can create a free account on Royalty Exchange to review listings, followed by a verification process to confirm understanding and available funds.

If a catalogue is acquired, the platform handles the administration of payments going forward.

Its investors span large investment companies and the family offices of wealthy people globally, but mostly US domiciled.

They typically seek uncorrelated alternative assets that generate regular income. Music catalogue revenue is unaffected by stock market movements and is based on use, Mr Martini says.

“On Royalty Exchange, you are not betting on new artists,” he says.

“Most catalogues available on our platform are older songs that have stood the test of time … you generally have three years or more of returns to analyse before making an investment.”

Mr Martini says: “The longer a catalogue has been earning royalties, the longer one could reasonably expect that it will continue to earn royalties. So you are investing in largely proven catalogues.”

SongVest, which also crowdfunds new albums, echoes the long-game outlook.

"The stock market could crash tomorrow and people will still listen to music,” says Mr Peace.

“So as long as there are radio stations and people do not cancel Apple and Spotify subscriptions en masse, they are a great hedge because that income stream will not be affected.

“As investors become more educated on these types of investments, we have seen more come to the platform.”

The concept of investing in music royalties has evolved from a relatively obscure idea to one generating mainstream attention, says Vijay Valecha, chief investment officer of Dubai-based Century Financial.

“In fact, the market for music royalties has gotten downright frothy, attracting billions in investment dollars,” he says.

“Catalogue sales are not new … music industry insiders regularly bought and sold music rights between themselves.

“What is different today is the ability for retail investors to gain exposure to this new asset class.”

There are “compelling benefits”, including the uncorrelated investment nature of royalty payments that “make them the purest form of alternative investment”, says Mr Valecha, highlighting the yield possibilities.

“Royalties have a track record of strong earnings, with potential to deliver decent yields that rival bonds and dividend-paying stocks,” he says.

He also details risks, such as investors potentially “dramatically overvaluing” the worth of a royalty stream “due to naivete with the industry”.

“This danger is exacerbated by the fact that income from music royalties usually quickly declines in the first few years after the release of the song before levelling off," he says.

“Changes in music tastes and pop culture trends can affect returns based on the whims of both fans and industry executives alike.

“Lastly, investing in royalties through a fund may lack transparency or, more precisely, an unwillingness to disclose cash flows. In such instances, it could be hard to estimate long-term financial performance.”

However, Mr Valecha says: “Considering revenue in the global music industry could possibly double in years to come, a small proportion of the portfolio, perhaps, can be considered for allocation to this new asset class.”

Steve Cronin, founder of DeadSimpleSaving.com, also spotlights factors such as difficulty in pricing royalty streams accurately, “unless you have a lot of experience in the financial side of the music business”.

“This is definitely fun money only,” he says. “I definitely would not stake my retirement on this, you could easily end up paying … money for nothing.”

Mr Caudill, meanwhile, says he has been “pleasantly surprised” by the returns on his music investments, with some catalogues delivering a first distribution 10 times what he expected.

"Music royalties are a very significant part of my investment portfolio, alongside early stage venture capital,” he says.

“Because the assets are backed by copyrights, the term of the investment is life of the artist plus 70 years, so the potential is there for strong growing distributions that can be passed onto one’s children.”

Source:
The National