The Hipgnosis Songs Fund (HSF) kickstarted the music rights investment boom in back in 2018 when its shares first listed on the London Stock Exchange raising $1.2 billion. By then, its founder and CEO, Merck Mercuriadis, had already emerged as a leading voice for the music royalty investment case and had begun assembling a portfolio of several thousand song copyrights. HSF’s successful listing and high-profile early catalog acquisitions drew other music rights investors into the public capital markets, including Round Hill Music, which listed its Round Hill Music Royalty Fund (RHM) on the London Exchange in 2020 and Reservoir Media, which went public through a SPAC merger backed by Roth Capital in 2021.
Fast forward to 2023 and both HSF and RHM are going private. Earlier this month, Round Hill announced that Alchemy Copyrights, LLC, dba Concord, will acquire all outstanding shares of RHM in a deal valued at $469 million. Then last week, Hipgnosis announced plans to sell 29 song catalogs currently owned by HSF to Hipgnosis Songs Capital, its unlisted private equity arm back by Blackstone, in a deal worth $440 million. Both Hipgnosis and Round Hill attributed the moves to an undervaluing of their shares by public markets.
The catalog sale will serve “as a catalyst for a re-rating of [HSF’s] share price,” Mercuriadis said in an internal email, by providing the funds to pay down debt and to buy back $180 million of HSF’s own shares.
“Given the substantial share price discount to fundamental value in recent months, share buy backs enable HSF to invest further into the remaining portfolio at a material discount to its fundamental asset value,” according to the official announcement. “These disposals are of the smallest magnitude possible that would provide the required capital to execute on this strategy, whilst ensuring that the ongoing investment case for Hipgnosis Songs Fund remains intact by protecting the strength of the remaining portfolio.”
Round Hill offered a similar justification for its sale to Concord.
“RHM has experienced a significant de-rating over the last year driven by the inflationary and higher interest rate environment, which has impacted most listed alternative investment companies,” the company said. “The RHM Board believes that the Acquisition is in the best interests of RHM Shareholders by providing RHM Shareholders with an opportunity to realize the value of their RHM Shares for cash at a significant premium, and a value greater than the highest price at which the RHM Shares have traded since the Company’s IPO in November 2020.”
It’s true that the macroeconomic landscape has changed since HSF’s and RHM’s respective IPOs. At the time, interest rates were riding more than a decade of record lows while equity prices were riding high, creating an environment of low yields from traditional asset classes. Institutional investors like pension funds, insurance pools and non-profit endowments, in their perpetual need of stable, long-term returns, were searching for high-yielding but relatively low-risk places to put their money. Some of that money ended up flowing into new, alternative asset types such as copyright royalties.
With borrowing costs at record lows, non-institutional investors were able to amass bulging war chests of cheap money, much of which also got plowed into alternative asset classes, including fine art and collectibles, and music rights, in addition to more exotic assets like cryptocurrency.
Since the end of 2022, however, interest rates of soared as the Federal Reserve and other central banks have raised rates to combat post-Covid pandemic inflation. Those higher rates have resulted in higher bond yields and lower equity prices, and put an end to cheap money, luring many long-term investors away from alternative assets in favor of more traditional ones like bond and credit markets.
At the time of the HSF IPO, the music business was also still on the upside of the streaming adoption curve. But that landscape, too, has changed. Streaming adoption has reached saturation levels in most major markets, leaving the industry to do the harder, grubbier work of squeezing higher returns from the existing subscriber base (a challenge the movie and TV business is also confronting).
According to the RIAA’s 2023 mid-year report, revenue generated from paid subscription streaming in the U.S. grew by 11% in the first six months on a retail basis, even as growth in the total number paid subscriptions continued to slow, rising only 6.4%. That suggests the price hikes enacted by Apple, Amazon and Spotify this year have been successful at increasing revenue per subscriber. But the work will only get harder over time as the untapped portion of the total addressable market continues to shrink.
The shift in the macroeconomic environment, coupled with the changing secular trends in the music streaming economy, have dimmed many investors’ appetites for royalty-backed assets.
Not all investors’ appetites, however. The private equity market for music rights has remained relatively robust, as evidenced by Carlyle Global Credit’s recent commitment of $500 million to a new music investing venture, Litmus Music, as well as Blackstone’s acquisition of HSF assets, even as publicly traded royalty funds have seen their share prices lag the market.
Whether that trend is good long-term news for the music industry and its stakeholders, however, is another question. Private equity investors, as a rule, are not a sentimental lot. Their time horizons tend to be shorter, and their return-rate thresholds higher than those of pension funds and endowments. They may back or hire executives with sector experience to identify and manage investments while they hold them, but their commitment to any given sector generally does not extend beyond the point where returns fall below their thresholds.
To be sure, most song and master-recording catalogs remain firmly in the hands of industry incumbents, even after the flurry of deals over the past half decade. Many of the most valuable catalogs sold to date, in fact, such as those of Bruce Springsteen, Bob Dylan and Neil Young, have been acquired by incumbent major music publishers and record companies.
Yet, as MIDiA Research analyst Mark Mulligan spelled out in an inciteful blog post last week, the streaming economy “is shaped by diverse and often competing needs.” As private equity capital gains a larger direct stake in that economy, its near-term priorities will weigh more heavily in that competition.
“Any successful system with diverse stakeholder needs operates by striking a pragmatic balance of meeting those needs. But a truly good compromise means that neither party is truly happy,” Mulligan writes. “A brutal assessment of streaming would be that no one is happy. Every stakeholder, except perhaps, the consumer, has beef with how streaming operates. All of which means that any fixes (at least those that will succeed) will need to deliver some form of benefit to all stakeholders, big and small.”
The big ones tend to have the loudest voices, though.