The music industry’s revenue has grown steadily over the past six years to reach $ 40 billion, by some estimates, after streaming services such as Spotify and
started to gain ground over six years ago.
According to Jordan Stein, director of Cresset Private Capital in Chicago, all this money has opened up an opportunity for investors as public and private funds reclaim the music royalty rights from song catalogs to create diverse portfolios.
On the public market, vehicles such as the
Hipgnosis Songs Fund
(ticker: SONG), which is listed on the London Stock Exchange in the UK, allows investors to get a tranche of royalties every time a song is aired, performed or performed in an advertisement or movie. There are also markets such as Royalty Exchange and Songvest which allow individuals to bid on intellectual property rights which are auctioned off by artists, independent labels and publishing houses.
One of the reasons investors are drawn to music royalty funds is that their performance has a low correlation with other financial stocks. Even at the height of the pandemic, when live performances were largely interrupted and global markets were volatile, people continued to listen to music, Stein says.
“People will always be listening to music, which offers protection against negative scenarios,” he says.
The returns generated by these funds, both public and private, have been in the range of 5-10%, although private equity funds could likely generate higher returns by eventually selling the royalty rights portfolio than they do. they constituted.
Penta recently spoke with Stein about the growing investment opportunities for wealthy individuals and families in music royalty rights.
A booming market
Intellectual property rights in the world of music are generated by copyright in lyrics and lyrics, considered as publishing rights, and masters or song recordings, which are rights related to recordings. originals of the song.
Regarding publishing rights, future royalties are shared between songwriters and publishers even if a new version of a song is played. The main recordings are owned by record companies and part of the payments goes to the artist. The dynamics of this sector of the music industry became widely known when Taylor Swift began to end this arrangement with the re-recording of her previous studio albums. In doing so, she acquired full ownership of her own masters.
The intellectual property rights markets for song publishing and master recordings have together generated around $ 40 billion in annual revenue and are expected to continue to grow at 9% per year through 2030.
The driving force behind this growth is the increase in accessibility to music through streaming services and from social media platforms such as TikTok and Twitch, “where all of these content creators are using music,” says Stein. “It increases the number of songs you listen to, which generates all this cash flow. ”
Another boost to the industry comes from regulators making rules in Europe and the United States to ensure artists are paid fully for their songs, even when they are following someone’s YouTube post in the background. a.
“For a while it was like the Old West,” says Stein. Current and future regulations will ensure that the people who own and create the enormous amount of content used today “are fairly compensated”.
How to invest in royalty rights
One of the ways that individual investors can gain exposure to the growth of the music industry is through a publicly traded company. Hipgnosis, with $ 2.2 billion in assets and listed on the London Stock Exchange, is the largest music royalty company focused on proven great musicians and their song catalogs.
Marketplace gives investors the ability to bid on an individual catalog or, in some cases, a single album or song. Royalty Exchange, for example, recently sold future royalties to Jay-Z’s Grammy Award. State of mind of the empire, with the voices of Alicia Keys, for US $ 190,500. Based on past royalties, the marketplace provides a “theoretical internal rate of return” on this ten-year investment of 9.9%.
But wealthy individuals and families, as well as institutions, are more likely to invest in music royalties through private markets. According to Stein, there has been “significant growth” in the number of private funds created to recover these royalty rights “due to the explosive growth the music royalty segment has experienced.”
Private equity managers such as KKR have entered this arena. Although Stein says it’s not clear what kinds of structures these companies can create, they are likely to look like a typical private equity fund with a five- or seven-year term. The underlying portfolio that is purchased will generate continuous cash flow for investors as long as the fund exists, in addition to a windfall when the catalog is finally sold.
“In general, the larger and more mature the catalog or catalog portfolio, the higher the multiple at which it can sell,” says Stein.
Catalogs for well-known large artists sell at multiples of around 15 times their average cash flow, generating annualized returns of around 5-10%, while smaller catalogs of lesser-known artists are said to have sold. for smaller multiples, generating returns between 10 and 20%, he says.
NFTs could propel growth
Another potentially important source of royalty income could be generated by non-fungible tokens, or NFTs. Blockchain technology has the potential to radically change the market for songwriters and musicians by removing layers of administrative intermediaries, including publishers, distributors, record labels, and performing rights organizations.
PROs are responsible for ensuring that those who own the rights to the songs are “paid fairly and accurately based on the number of times a song is played in a bar or streamed on Spotify,” says Stein. It can take months, or even longer, for all of these funds to flow in. The Kings of Leon band started the trend in March when they sold their latest album and associated material as NFT, Rolling Stone reported at the time. The total sale would have generated more than US $ 2 million.
“You could do in one day on [a] sell the equivalent of hundreds of millions of streams and you get paid instantly, ”says Stein.