There is nothing new about investors turning to the music industry. Just remember John Lennon’s concerns about Northern Songs, the publisher that owned the rights to Lennon and McCartney hits, bought out by “men in suits” in 1969.
The interest has always been there, from patrons buying an 18th century violin, loaning it to famous musicians and eventually reselling it for a profit, to companies simply buying up publishing houses. However, music is an ever-changing industry and has evolved tremendously since The Beatles topped the charts.
The advent of the internet has created an ever-growing snowball effect, and for Gary Moglione, leader of the Momentum Multi-Asset Value Trust, it is only a matter of time before its potential will emerge. investment does not materialize.
“It’s an asset class that we really love… We’re going to be sitting in this space for a long time, patiently waiting for these changes to materialize,” Moglione said.
The manager cited several reasons for this positive view, including the benefits of diversification, regularity of income and the potential for capital growth, which he believes will benefit from the significant structural changes taking place in a disrupted and growing market. constant.
Online subscription-based models are mushrooming on all fronts, especially in entertainment, and music was one of the first industries to see its potential. Platforms like Spotify were quick to strike new deals with publishers giving customers an irresistible deal: all the music you’ll ever need at the push of a button.
This latest chapter in the history of the music industry follows years of mass piracy and file sharing that rocked the foundations of a sector that made most of its income from record sales. physical. Profits have now returned to levels last seen in the early 2000s.
In 2020, the revenues of the global recorded music industry grew 7.4% to $ 21.6 billion (€ 18.34 billion), according to the Federation’s latest global music report. International Phonographic Industry (IFPI), marking the sixth consecutive year of growth.
This compares to $ 23.6 billion in 2001 and a 20-year low of $ 14 billion in 2014, when streaming platforms were gaining strength, but not enough to offset the drop in physical sales.
Millennials and Generation Z are expected to propel change, joined by retired baby boomers. Goldman Sachs predicts revenue will grow to $ 131 billion by 2030, combining recorded contributions, live music and publishing.
Moglione, who is part of a team managing over £ 800million, holds positions in Hipgnosis Songs fund and Round Hill Music fund, both of which have caught the attention of investors since their IPO in 2018. and 2020, respectively.
Speaking about his choice for Hipgnosis, which was founded by former Elton manager John Merck Mercuriadis, Moglione said it was partly based on the firm’s schedule for acquiring assets.
He points out that in a business where you pay for multiples based on past performance, Hipgnosis paid 12 times earnings multiples for music catalog portfolios at a time when the music industry was already growing. constant, even though she was still recovering from one of the greatest crises in her history.
“Normally in the stock market you would have to pay for it, and you would pay huge multiples. The multiples paid, relative to the equity market, remain very attractive from a valuation point of view, ”said Moglione.
According to the Berklee College of Music in the United States, established classic catalogs are traded between 10 and 15 times more than publisher’s net share (NPS), with newer and less popular ones being sold about five to ten times. The NPS is defined as the amount of royalties collected by a music publisher minus the amount that must be paid to writers, performers and others.
Despite these positive numbers, Moglione said it was not easy to sell the idea to clients, namely retail clients, wealth managers and discretionary fund managers. Potential buyers have shown interest but have remained reluctant to invest in the music industry.
However, he said some investors were rallying to the idea as growth in the industry began to show on earnings numbers. This should lead to more competition, with more private equity vehicles jumping into the listed space.
Some might consider paying 12 x NPS to be expensive, especially if the asset isn’t quite appealing. However, platforms spread across the entire audiovisual spectrum increasingly need music to maintain their appeal, which is likely to support the growth of the music industry.
Not that long ago, only movies and a few TV series asked for permission to use songs as themes or background music. However, the rise of subscription-based models like Amazon Prime Video and Netflix has been a game-changer, especially when most customers see this expense as just another utility bill they’re unlikely to make. to cancel.
Owners of music catalogs are expected to take advantage of this trend, with streaming rights now the main source of earnings for the industry, rising 19.9% in 2020 to $ 13.4 billion, according to the report. ‘IFPI. Meanwhile, sync rights to songs appearing in films totaled $ 400 million last year, and social media sites such as Instagram and TikTok are expected to generate additional revenue.
In the fiscal year ended March, Hipgnosis spent $ 1.08 billion on song rights to names such as Neil Young and Shakira, bringing the total portfolio value to $ 2 billion across 138 catalogs, making a profit before tax of $ 44.5 million.
China turns up the volume
The music industry is also expected to benefit from China’s growing prosperity. In 2020, the country became the seventh largest music market in the world after spending years outside the top 50.
According to Shanghai-based iResearch Consulting’s Online Audio Industry Report 2020, the country’s online audio industry market revenue was CNY 17.58 billion ($ 2.77 billion), with estimates showing market revenue of CNY 54.3 billion by 2022.
Nonetheless, Moglione said that neither Hipgnosis nor Round Music will provide great exposure to China, at least in the short term, as local Chinese companies have a strong presence in the market and musical tastes can differ significantly.
“Vehicles like Hipgnosis and Round Hill have a lot of western music, so you’re not going to catch up on this channel because local Asian music and local dialect music would be the main driver,” he said.
New York-listed Chinese conglomerate Tencent Music Entertainment owns the music streaming platform QQ Music in partnership with Spotify, as well as Kugou and Kuwo, two other popular music subscription services. As of June 2021, these combined services had 66.2 million paid users, up 40% per year, with 623 million monthly active users.
China is not only gaining presence in the streaming industry, but also in the vintage instrument sector.
Tim Ingles, co-founder of quality musical instrument dealer Ingles & Hayday, believes Asia and China will soon become much more dominant given the growing number of classical music students and international respect for the Beijing Conservatory. .
“There is a very strong interest in the development of the cultural sector,” said Ingles.
“I have no doubt that China in particular, and Asia in general, will be a force to watch in the future in the field of classical music.”
Ingles, who headed Sotheby’s musical instruments department for 15 years alongside his partner Paul Hayday, said the violin market can go through all kinds of crises, financial or epidemic. However, when things get ‘sticky’ there can be liquidity issues.
“People say, why should I sell? My money is not worth anything, my life stock portfolio is not doing very well, my properties are not great. The last thing I’m going to do is sell my Stradivarius, ”he said.
This resilient sector has also seen a noticeable increase in prices. Ingles gives the example of a violin worth £ 30,000 in the early 1970s which he recently sold for £ 5million. High-profile sales to a relatively small owner’s club tend to generate inflation.
But how and when to profit from an investment like the Messiah Stradivarius, the world’s most expensive violin with an estimated price of over $ 20 million?
“Often, instruments are owned within families and passed down from generation to generation and hit the market every 30 years or so. But even if someone is buying as an investment, they should aim for a 10-year holding.
Ingles, who has been with the business for 25 years, said interest from private equity firms is still low.
“If a financial institution comes to us, it’s usually because there is someone on their board of directors who is interested in music,” he said.
The clients are usually foundations which then lend the instrument to players, but also institutions like the National Bank of Austria, which built up a collection in the 1990s and completes it today.
Nonetheless, the advent of online auctions has widened the network to catch buyers and Ingles said its last sale in June had 102 new bidders.
“This could attract investors to the market who are less interested in the instrument but more in the assets,” he said.