Aug 15, 2017 Allen Bargfrede
The recorded music industry is finally growing at a healthy pace again after years of decline, mostly thanks to increasing streaming revenue from the more than 112 million (and growing) subscribers in 2016 – a 61% year-over-year increase from 2015. According to IFPI’s Global Music Report, 2016 saw global music revenues increase to $15.7B, a nearly 6% increase over 2015. Just last week, Warner Music Group reported its best quarter (Q2, 2017) in 14 years, with $917 million in revenue and a 59% increase in streaming cash – far more than enough to offset the continuing decline in digital download sales.
These increases are starting to gather the attention of investors, and while a lot of focus continues to be placed on technology and digital media companies in the space, more companies, fund managers, and private investors are starting to look at music rights as a relatively stable diverse asset class that is not impacted by swings in the broader asset markets. These ideas are not new: music royalty investing first came to light when Los Angeles financier David Pullman packaged David Bowie’s catalog in bonds backed by the royalty streams and sold it to Prudential. Mr. Bowie raised about $55 million in the deal, and the bonds paid interest of 7.9% annually for ten years.
More recently, the Dutch Pension Fund ABP invested in Imagem and cashed out earlier this year when Imagem was sold for between $500-$600 million to Concord Music Group, who themselves are partially owned by Barings Alternative Investments. Major transactions continue with rumors that French aggregator and label, Believe, is seeking an acquisition at a valuation of around €400 million and that Vivendi is considering spinning out its Universal Music subsidiary. Round Hill, which has a portfolio that includes songs by the Beatles, raised more than $200 million in 2014. Kobalt Music Group, through its Kobalt Capital Ltd group, manages a little-publicized music asset fund that has invested over $200 million in copyrights over the past five years. Canadian indie music publisher ole is controlled by Ontario Teachers’ Pension Fund, the main equity investor behind the more than $520 million in music assets acquired over the past decade.
The Wall Street Journal recently reported on these types of deals: “A small but growing number of investors is buying the rights to musicians’ future earnings, lured by returns that can run between 8% and 12% annually, or more when junk bonds are yielding less than 6%.” However, there are risks: the assets are often hard to value, due to unpredictable decreases in value that occur over time, and there is a lack of a fluid market for their exchange, although sites like Royalty Exchange are starting to offer platforms with more exposure to the assets.
Meanwhile, as back-music publishing assets continue to look attractive, even more creative funding systems for new and emerging artists are evolving as well. For example, Amplify, a project in the UK, takes advantage of the Seed Enterprise Investment Scheme (SEIS) – allowing investors to take up to 45% of losses as tax credits and to avoid capital gains taxes on any qualifying assets held for more than three years. The Unison Fund also recently launched in the US, with the stated goal of funding both artists and live music operations.
My firm, Blue Tile Media Partners, founded in 2016, focuses our investment on both traditional back catalog royalty streams and emerging artist investments in “equity-type” arrangement which allows investors to benefit all revenue streams of an artist. Our goal is to provide two risk portfolios to investors: low-risk, medium return from the back catalog and high-risk, high-reward through the artist investment fund. In our model, artists (and their artist managers) are vetted and offered funding in an “equity-type” arrangement, with funding coming in tranches based on successful performance.
Anytime you start to see this kind of interest in an asset class means optimism is blooming. More capital is flowing in, more investors are interested in the space, and more opportunities are emerging across the music ecosystem. While some may decry the perceived interest as part of the continued “corporatization” of music, I believe the funding can and will offer more opportunities for songwriters and artists. Personally, I’m more excited and optimistic about the health of and possibilities in the music industry today than ever before.
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