By FERGUS SHAW
In 2019, the Hipgnosis Songs Fund represented a new asset class within our Multi-Asset Portfolios – Music Royalties.
We are in the fortunate position of having studied the asset class since 2012 and are therefore familiar with many of its idiosyncrasies. With the Fund being the first such closed end investment company to list in London, many analysts and financial journalists have had to grapple with the asset class for the first time.
A recent update call with the company confirmed our assessment of the investment opportunity provided by music provided libraries are purchased well and managed effectively. The meeting further confirmed our observation that broader market participants require time to fully get to grips with the nature of music acquisition, valuation and management.
The market-place for music rights is informal and unusual, in transactions the seller is often an artist with an eye on legacy as much as highest price. Longstanding relationships within the music industry and an artist friendly reputation are therefore imperative if a high-quality portfolio of music is to be acquired and curated. We believe Hipgnosis founder, Merck Mercuriadis, possesses these attributes.
Questions have been posed with regards to the tendency of the twice-yearly independent valuation of the portfolio to result in uplifts to the value of catalogues in relatively short periods post acquisition. Our reading of this is that it is proof of the Hipgnosis team’s ability to avoid overpaying. The average multiple of catalogue earnings that has been paid for the portfolio as it currently stands is 14.6x which we believe is fair when compared to multiples being paid in other asset classes or indeed within music sector where the catalogues of Bob Dylan and Stevie Nicks are believed have changed hands on much higher multiples of current revenue streams.
The collection of music royalties is not straight forward in the way one might view collecting rent on a building from a tenant. The same music can be played or used across multiple jurisdictions and media and therefore multiple agencies are involved. Royalties due are therefore subject to calculation, apportionment and collection process. This inevitably results in some level of time lag. Poor catalogue management would see greater time delays and perhaps royalties left in escrow for prolonged periods. Our view of the Hipgnosis team is that they are fully focused on maximising the value of the catalogue and therefore utilise best practice, including technological innovation to ensure royalties are collected in the shortest timeframe achievable and any outstanding are chased with vigour.
Recent catalogue acquisitions support the hypothesis that Mercuriadis is recognised by important artists and music industry professionals as someone to be trusted to both protect legacy and enhance value, income and standing of musicians. The catalogue of producer rights formerly owned by Jimmy Iovine, a 50% interest in the catalogue of Neil Young and the catalogue of Lyndsey Buckingham are trophy assets both in terms of revenue potential and the artistic gravitas they bring.
The attributes Merck brings to Hipgnosis: deep relationships, the trust of song writers and strategic vision, are hard to replicate. His advocacy for song writers is rooted in his own experience in the industry. Integrity within the community is hard won. Other players can offer more money and that is enough for some. But can those players credibly offer artists the curation and care they feel their legacy deserves? The evidence suggests not. Of course, the other side of the coin to this quality is key-man risk. However, this is a risk we can easily understand and monitor. His majority ownership of the management company as well as a stake in the Trust aligns his interests with shareholders, in our view.