This July, roughly six years after the debut of Hipgnosis Songs Fund (HSF) on the London Inventory Change, the comparatively short-lived experiment of publicly traded catalog funds — also referred to as funding trusts — will probably finish. World funding large Blackstone is anticipated to win over a minimum of three-quarters of HSF’s shareholders with its $1.58 billion provide to purchase the 65,000-song catalog.
The one different listed fund, Spherical Hill Music Royalty Fund, was taken personal in November when Harmony acquired it for $468 million. However although their runs had been quick, these funds reworked how the funding world sees music. Hipgnosis founder Merck Mercuriadis led the cost to persuade institutional buyers of the steady, noncyclical nature of music rights, and so they poured billions into the asset class, bid up the costs of music catalogs to unprecedented heights and fueled a frenzy for acquisitions, which meant creators bought extra money than ever for promoting the rights to their work.
Investments in music royalties preserve thriving within the personal market — the place the Hipgnosis and Spherical Hill funds proceed to do enterprise — however the cash is now flowing to asset-backed securities, the identical monetary automobile used to create “Bowie bonds” within the Nineties. Up to now two years, Harmony, Kobalt, HarbourView Fairness Companions, Chord Music Companions and others have raised $3.3 billion utilizing securitizations, and music mental property buyers say cash of that magnitude will assist preserve catalog costs and multiples close to record-high ranges.
Regardless of the game-changing impact that the Hipgnosis and Spherical Hill funds had on the music enterprise, they confronted various obstacles. For one, buyers “misunderstood” the best way that music copyright grants administrative management to the proprietor, Spherical Hill co-founder Josh Gruss says. This was borne out by the due diligence report HSF launched in March, which indicated buyers didn’t comprehend the rights HSF had acquired or the shortage of management it had over a lot of its portfolio.
However rates of interest might have been the demise knell. When charges had been low, HSF and Spherical Hill supplied engaging returns for a suitable stage of danger, however when charges started rising, the funds’ dividends weren’t practically as engaging. By the top of 2022, the Financial institution of England’s official financial institution fee rose to three.5%, which put downward strain on HSF’s share worth as a result of the risk-free fee wasn’t removed from the fund’s dividend. Spherical Hill was equally affected. “In the event you can put your cash within the financial institution and earn 4.5%,” Gruss says, “Spherical Hill shouldn’t [pay investors] 4.5%.”
HSF had different issues, too, together with sizable debt and the lasting pall forged by a Sept. 7, 2022, Monetary Occasions article that described HSF’s stalled progress as rates of interest rose and a subdued share worth that left the fund unable to promote extra shares to fund catalog acquisitions. “If the [Financial Times] thinks it’s an issue, it’s probably going to be an issue,” says Philipp Saure of ContourMusik, a agency that focuses on personal securitizations of music property.
Had HSF been based at present, it could have put extra give attention to asset-backed securitizations. First deployed within the music enterprise by David Bowie in 1997 to lift $55 million from his recorded music catalog, they permit firms that personal music rights to promote debt, utilizing music royalties as collateral.
The scale of latest ABS offers dwarfs the cash raised by Bowie bonds. In 2022, Harmony brokered a $1.8 billion securitization, and Chord, a enterprise of KKR Credit score Advisors and Dundee Companions, did one for $733 million. Hipgnosis Music Administration, a unique Hipgnosis firm that advises HSF, additionally raised $222 million via an ABS that yr. In 2024, HarbourView and Kobalt put collectively $500 million and $267 million ABS offers, respectively, and sources say that way more unpublicized securitizations have closed in recent times.
Whereas each the ABS and funding belief fashions let buyers purchase into recorded music and publishing royalties, there are key variations between the 2. ABS debt is bought by institutional buyers corresponding to pension funds and insurance coverage firms with time horizons that match the lengthy durations of music property. “They’re not as impatient [as retail investors],” Saure says, “so that you don’t have this ‘trial within the courtroom of public opinion’ component.”
Institutional buyers’ want for a selected fee of return is an strategy that works nicely with established music catalogs that constantly generate money. Shares in Common Music Group or Warner Music Group are “speculative” investments that would lose cash or produce double-digit good points, says a financial institution supply, who provides that “public buyers are progress buyers, not simply money circulation buyers” who search a gradual return. In distinction, ABS buyers know precisely what to anticipate over a selected interval.
ABS offers are complicated and contain ongoing administration and customarily excessive prices, however they are often well worth the effort. “Every construction has its execs and cons, and every is better-suited to various market circumstances,” Reservoir Media CEO Golnar Khosrowshahi says. “Securitization at present is engaging as a result of it lowers [the] price of capital on this rate of interest surroundings.”
Harmony CFO Kent Hoskins says he prefers the flexibleness of securitizations over conventional debt: “We’ve very a lot appreciated the capital construction that allowed us to comparatively simply draw new debt for brand new acquisitions.” An ABS creates a belief that manages a group of property that acts as collateral for buyers. If Harmony is inside its covenants, corresponding to a selected loan-to-value ratio — the dimensions of a mortgage in contrast with the worth of an asset bought with the mortgage — he explains, the corporate can get extra debt out of a catalog’s specific worth. Time period loans are extra restrictive, he provides, and provides the borrower a decrease loan-to-value ratio. Harmony did an ABS deal in 2022 with what Hoskins calls a “comparatively low” loan-to-value ratio within the “low 40s” in contrast with ABS offers that he says have gone as excessive as 65%. That buffer allowed the music firm to do one other issuance in 2023 for $500 million, which funded its $468 million acquisition of the Spherical Hill Music Royalty Fund in November.
Music could also be a recession-proof, steady commodity, however well-diversified ABS offers aren’t with out their dangers. One supply factors to synthetic intelligence as an element that would jeopardize steady money flows if it causes a significant financial shift like pirated music did within the early 2000s.
Typically, although, institutional buyers see music as a secure asset class over time. “There was robust demand for each music ABS deal we’ve got executed,” the identical supply says. “As a number of the retail cash is strolling away,” Saure provides, “establishments have gotten extra assured.”
