The investment community’s never-ending search for the holy grail of recurring income streams has brought an old school asset back into vogue in the last 12 months.
The search for an earnings stream that is entirely predictable, uncorrelated with economic activity and recurring ‘ad infinitum’ is like the search for the holy grail, no one actually knows if it really exists but that doesn’t stop a lot of people from looking for it. However, throughout history, a number of assets have been created that have tried to replicate those characteristics and every now and again an old asset class that was on the precipice of being relegated to the annals of history gets dragged back into the spotlight.
In 2020 that’s exactly what the COVID-19 pandemic did for music rights.
What makes music rights an attractive asset?
Streaming has never been as popular (and as stable) as now, and the dynamically expanding market keeps on increasing the demand for music content. Platforms like Netflix, Amazon, Disney+, Hulu, YouTube and Spotify are just some of the 200+ streaming services that are continuously growing their user base - and content; in addition to social media like TikTok and Instagram, where music also plays a key role, all resulting in a steady income generated for copyright owners.
Music rights owners also utilize “syncing”, a technique when they strategically place their music into movies, TV shows and ads - many times with the help of in-house sync-teams - to boost the revenue coming from their titles.
Also, research has shown that there’s only a low correlation to economic activity - see the following graph:
These attributes definitely push this asset towards the Holy Grail category, but let’s have a look at what exact numbers we’re talking about.
What’s the actual value of music?
Of particular interest has been the growth in streaming revenues from the “Golden Oldies” that has seen their values escalate and a number of significant catalogues change ownership including Bob Dylan’s sale of his catalogue to Vivendi’s (VIV.France) Universal Music Publishing Group for a reported US$300 million and Stevie Nicks sale of part of her catalogue to Primary Wave for US$80m.
According to Barry Massarsky, an economist and consultant who specialises in valuing music portfolios and has reviewed over $4 billion in music funds, “rock portfolios from the 1970s and early 1980s are especially sought after” which has driven the value of publishing rights on these older songs higher in 2020. The revenue multiple paid for publishing rights on these older songs has risen to 18x, from 13x to 14x from just two years ago.
Who is involved?
Also of interest is the increasing participation of Private Equity funds in this asset class. Historically, music publishing rights were typically owned by either the Record Labels, one of a small number of Music Royalty Funds, or by a small number of Artists or High Net Worth individuals.
However, in July 2020 we saw Shamrock Capital raising a $400 million fund focused on music and other media content IP and in January 2021, KKR agreed a deal to acquire a majority stake in the music catalogue of OneRepublic and lead singer Ryan Tedder, with reports valuing the deal at around US$200 million. These are just two examples of PE playing in this space and there have been many more transactions over the last 12 months as artists have cashed in on the value growth of their catalogues and they have needed to fill the gap in their personal income streams as touring revenues have been wiped out.
What can go wrong?
While on paper all this sounds like an investor’s dream come true, many believe that investing in music is an unchartered territory that has its own pitfalls.
A major one is the valuation risk, as the income for a song after release changes dynamically - mostly towards the negative - over time.
In addition to this, legal issues - who really owns the music, how can it be guaranteed -, technology disruptions in this fast-changing environment, as well as regulatory and inflation risks can blur the picture for a seemingly bright investment opportunity.
And last but not least the very public aspect of the music industry could be an unwelcome surprise, as the PE giant Carlyle Group has first-hand experience of when Taylor Swift called her fans to intervene with the new owners of her former recording company.
What we can only be sure of is that there will be more activity in this space through 2021 as the pursuit of the holy grail continues.