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After the gold rush

25 November 2020 By Liam Proud

Music-industry bigwig Merck Mercuriadis wants to make songs into an asset class. In a sense he has already succeeded: the former Elton John manager has snapped up over $1.8 billion of rights from artists including Rihanna and 50 Cent through his London-listed vehicle Hipgnosis Songs Fund. The investment thesis nonetheless has some dissonant undertones.

Mecuriadis is surfing two big trends. One is the step change in the way rights owners are remunerated: streaming services like Spotify Technology pay songwriters a fee every time their tunes are played. With the right selection of songs, that can create a stable cash flow which lasts until the copyright expires – usually 70 years after the writers’ death. The royalties can rise even faster if song owners like Hipgnosis get other artists to cover and sample their tunes.

The other big theme is the collapse in long-term government bond yields, which forces investors to scour for alternative sources of income that won’t get hit when the economy weakens. Hipgnosis appears to fit that bill, since its shares throw off a 4.5% dividend yield. Industry-wide income from performance royalties had a slightly negative correlation with rich-world GDP growth between 2005 and 2019, according to a Breakingviews analysis of IFPI and OECD data.

But buying esoteric assets brings new risks. The music industry has changed hugely over the past decade, and could do so again. Spotify and others may eventually be big enough to squeeze rights owners into surrendering more of their share of the pie.

Investors are also taking a big punt on Mercuriadis and his advisers, including artist Nile Rodgers. Peerless musical reputations notwithstanding, they only have a short track record of investing money. And investors will struggle to make their own judgments about the fund’s worth since it doesn’t disclose much on individual songs’ performance, or its assumptions for future streaming growth. Instead, investors have to rely on an independent valuer’s assessment.

Frenetic dealmaking adds further risk. Since listing in July 2018, Hipgnosis has spent an average of almost $15 million a week on songs. That increases the odds of hitting a bum note. Since interest rates are likely to stay low, investors will keep pouring money into music rights. But as with all untested assets, they should be prepared for some screeching feedback.

 

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