Are music royalties a new Alternative Investment? – Marc Wood writes

What if your spending on music became an investment in the traditional sense: putting money into artists’ careers with the deliberate intention of receiving returns on their royalties and other revenue streams? Record labels already build their entire business models around this premise, but what if you could do the same as an average fan? Would it still be an act of vanity? More importantly, would it actually make you any money?

An increasing number of financial firms are forming alternative investment funds that frame independent and emerging artists as the next lucrative asset class, such as Black Rock’s Alignment Artist Capital and AGI Partners’ Unison Fund. As paid streaming subscriptions continue to drive aggregate growth in recorded music revenues, industry insiders are cashing in specifically on performance royalties, which are paid to songwriters and composers every time their work is “broadcast” in public (including on streaming services). Within the music industry, publishers like Concord Music Group and Round Hill Music are acquiring legacy catalogs for unprecedented, multi million-dollar prices. According to Billboard, a songwriter’s catalog typically sells for 10 times its net publishing share (NPS), but that multiple has increased to 12x or even 16x in recent years amidst a seller’s market.

In response, some companies are even trying to launch IPOs for song royalties. The Hipgnosis Songs Fund, a music IP investment company co-founded by veteran artist manager Merck Mercuriadis (previous clients include Iron Maiden, Elton John, Macy Gray and Mary J. Blige), is planning a £200 million listing on the London Stock Exchange later this year. Music production duo F.B.T. Productions is selling off up to 25 percent of their royalty share from rapper Eminem’s pre-2013 catalog, and online royalty marketplace Royalty Exchange is helping to raise anywhere from US$11 million to $50 million to list the income stream directly to NASDAQ, under the moniker Royalty Flow. Notably, Royalty Exchange is leveraging Regulation A+ of the JOBS Act for an equity campaign in which any private investor, accredited or otherwise, can participate, with a minimum buy-in of $2,250 for 150 shares of Class A common stock.

Although music royalties may not be thought of as a real asset like a road or building, there is something strangely tangible about hearing a well-known song and realising you own the rights to it. From an asset allocation standpoint, music royalties provide an interesting means of diversifying away from other alternative investments and traditional asset classes. Brexit news flow and Donald Trump’s tweets can influence the direction of equity and bond markets, but these factors are unlikely to dictate whether a song gets played or not.

The investment case for music royalties is also supported by an increasingly positive backdrop for the industry. Of course, the sector did experience a challenging period over the first 10 to 15 years of the 21st century, after the internet became a gateway for illegal downloading and file sharing. This led to a decline in revenues, which put significant pressure on businesses. In addition, copyrights became attractively priced, prompting an increased willingness amongst writers to sell their material.

The tide began turning in 2015 when global recorded music revenues increased for the first time since 1999, largely driven by technological disruption. Since then, revenues and royalty income have continued to rise, buoyed by the growth in music streaming services.

The global proliferation of smartphones has played a key role in this turnaround by increasing the availability and ease of legal music consumption, most notably in emerging markets. Meanwhile, the introduction of ad-funded free streaming in developed markets helped to dramatically reduce piracy rates.

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(Source: Marc Wood)