How to play the music royalty boom as streaming services fuel growth
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Canadian pop star Justin Bieber recently sold his song catalog rights to a British investment firm for $200 million, joining a parade of big-name artists who have struck deals with major investors.
A music royalty land grab is underway, and a growing number of players — from private equity firms to mutual funds and entertainment giants — are getting involved in a catalog acquisition frenzy.
But private investors also have opportunities to receive royalties from music. The strong consumption growth is fueled by paid streaming services like Spotify and social media platforms like TikTok, YouTube and Instagram.
“It’s an emerging asset class,” said Rob Tétrault, portfolio manager and head of the Tétrault Wealth Advisory Group at Canaccord Genuity Wealth Management in Winnipeg.
“I think we’re going to stream more next year than we do today, and even more in five years. That’s one reason we own it [in client portfolios].”
Goldman Sachs Group Inc., in its industry report “Music in the Air” published last June, predicts that global music industry revenues will grow to US$53.2 billion by 2030. That’s $7.5 billion more than the 2021 forecast of $45.7 billion.
This asset class has also attracted Toronto-based Brookfield Asset Management Inc., which last fall bought a stake in US music publisher Primary Wave, owner of the rights to Whitney Houston’s hits and others.
Music royalties are a compelling alternative investment for returns and even growth — if you don’t pay too much for it — because they’re uncorrelated with the economy and stock markets, says Mr. Tétraut.
One risk of investing in this asset class is that people will stop paying for streaming, but that’s unlikely because consumers are used to paying monthly subscription fees that aren’t onerous, he says.
Still, a song or catalog could stop becoming popular because the artist is shunned over something of a scandal, he adds.
“Obviously, the more you diversify the music catalogues, the less risk there is,” he says.
Strategies of Canadian players
In Canada, investments in music royalties are now primarily available to accredited investors. There are two private alternative investment funds, while Toronto-based Music Royalties Inc. is a royalty earning company with plans to go public.
Unlike blockbuster deals with famous artists, song rights can also be acquired at cheaper valuations from co-songwriters, producers, managers and others who also own part of the royalties.
The ICM Crescendo Music Royalty Fund, which has raised $65 million since its inception in 2020, owns rights to music created by artists such as Taylor Swift, Tim McGraw, Faith Hill, Lauren Daigle, Sleeping with Sirens, Janis Joplin and Gordon Lightfoot is listed.
“We aim to pay 10x to 12x cash flow for royalties,” but catalogs from famous artists have traded for 20x to 30x, says David Vankka, chief executive officer of ICM Asset Management Inc. based in Calgary.
ICM’s strategy is to buy assets across genres and types of licensing rights, he says.
“We own pop, rock, electronic, R&B, hip-hop, classical and Christian music,” he says. “We just bought a Latin catalog as well.”
The fund pays a monthly distribution and yields around 6.5 percent. In 2022, it returned about 15 percent, depending on unit series, after its financial statements and valuation were audited by KPMG.
The Barometer Global Music Royalty Fund, launched in 2021 by Toronto-based Kilometer Music Group and Barometer Capital Management Inc., has raised approximately $80 million so far.
The fund owns rights to four of the top 10 songs of all time streaming on Spotify. they include Blinding lights by The Weeknd, the #1 streamed song; sunflower by Post Malone; A dance by Drake and Closer by The Chainsmokers.
The fund also has music rights to die for you by The Weeknd. The song was first released in 2016 but has come back to life thanks to TikTok. It reached #6 on the US Billboard Hot 100 record chart and a remix by The Weeknd and Ariana Grande was released on February 24.
“Part of our thesis is that when you buy the greatest songs in the world, great things will happen to them,” said Michael McCarty, CEO of Kilometer Music Group, a music creation and rights management company.
“Miniature Venture Capital Fund”
The Barometer fund, which distributes quarterly, returned 6.5 percent in 2022. After a third-party evaluation of his music catalogs, he achieved a total return of 11.5 percent.
But there’s now a potential growth spurt from deals with songwriters [including Prince 85 who has worked with The Weeknd] who will create new catalogs for the fund in a Toronto studio, he says.
“We believe that we will achieve much higher returns with this [smaller] buckets than the mainstream catalogues,” says McCarty. “It’s a higher risk, but we kind of look at it as a mini venture capital fund.”
The fund, which has paid 10 to 20 times next year’s expected earnings for song rights, also has a $50 million line of credit with a US financial institution for a “significant war chest,” he adds.
Alignment with “hymn songs”
Music Royalties, which has raised $20 million from private placements since 2018, owns rights to songs sung by artists like the late Avicii, Drake, Rihanna and bands like The Who and Dire Straits.
“We just target the anthem songs, or the ones we all know,” with a diversification by genre and music era, says Tim Gallagher, CEO of Music Royalties and former CEO of Metalla Royalty & Streaming Ltd.
The company has about 300 shareholders who receive a monthly payout.
“We have tripled the dividend [$0.01 cent to $0.03 cent a share] and the stock price over the last four years,” he says. “We just passed the $5 million milestone in dividends paid to shareholders.”
Music Royalties has paid 5x to 18x cash flow for song rights, but “we’re trying to average 10x multiples,” says Gallagher.
It acquired some of its music rights through the Denver-based Royalty Exchange, an online platform that allows private and institutional investors to buy and sell royalties. Raleigh, NC-based SongVest and Luxembourg-based ANote Music are other online marketplaces.
Music Royalties, which has no debt and plans to raise another $10 million from private placements this year, plans to go public at some point, says Mr Gallagher. “We just want to be smart with the timing.”
“First inning” only for entertainment fees
Best known among publicly traded music royalties is the London Stock Exchange-listed Hipgnosis Songs Fund Ltd., co-founded by Canadian-born music executive Merck Mercuriadis.
The fund has rights to songs by artists such as Mr. Bieber, Neil Young and Justin Timberlake. However, its shares have struggled over the past year as interest rates have pushed up the cost of its debt.
Music Royalties, which is 90 percent invested in music rights, has also diversified in other ways. It receives a book fee from head first javaa best-selling Java programming book on Amazon, and a film license from Rod die modela film about rock star Rod Stewart in his early years.
Getting cash flow from royalties is a long-term story, and it’s possible that one day investments will focus on a copyrighted book, TV show, game or movie, says Gallagher.
It took 60 years to understand real estate investment trusts (REITs), and now there are different types of REITs, he says, drawing a parallel.
“The very idea that you could list real estate on the stock exchange was just strange,” he says.
Given the longevity of copyright protection, music rights are an attractive investment, he argues.
“We’re only in the first inning for entertainment licenses.”
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