J.P. Morgan simply wrote a glowing endorsement of Hipgnosis Songs Fund. Right here’s why.


MBW Reacts is a collection of brief remark items from the MBW group. They’re our ‘fast take’ reactions – via a music biz lens – to main leisure information tales.

J.P. Morgan issued a glowing analysis observe on UK-listed J.P. Morgan, sustaining its ‘obese’ ranking on HSF’s inventory.

J.P. Morgan’s analysis observe on Hipgnosis Songs Fund was a thundering vote of confidence in HSF’s enterprise, following a latest flurry of enterprise media scrutiny.

Particularly, a run of three comparable latest articles within the Monetary Instances on HSF every questioned features of Hipgnosis Songs Fund, together with:

  • The actual fact HSF hasn’t purchased a catalog up to now 12 months;
  • The truth that it’s refusing to boost new funds;
  • The influence of present macro-economic pressures on HSF’s worth, and its funds.

We’ll get to some necessary element behind all three of these shortly, and what J.P. Morgan has to say about them.

However first issues first: Stated protection of HSF has led to some follow-up reporting, which in flip has led to the wonky conclusion in some quarters that ‘Hipgnosis has burned via its money’.

As a lot as that concept would possibly deliver glee to these with the knives out for highest level since 2008 within the US and UK.

Understanding Hipgnosis

To grasp the Hipgnosis group – and why it nonetheless has a possible pipeline of billions of {dollars} in its M&A arsenal – we first must refresh our recollections of the three Hipgnosis-branded firms:

  • Hipgnosis Songs Fund (HSF): a UK-listed FTSE 250 firm that has acquired over $2 billion in catalogs up to now, which have collectively been given an impartial valuation of $2.7 billion;
  • Hipgnosis Songs Capital (HSC): a personal fund, fully-funded by Blackstone, that has spent round $300 million buying copyrights in 2022 alone, from the likes of Justin Timberlake, Kenny Chesney and the Leonard Cohen property;
  • Hipgnosis Tune Administration (HSM): a ‘track administration’ and Funding Administration firm that advises on the investments of HSF and HSC, and manages the belongings of each.

In essence, firm (iii) – Hipgnosis Tune Administration – chooses which catalogs to spend HSF’s and HSC’s cash on.

Over three years (2018-2021), HSM constructed up a portfolio for Hipgnosis Songs Fund of ≈65,000 copyrights from writers equivalent to Mark Ronson, Purple Sizzling Chili Peppers, Neil Younger, Lindsey Buckingham, Difficult Stewart and lots of others.

Nevertheless, final summer season, HSM confirmed that its major supply of capital for offers had successfully switched to firm (iii): Hipgnosis Songs Capital.

The preliminary dedication to HSC from Blackstone was a billion {dollars} (a mixture of fairness and debt). Sources counsel this dedication remains to be anticipated to multiply over the subsequent few years.

It’s this fund (HSC) that has spent $300 million on music rights in 2022 to this point through HSM – and which is predicted to spend someplace close to that once more within the the rest of the yr.

Rising rates of interest, nevertheless, are more likely to put a cap on the multiples any music firm is keen to pay for copyright buyouts within the present surroundings.

Except potential sellers are keen to drop their desired a number of to this degree, we might even see one thing of a cool-down within the music M&An area within the months forward.

(There’s a flip-side to this case: Some artists and songwriters might certainly be keen to promote at a decrease a number of than their friends achieved lately – as a result of as soon as they’ve cash within the financial institution, high-interest charges and a battered inventory market arguably create an funding market the place stated cash can shortly acquire in worth.)

Why is Hipgnosis Tune Fund not elevating cash?

For informal observers of Hipgnosis Songs Fund (HSF) – which has spent over USD $2 billion on catalogs since being based in 2018 – the present halt in its spending exercise might come as a shock.

But for HSF buyers, and people extra carefully watching the corporate, it’s not precisely surprising.

Hipgnosis Songs Fund informed its shareholders when it raised $215 million final July that it was placing a cease on additional raises till Q2 2022 on the earliest.

The next month, in August 2021, HSF informed buyers that it was “absolutely invested”, following acquisitions of a number of catalogs (utilizing that $215m) together with music by the Purple Sizzling Chili Peppers and Christine McVie of Fleetwood Mac.

Q2 2022 has now been and gone, which implies HSF is free from its self-imposed moratorium on elevating cash. However market situations don’t seem like they did final summer season.

Particularly, with the twin shocks of a steep rise in inflation plus the battle in Ukraine, public share costs throughout the board have been hit exhausting.

Publicly traded music compares haven’t been resistant to this development: Hipgnosis Songs Fund is down 20% YTD in 2022; 27%; 33%; 42%; 50%; 58%.

It’s subsequently unlikely that firms like these would select to boost new fairness (through share points) at present inventory costs as it could harm the holdings of present shareholders. In accordance, HSF has opted not to take action.

One other barrier to Hipgnosis elevating cash proper now: these rising rates of interest.

HSF presently has a debt stack of $600 million. The price of servicing that debt will increase with each rate of interest rise.

That being stated, HSF confirmed to shareholders this week that it has now secured a brand new debt refinancing package deal. J.P. Morgan was impressed with this information, saying this refi is “anticipated to decrease [HSF’s] facility value and improve its dimension”.

As MBW defined in November, HSF – as long as it has the funds accessible – can choose to amass a 20% stake alongside HSC (through the latter’s billion-dollar-plus pot of Blackstone cash) in any catalog buyout proposed by HSM.

Why is Hipgnosis Songs Fund’s Professional-forma income declining?

One main subject raised by monetary media shops in latest weeks: The ‘Professional-forma’ income (PFAR) of Hipgnosis Songs Fund declined YoY in HSF’s FY 2022 (to finish of March 2022).

On the floor of it, this actually seems to be troubling: ‘Professional-forma’ income (PFAR), which HSF voluntarily publishes, reveals the royalty income earned by catalogs in a calendar yr primarily based on royalty statements obtained, no matter whether or not the songs had been owned by the corporate over the interval analyzed. It’s a ‘pure’ like-for-like reflection of how catalogs are performing.

You’d count on a certain quantity of decline every year in ‘Professional-forma’ income at an organization like Hipgnosis Songs Fund because of newer catalogs; i.e. catalogs which are nonetheless ‘leveling off’ from their business peak earlier than they hit a long-tail plateau.

In flip, you’d count on these declines to be offset by an increase in revenue from older catalogs which have already hit that plateau.

For instance, inside HSF’s catalog of songs, you’d count on Form Of You (launched in 2017) to nonetheless be on a powerful decay curve, however you’d count on classics from Neil Younger, Lindsey Buckingham, Bon Jovi and so on. to be growing annual income as they trip streaming’s progress.

So what went awry inside HSF’s ‘Professional-forma’ income in FY 2022? In a phrase: Covid.

Performing rights societies throughout the globe sometimes account to publishing rights-holders 12 to 18 months behind the second of consumption. Inside HSF’s numbers proper now, that lag is essential.

In the event you return 12 to 18 months from the top of HSF’s newest fiscal yr (March 2022), you land on the coronary heart of the best degree of unfavourable influence that COVID lockdowns had on all companies.

Thus, there’s a considerable quantity of efficiency revenues from world wide – music being performed in bars, eating places, outlets, nightclubs, and the entire stay performances by artists – that might have been there in ‘regular’ situations however aren’t mirrored in HSF’s numbers.

“We count on a really sturdy bounce again in [Hipgnosis songs Fund’s] efficiency revenue.”

J.P. Morgan

This Covid-driven income deficit is arguably extra pronounced for firms like HSF than it’s for the key music firms, as a result of HSF is only within the catalog enterprise; it doesn’t have a streaming money bump from new frontline hits to offset the unfavourable influence from Covid lockdowns.

J.P. Morgan this week famous why it was unworried by the ‘Professional-forma’ decline in Hipgnosis Songs Fund’s numbers for FY 2022, stating: “We count on a really sturdy bounce again in [HSF’s] efficiency revenue (ex the efficiency factor of streaming, which is assessed by SONG as ‘streaming’ however in actuality is a mix of mechanical and efficiency), which was late to indicate up within the PFAR numbers, but additionally late to get better given the lag vs UMG and WMG.”

The early indicators of that restoration had been truly already there inside HSF’s FY 2022 numbers:

  • For the complete calendar yr 2021, HSF’s PFAR was certainly down 5.3% YoY;
  • However within the second half of 2021 alone (July- December), HSF’s PFAR was up (vs the primary half of 2021) by double digits (+11.6%, see under)

(How a lot HSF buyers actually care concerning the PFAR vs. the corporate’s potential to pay its anticipated dividends is one other matter. At its AGM this week, Hipgnosis confirmed it could pay its interim 2022 dividend in October on the anticipated worth, and reiterated it was heading in the right direction to pay its full-year dividend, additionally on the anticipated worth, in March 2023. J.P. Morgan appeared happy by this information.)

Hipgnosis Tune Administration x Blackstone

One other query mark raised by latest reporting factors particularly to Hipgnosis Tune Administration (HSM) and Blackstone’s degree of involvement within the firm.

Nearly a yr in the past, Hipgnosis introduced its partnership with Blackstone, with the funding large absolutely funding Hipgnosis Songs Capital (HSC), whereas making an undisclosed funding into Hipgnosis Tune Administration (HSM).

MBW has accomplished some digging, and understands that Blackstone owns 51% of HSM, with Mercuriadis and his household proudly owning 35% and long-standing Hipgnosis allies, together with

A controversial low cost price – and a few very well timed headwinds

One other side picked up in latest reporting from the Monetary Instances and others was the best way by which Hipgnosis Songs Fund (the UK-listed firm) is independently valued each six months.

To worth HSF, the corporate turns to a bunch of music business specialists inside Citrin Cooperman. This group beforehand operated as Massarsky Consulting earlier than being acquired by Citrin Cooperman earlier this yr.

Questions have been raised over Citrin Cooperman’s insistence that an 8.5% ‘low cost price’ stays enough for music valuations regardless of quickly rising rates of interest within the US, UK and elsewhere.

To maintain it easy: If this low cost price was to be elevated by Citrin, it could decrease the worth of Hipgnosis Songs Fund on a NAV (Web Asset Worth) foundation.

J.P. Morgan, although, says it continues to be happy with the 8.5% low cost price, and sees no want for adjustment.

The funding firm stated in its analysis observe this week: “We truly assume an 8.5% low cost price appeared vastly conservative earlier within the yr till US lengthy charges began to rise… now we imagine it seems to be affordable given the still-big threat premium and decrease beta of music because it has turn out to be a subscription-based utility annuity stream.”

In fact, with heavy inflation, a dwindling inventory market, and the Fed ratcheting up these rates of interest, firms like Hipgnosis Songs Fund are having to sort out some substantial macroeconomic headwinds right now.

But J.P. Morgan notes that there’s additionally a widespread variety of ‘tail-winds’ serving to increase the longer term prospects for HSF (and the broader Hipgnosis group).

The J.P. Morgan analysis observe this week, penned by Christopher Brown and Adam Kelly, famous the latest ‘CRB III’ determination, which upheld higher mechanical charges for songwriters and publishers within the US for the years 2018-2022.

Because of this, the likes of Spotify, not too long ago reported a $17 million windfall from the CRB III catch-up course of in calendar Q2.

J.P. Morgan additionally likes the look of the recently-inked ‘CRB IV’ settlement between publishers and streaming companies within the States, which might set the mechanical headline price paid to pubcos at 15.35% of every streamer’s US income.

“We’re optimistic about income [at Hipgnosis Songs Fund] over the approaching yr, with [many] constructive drivers.”

J.P. Morgan

If ratified by the Copyright Royalty Board judges within the US, this may barely improve the mechanical price paid to publishers from 2023-2027 within the US on account of CRB III.

What’s extra, the historic power of the US greenback vs. the British pound works in Hipgnosis Songs Fund’s favor on the subject of paying its UK dividends (nearly all of the corporate’s revenues are generated within the US).

Mixed with HSF’s debt refinancing, this run of reports has put J.P. Morgan in a buoyant temper.

The funding agency’s observe this week stated it was “optimistic about income [at HSF] over the approaching yr, with [many] constructive drivers”, together with an anticipated improve in streaming subscription income and potential worth rises on companies like Spotify.

J.P. Morgan can be eager on the influence that the Mechanical Licensing Collective (MLC) is having within the States, forecasting that it “ought to result in larger payouts from US streaming [to HSF], with extra environment friendly, commission-free collections from DSPs”.

Moreover, J.P. Morgan means that HSF will profit from some “first time contributions to come back from rising digital platforms, not hitherto in SONG’s proforma annual income”.Music Enterprise Worldwide



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