Why Wall Avenue continues to be betting on the music trade

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For Barry Massarsky, a specialist quantity cruncher for pop stars and report labels, the financialisation of music has been superb enterprise.

“We’re so busy. We’re so unbelievably contracted with so many various gamers . . . new funds are coming in a few times per week”, Massarsky advised the Monetary Occasions in July. “[My business partner] is like: ‘Maintain the door shut!’ It’s wild . . . the market is scintillating”.

Individuals who have labored with Massarsky describe him as an everlasting optimist — one former shopper in contrast him to the mentor within the movie Jerry Maguire who says: “I clap my fingers each morning and say, ‘That is gonna be an ideal day!”. However, till not too long ago, the Cornell enterprise faculty graduate had spent greater than a decade toiling in an trade affected by power malaise.

As an economist he calculated the worth of music royalties for report labels, publishers and artists. When on-line piracy disrupted the trade within the 2000s, Massarsky earned his maintain by calculating, for instance, how a lot cash Bob Dylan stood to lose as a result of copyright infringement on an internet site known as mp3.com.

© FT montage

However lately, music streaming has resuscitated trade income, whereas central banks lower rates of interest to historic lows, sending traders trying to find new sources of returns. The consequence: the world’s largest traders poured billions into what had been a staid sector and music royalty funds had been was a recognised asset class. Massarsky and his small staff grew to become the monetary wizards behind billions of {dollars} in high-profile transactions.

In the present day, music executives, legal professionals and brokers say the inflow of Wall Avenue money is unprecedented. After a string of investments within the sector, Blackstone now earns cash each time Justin Timberlake’s “SexyBack” performs in a shopping center. Apollo will get paid every time Luis Fonsi’s “Despacito” is blasted by means of a nightclub.

The phenomenon was pioneered by a London-listed funding belief known as Hipgnosis, named after an artwork group that designed album covers for Pink Floyd and others. In 2018 Merck Mercuriadis, a music obsessive who as soon as managed Elton John, created the fund as a car to purchase songs, pitching them to institutional traders as a method to make dependable, bond-like returns.

Lex chart showing Hipgnosis Songs Fund Share price vs 10-year Gilt yield

In an period of rising rates of interest, the nascent asset class faces its first actual take a look at. “What you’re shopping for is an anticipated future stream of money flows. If charges go up, you low cost these money flows at these greater ranges,” says Dan Ivascyn, Pimco’s chief funding officer. “Music IP [intellectual property], like different non-public markets, is an space the place we haven’t seen the markets absolutely react to the realities of what we’re seeing in public markets. You’re going to see transaction volumes decelerate.”

Below these situations Massarsky’s position can be essential. If he had been to start out utilizing greater rates of interest as a part of his calculations — reflecting rising real-world charges — the valuation of tens of hundreds of songs would fall, probably wreaking havoc for traders who’ve used debt in the direction of the purchases. Up to now he has resisted.

The wealthy get wealthy

“All people is aware of the struggle was fastened. The poor keep poor, the wealthy get wealthy,” Leonard Cohen sang in his 1988 hit “All people Is aware of”.

Blackstone — the non-public fairness titan whose chief govt, Stephen Schwarzman, made greater than a billion {dollars} final yr — not solely owns rights to that music, however has packaged it up with a bunch of others and securitised it as collateral in opposition to a whole lot of hundreds of thousands of {dollars} of debt.

The story of how that occurred traces the story of post-financial disaster capitalism. When Mercuriadis based Hipgnosis in 2018, rates of interest had been low and the inventory market was in its ninth yr of a historic rally. As not too long ago as 2019, solely $368mn value of music catalogue offers had been introduced publicly, based on Midia Analysis. However as traders made artistic makes an attempt to generate greater returns than the measly sums on supply from authorities bonds, an funding case for songs was developed. Music catalogue dealmaking ballooned to $1.9bn in 2020, then to $5.3bn in 2021, says Midia.

Spending on music catalogues is rising sharply, with rock and the noughties proving particular sweet spots.  Charts showing publicly announced spending on music catalogues has increased from less than $0.5bn in 2019 to more than $5bn in 2021

The rationale went like this: by amassing a variety of songs collectively in a single fund, their royalties — paid to copyright house owners when a music is performed — could possibly be aggregated into a gradual stream of money flows from which to pay dividends. Massive traders reminiscent of Pimco and Apollo had been lured into music royalties for the primary time.

Amid the push, teams together with Investec Wealth & Funding, Aviva Buyers and the Church of England’s fund supervisor, CCLA, gave their cash to Mercuriadis’s London-listed funding belief Hipgnosis Songs Fund, which has spent it shopping for copyrights to greater than 65,000 songs.

“We predict this funding will generate supernormal returns . . . it’s much less well-known [than other asset classes] and we predict we’re early to this,” says Paul Flood, a portfolio supervisor at Newton Funding Administration, which as of HSF’s newest annual report was its largest shareholder with a ten per cent stake.

Mercuriadis employed Massarsky as a third-party agent to calculate the music portfolio’s “internet asset worth” to current to his shareholders. By Massarsky’s calculations, Hipgnosis gave the impression to be making prophetically profitable bets. Each six months, Massarsky calculated that the portfolio, to which songs had been always being added, was value increasingly more: from £128mn in March 2019 to $2.7bn on the finish of March. (Hipgnosis’s reporting forex modified from sterling to greenback). 

In the meantime Mercuriadis sealed his status as a pal to the celebs, positioning himself as a bridge between stuffy traders and erratic musicians. He waxed lyrical in interviews about how songs had been “higher than gold or oil” as an funding. As his fund purchased extra songs it reported ever-rising revenues — from £7.2mn in 2019 to $168.3mn by March this yr — and financiers rallied behind it. 4 of the six banks that cowl the inventory — JPMorgan, the Royal Financial institution of Canada, Investec and Liberum — have a purchase score.

However the tempo of acquisitions masked the underlying efficiency of the catalogues. The professional forma royalty income these songs generate — a measure that strips out the enhance from new purchases — has been falling for a minimum of the previous two years, ever because it was first disclosed.

As of the top of August final yr, Mercuriadis’ London-listed fund had invested all the cash it raised for music catalogues. It may now not elevate extra with out diluting shareholders — the share value is buying and selling too far under the valuation that Hipgnosis Songs Fund derives from Massarsky’s numbers. With that public fund successfully frozen, Mercuriadis now depends on Blackstone for funding.

Final yr Blackstone purchased Hipgnosis Track Administration, Mercuriadis’s administration firm, which advises the listed fund. Blackstone additionally arrange a separate $1bn fund, Hipnogsis Songs Capital, from which to do extra music offers, which HSM additionally advises. Mercuriadis used a few of this money to purchase the catalogues of Cohen, Timberlake and others for the Blackstone fund.

GM020904_22X Blackstone bet WEB

In August Hipgnosis Songs Capital issued $222mn of asset-backed securities, or bonds that use music copyrights as collateral, to assist finance its acquisitions. Chord Music Companions, backed by Blackstone’s rival non-public fairness group KKR, had organized an identical securitisation in January, tied to about 62,000 songs. However HSC should pay greater than 6 per cent a yr for its debt, in comparison with slightly below 4 per cent paid by Chord, in an indication of how rising charges are already consuming away at potential returns.

Blackstone is now imposing higher monetary self-discipline, utilizing knowledge analytics and spreadsheets to evaluate potential returns, say two folks with data of the matter.

“Plenty of offers that had been completely irrationally priced 12 months in the past, the irrational behaviour . . . is out of the market,” says Hartwig Masuch, chief govt of music firm BMG, which has partnered with KKR to purchase $1bn of music rights. “There’s been a little bit acknowledgment with among the backers of monetary autos, that it’s not sufficient that you just’re capable of spend cash. It’s important to make sense of what you purchase.”

A basket of fine

Whilst financial situations bitter, Wall Avenue giants are nonetheless competing for hit songs in opposition to conventional consumers — the foremost report labels — in addition to smaller specialist funds. Blackstone has doubled down on its Hipgnosis investments. KKR re-entered the music enterprise after a decade away, with a brand new billion-dollar fund. Carlyle, after serving to finance a $300mn acquisition of Taylor Swift’s former report label in 2019, has dedicated $500mn to purchasing songs — even after being dragged right into a bitter feud that led Swift to re-record her catalogue.

“If you concentrate on investing in a variety of different asset courses proper now, it’s fairly treacherous. There’s inflation, there’s provide chain danger, there’s geopolitical danger,” says a senior govt at a significant non-public fairness group. “Music is comparatively resistant to these issues”.

Massarsky’s consulting follow, which was offered a to bigger accounting group Citrin Cooperman in January, with a staff of 5, is concerned in about three-quarters of all offers out there.

Hipgnosis’s listed car makes use of Massarsky’s asset worth calculation as a measure of success and in addition a determinant of its borrowing: the fund is allowed to borrow 30 per cent of the fairness worth derived from Massarsky’s figures. Mark Mulligan, a music analyst for Midia, says this construction can create a “virtuous cycle” as Hipgnosis’ catalogue is revalued by Massarsky each six months.

“Hipgnosis goes to the market and says: that is how a lot our asset has elevated in worth,” says Mulligan. “Not how a lot revenue has elevated, however how a lot the valuation . . . has elevated. A lot of what drives the worth is just: how a lot are folks keen to pay? How a lot they’re keen to pay is formed by the valuations . . . It’s this echo chamber.” 

The pinnacle of 1 main music purchaser says Massarsky “validates a variety of valuations that we’d not settle for as a value”. “Keep in mind that downside of the score businesses in 2007?” says Michael Sukin, a music lawyer who employed Massarsky as an economist for American Society of Composers, Authors and Publishers within the Eighties, referring to the subprime mortgage disaster.

The Massarsky Group says its work is “strictly impartial” and that the agency is “compensated solely for our experience . . . We don’t validate valuations, that’s merely not a part of what we do. We conduct impartial valuations that replicate, to the perfect of our capability, what the market would bear.”

In numbers

Ariana Grande
Ariana Grande, who has labored extensively with Hipgnosis-signed songwriters Savan Kotecha and Rodney Jerkins

146

Variety of music catalogues owned by Hipgnosis, together with that of Ariana Grande (pictured)

3,854

Variety of songs that hit No1 on the music charts which can be a part of Hipgnosis’s portfolio

$2.7bn

Combination honest worth of Hipgnosis’s portfolio, as decided by third-party evaluation

The funding belief mannequin, which benefited Hipgnosis in earlier years, has turn into an issue for the corporate in current months. More and more its public inventory is buying and selling out of line with what Massarsky’s estimates say the portfolio is value — a niche of about 30 per cent. Massarsky Group’s calculation of the online asset worth of a music catalogue is set utilizing a reduction charge — an rate of interest to assist calculate the present worth of future money flows. The upper the low cost charge, the decrease the present worth, and vice versa. Even because the Fed has aggressively raised rates of interest this yr, the group insists it doesn’t want to extend its low cost charge.

Nari Matsuura, a associate at Citrin Cooperman and member of Massarsky’s staff, says: “We are able to’t change our low cost charge week to week, it will be irresponsible. A correct low cost charge takes each the current and future into consideration and our present low cost charge accommodates for that, which is why we predict it’s acceptable in the intervening time”.

If the group did mark down valuations, Hipgnosis Songs Fund could be prevented from borrowing a lot, or any, extra. It has already borrowed $600mn, about 27 per cent of its $2.2bn operational fairness worth, near its higher restrict of 30 per cent. A significant markdown, from $2.2bn to $1.5bn, would danger placing the fund in breach of the phrases of its loans from JPMorgan and forcing it to repay some debt.

Hipgnosis executives privately tout Blackstone’s involvement as a reassuring issue for shareholders within the authentic, listed fund, saying that if the share value falls the Wall Avenue non-public fairness group might step in and purchase its catalogue, placing a ground, of types, on its worth. However Flood, from Newton, is cautious of giving Blackstone too straightforward a path to snap up the catalogues cheaply.

“If Blackstone made a cheeky bid, we’d inform the board to see each report label on the planet and each different non-public fairness agency” to get the very best potential value for the songs, he says.

When the music stops

A broader tradition conflict is being felt within the music trade as Wall Avenue enters a sector that had been used to working extra informally, with offers topic to the whims of huge personalities and private relationships.

Securitising songs has led to some uncommon types of monetary evaluation, reminiscent of a Kroll report that final month advised bond traders a canopy of Cohen’s “Hallelujah” by Pentatonix, a US a-cappella group, accounts for greater than 3 times as many Spotify streams as the unique. It additionally beats Jeff Buckley’s cowl. When 10 totally different variations of the music “Hallelujah” are added collectively they account for nearly 13 per cent of the Blackstone catalogue’s royalties.

Retrieving royalty funds — the lifeblood of those offers — generally is a cumbersome course of. One music firm chief govt says that always, one of the vital tough obstacles to purchasing an artist’s catalogue is that the musician can not discover their bodily grasp copy.

Blackstone executives consider they will extract extra money from music by means of extra refined administration, say folks conversant in the matter. The rationale is that songs might be managed in an identical method to different property: returns might be boosted by, say, persuading filmmakers to make use of songs out of your catalogue, or bringing in royalty funds extra shortly and effectively.

The query now could be whether or not financiers can discover a method to revenue regardless of hovering inflation and better rates of interest — and what is going to occur to traders’ money in the event that they discover they can not.

Non-public fairness executives usually cite Goldman Sachs in validating their music investments, calling the financial institution’s annual music report the “bible” of the market. Goldman predicts music income will practically double to $153bn by 2030, as streaming income rises 12 per cent per yr on common.

However current numbers inform a distinct story. Warner Music reported that second-quarter streaming income grew lower than 3 per cent from a yr in the past, whereas market chief Common stated subscription streaming gross sales rose solely 7 per cent after years of double-digit development.

But by means of all of it, Massarsky is bullish. He cites new methods of getting cash from songs, reminiscent of funds when they’re performed on Peloton bikes or TikTok. “We’re completely amazed on the development,” he stated in July, as inventory markets lurched. “It’s a basket of fine.”

Extra reporting by Brooke Masters
Pictures: Dreamstime/Getty Pictures/Reuters/Paul Bergen/Redferns

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