Investors in Search of Yield Turn to Music-Royalty Funds

Betting your money on

Keith Richards

might sound risky. But at a time when some $15 trillion in government bonds around the world have negative yields, it might not be a bad wager.Funds focused on music royalties are gaining traction as investors stray from the beaten path in a hunt for yield. Such funds buy the rights to music catalogs and generate royalty payments for investors when songs are bought, streamed or performed. The firms behind the funds say they actively manage these assets, seeking licensing deals that allow songs to generate greater income.

The surging popularity of streaming services, which let users listen to an unlimited amount of music in exchange for a monthly fee or for listening to ads, is reshaping the music industry and making song catalogs more valuable. Streaming revenue—which rose 34% in 2018 and is expected to keep growing, according to the International Federation of the Phonographic Industry—has injected new life into an industry that had revenue declines from 2001 to 2014 amid illegal downloading. Performers have taken note, leading some, including

Taylor Swift,

to fight for more autonomy over their work. Investors, too, have shown increasing interest in acquiring song catalogs as streaming platforms from Spotify, Apple Inc. and others add premium subscribers at a fast clip.

There is currently about $3.2 billion in total invested in funds focused on music royalties, according to Massarsky Consulting, a New York consulting firm that performs catalog valuations for music publishers and record labels. While declining to give exact growth figures, Massarsky says the royalty-fund business has grown “immeasurably” in the last two years. Royalties earnings historically haven’t been correlated to other markets, Massarsky says, which makes them attractive to investors looking to diversify. The funds say they tend to attract money from institutions with longer investment horizons, like insurance companies, endowments and pension funds. Globally, there are at least five music-focused royalties funds, two of which have launched in the past two years, according to

Charles Johnson,

who leads the sports and entertainment team at investment bank SunTrust Robinson Humphrey. Only one is publicly traded.

Hipgnosis Songs FundLtd.

, founded by

Merck Mercuriadis,

a music-industry veteran who has managed artists including Beyoncé and

Elton John,

listed on the London Stock Exchange last year. In its first results as a public company, the fund reported a yield of 6.1% on assets invested between June 8, 2018 and March 31, 2019, while the net value of its underlying catalogs rose 2.2% over the same period. The S&P 500 rose 2% in that time, and yielded 1.82%, according to FactSet. Catalogs can accrue annual yields of 5% to 20%, according to Massarsky. Some genres, such as hip-hop and country, tend to yield higher returns. Better-known songs tend to trade at higher valuations and offer lower yields at lower volatility. Some funds target classic songs with a longer and more reliable earnings history. Round Hill Music, a private-equity firm based in New York, has closed two royalty funds worth a total of $472 million since 2010, and is raising a third fund in the region of $300 million. About 80% of its investors are large institutions and endowments, says Chief Executive

Josh Gruss.

Round Hill’s holdings include stakes in “What a Wonderful World” by

Louis Armstrong,

20 Motown-era hits, such as “You Can’t Hurry Love” and “I Can’t Help Myself,” as well as six songs by the Beatles, including “I Saw Her Standing There.” But Round Hill also bought the rights to a catalog by little-known pop-rock group American Authors in 2013, partly because management thought one song’s title—”Best Day of My Life”—would lend itself well to use in films, advertisements and videogames, known as synchronization. The song has since been used in ads for Apple and Hyundai, among others. Bought for a mid-six-figure sum, the catalog is now worth more than $4 million, says Mr. Gruss.

Private-equity firm Round Hill Music purchased the rights to a catalog by pop-rock group American Authors in 2013.

Photo:

Mariano Regidor/Redferns/Getty Images

Hipgnosis, which owns stakes in songs from Beyoncé,

Bruno Mars,

Justin Bieber

and

Shawn Mendes,

among others, also has boosted the synchronization value of its holdings. The fund noticed a 25% stake in one track had earned $7,000 in 2017-18, the year before it bought it. In 2019, Hipgnosis placed the track in a TV commercial for a large fashion house, receiving a 25% cut of $500,000. That, in turn, increased the play of the song on streaming platforms. “We went from earning $7,000 to being guaranteed $125,000 for it. So it will make somewhere between $125,000 and $150,000 from the ancillary use. In one fell swoop we increased the earning of that song by 20 times,” says Mr. Mercuriadis. Music-royalties funds often buy rights from lower-profile songwriters who collaborate with global superstars, and are better incentivized to cash in part of their rights to future earnings. “Our typical proposition to a songwriter is, give us half your copyrights, you’ll take some liquidity, take some money off the table, but you also have a great partner who’s working their butt off to add value,” says Round Hill’s Mr. Gruss. While music-royalties funds tend to attract institutional investors, there is a way for smaller investors to get in the game, too. Online marketplaces such as Royalty Exchange and SongVest allow individuals to buy slices of song catalogs in transactions that are typically far smaller. A share in five tracks by rapper

Cardi B,

including No. 1 hit “Bodak Yellow,” recently sold for $125,300. Whether this is a good time to invest in music royalties remains to be seen. As the investment backdrop for song catalogs has improved, valuations have soared, surpassing levels last seen 10 years ago, according to Suntrust’s Mr. Johnson. Investors who might have expected to pay eight to 10 times net publisher’s share—a measure of trailing net annual earnings—can today expect to pay closer to 16 to 20 times, he says. Mr. Frankl-Duval and Ms. Harley-McKeown are reporters for The Wall Street Journal in London. Email him at Mischa.Frankl-Duval@wsj.com and her at Lucy.Harley-McKeown@wsj.com

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