Private Equity in the Music Industry

2,263

The music industry has long been a source of great art and justifiable pride. Everyone seems to have embraced music and its ability to form an emotional bond with customers, from advertisers and retailers to bankers. But with greater technological strides, this sphere is changing and is becoming an investment avenue. There has been a trend of increased inflow of private equity capital in this industry.

This observable increase in investments by private equity institutions and hedge funds has been in music, specifically as a financial asset, where its royalties and streaming yield returns. Hipgnosis Songs Fund, Shamrock Capital and KKR are some of the leading investors in this space. The million-dollar deals feature the work of some of the most evergreen artists of the last few decades and heavily feature chart-toppers such as “Firework” by Katy Perry, and “Diamonds” by Rihanna. These investment companies currently own intellectual properties of works from leading artists including 50cent, Shakira, The Chainsmokers, Skrillex, Blondie, and Taylor Swift. Hipgnosis Songs Fund alone valued its portfolio
at 2.2bn dollars in June 2021. So why are these professionals, so bullish on such assets?

As an asset class, musical royalties may be new but as an alternative investment, art has existed for centuries. What makes music a profitable asset is the timing. Simply put, the legal, economic and technological facets of music are somewhat in sync; the risk is sufficiently low and the returns are promising enough to demand an investment. The thing that makes this investment possible now, is the way the music industry is currently structured around the world. Goldman Sachs Research estimates that the global revenue will almost double from 77bn dollars in 2019 to 142bn in 2030. The global industry has seen growth consecutively for six years now, according to Rolling Stones, almost 62% of the total revenue now comes from music streaming. This is a staggering number, marking a shift from the physical sales that relied heavily on the production and distribution of physical copies of cassettes, CDs and vinyls. Social media platforms like Instagram, Youtube and Tiktok, which create massive audio-visual engagement are becoming crucial in maintaining and creating “hype” for these “fandoms”. It becomes important to note that, with the burgeoning industries for streaming in countries like China and the recent changes in the way social media functions with respect to copyrighted music, revenues are expected to increase. Moreover, with the increasingly stringent copyright laws, musical royalties are seeing increased security when compared to the global music piracy existent in the last two decades.

An article by JD Supra highlights:

“In a year in which the world economy contracted by 6%, the global recorded music market grew by 7.4% to US$21.6 billion, according to the IFPI. Streaming revenues meanwhile were up by 19.9% year on year, offsetting declines in physical sales and performance rights
revenues.”

According to Goldman Sachs, streaming revenues have displayed 18 per cent year-on-year growth, with services such as Spotify, Apple Music and Pandora increasing their market share. These allow an opportunity to participate in a dynamic environment where the professionals from the field make calculated guesses and thus represent scope for a good return. There is, however, a unique risk undertaken. The risks that are associated depend on the artist, their engagement with their core audience, and the life cycle of their work significantly, especially for entire albums and catalogues. Music as an asset largely lacks the legal processes that confine systems such as the legality of physical transfer for art, or of maintenance and security of real estate and thus becomes easier to rely upon. They are better secured legally due to the extensive copyright laws that exist, than conventional art, which faces issues for insurance, maintenance and faces extensive forgery.

There are numerous ways to value these assets whether it is by estimating the internal rate of return or by estimating the market value, but that subjectivity also means that valuation becomes difficult. Predictions by different industry experts differ, not just about the industry’s growth but more particularly about consumer tastes. When the value of these assets is ascertained and the minimum amount of streams each year are calculated and predicted, which is used to estimate the yield and the approximate dividend. However, it becomes important to understand that like other assets, copyrights have an expiry, so most investment companies buy these masters for a fixed period of time with the aim to sell them at a specified period of time. This means that either someone should be willing and available to buy the asset at that point in time, at the expected price for the investment to really be successful, or the individual asset must
independently bring in enough cash flow for it to be profitable.

As greater digitization takes place and technological advances are made, the same experience, if not better, can be expected from these platforms in terms of accommodating the different musical styles and sensory experiences. This is a sign of optimism for the industry, but it also comes at a time when more and more artists are rallying for better pay from platforms like Spotify and Apple Music. The nature of these streaming platforms now means that the artists are at the mercy of the pay per stream that is set by these services, which is very often just pennies, and thus the income relies more and more on the volume of streams. More streams mean better pay and being featured more, creators debate that quantity does not equal quality. Artists like Thom Yorke, Beyonce and Adele have, in the past, have either withdrawn their work or delayed the launch and criticised these platforms. They have been successfully heard. This, however, cannot be said for the majority of the artists, who still struggle with this issue, whose complaints have fallen to deaf ears. The power that these platforms wield is a direct risk to the income from these streams, since they also hold the power to decrease the pay per stream, or shadowban an artist.

Furthermore, Spotify is observably altering its algorithm towards increasing podcast listens, and with the increasing budgets on advertising and on maintaining a podcast platform like Anchor, it becomes clear that it aims to shift a significant chunk of engagement to podcasts, which are cheaper for them to manage, and are less of legal hassle.

While the questions still persist, the future of this asset largely depends on whether this becomes mainstream in the media and entertainment sector or is restricted to a niche.
So far, Hipgnosis Songs Fund has been able to maintain the dividend yield, but some industry experts remain sceptical, they are unsure, whether, with the changing tastes, these funds would be able to manage their portfolios and alter them proportionately. Moreover, with the changing regulations as well as increasing competition, the risk of fluctuating valuations increase. Taylor Swift, in response to the sale of her masters, is currently re-recording masters, massively decreasing the value of the original masters. This brings up the bigger questions about the artist ownership of artwork, as well as the consent of the artist in regards to the third party buying these assets. This is a massive issue since the asset depends significantly on the artist’s engagement with their audience, when that is subject to volatility, theoretically, the asset becomes relatively unsafe. That, however, is a discussion for another day.

For sources click here

Follow Us @