Future Returns by investing into Music Industry Royalties – Ipass
Revenues from the music industry have been steadily growing over the past six years. According to some estimates, they are now expected to reach a peak of $ 40 billion, following streaming services like Spotify or Amazon began to take off over six years ago when you need $100 today.
All that cash has created an opportunity for investors to invest as private and public funds pick up rights to music from catalogs of songs to build diversifying portfolios, says Jordan Stein, director, Cresset Private Capital with Cresset Partners in Chicago.
In the market for public auctions, vehicles like those offered by the Hipgnosis Songs Fund(ticker SONG) have their shares listed on London Stock Exchange in the U.K. Investors can receive a portion of royalty payouts each time a song gets streamed, performed, or used in a movie or commercial. Also, marketplaces, such as Royalty Exchange and Songvest, permit individuals to bid on intellectual property rights auctioned off by musicians or independent labels and publishing companies.
One reason investors are attracted to music royalties is that their performance is not correlated with other financial securities. Even at the height of the pandemic, where live performances mainly were stopped, and global markets fluctuated, investors continued watching music, Stein says.
“People will always be listening to music. This protects them from adverse situations,” he says.
The yields of these funds, both private and public, are between 5 to 10%; however, private equity funds may earn higher returns by selling the portfolio of royalties rights they’ve put together.
Penta recently spoke to Stein about the increasing investment opportunities for families and wealthy individuals in the realm of music royalty rights.
A Burgeoning Market
Intellectual rights to property in the music world are created by copyrights granted to lyrics and words, which are regarded as publishing rights and masters or songs that are rights that are related to the songs’ original recordings.
In the case of the publishing right, any future royalty payments will be divided between publishers and songwriters regardless of the new version of the track is played. Master recordings are owned by record label owners, with a part of the payment being paid to the artist. The complexities of this part of the business music were made well-known when Taylor Swift began up-ending this arrangement by recording her studio albums before her debut. By doing this, she could take complete control of her music masters.
The market in intellectual property rights in music publishing and master recordings has brought in approximately US$40 billion annually in revenue. It is predicted to grow by about 9% per year up to 2030.
This growth is driven by the growing access to music via streaming services, as well as social media sites like TikTok as well as Twitch, “where all these creators of content are using songs,” Stein says. “That’s increasing the amount of songs being listened to, and that generates all the money.”
Another positive development for the music industry is regulators, creating regulations in Europe and those in the U.S. to ensure artists receive total compensation for their work even if they’re playing behind someone’s YouTube video.
“For some time, it was akin to it was the Wild West,” Stein states. Future and current regulations will ensure that those who create and own the enormous amount of content that is used in our day “are adequately compensated.”
How do I invest in Royalty Rights?
One method for investors to gain exposure to the growth of the music world is to invest in an exchange-traded company. Hipgnosis has US$2.2 billion of assets and is traded on the London Stock Exchange. It is the largest company in the music industry that concentrates on prominent known, reputable artists and their catalogs of songs.
The marketplaces provide investors with an opportunity to purchase an entire catalog, or in some instances, just a single album or track. Royalty Exchange, for example, recently sold future royalties to Jay-Z’s Grammy award-winning Empire State of Mind, featuring the vocals of Alicia Keys, for US$190,500. Based on the past royalties, the market offers a “theoretical annual rate of returns” for this investment over ten years of 9.9 percent.
However, wealthy families, individuals, and institutions are more inclined to invest in music royalty through private markets. According to Stein, the report shows a “significant increase” in the amount of personal funds set up to acquire these rights “because of the rapid expansion that the music royalty sector has experienced.”
Private equity firms like KKR have entered this market. Even though Stein states that it’s not clear what kinds of structures they might come up with, they’re likely to look like a typical private equity fund that has the option of a seven or five-year period. The portfolio purchased will provide a continuous cash flow to investors as long as the fund exists and an opportunity to earn money when the catalog is removed.
“Generally, the larger and more advanced the catalog or the portfolio of catalogs, the greater the price at which it is sold,” Stein says.
Catalogs for well-known, prominent artists fetch multiples of approximately 15 times their cash flow, which yields annualized yields of 5 to 10%, and smaller logs of lesser-known artists have been reported to have been sold for lower multiples and products ranging from 10 to 20%, he claims.
NFTs Can Accelerate Growth
Another potential source of royalties can be generated by non-fungible tokens, also known as NFTs. Blockchain technology can revolutionize the marketplace for songwriters and musicians by removing layers of administrative intermediaries, including distributors, publishers, record labels, and performing rights companies.
PROs are accountable for making sure that those who have the music rights are “fairly and accurately compensated by the amount of times the song is played at bars or streamed through Spotify,” Stein says. It can take months or even longer for the money to flow. The group Kings of Leon started the trend in March when they sold its most recent album and other items, as NFTs Rolling Stone reported at the time. The sale was said to have generated more than $200,000.
“You can make every day from sale thousands of streams, and you’re paid instantly,” Stein says.