Originally sent to newsletter subscribers on November 13th.
Five years ago, Wall Street and the traditional investment community got into music royalties in a big way.
The Rise Of Hipgnosis Songs Fund
The Hipgnosis Songs Fund was founded as an investment vehicle for music rights on the public markets (it’s listed on the London Stock Exchange). The fund used public markets to raise money, which it then used to purchase music rights.
In exchange for investing into the fund, investors hoped to receive regular dividend payments that could grow over time and be uncorrelated to most risk assets.
Basically, people don’t stop listening to music based on whether the economy is doing bad or good, so the songs can keep producing earnings, rain or shine. At the same time, the music industry was seeing growth from the rise of streaming and digital royalties.
Their pitch was successful in a big way. Blackstone got involved and it grew to hold more than $2.5B in assets.
The Fall Of The Hipgnosis Songs Fund
Hipgnosis launched and scaled their fund during the low inflation and low interest rate environment of the late 2010s and early 2020s. This environment, along with increased competition for music rights, would set the stage for the current conundrum.
Here’s what the problems roughly shape up to:
- Yields from assets acquired during a boom in prices being lower
- Debt taken to scale needing servicing
- Rising inflation and interest rates provide competition for safe yields and cause investors to value the future earnings of the fund differently
- The share price comes under pressure causing difficulties for issuing new shares to purchase more music rights
That would be pretty tough under normal circumstances, but unfortunately these aren’t normal circumstances. The Hipgnosis fund had a provision that after 5 years (this year) investors would have to vote on whether to continue the fund for another 5 years.
As part of positioning for this, we previously reported a proposal from the Hipgnosis management team to try to sell ~$440M in rights. That vote failed.
So too did the vote to continue the fund for the next 5 years.
That leaves the board with 6 months to figure out a proposal and try to work something out with shareholders. If not, the entire fund might get sold off.
Given everything that’s going on, they’ve paused dividend payments until the new fiscal year, which starts in April.
The Potential Impact
I think music royalties are still an interesting and viable alternative asset class, regardless of how things with Hipgnosis shake out. In my opinion there are two likely outcomes, none of which really changes anything for retail investors.
One, the board and shareholders reach some type of continuity agreement. This may involve a sale of some of their assets, as the management team was previously looking to do.
Two, they move to sell the fund. In this situation it likely gets gobbled up by a large financial institution and we don’t really hear anything else about it afterwards. Blackstone is an obvious candidate given they already own a part of it.
Even in the unlikely scenario that it turns into a forced fire sale of billions of dollars in music rights, the size of these transactions is simply unlikely to filter down to us in a meaningful way. Perhaps there could be a trickle-down effect that leads to prices falling in general. That could just make it easier to get higher-yielding assets or it could remove some supply in the market as rights holders wait for conditions to improve before pursuing asset sales.