Investment funds are keeping a keen eye on the music industry, but what opportunity are they chasing and what can we all learn from this?
Just like a company share or bond, music royalties can be seen as a viable investment for many, including big investment funds. In this article, we dive into the new role of Investment Funds in the music industry, and the opportunities they are chasing.
Investment funds & music royalties
Did you ever put your money in a little piggy bank when you were a kid? Well, now imagine that instead of letting your money sit there over time, you’re putting it in a place where the money will be invested in assets that will later (hopefully) hand you more money than the amount you put in the first place. Now imagine that instead of you being the only person to put your money in the piggy bank, many others like you put theirs in as well. That’s an investment fund.
More technically, according to Investopedia, an investment fund is a supply of capital belonging to “numerous investors used to collectively purchase securities while each investor retains ownership and control of his own shares”. Meaning, each investor receives, at the end, the same share of the money they have initially put in the fund, which translates to a greater absolute amount than the initial one, given the returns on investment. They have ownership over their share of capital, and they can later sell it if they want to.
Now that we’ve covered this, let’s approach music royalties and the opportunity they represent. As Royalty Exchange puts it, each royalty stream “is dependent on the kind of copyright it is associated with”. This is because copyrights are a type of intellectual property representing rights held by the individuals that have created that piece of music work. Rightsholders that own shares in tracks thus earn royalties from them over time.
Pieces of music are investment assets; the higher the return the more attractive the asset becomes. This is a perfect environment for investment funds’ proliferation.
Why are music royalties attractive?
Firstly, opposite to other asset classes, music royalties are stable and very much independent of market fluctuations. Their fluctuation does not rely greatly on other economic activities, such as agriculture, transportation, or mining. As Covid-19 has proven, the music industry can be quite robust in drastically changing situations. One of the reasons might be the multiplicity of channels the “monetary value of music derives from”, as reported by Matheson. This can be from public performances, concerts, film scores, or streaming revenues.
Music income streams are stable and reliable: the new streaming royalties have reversed slumping music revenues “after 15 years of declines caused by piracy and the decline of the physical album”, Finance puts it.
Even though most of the revenue from a piece of music is made close after its release, a stable and recurring stream of income is consistently perpetuated over several years, if not decades.
As we have previously mentioned, investors appreciate high rates of return and the music business provides exactly that. This key factor was particularly attractive in a world of low-interest rates, close to 0% in some markets. According to Finance, while as of September 2020 the S&P 500 dividend yield was 1.8%, the average annualised return on investment for catalogues sold on Royalty Exchange was greater than 12%. This is quite an impressive value for the current average.
Taking all this into consideration, it should come as no surprise that investment funds are increasingly more interested in the music industry.
How can you invest?
At this point, you might be wondering how to get started, so we’ll explain it all. Private investment is possible through companies like Royalty Exchange, which consists of a marketplace where individuals can purchase shares of music royalties. These investments are commonly funnelled to artists who want to gather funds in exchange for their incoming earnings.
On the other hand, companies like Hipgnosis Songs Fund, Catch Point or HarbourView are investment platforms that focus on building a diversified portfolio of intellectual property rights. In reality, they acquire renowned music catalogues of important songwriters, aiming to then distribute the return of music royalties across the various investors. As Finance writes: “Hipgnosis was founded on the premise that hit songs are predictable long-term assets unaffected by economic cycles that will grow in value as the global music market expands.”. Fast forward to today, Hipgnosis is one of the biggest music companies on the London Stock Exchange. This means that anyone can buy Hipgnosis stocks at LSE and benefit from their investments.
Song Sleuth focuses on finding hard-to-detect user-generated content which, in return, provides royalty-claiming opportunities for rightsholders. This means that Investment Funds that provide diversified portfolios of music royalties constitute one of our client segments.