Music industry revenues have steadily grown in the last six years to top US$40 billion, by some estimates, after streaming services such as Spotify and Amazon /zigman2/quotes/210331248/composite AMZN -1.25% began to gain traction more than six years ago.
All that cash has opened an opportunity for investors as public and private funds scoop up music royalty rights from song catalogs to create diversified portfolios, according to Jordan Stein , director, Cresset Private Capital with Cresset Partners in Chicago.
In the public market, vehicles such as the Hipgnosis Songs Fund /zigman2/quotes/204952632/delayed UK:SONG -0.72% (ticker: SONG), which is listed on the London Stock Exchange in the U.K., allow investors to get a slice of royalty payments every time a song is streamed, performed, or played in a commercial or movie. There are also marketplaces such as Royalty Exchange and Songvest that allow individuals to bid on intellectual property rights that are auctioned off by artists, independent labels, and publishing firms.
One reason investors are drawn to music royalty funds is their performance has a low correlation to other financial securities. Even during the height of the pandemic, when live performances were largely halted, and markets globally were volatile, people kept listening to music, Stein says.
“People will always listen to music—that provides protection against downside scenarios,” he says.
Yields generated by these funds, both public and private, have been in the neighborhood of 5% to 10%, although private equity funds could likely generate higher yields by eventually selling the portfolio of royalty rights they put together.
Penta recently spoke with Stein about growing investment opportunities for wealthy individuals and families in music royalty rights.
A Burgeoning Market
Intellectual property rights in the music world are generated by copyrights on words and lyrics, considered publishing rights, and masters or song recordings, which are rights related to the original recordings of the song.
When it comes to publishing rights, future royalties are split between songwriters and publishers even if a new version of a song is played. Master recordings are owned by record labels with a portion of payments going to the artist. The dynamics of this sector of the music business became widely known when Taylor Swift began up-ending this arrangement with the re-recording of her earlier studio albums. In doing so, she gained full ownership of her own masters.
The markets for intellectual property rights for song publishing and for master recordings have generated together about US$40 billion in annual revenue, and are expected to continue growing by 9% a year through 2030.
Driving this growth is increasing accessibility to music through streaming services, and from social media platforms such as TikTok and Twitch, “where all these content creators are using music,” Stein says. “That’s providing an uplift to the number of songs that are listened to, which generates all that cash flow.”
Another boost to the industry is coming from regulators who are developing rules in Europe and the U.S. to ensure artists are fully compensated for their songs, even when they are tracking in the background of someone’s YouTube post.
“For a period of time, it was like the Wild West,” Stein says. Current and future regulations will make sure that people who own and create the tremendous amount of content used today “are fairly paid.”
How to Invest in Royalty Rights
One way individual investors can get exposure to growth in the music industry is through a publicly traded company. Hipgnosis, with US$2.2 billion in assets and listed on the London Stock Exchange, is the biggest music royalty firm with a focus on large, proven musicians and their song catalogs.
The marketplaces give investors a chance to bid on an individual catalog or, in some cases, a single album or song. Royalty Exchange, for example, recently sold future royalties to Jay-Z’s Grammy Award-winning Empire State of Mind , with vocals by Alicia Keys , for US$190,500. Based on past royalties, the marketplace provides a “theoretical internal rate of return” on this ten-year investment of 9.9%.
But wealthy individuals and families, and institutions, are more likely to invest in music royalties through private markets. According to Stein, there’s been “significant growth” in the number of private funds created to scoop up these royalty rights “because of the explosive growth that the music royalty segment has seen.”
Private equity managers such as KKR have stepped into this arena. Although Stein says it isn’t clear what types of structures these firms may create, they are likely to resemble a typical private-equity fund with a five- or seven-year term. The underlying portfolio that is purchased will generate ongoing cash flow for investors while the fund exists, in addition to a windfall when the catalog is eventually sold.
“Generally, the bigger and more mature the catalog or portfolio of catalogs, the higher multiple it can sell for,” Stein says.
Catalogs for large, well-known artists sell for multiples of about 15 times their average cash flow, generating annualized yields of about 5% to 10%, while smaller catalogs of less widely known artists are rumored to have sold for smaller multiples, generating yields between 10% and 20%, he says.
NFTs Could Propel Growth
Another potentially large source of royalty revenue could be generated by nonfungible tokens, or NFTs. The blockchain technology has the potential to radically change the market for songwriters and musicians by eliminating layers of administrative middlemen, including publishers, distributors, record labels, and performing-rights organizations.
PROs are responsible for making sure those who own the rights to songs are “fairly and accurately paid based on the number of times a song is played in a bar or streamed on Spotify,” Stein says. It can take months, or longer, for all those funds to flow. The band Kings of Leon started the trend in March when it sold its newest album and related materials as NFTs, Rolling Stone reported at the time. The total sale reportedly generated more than US$2 million.
“You could make in a day on [a] sale the equivalent of hundreds of millions of streams—and you get paid instantaneously,” Stein says.