In July 2016, 25% of the songwriter’s share of the public performance royalties for Barry White’s hit ‘You’re the First, the Last, My Everything’ were put up for auction. The winning bid was $73 000 (R1.07 million).
That may sound like a huge sum of money to pay for a quarter share of a four-and-a-half minute song, but it’s worth considering that it had generated revenue of $6 704.81 over the previous year. That means that whoever bought the royalties had just secured themselves a yield of 9.2% per annum.
Given the popularity of the song and the fact that music rights last for 75 years after the death of the songwriter, that yield is also going to be earned over a very long period of time, and it is likely to increase. In purely economic terms, it therefore looks like a pretty astute investment.
But not that easy to get …
Historically, however, accessing this kind of asset has largely been restricted to very wealthy, and often very eccentric, individuals. For instance, Michael Jackson famously bought the publisher’s share of The Beatles catalogue, along with the rights to a number of other songs, for $47.5 million back in 1985.
Recently, buying into this kind of asset has however become more mainstream. In July last year Hipgnosis Songs Fund Limited listed on the London Stock Exchange, with the stated objective of providing shareholders with “an attractive and growing level of income, together with the potential for capital growth, from investment in songs and associated musical intellectual property rights”.
Already, the fund has acquired the rights to 1 230 songs, covering a range of genres. These include the English version of Despacito featuring Justin Bieber, Umbrella performed by Rihanna, Single Ladies made famous by Beyoncé, and Smooth performed by Santana and Rob Thomas.
“Hipgnosis is paid every time these songs are performed, regardless of the artist, streaming platform or media,” explains Mike Pinggera, head of multi-strategy at Sanlam Investments UK. “Funds like Hipgnosis buy catalogues of songs and effectively own the writer’s share. Although it is early days, Hipgnosis is targeting an attractive yield of 5% per annum – which is quite compelling in today’s low interest rate environment.”
The first part of what makes this strategy attractive is that it does not rely on speculation about whether a song will be a hit or not. The fund only buys the rights to music that is already popular.
“In order to value a catalogue, you want to see proven revenues,” says Pinggera. “The Hipgnosis team is not investing in fresh new young artists. They are not trying to find the next superstar. What they’re buying is established catalogues with proven revenue streams.”
An obvious question this raises is that if a songwriter is earning a steady income from holding the rights, why would they sell them?
“One way to think about it is to compare this strategy to others in our broader portfolio,” Pinggera explains. “We also invest in wind farms, for instance. We don’t get involved in building the wind farms, but we invest in operational assets. So whoever took the risk in building that wind farm can then recycle the capital and go and build more wind farms.”
The same principle applies with music rights.
“Having written a series of songs, the writer can maintain their ownership to the rights and take the annual revenue, or they can monetise that revenue stream now, go back into the studio and create more music,” says Pinggera. “We are a facilitator for the recycling [of] capital so that creative individuals can do creative things. What we’re interested in is long term, stable, predictable cash flows.”
For Pinggera, who is looking to build a diversified portfolio of real assets, music rights give him an additional source of uncorrelated returns, and one that he has found surprisingly tangible.
“I was in Johannesburg recently, and when I landed at the airport and jumped in the taxi the first song that played was Smooth by Santana,” he says. “That’s one of the songs in the Hipgnosis portfolio.
“So I’m sitting in the taxi and thinking: ‘Well, we’re getting paid’.”
He also believes the outlook for music rights is positive given that 60% of the world’s population is under 35 and 63% of people now have access to the internet via a mobile phone.
“There are also not so many reasons to pirate music now, because on your phone you can have the music for free if you’re prepared to just listen to a few advertisements,” says Pinggera. “So we look at the backdrop to music rights, supported by demographics and technological change, and we think it’s very encouraging.”
This supports the long-term attractiveness of these assets.
“In a world of Brexit and Donald Trump, we are looking for diversified sources of revenue that are not dependent on what happens in the near-term macro environment,” he says. “The reality is that I don’t know what Theresa May is going to do today or not, and I don’t know what Donald Trump is going to tweet. What I do know is that people are going to turn the radio on, or plug in their iPhones, and listen to music.”