Disclosure – Non-Independent Marketing Communication. This is a non-independent marketing communication commissioned by Hipgnosis Songs. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

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SONG has continued to deliver, yet now trades at an attractive discount…

 

Overview

 
Hipgnosis Songs (SONG) stole a significant lead over many corporates and private equity fund managers, having in 2018 created a new category of listed fund to invest in songwriter royalties. As was their aim at the start, SONG’s manager has built a large portfolio of songs, many of which are of ‘great cultural importance’. SONG now has a portfolio ‘fair value’ of c. £2.5bn, comprising 146 Catalogues and 65,413 Songs. With every significant acquisition made by SONG, by the manager’s new partner Blackstone or by other private equity or record labels, it is arguably becoming increasingly recognised as an alternative asset class.

SONG’s manager aims to provide total returns over the medium to long term of greater than 10%, with a high dividend yield and the prospect of capital growth. Underlying performance over the six months to 30/09/2021 saw NAV total returns of 4.63%, taking the NAV total return since IPO to 46.7%. SONG has performed strongly in absolute and relative terms.

Whilst income over the six months to 30/09/2021 has been affected by a fall in performance income, this was felt most in the younger catalogues. Older, more evergreen catalogues nearly made up for the fall in performance earnings with strong streaming earnings. Overall, catalogue revenues have fallen, but the dividend is still covered (see Dividend).

SONG’s success has allowed some significant senior management hires. The resulting breadth and depth of management resources, not to mention the partnership with Blackstone, should enable more active and successful management. The team continue to highlight synchronisation wins as evidence of added value. Over the past 18 months, synchronisation income has increased from 9% (12 months to 31/03/2020) to 16% of revenues (six months to 30/09/2021).

 

Analyst’s View

 

SONG’s board have committed not to issue further shares until after the publication of the March 2022 NAV (expected in June or July). With the gearing facility largely drawn down, we, therefore expect that the portfolio will remain relatively static until then.

Now a significant and impressive portfolio has been built up, the managers have a clear opportunity to sweat the portfolio and drive returns for shareholders. As we discuss in Performance, we believe that growth in music industry revenues from streaming, a higher share of royalties being paid to writers, active management from the Hipgnosis team, and valuation increases if the discount rate falls from the current rate of 8.5% are all potential sources of future NAV returns.

Whilst this remains a specialist area of investment and therefore does represent something of a leap of faith for generalist investors, the current discount to NAV of 7.5% perhaps provides something of a margin of safety. We believe it is notable that the NAV has generally shown low correlation to equity markets. More latterly, SONG’s shares have provided a degree of insulation to market volatility, but the discount has widened. We identify potential catalysts that might lead to a re-rating in Discount. This may offer an opportunity for investors willing to embrace this new alternative investment area. The recent partnership with Blackstone further supports the argument that this is an area of investment that is set to become more mainstream.
 

BULL BEAR
Attractive yield, with prospect of income and capital growth, and trading on a wide discount currently Unfamiliar and illiquid asset class, meaning the portfolio is difficult to analyse, even as disclosure improves
NAV returns likely to be uncorrelated with equity and bond markets Gearing (currently c. 28% of NAV) can exacerbate downside
Opportunity for capital growth from industry trends as well as active management Possibility that current positive industry trends will reserve

 
See the latest research on SONG here>

 

SONG: The why, the what and The Who?

 

KEY FACTS

 

Investment objective

To provide shareholders with an attractive and growing level of income, together with the potential for capital growth, from investment in a portfolio of songs and their associated intellectual property rights.

 
Hipgnosis Songs Fund (SONG) has achieved plenty in its short life, aside from having raised over £1bn of capital. Round Hill Music Royalty Fund joined SONG in the listed universe by IPO’ing in late 2020, providing some interesting comparatives for investors, as well as the potential for some friendly competition which in our view will likely be good for investors of both funds.

With SONG’s manager recently having hired one of the co-founders of Round Hill Music to help SONG deliver “best in class market disclosures”, we anticipate SONG taking a significant step forward in providing better information on its portfolio.

In our view, this offers the potential for the share price premium to expand (average premium of 2.3% since IPO), with the shares currently trading on a slight discount to JPMorgan Cazenove’s (FX adjusted) NAV estimate of 117.6p.

Both SONG and Round Hill Music’s managers have highlighted the potential for the discount rate applied by their valuers to be reduced, which, if it were to occur, would boost the NAV.
 
diy investing
 

SONG has so far provided relatively detailed information on its portfolio in the form of its annual and interim statements. However, SONG has announced that it will be providing Alternative Performance Measures in an upcoming “online workshop” – for which you can register here.

We hope this will shed more light on the core questions of steady state revenue run rate of its recently acquired catalogues, and perhaps more importantly how the entire portfolio is performing against forecasts made at the point of purchase.

We will aim to provide a more detailed analysis of the trust then. However, for the moment, and mindful of the potential for a re-rating should investors get more confident on the shape and characteristics of the existing portfolio, we re-examine the basic questions of ’why’, ‘what’, and ‘who’ as regards SONG and the asset class.
 

Why now?

 
Alongside the launch of two listed royalty funds (SONG and Round Hill Music Royalty Fund), of late there has been a marked increase in the generalist media coverage of music royalties.

In our view, this is likely because of several large transactions that have occurred recently where globally significant artists have sold their back catalogues.

These include Neil Young (who sold 50% of his publisher share and 50% of his writers share to SONG) and Bob Dylan (who sold his entire catalog to Universal Music). Whilst the press has sat up and taken notice, investment in song copyrights is not a new topic.

Paul McCartney allegedly fell out with former friend Michael Jackson because he was outbid on buying back the rights to the Beatles catalogue, with Jackson paying $47.5m for them in 1985.

We understand that McCartney has since regained control of some of them. Aside from emotional ties, it is financial considerations to investors that give these royalties a value.

BBC Radio 4 recently broadcast an interesting 30-minute documentary on song copyrights and the burgeoning market for these rights. The presenter and participants (including SONG’s manager Merck Mercuriadis) discussed many of the reasons behind this sudden burst of enthusiasm for this new ‘asset class’ from investors.

There appears to be a number of factors coming together that have resulted in rising interest. The first is regarding supply of high quality copyrights for sale. COVID has meant that touring income (from copyrights, but of greater significance to performing artists from ticket sales and merchandise) have completely dried up.

With a sudden halt to these income streams, selling catalogues enables performing artists to bridge the gap until touring can resume.

At the same time, technology is being increasingly used to capture and account for income due to copyright holders (traditionally, a manual and relatively opaque process) which is making income streams more transparent.

This makes valuing them easier, and, with interest rates very low, it is not hard to see higher values being placed on income streams that historically might have not been very discernable or clear.

Another reason put forward as to why songwriters are increasingly selling copyrights is that they are become more entrepreneurial. Whilst critics might say selling a catalogue comprising your first ten years output is short term, in many cases artists are investing in their future career by recycling this capital into touring, marketing or collaborating with other talent (music videos etc) to further their career and ensure it lasts another ten years. Rather than cashing out, they might be seen to be doubling down.

From an investor’s perspective, the future for copyrights looks increasingly rosy. As the graph below highlights, revenues from streaming are leading the resurgence in income across the entire music industry.

After a near 20 year decline in which piracy (initially copies of CDs, but then MP3 files through Napster etc) eroded revenues, streaming is contributing to growth once again.

In our view, this is very simply explained. As any user of Spotify will attest to, the access and personalized experience that this sort of service is able to offer is significantly better than anything that was previously available for free, illegally.

Spotify have pricing plans for developed markets, but, more importantly for growth, have lower pricing plans for developing countries with lower disposable income.

This is hugely significant, because for the first time it brings the majority of the potential addressable market into legally consuming music for the first time.

Rather than being a flash in the pan, it is possible that streaming revenues will continue to grow for many years to come, with the kicker coming from emerging markets which previously contributed almost nothing to industry revenues yet comprising of a massive untapped audience.
 
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What?

 
SONG’s manager and advisory board of music industry insiders aim to use their network to access copyrights of a portfolio of evergreen hits which will prove durable over many years.

In this way, they aim to provide an income stream of music royalties for a long time into the future. The manager aims to add significant value through intensive management of these assets.

Over the long term, the manager aims to generate a total return of 10%+, of which a proportion will come as a dividend (target of 5.25p per share for the current financial year).

The manager aims to buy catalogues which include songs with the following characteristics:
 

  • those that are proven hits, delivering royalty income for numerous years
  • those that are culturally influential and therefore likely to be continually played and/or covered by new recording artists
  • those that are underexploited and for which the manager is able to identify potential ‘sync’ or cover opportunities
  • those offering upside from the improved administration of collecting royalty income

 
As was highlighted in the Radio 4 documentary we refer to above, a large majority of songs do not produce significant long term income streams. Yet others become part of a generation’s consciousness, have extremely long lives, and provide very high and consistent earnings for their copyright holders.

Within SONG’s portfolio, these industry characteristics are likely to be replicated, with some very strong and long-lasting hits such as those from Neil Young, Shakira, Lindsey Buckingham (Fleetwood Mac) etc, alongside a long tail of other less well-known songs.

An important factor for SONG’s investors is that its portfolio of songs continue to earn the projected income into the future, and that SONG’s management team (by luck or judgement) are able to reinvent or otherwise reintroduce these songs to future generations.

A commonly cited example (not within SONG’s portfolio) is Leonard Cohen’s song Hallelujah, written in 1984. It was famously covered by Jeff Buckley, but interest in the song declined before it was then used in the film Shrek.

Since then, it has become a piece of cultural furniture for millions of people around the world, and has been covered since over 300 times, generating many multiples of copyright revenue every year compared to when it was first released.

A very specific example from SONG’s portfolio is the song Heart of Glass performed by Debbie Harry and Blondie first in 1978. This song was recently covered by Miley Cyrus and released with a new video on TikTok; on that platform alone the song now has been played 936 million individual times and 136 million times with the hashtag (#blondie), where fans have uploaded 131,600 new videos performing their own creative routine to the song.

This is a prime example of how to regenerate the interest in a song and making it relevant to a new younger audience.

As at 21/01/2021, SONG held 129 catalogues consisting of 60,836 Songs. These assets have been purchased on a blended multiple of 15.63x of historical income, which on a very simplistic basis represents a gross historic cash yield of 6.4%.

We hope to provide more visibility on the portfolio in a future research article – please click here to add SONG to your watchlist to be notified. However, aside from management initiatives, the manager believes income will be the beneficiary of a secular growth trend in royalty income.

This, they believe is being driven by regulatory moves (e.g. the US’s Copyright Royalty Board’s ruling for a 44% increase in the writer’s share of royalties that songwriters will receive by 2023), but also continued popularity of streaming subscription services.

For investors, the key considerations (and risks to their investment in SONG) are that the managers have bought well, that their projections of each song’s earnings into the future are conservative, and that the management team are able to capitalise on these assets to improve the earnings stream of the portfolio.

We expect that as time goes on, more information will be made available to investors that will enable them to determine for themselves whether these have been achieved.

Depending on the outcome – and time will surely tell – we think there is clear potential for a re-rating when one considers the yields and premiums available in other parts of the listed alternatives sector (infrastructure, renewable energy infrastructure etc).
 

Who?

 
This is a specialist asset class, and one that requires specialist expertise. SONG’s investment adviser is The Family (Music) Limited, which was founded by Merck Mercuriadis, former manager of globally successful recording artists such as Elton John, Guns N’ Roses, Morrissey, Iron Maiden and Beyoncé, and hit songwriters such as Diane Warren, Justin Tranter and The-Dream. He is also a former CEO of Sanctuary Group plc.

The Family (Music) Limited has an advisory board of music industry experts and is broadly intended to help with acquiring song catalogues, providing a broad range of expertise to the manager on different genres of music.

The advisory board includes award-winning members of the artist, songwriter, publishing, legal, financial, recorded-music and music-management communities. It includes Nile Rogers of Chic and Dave Stewart of Eurythmics.

The Family (Music) Limited has a growing team who support Merck Mercuriadis (CEO) in securing new investments for the portfolio, monitoring royalty and/or fee income via SONG’s various portfolio administrators and developing strategies to maximise the earnings potential of the songs in the portfolio through improved placement and coverage of songs.

In September 2020, SONG acquired Big Deal Music Group (now known as Hipgnosis Songs Group) which brought direct music administration expertise in-house, allowing SONG to collect revenue more effectively and actively manage the portfolio of songs.

Specific hires that the manger has made since September 2020 include Ted Cockle and Amy Thomson, who both have long careers in music management.

Latterly, as we note above, Richard Rowe joined very recently, having previously been a co-founder of Round Hill Music. As the breadth of talent at the manager expands, and the impact of the in-house Hipgnosis Music Group team becomes more apparent, there is clear potential for SONG’s credibility with investors to continue to improve.
 

 
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