Is this the world’s coolest investment trust? Merck Mercuriadis – former manager of Guns N’ Roses, Iron Maiden and Elton John – plans to launch a £200 million investment trust this month, investing in the music of today’s leading pop and rock artists.
Mercuriadis runs the Hipgnosis Songs Fund, which is seeking a stock market listing. At a recent pitch to investors, Hipgnosis said it has targeted acquisitions of more than 1000 songs – including tracks from Beyonce, Adele, Snoop Dog, Jay Z, Bruno Mars and Rihanna. The trust said it would own the rights to hits from across the last five decades.
The trust hopes this will generate a valuable income stream for investors via ongoing royalties, as well as capital appreciation of these music rights.
The trust will target a dividend yield of 6.5%, paid quarterly – and a total return of 10% a year over the medium term, net of fees. Hipgnosis said it had a range of songwriters willing to sell their music to the firm as it was a ‘trusted’ member of the artist and songwriter community.
An IPO is planned for the end of this month.
Can Royalty Payments Provide Alternative Income Stream?
While the yields will certainly look enticing for income seekers – many advisers are urging caution. Laith Khalaf, senior analyst at Hargreaves Lansdown says: “In theory it’s a nice idea: music royalties could be one way of offering diversification, and with yield thin on the ground, investors are always searching for ways to boost their income.”
Many successful hit records can generate valuable income streams for years. Royalty income is protected under UK law, with copyrights lasting for 70 years after the death of the writer, or last surviving co-writer.
For artists in their 20s today, this could mean income streams for 150 plus years – provided of course they don’t die early, and their songs continue to be played, streamed or downloaded. This, of course, is a big ‘if’: but as the examples of The Beatles, Pink Floyd and David Bowie show, music can have a long and profitable shelf-life.
One of the problems that has rocked the music industry in recent years is illegal downloading: which means artists and songwriters do not get the royalties they are due.
But concerted action by the industry, regulators and law enforcers has seen legal streaming replacing illegal downloading in recent years. Hipgnosis said royalty revenues were forecast to grow to £18 billion by 2030, compared to £1.8 billion in 2015.
But despite these optimistic forecasts Khalaf points out that this is still, largely an untested investment option. “With a normal investment trust you’d want to see some track record from the manager, and that principle applies in this case too.”
Mercuriadis and the team at Hipgnosis may have successfully managed rock bands for a number of years, he says, but does this translate into the financial know how needed to run this kind of investment? For example, selecting which royalties are likely to appreciate in value, and negotiating preferential buying terms? As with any investment there are no guaranteed of decent returns: the returns from this trust may be more ‘appetite for destruction’ than ‘paradise city’.
High Fees Hit Wrong Note
Of more immediate concern too is the proposed fee structure on the trust. Khalaf says: “I would also point out that the charges are pretty eyewatering, a bit like tickets to a Guns N’ Roses concert!”
For the first two years the trust will charge a flat 1.5% fee of the money its raises, up to £200 million. This will drop to 1.25% for the next £100 million, then 1% if it raises over £300 million. After two years, the same fee structure will relate to the market capitalisation of the trust – so will be based its collective share price, rather than the NAV.
In addition, there will be a performance fee: equivalent to 10% of any excess total shareholder return, over a 10% hurdle, subject to a high watermark. There will be a total cap on fees of 5% of the NAV of the trust.
Potential investors should also remember that this is a very niche area, so liquidity could be poor. An investment trust structure is probably best suited to investing in illiquid assets, but this does mean that the trust could move to a discount, if there is a lack of buyers, even if the assets under management are increasing in value.
However, the brokers of the trust point out that as fees are linked to share price it is in the managers interest not to let the trust move to large discounts.
Trust Structure Ideal For ‘Niche’ Investments
Simon Moore, senior portfolio manager at Seven Investment Management (7IM) said: “Investment trusts have seen a dramatic image change in recent times. Once dubbed ‘pale, male and stale’ more recently they have been described as the ‘hipsters of the investment world’. The proposed launch of a music rights investment trust, by the ex-manager of Guns N’ Roses certainly enhances this image.”
However he added that investors waiting for returns should do well to bear Guns N’ Roses ‘Patience’ track in mind.
He pointed out that while the investment trust sector houses some core, retail focussed sectors, it has always “excelled in the niche”. “Who could forget the Tea Plantations trust, which invested solely in Sri Lankan tea plantations. Or, indeed, Taverners investment trust which invested in pubs and breweries. Neither stood the test of time.
“There is however hope. Scottish Mortgage (SMT), now one of the most successful investment trusts in the sector, started life on a niche investment premise: funding rubber planters in South East Asia. Now it is a global generalist trust that has done so well it soared into the FTSE100 this year.”
Annabel Brodie-Smith of the Association of Investment Companies (AIC) added: “The unique closed-ended structure of investment companies makes them particularly suitable for illiquid assets such as infrastructure, property and unquoted companies, and more unusual or exotic assets. Today investment companies invest in everything from social housing and peer-to-peer loans to aircraft.”
‘Bowie Bonds’ Pioneered Music Industry Investments
Rock n’ roll excesses and the more sedate world of investment trusts might seem strange bedfellows. But this isn’t the first time investors have been offered the chance to profit on the back of record sales.
One of the pioneers of this was David Bowie, who in 1997 became the first music artist to offer a ‘bond’ secured against his extensive back catalogue – which included the Ziggy Stardust, Hunky Dory and Hero albums. The rights to this music was essentially licenced to EMI for a period of time, who then securitised these rights, via a 10-year bond which paid a coupon of 7.9%.
At the time the credit rating agency Moody’s even gave these so-called ‘Bowie Bonds’ an investment grade rating, although this was later downgraded to just one level above ‘junk bond’ after a downturn in the music industry.
Before this happened occurred though, other musicians seemed keen to jump of this bandwagon with Iron Maiden, James Brown and the writing team behind many of the Motown hits launching similar bonds.
Talking to the BBC, Cliff Dane, a music industry finance expert said the Bowie bonds “worked out well for everyone”. Despite the downturn in album sales, these bonds continued to pay the promised income to investors. Dane said: “Due to the particular nature of the security – the quality of the relevant Bowie songs and records it made very good economic sense for the investors, and the company organising it.”
But while this particular issue was deemed successful, he said this model wasn’t necessarily good for all asset-backed financing.
Dane draws a useful parallel to the mortgage market. Here, securitisation was very successful until bonds and other financial instruments started backed by sub-prime loans, that did not deliver expected income streams – or any income stream in some cases. The same problem can occur when it comes to music royalties – but it may be far harder to predict which songs will go on playing.
