Dependable recurring income from digital music rights is attracting major investment from PE funds
Streaming has made song rights one of the most compelling emerging asset classes going.
Lawrence Mestel, a US record industry veteran who earned his spurs at the likes of Island Records, Arista and Virgin Records, was one of the first to recognize this. A decade after establishing his music publishing and talent management company Primary Wave, the firm launched its first investment fund in 2016, raising US$300 million. That was followed in 2019 with Primary Wave Music IP Fund 2, which collected more than US$500 million. The funds have purchased the rights to music from Bob Ezrin, Dave Navarro, Culture Club and Whitney Houston to name just a few. The firm acquired an 80% stake in the song catalog of Stevie Nicks, for a reported US$100 million in December 2020.
Others have followed Primary's investment lead. Merck Mercuriadis, a veteran music industry executive and the former manager of acts including Guns N’ Roses and Destiny’s Child, teamed up with musician Nile Rodgers to found the Hipgnosis Songs Fund. The London Stock Exchange-listed vehicle, which launched in 2018 and has a market cap of £1.6 billion, has made music royalties investment its sole focus. In the past 12 months alone, the fund has acquired rights from artists including Neil Young, Shakira and Barry Manilow.
Full stream ahead
In the analog days, recorded music had a limited shelf life. Revenues were primarily made in the immediate weeks and months following the release of an album, with concerts used to lift sales volumes. In today's streaming environment, artists can build fanbases that constantly listen to their music, generating revenues every time their songs are played.
Streaming has thus completely changed the cash flow profile of the industry. Music, including timeless hits by legacy acts, brings in a steady stream of dependable revenues thanks to the widespread adoption of platforms such as Spotify, Apple Music and Pandora. The International Federation of the Phonographic Industry (IFPI), an industry body, estimates that streaming now accounts for 62.1% of global recorded music revenues.
The pandemic demonstrated how successfully the industry made its digital transition. In a year in which the world economy contracted by 6%, the global recorded music market grew by 7.4% to US$21.6 billion, according to the IFPI. Streaming revenues meanwhile were up by 19.9% year on year, offsetting declines in physical sales and performance rights revenues.
Private equity takes note
It is not only specialist funds led by former music moguls that are buying up rights in the streaming era. Long-established private equity houses have been making large investments into the space because, as an asset class, music royalties meet their criteria. PE firms like steady and recurring cash flows because they make for lower-risk investments and because they are well suited to servicing liabilities.
KKR announced in January this year that it had acquired a majority stake in the music catalogs of Grammy award-winning songwriter and producer Ryan Tedder, the lead singer of pop rock band OneRepublic. Interscope Records will continue to own the master recordings of OneRepublic, but KKR now owns the publishing and recorded music rights to the catalog that has almost 500 songs, including hits co-written with household names such as Beyoncé, Lady Gaga, Paul McCartney and U2.
Blackstone Group in April made a major move in the space by purchasing eOne Music from Hasbro for US$385 million. While Blackstone had already invested in the music industry, including into SESAC, a performance royalties collection society, the eOne deal gave Blackstone rights to songs from artists including The Lumineers and Snoop Dogg.
In another example of private equity's newfound taste for music rights, Providence Equity Partners joined forces with Warner Music Group to establish Tempo Music Investments in 2019. The firm now has a reported US$1 billion in dry powder at its disposal, and has acquired the catalogs of acts including the Jonas Brothers and Wiz Khalifa.
Social media drives growth
The full cash-generating potential of digital music is reaching new heights and stands investors in good stead to make even greater returns. In July 2020, the National Music Publishers’ Association (NMPA), a trade association for US songwriters and publishers, came to a multi-year licensing agreement with TikTok, a video-sharing social media app.
TikTok videos often use popular songs as backing tracks and, with more than 2 billion downloads, the platform has increasingly become the place where young people discover new music.
Not only do viral hits like Lil Nas X's “Old Town Road,” a song that was streamed 2.5 billion times in 2019 in the US alone, owe much of their success to TikTok, but songs by established acts can receive major boosts from popularity on the app. The NMPA agreement replaces a number of patchwork agreements the app had in place with music majors and indie labels, some of which had expired.
In March 2021 the NMPA inked a further deal with TikTok rival Triller, which had come under criticism for using artists' music without proper licensing arrangements in place. Triller previously had licensing agreements with Sony Music Entertainment, Warner Music Group and Universal Music Group, but in February, prior to the NMPA's retroactive opt-in agreement, Universal abruptly pulled its catalog from the app.
The improved licensing governance at hugely popular social media apps means that songwriters and publishers will be properly compensated for a type of short-form streaming that did not even exist just a few years ago.
This upside is compounded by the vast potential of less mature geographies. Unlike the US streaming market, China has only begun to gain ground. According to the Global Music Industry Report, the world's second-largest economy only entered the world’s top ten music markets for the first time in 2017. The purging of unlicensed music from platforms has legitimized the industry, with the Chinese digital music market growing in size from RMB 4.7 billion in 2017, according to iResearch, to a forecasted RMB 20.6 billion in 2021.
Far from being the death knell of the recorded music industry, streaming has given the industry a second life, and private equity has taken note of this highly investable asset class.