Saturday, June 12

Hipgnosis: the Fund Revolutionizing Music Management and Striking a Chord With Investors


“I don’t sing for nobody,” Neil Young crooned in This Note’s for You.

Now, he’s singing for Merck Mercuriadis, the 57-year-old entrepreneur revolutionizing music management.

The chief executive of

Hipgnosis Songs Fund

snapped up 50% of the Canadian folk singer’s entire catalogue of 1,180 songs in January as part of his mission to turn song ownership into a stable asset class that isn’t a slave to the rhythms of the stock market.

Since listing on the

London Stock Exchange

in 2018, Hipgnosis has raised $2 billion in debt and equity, and Mercuriadis has been buying music rights at lightning speed.

Read: Neil Young strikes heart of gold with 50% sale of song catalog to publishing house

In December and January alone, the fund did deals with Shakira, Fleetwood Mac’s Lindsey Buckingham and superstar producers Jimmy Iovine and Jack Antonoff. It now boasts more than 60,000 songs bought for about $1.75 billion. Last week, it added the music catalogue of pop songwriter Carole Bayer Sager to its portfolio.

Mercuriadis’s mission is disarmingly simple: Hipgnosis raises money from investors and buys revenue rights to hit songs. It then gets paid every time one of its songs is played, performed or used in TV, movies or video games.

The rise of streaming apps like

Spotify

has changed the way people play and pay for music. One of Mercuriadis’s big ideas is that these subscription services make music revenue more reliable.

“I could see very clearly that streaming was going to take music from being a discretionary or luxury purchase, to being a utility purchase,” Mercuriadis said in an interview with Barron’s.

“Great songs are predictable and reliable in their income streams.”

Read:Artists Are Striking Gold by Selling Their Music Rights. How Investors Can Cash In.

It is an industry step-change that investors and analysts are buying into, although some have concerns over the lack of transparency in how much Hipgnosis is paying for songs and how they are valued.

Much of the fund’s attraction lies in Mercuriadis’s industry insider background. His long career includes stints managing Beyoncé, Elton John and Guns N’ Roses.

But it also claims returns will be independent of economic and market cycles, making it a good diversification for investors and offering steady dividends.

“People consume music whether they’re living their best lives, or whether they’re experiencing challenges and looking for comfort and escape,” Mercuriadis said.

Investors humming along with Hipgnosis include the Church of England,

Aviva,

and

Axa.

Newton Investment Management, a subsidiary of BNY Mellon, nearly doubled its stake recently to 10%.

Mercuriadis has several strategies to boost cashflows and returns. First is what he calls “active song management,” which involves generating more revenue from a focused portfolio of high-value hits.

Too many well-loved songs, Mercuriadis said, are left to languish by industry giants like Universal Music Group,

Sony

and

Warner.

“We put time and effort into ensuring that those songs are getting real opportunities and being nurtured back to life.”

For example, when Hipgnosis bought the catalogue of Al Jackson, the former drummer of Booker T and The MG’s, it was generating $400,000 a year in reliable income. But Al Green’s Let’s Stay Together generated more than 80% of that. Mercuriadis has lifted the catalogue’s revenue to $600,000 a year by getting more out of five or six other songs, including Green Onions, which Jackson co-wrote and Mercuriadis calls “probably the greatest instrumental of all time.”

He will also seek to boost revenues by aggressively pursuing “synching” – placements in movies, TV shows, computer games and adverts. “Synching will be a massive, massive revenue stream,” he said. “The consumption of music is at the heart of selling every product.”

He placed the Eurythmics’ Love Is A Stranger into the latest series of The Crown, and just signed a $2 million deal for the use of Don’t Stop Believin’ by Journey.

Peloton,

TikTok,

Roblox,

and Minecraft will provide even more opportunities, Mercuriadis said.

Alongside reviving forgotten songs, Mercuriadis aims to make revenue collection more efficient. He believes that could deliver another sales boost of between 10% and 35%.

Shares in Hipgnosis are down 0.81% in the year to date, according to data from FactSet.

Read:Iconic Rock Songs Are Suddenly Hot Commodities. One Reason: Streaming.

Still, some analysts question how Hipgnosis values the assets that it has acquired and how it calculates the multiples that it discloses in its financial reports.

The fund has only disclosed the price it has paid twice: $23.75 million for buying the The-Dream’s catalog in 2018 and $322.9 million to buy 33,000 songs previously managed by Kobalt.

Mercuriadis said Hipgnosis is bound by confidentiality agreements with the artists concerning deal pricing. Investec analysts said recently that makes it difficult to fully analyze the portfolio.

An independent third-party assesses the value of each music catalogue after Hipgnosis buys it. But analysts are concerned that the valuer applies the same discount rate to all Hipgnosis catalogues even though these come with different levels of risk and popularity. It has also led to quick gains on the Hipgnosis fund’s net asset value.

“This is despite the manager not having had sufficient time to add value or for underlying market assumptions to have materially changed,” analysts at Stifel wrote in December.

In its recent half-year report, Hipgnosis said a lower discount rate reflected music’s ever more stable and predictable earnings through paid streaming.

“These catalogues are increasing in value very, very quickly and are only available for a short period of time at attractive prices,” Mercuriadis said. “And what we buy over the next two years is going to triple in net asset value inside of the decade.”

Mercuriadis has yet to buy his favourite songs, which include A Day in The Life by The Beatles, Wish You Were Here by Pink Floyd, or Papa was a Rolling Stone by The Temptations. But if investors keep handing Hipgnosis more money, he might one day get his hands on them.



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