The catalog acquisition boom is showing no signs of waning, even during a pandemic. Eamonn Forde examines the major driving forces behind the catalog gold rush and looks at what the future holds for this space.
Many industries are being hit hard by the global pandemic and, within music, it is the live business that has borne the brunt of it. Already publishers and collection societies are warning that revenues will be down this year, notably because of cancelled tours and festivals as well as because clubs, shops and cafes where music is played were closed.
Other music sectors are suffering, but the damage will not be so instantly visible because of a slower reveal around the losses in synchronisation income as TV and film productions ground to a halt. Things there are cautiously getting back into gear but there will be several months of potential income cruelly wiped from the slate this year.
Lisa Alter is a founding partner at legal firm Alter, Kendrick & Baron where she represents clients on both the buy and the sale side of content acquisition. She is optimistic that we are now through the worst of it. She believes the synchronisation business will soon roar back into life again and that this will all be a temporary (albeit significant) drop.
“There’s no question that once we get on the other side of this thing, which we will eventually, that [TV and film] productions will probably start like wildfire,” she says. “There’ll be a whole new rush of exploitation that they’ll be in on the ground floor for.”
The overall slump in the market since March, however, is not appearing to land body blows on the content and catalog acquisition sector.
Alaister Moughan, founder of music consultancy Moghan Music and until recently a music specialist at 23 Capital, says that income from live, synchronisation and public performance may be down, but streaming income continues to grow. If anything, this will draw in even more investors who seek to buy catalogs outright or take a passive cut of income.
“You hear the words ‘non-correlated assets’ – meaning that if the economy goes down, music doesn’t necessarily go down as much as other types of income,” he says. “In some ways, [the pandemic is] almost a test of that theory.”
You hear the words ‘non-correlated assets’ – meaning that if the economy goes down, music doesn’t necessarily go down as much as other types of income. In some ways, [the pandemic is] almost a test of that theory.
– Alaister Moughan, Moghan Music
He adds that any slumps in catalog earnings this year will be put into a much wider investment context by those with money to invest.
“Because of the nature of the royalties, people are always looking at wider forecasts rather than two- or three-year forecasts,” he argues. “There is a weird paradox that, oddly enough, is making this asset class more attractive because people are saying that non-correlated assets are quite important when stuff like this [the pandemic] happens. So in a weird way there is a positive spin to it.”
For Alter, the impact of the pandemic might actually mean – mainly for unfortunate reasons – that more catalogs start to appear on the auction block this year. Investors will not be spooked by wild (if temporary) fluctuations in the market because catalogs that might not normally have been for sale will suddenly become available.
“With the pandemic, there’s another sad aspect which is that some of the performing artists may need to sell because they’re not touring,” she explains. “Touring is often the biggest portion of an artist’s income, but that’s not happening [currently]. So that might inspire artists to look to sell all or a portion of their rights which they might not have considered in the past.”
With the pandemic, there’s another sad aspect which is that some of the performing artists may need to sell because they’re not touring.
– Lisa Alter, Alter, Kendrick & Baron
“With the pandemic, there’s another sad aspect which is that some of the performing artists may need to sell because they’re not touring,” she explains
In terms of overall trends, Hipgnosis continues to lead the pack here, buying up multiple catalogs and seeing its market cap pass £1 billion in early August. “Having established proven songs as a highly investible asset class is not only great for Hipgnosis but for all songwriters,” Merck Mercuriadis, the company’s founder and CEO, told Music Business Worldwide.
Mercuriadis was also profiled in The Guardian at the start of August where he argued that music (and the value of music rights) can weather most storms.
“Proven songs are predictable and reliable in their income streams,” he said. “When I say it [music] is as good or better than gold or oil, it is because it is uncorrelated to what is happening in the marketplace.”
While it is true that Hipgnosis is its own centre of gravity here, steadily accelerating through a buying spree, the overall market appears, despite the pandemic (or, arguably, because of it), to be incredibly buoyant.
Moughan summarises neatly what has happened to the market in a relatively short space of time with regard to his own job.
“Three years ago when I started, it was an extremely niche skill that I had – to have this valuation background,” he says. “There was a deal every three months maybe – even if that. Maybe one really big deal a year. But now with Merck, it’s a deal a week, if not more. The interest in it and the number of acquisitions have grown so significantly even in that short three-year period. It is very fortunate in my case that it has come into vogue at the right time.”
He also says that the stampede is being caused by investors from outside of the traditional music business. Whereas in the past, it was generally publishers buying up catalogs from writers or other publishers, now a whole new class of investors from outside the traditional music business have stepped forward.
The other factor that has made catalogs more attractive to buy and much easier to value is digital. Streaming has been returning the record business to growth and the knock-on effect for publishers is obvious. And with streaming comes intricate and real-time data on how catalogs are performing.
For streaming there is just so much more data to forecast out from what you think a music publishing catalog is going to earn.
– Alaister Moughan, Moghan Music
“For streaming there is just so much more data to forecast out from what you think a music publishing catalog is going to earn,” says Moughan. “There are micro payments and you can see that month-by-month rather than the traditional physical sales [that were reported much more slowly]. That has made more financially minded people look at this income stream and feel more confident in its long-term prospects and be able to look at numbers to back that up. Traditionally, royalty accounting was quite complex. It seemed more like a wholesale business; but now people can see the streaming numbers. It gives them more confidence that there’s more data that they can model with. That, combined with the actual growth, has definitely brought an interest because people can get much deeper financial modelling going on.”
The headline-grabbing deals tend to be those companies buying up or buying into reliably “classic” catalogs from the early 1990s (and going backwards through time from there). These are the evergreen hits for Boomers and Gen X with decades of sales and ongoing radio play behind them and which have managed, for the most part, to make the transition into streaming.
Most significantly as regards where things are now, these are songs that tended to have one or two writers behind them, making publishing splits relatively straightforward.
This may now be a relic of the creative past. Analysis of 2018’s 100 biggest songs by Music Week found that on average 5.34 people were involved in writing a hit. This fundamental shift in the very architecture of contemporary songwriting has profound knock-on effects for investment in songwriting catalogs.
“The risk is that there isn’t a new track record,” says Alter with regard to contemporary hits. “Something gets released, it’s the hottest thing ever, there’s a tremendous spike, and there’s a huge volume of streaming. But the risk is that in three years – or two years or even a year and a half – it is now yesterday’s news, no one’s listening to it anymore and it doesn’t have the legs to go forward. When you’re looking at something that’s a couple of years old, that’s risky.”
Beyond the staying power (or not) of newer hits, how the publishing is split between writers can be a turn off for some potential investors.
“The theory that you can increase sync [or other licensing] is made a lot more difficult when you’ve got six co-writers,” says Moughan. “When you do have investors who are looking just to acquire passive income streams, that might not necessarily worry them as much. Recent hits are definitely harder to model and it takes longer for people to get comfortable with them. Everyone wants to buy a catalog with 20 years of track record, but there’s so much competition for those catalogs.”
Even so, Moughan says that the growing demand for older catalogs does not mean investors who cannot afford the higher fees for these long-established classics are deserting music entirely. Rather they are looking to invest in music – and if that happens to be songs minted in the last few years then so be it.
“There’s just so many more people coming into the market that, on the demand side, [newer compositions] seem to be growing as well,” he says. “The number of calls we got at 23 Capital from people asking us if we knew any catalogs for sale, that demand kept on growing.”
Alter, however, counters this and says some major investors she knows of are seeing their interest in catalogs being index-linked to the number of writers involved: the more writers there are, the lower their interest.
“A lot of the big players don’t want to do tiny deals – it’s not worth it,” she says. “And the other piece of it is that every co-writer has a say in licensing. You could find yourself with your hands tied, unable to get licences finalised because the licensee is chasing five, six, seven, eight other people. If they sell as a block, that’s one thing – or at least half or a significant portion of the writers all collaboratively decide to sell – but it definitely presents more challenges.”
You could find yourself with your hands tied, unable to get licences finalised because the licensee is chasing five, six, seven, eight other people.
– Lisa Alter, Alter, Kendrick & Baron
It may then be the case that the investors with the deepest pockets slug it out at the top end for the biggest and oldest catalogs as they have confidence in them. Against this, a new generation of investors may now be coming in with smaller per-acquisition budgets behind them but who are prepared to buy into smaller and slightly unproven contemporary catalogs as they don’t come with blockbuster price tags. There may then be the emergence of a new investor class system: on the one side, those who pay highly for guaranteed hits; and on the other side, those who are prepared to gamble (notably with lower investment) for what might prove to be the enduring hits of tomorrow.
Alter, however, says that the advice she is giving to newer writers is to hold off from selling if they can for a number of years when, hopefully, they will have more hits under their belt and more bargaining power.
“From a seller’s point of view,” she says, “if that new artist or that songwriter was only two years out and was saying, ‘I’m going to go and sell everything now,’ I might caution them not to. Wait. Don’t give it all away yet. If you wait a few more years and really get yourself on the map, then it could be even more valuable. You can’t possibly value something that’s two years’ old from a new artist or a new songwriter in the same way that you value something that’s even five, six, seven or 10 or more years.”
In The Guardian feature mentioned above, Mercuriadis estimated that he had another two years to spend upwards of £3 billion acquiring artist catalogs before the price goes through the roof. Some would argue that Hipgnosis is the primary cause of the dramatic uptick in the value of catalogs (where earning multiples of 20x or 25x are now being used to arrive at sale prices), but there are still enough investors coming into the market hoping there is still plenty of time to catch the wave.
As prices rise and competition grows, what has become even more important in closing deals is having an intricate working knowledge of the catalog that is about to be bought. That goes far beyond the due diligence that is necessary to work out past earnings and arrive at a sale price from that.
“For the deals that companies like Primary Wave and Round Hill are involved with, the person has got to want to sell the catalog – so you have to sell them on your services,” says Moughan. “One thing that Merck does really well is that – and say what you want about what he’s paying – he definitely learns the catalog and he speaks a really great pitch to the artist who is selling, explaining why they should sell to them rather than to a faceless acquirer.”
One thing that Merck does really well is that – and say what you want about what he’s paying – he definitely learns the catalog and he speaks a really great pitch to the artist who is selling.
– Alaister Moughan, Moghan Music
“One thing that Merck does really well is that – and say what you want about what he’s paying – he definitely learns the catalog and he speaks a really great pitch to the artist who is selling,
Alter says this intimate knowledge about a writer or a catalog is rarer than one might expect in the acquisition space.
“If I’m representing the buyer, I would say at least 75% to 80% of the time, the firm representing the seller met their client a week ago and has no history!“ she says. “When the seller has lawyers, managers, business managers and accountants that they’ve been working with for forever, then you have a much better shot of getting documentation and having somebody know how things got from A to B to C. That’s rarely the case, unfortunately, these days.”
It is unquestionably an unusual time to be doing business, but one bright spot is that catalogs are still being valued highly by the investment world. Drops in revenue might force the hand of some writers to sell all their rights or significant stakes in them as they are desperate to make up for lost earnings elsewhere, but there is no shortage of buyers for them.
Maybe catalog investment will start to mimic the shape of the record business – with the likes of Hipgnosis taking on the role of the majors as they are focused on proven hits and market share whereas a generation of savvy new investors might start to think like indies, making smaller and earlier investments as they believe in the growth potential of what they are buying into.
Perhaps the best end result is a cleanly bifurcated market – a handful of giants battling amongst each other for control of the demonstrably evergreen which leaves space for the smaller and more nimble players to hunt down and nurture the green shoots.
