In our new Money Moves series music consultant Alaister Moughan speaks to the movers and shakers of the music finance industry. In our latest instalment we catch up with Lyric Capital Group Partner Ross Cameron.
Lyric Capital made headlines facilitating the $US350 million management buy-out of Spirit Music in 2019. Managing partner Jon Singer has big expectations for Spirit, recently stating an intention to grow the company to a billion dollar valuation.
In this edition of Money Moves, Ross Cameron, who came into the music world from a finance background, speaks about Spirit’s past, future plans and financial focus with a “human touch” which is a critical part of their offering.
How do you entice investors to music catalogs?
Music royalties as an asset class provide a very attractive investment. They have favourable trends, risk adjusted returns, low volatility and minimal correlation. The investment thesis has strengthened over the last nine months. Looking back to 2008-2009 we always knew music royalties were recession proof.
Now we can safely say they remain a very resilient asset class, even during an economic shutdown. This is particularly appealing to European investors who are very thirsty for yield right now and frankly scared to put their money into equities. They are running out of asset classes that provide some safety and that are not overpriced.
“Looking back to 2008-2009 we always knew music royalties were recession proof. Now we can safely say they remain a very resilient asset class, even during an economic shutdown.”
The other thing is that it’s starting to prove out in terms of the public markets – during the pandemic the Hipgnosis stock price actually went up. This could be due to multiple factors, but the main driver is that it’s a safe haven for money.
Speaking of public markets, there is a growing presence of music listings. As well as Hipgnosis there have been recent announcements by Warner Music, Universal and Round Hill. Is this a sign of the confidence in the asset class relative to three to five years ago?
Definitely. Over the last six years, the institutional investors in the public markets have started to become very educated in this asset class.
It started with Round Hill. Primary Wave followed suit and then Kobalt brought in a lot of VC firms as well as their own private equity group. There’s been a slow education process, but potential investors are starting to really look at this as the new pharmaceutical royalty asset class. Where that’s now overpriced, music is still a fairly new asset class. So that brings with it some equity upside and there’s still great value to be had.
On some level, music is thought of as something new, particularly in the public markets, and there are going to be hiccups. Hipgnosis has gone a long way to try to create a pretty special investment product that’s public but it’s not without reporting requirements.
The market is now trying to get its head around how transparent this process and this company is. What should they be looking for? What questions should they be asking? There is more education to do but the more education someone else does, the easier it is.
Lyric Capital is best known for its role in the recapitalization of Spirit Music Group. Tell us more about your involvement in that deal and the expectations for it…
We are the private equity group that backed Spirit and had a very close unique relationship. We ultimately did turn their investment around. Not that it was underwater, but we added a lot of value in a very short period of time and ended up with a great result for them.
There was so much value to unlock in that portfolio and so many favourable tailwinds that hadn’t yet impacted the cash flows.
Pegasus gave us a unique opportunity to participate in a process where we were bidders in our own company. They did the right thing by their investors and went and sought out other bids. But ultimately, we were able to buy Spirit and to bring in additional capital through Lyric Fund One which was backed by great institutional investors that had a long term vision in the space, understood the cash flows, had done their homework and had been seeking an opportunity for a long time.
“It was a perfect marriage of an institutional capital management team that knows the asset and wants to continue to invest in as well as manage the existing portfolio.”
It was a perfect marriage of an institutional capital management team that knows the asset and wants to continue to invest in as well as manage the existing portfolio. The outcome is that over the last two years under the Lyric umbrella we’ve really built on a great foundation of assets. We’ve added another 100 million dollars of copyright assets to the portfolio and we’re sitting on a well-diversified pool of cash flows.
That scale unlocks a lot of different opportunities for investors. The public markets are opening up to this asset class and securitization, although we might be a little too small, is something to explore. I think the future for Lyric Fund One is a great one. We are going to be top of the pile in terms of private equity funds and we want to continue to deploy capital in the space. We think there is a great pipeline of deals that we can transact at multiples that are well below what you see published.
Spirit is just one of the portfolio companies of the Lyric Capital Group. What opportunities do you look for in the music space outside of this?
Our main focus is content ownership. Right now, every catalog we purchase or every administration deal we sign ultimately goes under the Spirit portfolio umbrella. So I view it as one portfolio company.
That being said, we do have different business lines. Within Spirit we have a Nashville office, which sources great catalog opportunities to purchase as well as develops writers. We have a fantastic roster of writers that is managed by Frank Rogers who has come on board with us and has really transformed that division.
We also have the LA-based Spirit Production Music that is run by Alan Ett and he has done a great job growing that business line. Additionally, we have a great UK office that is focused on UK-centric signings.
I don’t actually view Lyric as having multiple investments. It is all one investment in one thesis, which is content ownership. You buy great stable evergreen copyrights that have long-term yield to them and then supplement that with these talent acquisition divisions in Nashville, Los Angeles and the UK and build a roster of writers that continue to develop new copyrights and bolster our catalog.
As for what we are interested in in the future? I’d say anything and everything that fits that core thesis. Master catalogs are exciting. We are looking to buy master catalogs that have the same kind of dynamic as our publishing ones. We are seeking evergreen, iconic, stable and quality assets. We have done that with the Tim McGraw purchase and the piece of Ingrid Michaelson’s masters. It’s an expansion of the thesis.
Are the characteristics of a master catalog becoming closer to those of a publishing catalog in terms of administration?
Absolutely. The distribution platforms are fairly commoditised at this point. For us it’s about how we are set up to add value. There is a strong delineation between master and publishing catalogs so long as you have re-record restrictions in place.
That has been a topical issue, especially in light of the Big Machine Label Group deal last year…
It is a hot button issue. But when you are buying from the writer or artist it is a willing buyer / willing seller transaction.
When we enter into an agreement with a creator we don’t just see it as acquiring copyrights – we are making a commitment to be a proactive partner and to look after the long-term interests and career of the songwriter. It’s very important to us that the creator knows that Spirit is the right home to nurture and protect their copyrights. We want artists and writers to feel good about entrusting their songs with Spirit.
We are very focused on the preservation and enhancement of assets and ultimately the writers’ and artists’ legacies. When you entrust assets with us you are not leaving them with a financial institution.
“We are very focused on the preservation and enhancement of assets and ultimately the writers’ and artists’ legacies. When you entrust assets with us you are not leaving them with a financial institution.”
Jon Singer, who is the co-founding partner of Lyric and the chairman of Spirit, is probably the most caring person about legacy and preservation that the private equity world has ever seen. It is just not typical for a private equity group. We focus on that and we have been able to create some amazing stories.
What we’ve been able to do with the T. Rex catalog, for example, has been pretty astounding. Marc Bolan is now in the Rock & Roll Hall of Fame – that was an effort by Jon and the management team at Spirit. We were instrumental in getting his name out there and pushing that agenda forward.
You also have the takeover of Dallas Buyers Club which has three T. Rex songs in it. That wasn’t an accident. That was our team working with the production and the studio to say if we are going to do this, let’s do something unique here.
There’s a documentary coming out on T. Rex and there’s a tribute album that was just released with Elton John and Kesha. We have a real focus and a real marketing plan and vision for these assets. We are not just about knowing cash flow and promising yield, there is more of a high touch relationship here.
As we have discussed, there is a lot of investor appetite for this asset class and there has been some talk around the possibilities of securitization. Historically, there has been the Bowie Bonds and more recently the SESAC listing. What do you think of securitization generally for this asset class? Is there more to come in this area?
I think it is an interesting future for this asset class. I mentioned scale earlier. Scale unlocks unique opportunities, including securitization and IPO. These assets are right for securitization. Putting on my finance hat, they are blobs of cash flows.
The bigger the portfolio, the more stable the portfolio and the more clarity and certainty you can underwrite going forward as a bond. So, should there be more securitizations? Absolutely. But the key is scale.
The risk in these assets, if you are selling a $20 million asset and you are trying to securitize it, is there’s not a whole lot of stability. You are talking $2 million of cash flows. A sync falls off in one year and suddenly there’s a lot of volatility. It is about scale and diversification.
What is your view on why multiples are increasing and if these high prices are justified?
I think there are a lot of different dynamics that are moving multiples up. One is we are in a low interest rate environment and we will be living in that for the foreseeable future.
As institutional investors come into this market and view it as an investable asset class, you are going to get different entities come in with different costs of capital. This goes into the ‘what’s the proper discount rate that we should be applying?’ debate. That debate is interesting but not changing how we are doing our underwriting.
The second one is truly you have for the first time real public institutional money. Whether it is Hipgnosis or Round Hill, they have ultimately the cheapest cost of capital. And so, Hipgnosis is able to price differently than historically when you had private equity backed investors that have different investment criteria and variables. That’s not wrong or right. That has just made them competitive in this market.
That being said, there are a lot of deals. Ultimately, there is a lot of space to play.
Temporarily, I think they have driven up the multiples a little bit. The other thing is multiple information is rarely available. It’s pretty hard to figure out on a true multiple of normalized cash flow what people are paying .
“I don’t put much stock in the idea multiples are getting crazy. You can’t know the true answer.”
It’s easy to say multiples have gone up but I can guarantee that no one knows what we paid for our last four or five catalogs. And if they do, it is not been disclosed by us, so it is probably not accurate. It’s the same with Round Hill and Downtown. So, I don’t put much stock in the idea multiples are getting crazy. You can’t know the true answer.
It’s a great headline that any asset is worth 17 times. But ultimately, deals are transacting at lower multiples in that, particularly of sub scale. I am not sure I totally buy it, but I can see why multiples would go up because of the low interest rate environment and the downwards shift in discount rates that are being applied.
Enjoyed this interview? Why not check out:
- Money Moves – Barry Massarsky on Data-Driven Catalog Valuations and Drivers of Growth in the Music Investment Market
- Money Moves – Primary Wave’s David Weitzman Talks Acquiring Iconic Catalogs & Unique Marketing-Driven Approach
- Money Moves – Round Hill CEO Josh Gruss Talks Doubling Down on Country and Rock, and the Growing Music Royalties Investment Market