In our new Money Moves series music consultant Alaister Moughan speaks to the movers and shakers of the music finance industry. Our second interviewee is Round Hill CEO Josh Gruss.
Round Hill has been active in the catalog acquisition market since 2012, making major waves in 2018 with its $240m acquisition of Carlin Music.
Since then, Round Hill has marched on, making deals with high profile artists such as Johnny Rzeznik of the Goo Goo Dolls, Matchbox Twenty’s Rob Thomas and Craig David. Reportedly they are now seeking to raise $375m on the London Stock Exchange to target a pipeline of more than 40 catalogs.
I spoke with CEO Josh Gruss about Round Hill’s key interest in country and rock music and how he has seen the industry develop over the past few years.
[Please note: This interview was conducted before Round Hill officially announced their plans to float a new fund on the LSE next month.]
In the next instalment of our Money Moves interview series, Round Hill CEO Josh Gruss
What is your elevator pitch to investors on why they should put money into music catalogs?
I’ve been doing that pitch now for 10 years, over three funds, and I’ve probably tried to make that pitch well over 400 times.
That being said, I don’t know if I have it down pat or if my pitch is any good but it goes back to why I wanted to start Round Hill in the first place.
It’s non correlated, it’s consistent. It’s low risk. It’s an area where there are a lot of inefficiencies in a very efficient financial world. Those are the main parts. On top of that it’s fun – it’s really satisfying to hear your own music on the radio.
“It’s non correlated, it’s consistent. It’s low risk. It’s an area where there are a lot of inefficiencies in a very efficient financial world.”
In some of Round Hill’s more recent deals there seems to be a shift into the frontline space. What made you comfortable making that transition and what are the considerations when you are looking to get involved in that part of the business?
First of all we’ve done a lot in catalog. If you are building a music company like ours, you have to have a foundation of catalog before you are really given the license to do any frontline because the frontline stuff has a totally different risk profile.
By having a lot of catalog you can take a little bit of your capital and put it into more risky areas.
Going back to 2010, we set off to get invested in music royalty rights which could have been in either masters or publishing. But at that time the master side of the equation was a really ugly picture. So we avoided that up until 2015 when we decided to allocate 20% of our funds to masters.
The reason I mention that is because it was within publishing that we started out in frontline. Once we had built up our publishing catalog, over about five years, we started dealing with frontline – mostly in country music because we thought it was a lot easier to achieve a hit country song than a pop song. The pop world is very, very competitive.
All the majors are trying to sign those writers. You also have up to 10 writers on a song sometimes. That means even if you do have a hit, what does that really mean if it’s diluted down to 5 or 10% of a song?
A country number one song might not be as profitable as a pop number one song but it’s a lot easier to get there. Plus, you rarely have more than three or four writers on a country song and you often have life of copyright in those deals, whereas a lot of the pop deals have 10 year reversions. It just made a lot more sense.
“A country number one song might not be as profitable as a pop number one song but it’s a lot easier to get there. Plus, you rarely have more than three or four writers on a country song and you often have life of copyright in those deals.”
So our frontline stuff got really busy with country related songwriters and we obtained a lot of market share that way. We’ve had over 50 billboard number one songs, mostly in country.
There have been a few pop hits as well. The other beauty of country music is you have the optionality for a crossover. Sometimes it’s a number one country song and lo and behold, it becomes a number one pop song as well. We’ve had three or four of those and that’s been huge.
It has been great to have over 50 number one songs in the last five years. We started investing in recordings and building up that foundation and after a while that gave us license to start doing frontline in terms of recordings.
Similar to how we chose that lane of country for frontline, we chose the lane of rock for Black Hill Records.
Why? Because the major labels are not focused on rock. They could give a crap about rock. Most people think rock is dead when the reality is rock is huge. The fan base for rock music is always very loyal. It’s worldwide and it feels like a very safe lane to be in for frontline.
Yes, in addition to Black Hill Records you have made catalog deals with the likes of Johnny Rzeznik (Goo Goo Dolls) and Rob Thomas (Matchbox Twenty). It seems as though you guys really like rock music.…
The demographic shifts. So far, the biggest wave of new streaming subscribers has come from younger demographics. That’s no longer where the growth lives for streaming subscription.
It’s now people in their 30s and 40s. It is not people that listen to pop and hip hop. It is people who listen to classic catalog.
The numbers we’ve seen in the last three or four months have been just phenomenal. I think that the demographic thing has something to do with that.
The Goo Goo Dolls are a good example. I know that they are not that big in Europe but they are a huge band here in the States. They had a song called “Iris” which is over 20-years-old but still one of the top 10 most performed songs on US radio. It’s a huge tune. That group is a perfect catalog acquisition for us. It is older but not too old and wildly popular.
A lot of routine parts of the publishing business, such as administration, are often considered commodity-like. How do you ensure that you are providing the most competitive offering for that part of the company?
That’s a good question. Offering administration services has never really been a key part of what we do. For the most part, we look after our own properties and that means the incentive to really work our own stuff is there because we own it 100%.
If we had a big business like Kobalt where we were charging somewhere between 5 to 10% to manage another organisation’s rights, then it’s just inserting something into the machine.
You don’t have much incentive to maximise those revenues, especially if you’re only making 5% of them. So that’s not a big focus for us. Everything that we administer is our own.
That being said, you still have to have an attractive platform because a lot of times, songwriters are selling you half of what they own. They are not doing an admin deal with you, but they are selling you half their copyrights and retaining the other half.
That’s a different type of partnership. They still rely on your expertise. That’s why we bought Zync, to stake our flag in synchronisation. That was a big move for us to be able to claim that we now have what is regarded as the world’s most elite synchronisation staff.
“That’s why we bought Zync, to stake our flag in synchronisation. That was a big move for us to be able to claim that we now have what is regarded as the world’s most elite synchronisation staff.”
Instead of claiming our technology is great we thought synchronisation is an amazing lever to add value, and it’s what most songwriters care about when looking at a publisher.
That’s one area that’s actually not commodity like, it’s not like a computer that helps you efficiently process things. Synchronisation has to be person to person, it has to be relationship driven, you have to have people searching for the right song and pitching the right music. So instead of technology or something else, we focus on having the right people for the job.
Beyond that, we’re going to announce something relatively soon related to neighbouring rights. That’s another area that a lot of other groups have divisions for but so far we haven’t. We are looking to come up with a differentiated offering in that area.
Is it becoming more common in deals that the artist/songwriter retains an ongoing interest in their catalog? Is this something you have seen and prefer?
It is always much better because if a songwriter is selling and they are not keeping a piece, that just means that all they care about is top dollar, right? I’m selling it, here you go.
We are not the best place for top dollar, there are others in our peer group that seem to be able to pay more than we can.
But if that seller sees value in Round Hill as a partner that’s when we shine. We are a real publisher, we do our own administration, we have our own record label, we do have all these things that an artist or songwriter might want. So we really shine if someone wants to sell, let’s say 70%, and really cares about the home and the stewardship going forward.
Most artists want to keep going. Rob Thomas is a great example. He wanted to sell a piece of his catalog, but he is also not done with his career and is still extremely viable as a current songwriter. He needs and wants a lot of attention and hand holding and that is what we do.
What is your view on why multiples are increasing and whether these high prices are justified?
Lots of different factors. One is interest rates. Look where the 10-year Treasury is today versus even a couple of years ago.
The 10-year Treasury might have been at 3% a few years ago. Now, it’s at 50 basis points.
That alone is going to push valuations for any type of assets. Throw on a layer on top of that; the continued growth within areas of our business, with streaming in particular as well as the updates to copyright law such as the Music Modernization Act, which are cleaning up some of the risk and taking out some of the uncertainty.
Then throw in the COVID environment where having something that is non-correlated really steps up value because people start to realise that you need a diversified portfolio in your investments because crazy things can happen. Music royalties have definitely come out the other side of COVID as one of the winners in this world.
“Music royalties have definitely come out the other side of COVID as one of the winners in this [investment] world.”
There’s probably five other things I can add to that list. One has to be competition. In the music space, groups like Round Hill have gone out and, as I said at the very beginning, we’ve done at least 400 institutional investor meetings over our history.
Think about how many Primary Wave has done, think about how many Hipgnosis has done.
We’ve taken a marketplace that when Round Hill started, literally no one had ever heard about. Even the Harvard and Yale endowments, the most sophisticated investors in the world, never came across the music royalty space. In 99.9% of every meeting we are teaching these potential investors about our space for the very first time.
But over the course of time, that space has gotten more and more educated. Certainly groups that have raised funds say, “Hey, I have some background in music, I can do this,” so there’s more competition. That leads to the higher valuations.
In an interview with MBW earlier this year you said that one of the real strengths of Round Hill was that you have raised funds in a way where you can draw on your commitments as opportunities arise. What is the advantage of having such a structure relative to some of your competitors?
It’s a structure where you have committed capital and you call it down as opportunities arise – it’s the classic private equity model, at least in the US.
The advantage of that is that you are not under pressure to just spend the money. If you are on, say, the London Stock Exchange and you raise $200 million that goes into your bank account right away.
There’s so much pressure from the investors to deploy it, because they don’t want their cash just sitting there doing nothing. The flip side of that is that, from the manager’s perspective, they feel a pressure to spend it any which way possible and sometimes financial discipline gets thrown out the window.
Whereas if you are drawing down the capital, you are not worried about the cash burn and you can do things in a more steady measure.
Pre COVID there weren’t a lot of music catalogs consistently on the market. You could not predict that there would be five available this month and three next month. It can come and go…
Yeah and this means you need a certain investment pace.
You can create a serious bottleneck if you are trying to do 50 deals at a time. If you only have one law firm as the transactional support it creates a huge bottleneck because they can’t process 50 deals super quickly. It’ll take two or three years to get all those deals done.
In a more steady measured approach, you’re not overwhelming the system with 50 deals at one time for the lawyer but also for the administration people.
If I told my admin team that they had that many deals on their desk in one day they would go crazy because there would be so much work.
This is the one thing that most people don’t appreciate enough about our space is that it’s a lot of administrative work to send out letters of direction to register the songs properly once you buy things.
Once you buy a catalog, that’s just when the work begins.
There is so much work to make sure those cash flows come in. That sort of integration risk exists if you’re doing a lot of deals at once, or if you do a couple of massive deals like BMG did in their early days. They must have had a lot of issues.
I sleep really well at night because I know we have a great admin team and that once we buy something they are going to do a great job to get the money flowing properly. Plus, we have Steve Clark, our new Chief Operating Officer. So even with Warner Chappell stuff, our sub-publisher, I know that he’ll double, triple check to make sure they’ve done that part of the job.
“I sleep really well at night because I know we have a great admin team and that once we buy something they are going to do a great job to get the money flowing properly.”
But if we outsourced everything to Kobalt, I don’t think I would sleep as well. I don’t know what they’re doing. I can’t just walk across the hall to Kobalt and ask, “have you got all the new Goo Goo Dolls songs tapped in online?” I don’t know if Kobalt is doing that. It’s hard to see what’s going on behind the scenes and if they’re doing things the right way. I always say that I’m a real big proponent of not outsourcing administration.
Until recently, the number of publicly listed “pure” music copyright companies was limited. With listings from Warner Music and Hipgnosis (and soon Universal), that seems to be changing. Why do you think this is happening? How have you seen the capital raising part of the catalog market change?
That’s a great question. So Warner Music going public again is great for our space because it creates a publicly traded comp.
You can think of Round Hill as a mini version of Warner Chappell and you can look to see where Warner Chappell is trading on different metrics.
All their documentation is publicly available and people can learn more about the industry through them. Before Warner or Hipgnosis went public there was no publicly traded way to get pure exposure to our space.
There was a lot of demand for music royalty investing that way but there was no supply. So now there’s some supply and I think demand is even growing more for more options that are publicly traded. So I imagine you’ll see more of that.
At the same time, the private equity model works pretty well for the space. Music royalty investing in the private equity world gets lumped in with the private debt type investment world. It is seen now alongside other private debt type investments such as aircraft leasing and litigation finance. It has created a little home for itself in the asset allocations for a lot of private equity investors.