If anything, the coronavirus pandemic has bolstered the value of publishing and recording catalogs, while the flow of capital ready to be invested in music assets has not dried out. Such were the main takeaways from the virtual edition of the Music Finance Forum, presented by Winston Baker on September 24, 2020.
As counter-intuitive as it seems, keeping people home on lockdown could yield positive benefits for the owners and managers of music assets. For a start, streaming consumption, which dropped at the start of the pandemic in March, picked up quickly and has proven resilient ever since. As a consequence, the fear that returns on investment could have been impacted by Covid-19 was mitigated by the rise in digital consumption and has given investors hope that the pandemic could just be a bump in the road.
“Consumption of premium content has never been more engaged,” said Sherrese Clarke Soares, Chief Executive Officer of Tempo Music, a portfolio company of Providence Equity Partners. “Technology has been all we’ve had during the pandemic, and this has given confidence about IP and its resilience.”
Speaking during the “State of the Music Industry” panel, Clarke Soares added that her company is focused on the long term value of content IP, and that the pandemic validated their strategy since recorded music revenues have been strong. “We have a long term view because we believe that [IP assets] will continue to be resilient,” she said. “We value premium IP as a long term strategy for investing.”
“We have a long term view because we believe that [IP assets] will continue to be resilient.”
– Sherrese Clarke Soares, Tempo Music
Hector Baldonado, Esq., Founder of The Baldonado Group, concurred, stating that while the live music side has been hit hard, “royalties have been very robust.” He went on: “When [the pandemic] started off, we saw an immediate decline in music consumption but it picked up and there’s been continuous growth since. Eventually people settled into what was going on and started listening to music again and finding comfort in it. So there’s opportunities to get value in IP and purchasing IP.”
For Paul Pacifico, Chief Executive Officer of the Association of Independent Music UK (AIM), one of the learnings from recent times was that streaming has had a significant effects on the way investors look at master catalogs. “Masters are now seen through a similar lens as publishing and it open opportunities,” he enthused.
“Masters are now seen through a similar lens as publishing and it open opportunities.”
– Paul Pacifico, AIM
Pacifico said he was buoyant about new ways to disseminate music such as livestreaming but also the development of AI-driven technologies, as well as the “gamification of music” that will further enhance the value of catalogs, once the monetisation points are effective. “There is a world of innovation going on and we are seeing it now in front of out eyes,” he said. “New innovators will come to market in the next 24 months and we will see the convergence of revenue flows that are going to cross over into the [online] live experience. We will see long growth and that will be bleeding into valuations.” The challenge for the music industry, he added, will be in having “to play catch up” with the new behaviours of Generation Z and to monetise these behaviours.
Barry Massarsky, President of Massarsky Consulting, a firm that works with investors and asset owners to put a valuation price on IP assets, cautioned nonetheless that performance income from the use of music in bars, restaurants and other businesses, which represents 48% of income sources for transactions, suffered during the pandemic. However, the solid performance of streaming helped offset losses in other areas of revenue. He also forecasts a strong return to growth for synchronisation and an increase in mechanicals too, with the rise of streaming.
Massarsky said that during valuations, investors look at all sources of income, but live “does not come into the picture.” He elaborated: “We are looking at masters and publishing. We look at streaming and radio airplay. That’s what drives increase in value. We do not mark up live performances.” He added that for publishing catalogs, investors look at the Net Publishers’ Share (NPS) and/or cash flow and apply multiples. With catalogs of standards, the average multiple went from 15.2 in 2017 to 17.3 in 2019/2020.
Another aspect that keeps pushing prices up in valuations is the rolling effect of successes due to streaming, where songs begin their careers in the US and then spread around the world, or vice versa. This, said Massarsky, boosts the value of assets since the exploitation of songs lasts longer and songs gains a longer shelf value due to international exposure. The key for investors will be the returns from a healthy streaming market, he predicted. “Digital streaming does not know how to stop its growth and this will ramp up the value of masters,” he added.
On a practical side, Massarsky indicated that during lockdown, a lot of consumers listened to more “catalog” music, which played into the hands of the owners of such music, particularly those wanting to sell. “Clearly in streaming there’s a movement towards older songs, and catalogs we valued dedicated to standards [songs that are two to three years old or more] were not affected. The market kept going on with transactions.”
“Clearly in streaming there’s a movement towards older songs, and catalogs we valued dedicated to standards [songs that are two to three years old or more] were not affected.”
– Barry Massarsky, Massarsky Consulting
Massarsky also noted that he saw no shortage of buyers or sellers in the market. “Every day you have new folks who want to sell and look at putting assets to market, and there’s more buyers,” he said.
Interestingly, a follow-up panel titled “New Money, New Funds, New Perspectives” picked up on this notion that we are currently seeing near perfect market conditions, with capital flowing at a low cost, and a wide range of sellers. “There is a tremendous supply of great assets and lots of capital available,” explained Andrew Bergman, Chief Operating Officer at Downtown Music Holdings, a music publishing house turned full-service music company. “The iconic nature of music created a fantastic market. Publishing is an incredibly transactional business. We do a lot of deals, from writers at an early stage of development to catalogs.”
Bergman explained that the low cost of capital has helped to finance a lot of “aggressive” new entrants. However, what he has noted since the start of the pandemic is that the nature of the deals is also evolving with sellers asking for all sorts of arrangements, from long term administration deals to partial sales. “There are catalogs coming to market that would not have normally because live revenues have stopped, and other catalogs coming to market because of the value. People see that it is a good time to sell.”
For Jason Sklar, a Partner at Shamrock Capital Advisors, which manages assets in the media and entertainment sphere, “a lot of capital” has entered the system from different sources, from asset management and private equity firms to investors that have access to funds. “There is a lot of capital, every week a new fund is being formed,” he said. “Some of that is driven by the fact that there is a ton of supply with lots of rights holders looking for some sort of liquidity from their rights.”
“It can take different forms. It can be a full sale, or a slice of income such as digital rights or even digital performance. Because of that, we can pick and chose the lane we want to be in.”
– Jason Sklar, Shamrock Capital Advisors
Like Bergman, Sklar has seen an evolution of the type of deals in the marketplace. “It can take different forms,” he explained. “It can be a full sale, or a slice of income such as digital rights or even digital performance. Because of that, we can pick and chose the lane we want to be in.”
Sklar added: “We are typically a buyer and not into operations. We are investors in this asset class but not trying to build infrastructure. There are are others that can do it better, so we can set up partnerships with people who will do that, and once we have made the acquisition, bring them in to optimise the value of the IP we have acquired.”
Richard Conlon, a former BMI and SoundExchange executive, recently co-founded Catch Points Rights Partners, a new firm focused on acquiring and financing entertainment royalties. “We have a sort of hybrid approach,” said Conlon, whose team has deep experience in the investment world and 30 years of experience in music royalties. “We are sort of in the middle in terms of how how we’re managing our administration and revenue assurance: we work with outside parties but we’re very deeply ingrained. If we buy something, you can rest assured that we will be making sure that we get our money out of everything. It’s very exciting – there are a lot of ways to skin this cat.”
“This data moving into our system has been a long time coming and it’s going to make the business better.”
– Richard Conlon, Catch Points Rights Partners
Conlon, who has a very data driven approach to managing acquisitions, explained that there’s an opportunity now to apply more data points to the valuation of a catalog. “Think about the sheer volume of dollars over the last 100 years that have been distributed based on surveys and proxies and estimations. We have good data now which means we can think about these assets better,” he said. “It can help create this new market where you say I’m going to slice off a certain piece of my rights. You might want to package your rights differently and have them represented differently. This data moving into our system has been a long time coming and it’s going to make the business better.”