Barely a week goes by without news of some big or mid-sized publishing catalogue being bought up. It is a boom time in the sector and new-entrant companies like Hipgnosis and Ithaca Holdings are among those leading the charge here. And publishing in particular has always been seen as a solid investment by those working in music – one only has to look at how much Michael Jackson’s fortune (and his posthumous earnings) were derived from his 50% in Sony/ATV until his estate cashed it in for $750m in 2016, having paid $47.5m for ATV back in 1985.
MIDiA recently pegged the value of music catalogue acquisitions since 2010, both recorded and publishing, at $6.5bn – and these are just the transactions where the numbers have been made public. It used this to declare that the next phase in the industry will be the “the emergence of full-stack music companies” that roll publishing, recorded and other assets into a hybrid business. Companies like Downtown, AWAL and Primary Wave (perhaps illustrated best in it buying a share of the Whitney Houston estate) are cited as leading the way here.
But a growing story of recent times has been how those red of tooth and claw in the music business are competing for catalogue with those who have come from outside the music business. More people within music (both the old guard and the new generation of rights companies) are competing with more people and investment vehicles that are new to music – so the sale prices are naturally rising.
Merck Mercuriadis of Hipgnosis has talked about his company’s ambition to “establish songs as an asset class” and this is at the heart of what is happening here. (In the financial world, an “asset class” is defined as a category of investments that display similar characteristics and that behave similarly to one another in the marketplace; and within this they are subject to the same laws and regulatory systems.)
Vickie Nauman, founder of LA-based consultancy and advisory firm CrossBorderWorks, expands on this and explains why this is behind the boom in catalogue acquisitions of late.
“Kobalt says one single composition can have up to 600 different income streams,” she says. “You have a steady source of income that has data around it for past performance, which means anyone in the finance world can say, ‘OK, if we understand past performance then we can project future performance.’ So that has attracted people who are atypical music investment types – like financiers and those who are outside the industry.”
She also talks of how music in the digital age is uncorrelated to the vagaries of the modern market and that this is what makes music publishing catalogues so attractive to investors.
“People who are high net worth individuals and those that are representing high net worth individuals are also seeing that music is uncorrelated,” she argues. “The consumption of music is uncorrelated to the market and it’s uncorrelated to NASDAQ, the New York Stock Exchange or the London Stock Exchange. People are going to continue listening to music whether the market is up or down. And because we have things like YouTube and Spotify’s free version, even if times got really tough and people cancelled subscriptions, it’s habitual and they are always going to be able to have access to music. Because of that there’s an uncorrelated nature to music consumption.”
“The consumption of music is uncorrelated to the market and it’s uncorrelated to NASDAQ, the New York Stock Exchange or the London Stock Exchange. People are going to continue listening to music whether the market is up or down.”
– Vickie Nauman, CrossBorderWorks
She also says that the music business – after years of upheaval and disruption due to digital – is not only growing (which makes it attractive to any investor), it is also highly alluring for other, perhaps more simplistic, reasons.
“It’s really sexy to be able to say that you own a piece of some really high-profile catalogue or you put m]\oney into a fund that has acquired a really iconic catalogue,” she suggests. “There’s a sexiness and a cachet socially to be able to show that you are investing in music.”
Yet in an extremely buoyant market – and where competition is fierce – there is a risk of it uncoupling from common sense. Every bubble – from the South Sea bubble all the way back in 1720 through the dot com bubble in the late 1990s and into the US housing bubble and subprime mortgage crisis of the early 2000s – eventually bursts and this is down in a large part to a cavalier approach towards fiscal reality pumping up that bubble in the first place.
Michael Stretton, royalties controller & auditor at CC Young, talks of the importance of rigorous due diligence when presented with a catalogue for sale to ensure that you do not drastically overpay, adding that access to richer data sources, especially around streaming, gives potential buyers greater investment insights than they have ever had in the past.
“They are various ways of doing it,” he says of how to calculate a sensible bid for assets of this type. “You work out the internal rate of return. But before you start on that, you need to get a good feel for, say, the last five years or however much data you’ve got. For instance, in one case, we were looking at the last five years and found out that the royalties had been calculated wrong.”
He adds, “Obviously a catalogue that is 40 years old is very different from something that’s five years old. So you have various sales profiles and you get your best fit. Then you get as much information as you can and just try and tweak it so that your forecast for however long is as accurate as you can make it.”
“Obviously a catalogue that is 40 years old is very different from something that’s five years old. So you have various sales profiles and you get your best fit. Then you get as much information as you can and just try and tweak it so that your forecast for however long is as accurate as you can make it.”
– Michael Stretton, CC Young
Both Stretton and Nauman warn against a reckless acquisition culture taking hold here as it will not only mean investors losing their shirts but also curdling the market for everyone here.
Stretton suggests a few years back, the rule of thumb was that bids were being made on a multiple of 12 on a catalogue’s projected income in a period. So, if it was projected to earn £1m a year, offers would be made of £12m. That started to creep up to the point where a multiple of 16 had become normalised.
“They’re saying that’s how much they’re going to spend,” he says of investors’ attitudes here. “Even if they borrow the money in the first place, they think they can service the debt from the income streams and have some money left over.”
Nauman suggests, however, that bidding in the US have accelerated to a terrifying level.
“I definitely think that things have gone off the rails a little bit with some of these acquisitions and I’ve seen some things that are 29x annual [earnings],” she claims. Some are doing this, she says, purely as a market share play – either buying their way to dominance or spending to ensure their supremacy.
“I definitely think that things have gone off the rails a little bit with some of these acquisitions and I’ve seen some things that are 29x annual [earnings].”
– Vickie Nauman, CrossBorderWorks
“You have to go back a few steps to think about what the acquiring company’s interest is,” she says. “Is it about acquiring a publisher or a music company that is acquiring a catalogue to add to their roster because they believe that it will be complimentary to their existing artists and they can really work those artists? If you’re looking at it from that standpoint, there’s no way that you should participate in something that’s really inflated because you’re taking a methodical, measured approach to working catalogues of music.”
Caution, she maintains, has to be the watchword here. “You have to do the math and you have to figure out where your money is coming from to acquire these catalogues and what your cost of capital is. [You also have to work out] if you going to be able to turn that catalogue around and be able to make a little bit of money given your cost of catalogue – as well as the cost of both administration and acquisition – and be able to actually make that into a viable business,” she says.
Stretton suggests that there is a risk of putting in a bid based on absolute best case scenario earnings projects, but that a more complex forecast modelling approach is essential.
“You always do as much research as you can, find out what’s going on and see how that affects your income projections,” he proposes. “When you do these projections, you always do several scenarios. Sometimes it’s just best, middling, worst. Your client would end up with maybe half a dozen different projections and then it will be up to them to say what the likelihood of something going one way or the other would be. But at least they would be able to see what the numbers were for each case.”
There is significant competition here and it’s somewhat like the London rental market – as soon as you learn that a property becomes available, it has invariably gone. But unlike the London rental market, where bids are going in even before people have viewed the property, there has never been greater visibility on the past earnings of a catalogue and, in a newly stabilised market, how that will likely earn out in the future.
“The money [from streaming] is coming through properly,” says Stretton. “Whereas before it was a little bit hit and miss, with streaming the information coming now through is better.”
Nauman, however, warns that while things might be more transparent, it does not follow that they are perfect. And this is something investors, especially those from outside of the music business flocking to the boom around publishing catalogues, need to be acutely attuned to.
“There are all the problems that we’re seeing around the world around publishing rights and actually being able to collect all the money that is due – getting it to the rightful owners and to the rightsholders,” she says. “In publishing, even though there is a lot of mitigated risk across all the different revenue streams, there’s also a real need to clean up this part of the industry and make sure that the data that we have is actually reflective of the value of the publishing. There’s a lot of money that it’s just not making its way through the system.”
“In publishing, even though there is a lot of mitigated risk across all the different revenue streams, there’s also a real need to clean up this part of the industry and make sure that the data that we have is actually reflective of the value of the publishing.”
– Vickie Nauman, founder of CrossBorderWorks
Ultimately, she says, you need to move extremely carefully here. “If you have financial investors – but not necessarily people who understand the layers of how to effectively manage a catalogue of music rights – there’s also some risk in there that you’re just not collecting all the money that you’re rightfully owed.”
The irony of it all is that data may have helped to pin a truer value on catalogues, but data still has some way to go to ensure that every cent that is earned flows back to where it should.