So, here’s an investment trust that’s a little bit different. Hipgnosis Songs Fund (SONG) joined the market on 11 July 2018, raising £202m at 100p per share.
It’s one of many investment trusts tapping into the demand for income and returns that aren’t directly correlated to the stock market. Hipgnosis Songs is shooting for a 5% dividend yield (based on its float price) as part of a total target return of 10% a year, courtesy of money generated from music royalties.
The share price has risen to 103p to sell and 105p to buy, so there’s a little bit of a spread there but nothing too concerning. The costs of the new issue were £4m (i.e. 2%), so the shares are currently trading at an initial premium to net assets of around 6%.
The trust’s website can be found here, although there isn’t a lot of information on there so far apart from the Prospectus.
Who’s behind Hipgnosis Songs?
According to Wikipedia, Hipgnosis was an art group that specialised in designing album covers from the late 1960s to early 1980s for the likes of Pink Floyd (including the iconic Dark Side Of The Moon), T Rex, 10cc and many others. However, there doesn’t appear to be any direct connection between the design group and this investment trust as far as I can tell.
The main man behind Hipgnosis Songs is Merck Mercuriadis, who has managed the likes of Elton John, Iron Maiden, Guns N’ Roses and the Pet Shop Boys. He’s 54 and has worked in the music industry for over 30 years. He was also involved in the UK-listed Sanctuary Group, which had a shortish spell in the sun in the late 1990s and early 2000s, before overreaching with acquisitions and eventually being bought out by Universal Music in 2007.
On a similar note, this isn’t the first time Hipgnosis Songs has tried to join the UK market, as there was apparently an aborted attempt last year when the company was being advised by Cenkos. The second time was the charm it seems, with N+1 Singer now doing the advisory honours.
Interestingly, the target yield for the aborted flotation last year was said to be 6.5%, rather than the current level of 5%, although the overall return target was the same at 10%.
It’s not entirely clear what happened last year — the float was pushed back to allow a potential big investor, who wanted a 20% stake, to do some more research. But then everything went quiet. No shareholder of this size has been disclosed so far, however, with CCLA, Investec, and Invesco all revealing holdings of around 10%.
I was a little surprised to see how little the directors and Merck Mercuriadis planned to invest when Hipgnosis Songs joined the market. The chairman, Andrew Sutch, bought 10,000 shares and the other two directors bought 15,000 each. Mercuriadis, who is not a director, bought 100,000.
The basic management fee for the fund will be 1% of market value up to £250m, 0.9% between £250m and £500m, 0.8% above £500. Apparently, this is lower than the proposed fee last year, which was to be 1.5%. Maybe that was a sticking point last time.
There is also a 10% performance element on any excess earned over the stated 10% per annum long-term return target, with the usual high watermark arrangement in place.
The basic fee is to be paid in cash and the performance element in shares with an 18-month lock-up period.
Let the music begin
Hipgnosis Songs is essentially starting with a blank sheet of paper, as when it listed it didn’t own the rights to any songs. However, it has targetted eight ‘pipeline’ catalogues that it believes could use up all the initial cash it raised when it floated.
Its first purchase was announced within a few hours of the company joining the market – it’s paying $24m for a 75% interest in the catalogue of The-Dream, which consists of 302 songs including Umbrella (sung by Rihanna), Single Ladies (Beyoncé) and Baby (Justin Beiber).
The-Dream is described by the company as “arguably the culturally most important songwriter of his generation”, and as part of this deal, he’s joined the trust’s advisory board. This advisory board contains a number of music industry veterans, with the most notable inclusion being Nile Rodgers.
Hipgnosis Songs aims to own a portfolio of at least 300 songs, so it’s achieved that already with this first acquisition, although it’s also looking for 100% ownership whenever possible (which notable wasn’t the case with The-Dream purchase).
It says that no individual song will account for 10% of its assets when it is initially purchased, although it wouldn’t subsequently sell part of the rights to a song if it subsequently increased in value and became larger than 10%.
How the music business works
I can’t claim any particular insight into the music industry or how the value of music royalties might grow over time. Hipgnosis Songs describes the three main components of its income stream as:
- mechanical royalties – when a copy of a song is made, whether physical (e.g. CDs, DVDs) or digital (e.g. permanent downloads, streaming, webcast);
- performance royalties – when a song is performed live or broadcast on TV or Radio, or when a song is streamed online; and
- synchronisation fees – when a song is used in another form of media (e.g. movie, TV show, video game, advertisement).
I suspect the second and the third of these are the main drivers. Obviously, there are risks aplenty here, and while reading a Prospectus for a new issue can be a scary prospect, as they often run to 200 pages and have plenty of financial jargon, the Risk Factors section is always useful if only to douse any impetuousness!
For example, it reminds us that the reputation of an artist can affect the value of their rights (thank you social media), and the fact that most royalties will be paid in other currencies. The relationship between copyright holders and Digital Service Providers like Spotify and Apple Music is also still evolving.
The Prospectus also has some financial information on the music industry. It says global recorded music revenues peaked in 1999 at $29bn and then declined for 15 years as piracy damaged returns. More recently, the growth of streaming services has enabled revenues to rise again, although it may not be until 2027 that the 1999 peak is surpassed.
In 2017 it says there was a 16% increase in US retail spending on music, a 43% increase in US streaming revenues and a 56% increase in US streaming subscriptions. And, at the start of this year, the Copyright Royalty Board ruled to increase songwriter rates for interactive streaming by nearly 50% over the next five years.
The John Lewis Christmas ads are also highlighted, as good examples of how the rights to previously somewhat obscure old tunes can suddenly become a lot more valuable.
More fundraising to come?
Hipgnosis will look to actively manage the rights that it has, and reckons the £200m it has raised should give 4% of the global music publishing business.
A number of new investment trusts that are starting from scratch like this often raise further funds by issuing C shares once they have joined the market. These C shares are then converted into ordinary shares at a later date.
Hipgnosis Songs has sought authority to issue up to 750m C shares at the issue price, so it could raise a further £750m. At nearly £1bn, it reckons its market share would then be close to 20%.
As the income from music royalties will be built up over time, the first-year dividend is expected to be lower than the longer-term 5% target.
Hipgnosis Songs reckons around 3.5% could be paid out in respect of the first year of trading. This short video on CNBC reveals £150m could be invested within 6 months and the full £200m within 9 months.
Dividends are expected to be quarterly and paid in November, February, May and August, with the first dividend likely to be paid in November 2018.
Infrequent net asset value updates
One other thing that is a little unusual about this investment trust is that it only expects to update its net asset value every six months. Many funds that invested in quoted companies publish daily updates, and most publish updates at least monthly.
There’s no equivalent of a stock market for music royalties, so it looks like a specialised valuation needs to be prepared each time. Here’s how the company describes the process:
In preparing its valuation the Company’s independent valuer will take into account a minimum of three years of historical revenues (normalised) earned by each Catalogue or Song, recent acquisition/bid prices for market transactions for comparable Catalogues, duration of the copyrights, quality of the Songs and other relevant factors as may be agreed between the Board and the Company’s independent valuer from time to time.
Hipgnosis Songs also says that net asset values could be published up to two months after each semi-annual valuation date.
For me, this is one to just watch for the time being.
New issues are riskier by their very nature, especially ones where there is no track record of prior performance to examine. I’d like to see what other purchases of song catalogues are made, and the level of detail provided when the trust releases updates and accounts. I’d probably need to do a bit more digging into how copyright revenues have grown in recent years, too.
By the way, if you’re interested in other new investment trusts, I did a recent post that summarised recent joiners.
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