Out of all the alternative investment trusts launched in the last few years, the most unusual is probably the Hipgnosis Songs Fund (LON:SONG), which provides exposure to music royalty and related income. This type of revenue is completely uncorrelated to the financial markets, with the fund targeting a net NAV total return of at least 10% per annum and a dividend yield of 5% based on the issue price, once fully invested.
The high prospective returns enabled Hipgnosis to raise £202m when it launched in July 2018, making it one of only two investment trust IPOs that were oversubscribed that year. Earlier this month it attracted a further £141.5m via a placing of new Ordinary shares, with the extra funds allowing it to take advantage of additional investment opportunities.
Founded by Merck Mercuriadis
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SONG’s Investment Adviser, The Family (Music) Limited, was founded by Merck Mercuriadis, who is the former manager of recording artists such as Elton John, Guns N’ Roses, Morrissey, Iron Maiden and Beyoncé.
In January it provided an update on the deployment progress to date, by which point it had acquired six music catalogues comprising a total of 1,230 songs. These had achieved 1,646 top 10 chart positions around the world including 402 Number 1s. Twenty of them were Number 1s in both the US and UK and 107 were Top 10 chart positions.
Since then there have been six further additions, including most recently a music catalogue from Brittany Hazzard, aka Starrah, an American songwriter, producer and singer whose songs have achieved 94 Number 1s, 199 Top 5s and 277 Top 10 Chart positions globally.
Starrah co-wrote Camila Cabello’s ‘Havana’ which is the IFPI global Number 1 Song of 2018. The catalogue includes a total of 14 US singles that have reached the Top 20 in the Billboard Hot 100 including Rihanna’s “Needed Me”, Drake’s “Fake Love”, Halsey’s “Now or Never”, and Nicki Minaj’s “No Frauds”.
A yield of 7.9%
According to the most recent disclosure, which was before the acquisition of the last two catalogues, the total investment was £234.1m. This represented an aggregate multiple of 12.63 times the historic net annual income of the songs and was equivalent to a yield of 7.9%.
Hipgnosis publishes two different NAVs. The IFRS NAV is based on the amortised cost of the catalogues, whereas the Operative NAV reflects their fair value according to an independent valuation. This takes into account a minimum of three years of historical revenues earned by each song, as well as recent acquisition/bid prices for comparable catalogues, the duration of the copyrights, and the quality of the songs.
The analysts at Numis believe that the Operative NAV is the most relevant for investors with the latest published figure being 98.7p. As the shares are trading at 104p it implies a premium of 5%. The fund has paid two dividends of 0.5p each and is targeting a total pay-out of 3.5p in its first year, rising to 5p once fully invested.
Hipgnosis is a unique investment proposition, which makes it very difficult to evaluate. If it successfully delivers its target returns it will more than justify its premium rating, but as with all of the other alternative funds, if it disappoints the shares could suffer a significant de-rating.