New music royalties fund to challenge Hipgnosis Songs

Round Hill Music Royalty (LON:RHM) raised $282m at its recent IPO, which it will use to generate an attractive and growing income by investing in music intellectual property.

The new investment trust will target total returns of nine to eleven percent per annum, including a dividend yield of 4.5%. Most of this money will come from royalty streams from a catalogue of songs, although the manager will also look to enhance the returns through improved royalty collection, pro-active licensing and increased usage and song exposure.

Round Hill had been hoping to raise $375m, but it is still a good result given the number of recent investment trust IPOs that failed to launch through lack of investor interest. One of the reasons it got off the ground is the success of the only other fund investing in music royalties, Hipgnosis Songs (LON:SONG).

SONG launched in July 2018 and has had a number of fundraising rounds since then that have increased its assets under management to almost £900m. It has been a steady performer and recovered quickly from the market sell-off in March.

Hipgnosis has shown that music royalties can work as an asset class and is currently paying a healthy 4.5% yield with quarterly dividends. The shares are trading at a six percent premium with the end of September NAV due to be announced when its interim accounts are published in December. 

Pipeline of opportunities

Round Hill invest in a songwriter’s copyright interest in a musical composition, which consists of the writer’s share, their publisher’s share and their performance rights, together with the rights in the recording of the composition that is known as the master recording rights. 

They have identified a seasoned portfolio of pipeline investments valued at $363m with established steady state revenues. These have a historic organic growth rate of four to five percent per annum from over 120,000 musical compositions in over 40 individual catalogues. They have generated net royalty income of more than $115m to date and achieved a 17% gross internal rate of return. 

As the firm didn’t hit their full fundraising target they will need to scale back the initial purchases, which could mean that they will be fully invested ahead of their three to six month target period. 

Track record

Round Hill was founded in 2010 by Josh Gruss and is headquartered in New York with offices in Nashville, Los Angeles and London. They currently manage three private funds and have been involved in over 70 individual catalogue transactions totalling over $650m. 

Their annual management fee will be one percent on a market cap up to $400m. There is also a performance fee of 10% of share price performance over a hurdle of 10% per annum compounding from the IPO price, subject to a high-water mark, as well as a portfolio administration agreement to pay Round Hill 10% of all net income it collects, which sounds expensive. 

Hipgnosis Songs has shown that this type of fund can work and is already up and running at a good size with an established yield of 4.5%. This makes it the safer option, but if you want exposure it might be worth waiting for the interim accounts in December to better gauge the recent performance and the extent of the premium to NAV.