A new investment company that has just floated on the London Stock Exchange is the first to earn music royalties from a portfolio of hit songs. The Hipgnosis Songs Fund (LON:SONG) is different from anything else on the market and offers the prospect of an attractive and completely uncorrelated source of return.
It first tried to float last summer, but failed to raise capital from a broad enough range of investors and had to make some changes before going ahead with the IPO. These seem to have paid off as the issue was oversubscribed and the fund was able to attract just over £200 million. The shares are due to start trading on the Specialist Fund Segment of the London Stock Exchange on 11 July.
The Investment Adviser, The Family (Music) Limited, was founded by Merck Mercuriadis, a former manager of recording artists such as Elton John, Guns N’ Roses, Morrissey, Iron Maiden and Beyonce. His experience of the music industry has enabled him to identify a suitable pipeline of songs, including a number of evergreen favourites that have stood the test of time.
Hits from each of the past five decades
The catalogue contains tracks performed by more than 50 global recording artists, with hits from each of the past five decades including more than ten number 1 songs in the UK and US. Discussions are underway that should enable the first of these to be acquired soon after the shares are admitted to the stock exchange with the whole £200 million expected to be deployed within 12 months.
Like many other industries, the music business is being totally transformed by the way we use technology and the directors believe that this has created a unique market opportunity. The pace at which revenues from music streaming will replace and increase those earned from physical and permanent download sales is forecast to grow significantly as people switch from illegal downloading to convenient and legal streaming. If the forecasts are right it could lead to a dramatic improvement in the monetisation of music.
An attractive level of income that can persist for decades
Whenever a song is played on the radio, streamed, downloaded, or accessed in any other (legal) way, it generates royalties. Cumulatively, these royalties can amount to an attractive level of income that can persist for decades under the protection of copyright law. This sort of revenue stream is almost completely uncorrelated to the performance of the financial markets.
The fund is targeting NAV total returns of at least 10% per annum (net of fees) over the medium term and a 5% dividend yield once fully invested, with the first dividend expected to be paid in November 2018. There is a share buyback facility in place and a continuation vote after five years to reduce the risk of the shares slipping to a wide discount.
It is obviously early days, but the Hipgnosis Songs Fund offers a completely different investment proposition from anything currently available to retail investors. To invest at the outset would require a huge leap of faith, so the prudent course would be to add it to your watch list and keep a close eye on how the capital is invested.