The Federal Reserve’s plan to raise interest rates in 2023 is unlikely to restraint investors’ appetite for music rights, say experts. As recently as October 2020, the Fed said it expected to leave interest rates unchanged through 2023, but now — faced with reigning in a booming economy and creeping inflation — the Fed believes it will raise the benchmark rate from near-zero to 0.6%.
Higher interest rates should have some, though slight, negative impact on demand for music rights for publishing and recorded music catalogs. Since low interest rates helped pique investors’ interest in music in the first place, the reverse should also be true: If low interest rates nudged upward, investors would pull back. That’s because the Fed’s actions would change investors’ calculus about rate-driven investments such as music royalty funds that invest in song catalogs and pay regular dividends to shareholders. Like a real estate investment trust, a music royalty fund — such as Hipgnosis Songs Fund Limited and Round Hill Music Royalty Fund — generates a steady flow of income that gets passed to investors.
“If interest rates rise, then people’s cost of capital rises, and the prices they’re willing to pay for things will probably go down a bit,” says Royalty Exchange partner Gary Young. Royalty Exchange’s marketplace allows investors to bid on specific bundles of rights such as a songwriters’ or a producers’ royalties for a group of songs.
Like Hipgnosis Songs Fund Limited. and Round Hill Music Royalty Fund, Royalty Exchange’s assets provide investors with consistent cash flow, not just gains when catalogs are sold for profit. A change in interest rates could make these royalties slightly less attractive for investors seeking income streams. That said, Young anticipates “a minor effect on valuations.”
Song royalties’ popularity has exploded since Hipgnosis Songs Fund Limited went public on the London Stock Exchange in 2018. Hipgnosis has raised over 1.1 billion euros ($1.3 billion) and went on a buying spree that landed Neil Young, The Chainsmokers and RZA, among other prominent songwriters, artists and producers’ copyrights and royalty streams. The result has been a 40.7% return since the initial public offering, according to financial statements released June 6. Similarly, Round Hill Music Royalty Fund followed with an IPO on the London Stock Exchange in November 2020, raising $280 million for an offshore royalty fund that’s built on proven songs that provide steady returns, not hit-and-miss songwriter development.
Another school of thought says music has proven itself a viable enough investment to weather the Fed’s decision and retain investor interest. “Record low interest rates set people on a wide-ranging search for yield,” says Young. Investors found music to be interesting, countercyclical assets that have long shelf lives and are not tied to the broad stock and bond markets. “I don’t think the trend of music catalog investments is going to go away because of rising interest rates,” adds Young. Interest rates got investors through the door; now music can endure the Fed’s fine tuning.
In the late ’10s, low interest rates sent investors to alternative asset classes such as music publishing and recorded music rights. (When the Fed sets rates near zero, safe U.S. Treasury bonds provide scant returns. Many investors are willing to take more risk in search of better returns.) Suddenly, hedge funds, private equity firms, pension funds and other large investors were competing with traditional buyers like publishing companies for the publishers’ and songwriters’ shares of royalties.
Subscription services such as Spotify and Apple Music, have led to double-digit streaming growth in the U.S. and globally and provide an alluring narrative for an industry coming out of a two-decade long morass. The recorded music business grew about 7% in 2020: IFPI puts revenues at $21.6 billion, up from $15.7 billion in 2016; MIDiA Research, which includes revenues streams such as production music that’s not tracked by IFPI, pegs 2020 revenues at $23.1 billion.
Given the continuing popularity of music subscription services, music should be an attractive investment through the rest of the decade. A much-cited Goldman Sachs forecast puts global paid subscriptions at 1.28 billion in 2030, leading the way to 11% cumulative annual growth and $57 billion combined recorded music and publishing revenue. Those expectation has permeated the marketplace. PSTH, in explaining the rationale for its UMG transaction, noted a “massive and growing total addressable market” and adoption of streaming services that “will generate many years of high growth.”
Philip Saure, co-founder of Tailwind Entertainment, an advisory firm focused on music investments, doesn’t expect an immediate impact on capital to flow into publishing assets. If streaming services can increase prices “by at least the rate of inflation,” says Saure, “it will, in my view, make the investment case even stronger.” Spotify has increased prices in 42 markets without a material impact on demand, according to company executives. Saure also expects the Copyright Royalty Board and other rate-setting organizations to consider inflation when setting future royalty rates.
On Sunday, Vivendi — prepping for a direct listing of 60% of its shares in Universal Music Group on the Euronext Amsterdam exchange — finalized a deal to sell 10% of its shares to Pershing Square Tontine Holdings, a SPAC founded by hedge fund Pershing Square Capital. That a blue-chip investor like Pershing Square — and its high-profile CEO, Bill Ackman — would invest in Universal Music Group should bolster music’s reputation among investors. Vivendi already sold 20% of UMG to a Tencent Corp.-led consortium from an agreement reached in December 2019. In the meantime, Warner Music Group had a successful IPO on the Nasdaq in June 2020. Independent music publishing company Reservoir Holdings Inc. is soon planning to merge with a SPAC, Roth CH Acquisition Co. II, and trade publicly on the Nasdaq.
It might not be a coincidence that all three companies recently made key acquisitions. “People are buying to beef up the look of their catalog” regardless of interest rate movements, says music attorney Michael Sukin. Vivendi was prepping to spin off UMG when it acquired Bob Dylan’s publishing catalog in December, 2020 for between $375 million to $400 million, according to Billboard’s estimates. Music rights valuations “somewhere between crazy and really, really crazy,” Warner CEO Stephen Cooper said in an Aug. 6, 2020, earnings call. Nevertheless, this month Warner bought producer David Guetta’s catalog of EDM standards such as “When Loves Takes Over” and “Sexy Bitch.” Also this month, Reservoir Holdings purchased Tommy Boy Records’ catalog of over 6,000 recordings ahead of its SPAC merger.
Interest rates matter little to companies seeking to bolster their catalogs in this way. “The music publishing market is not like a stock market [where] things can go up 4% and it can be meaningful,” says Sukin. “These are long-term investors.”
