The music stock market: Investing in Shakira and Neil Young’s hits

When a man buys a quarter of the songs on Spotify with over a billion streams, it’s a big deal. Merck Mercuriades, the founder of Hipgnosis Song Management (HSM), a British fund that owns rights to 65,000 popular songs, is poised to earn over $1.9 billion. While that seems great, it also carries a steep price. Here’s how it works: Hipgnosis buys song rights and establishes a music stock market, enabling investors to invest in these songs and receive dividends from their royalties. As the music industry transitions from physical media sales to streaming, music industry royalties reached $40 billion in 2022.

Although this type of investment vehicle has been around since the 1990s when David Bowie created the “Bowie Bond,” Hipgnosis has reimagined the concept for the streaming era. Investing in top artists is costly – acquiring song rights and valuing intellectual property has saddled the company with $650 million in debt, despite owning assets like Amy Winehouse’s Back to Black and some Nirvana hits. The company has public and private divisions, with one open to all investors and others held by major institutional investors. The entire structure is currently experiencing a crisis of confidence, and financial experts say the funds were initially structured incorrectly.

Hipgnosis’s extensive song portfolio, which was thriving in 2020, has recently suffered setbacks. The value of its music assets dropped by 26.3% to $1.9 billion following an audit by Shot Tower Capital. This year, the company’s revenue fell by 21%, and its stock price dropped by 50% over two years. To address $630 million in debt, dividend payments were stopped in late 2023. An accounting error further reduced the portfolio’s value by 7.6%.Mercuriades and his partners now need to clarify these issues to investors like BlackRock, who have held a 50% stake since 2018. Key shareholders such as Investec Wealth (7.5%) and Asset Value Investors (6.2%) are beginning to doubt the wisdom of investing in the company.

Mercuriades is a former music executive who worked with industry heavyweights like Beyoncé and Guns N’ Roses before starting Hipgnosis, which appealed to investment funds in the low-interest-rate economy five years ago. Before the pandemic, the venture attracted songwriters as well as investment funds by a low-risk asset class that paid dividends. When tours had to be postponed and cancelled due to the health emergency, selling music rights for hard cash looked like a wise business move.

Dark clouds are now looming over this business model focused on acquiring copyrights. Song royalties are unpredictable, making it difficult to price song rights accurately. Hipgnosis is now in a fight with shareholders over a revaluation of its music catalog value for future asset sales. In October 2023, 83% of shareholders rejected the $440 million sale of rights to a Blackstone-owned fund. Shot Tower Capital bankers hired by Hipgnosis stepped in to tackle the excessive debt burden and underperforming music revenue. They recalculated the portfolio value, slashing it by over a quarter in March.

Shot Tower Capital stood by its valuation of the Hipgnosis catalog and identified additional concerns. The firm noted that Hipgnosis doesn’t adhere to music industry standards and fails to conduct proper due diligence during acquisitions. Shot Tower Capital cited misleading company publications with inflated asset figures, excessive and unjustified expenses, and a potential conflict of interest with Blackstone. It also estimated that 75% of the Hipgnosis catalog missed financial targets.

However, Hipgnosis continues to enjoys solid analyst support with target prices well above the current price. For instance, Liberum has set a target price of £131 ($164) per share, even though the shares are currently trading at around £60 ($75). Investec (a large Hipgnosis shareholder) recently upgraded its recommendation to “buy” despite recent market declines. JP Morgan recommends an “overweight” position (a higher weighting than the benchmark’s current weighting), while RBC Capital, another major Hipgnosis shareholder, rates the stock as “outperform” with a target price of £120 ($150).

New players

Acquiring rights to popular songs hasn’t been a lucrative asset, especially at the prices paid by Hipgnosis. However, this hasn’t deterred new players from coming in and changing the game. JKBX, a startup backed by Spotify, is exploring a similar concept with a twist. With the approval of the Securities and Exchange Commission (SEC), the company offers rights representing a share of the copyrights of individual songs. These rights can be bought and sold on the platform. One Republic’s Counting Stars is one of the most expensive songs on JKBX, trading at over $31 per share with a yield of 4.17% (based on copyright earnings in 2022 and the current share price).

Another new player is Labelcoin, which emerged during the pandemic with a concept similar to JXBX. Labelcoin aims to democratize this investment type for small investors via a mobile app, akin to the SongVest app released in 2021. The company’s goal is to combat “artist poverty” by raising capital instead of selling copyrights to venture capitalists. Both companies carry significant debt burdens. Round Hill Music in London, which has a model similar to Hipgnosis, sold part of its catalog last year to manage its £108 million ($135 million) in debt. The company is currently in talks for acquisition by venture capitalists despite 32% revenue growth in 2022.

On April 26, Hipgnosis faces a crucial shareholder vote on the future of its music catalogs. Without shareholder support, it may need to consider a restructuring or sale of around £245 million ($308). Until then, it seems these funds will continue to sing the blues.

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