Hipgnosis Songs Fund strikes a chord in the London listed fund market
For more than 150 years, investors have looked to London’s investment funds market as a rich source of innovative and non-correlated income opportunities. Since 2018, one such source has been music royalties when Hipgnosis became the first music royalty fund to list on London Stock Exchange.
Offering investors a pure-play exposure to songs and associated musical IP rights, the growth of Hipgnosis shows how London’s markets can enable an innovative fund to scale rapidly. After listing on the specialist funds segment in July 2018, Hipgnosis has raised a total of over £1.25bn from its IPO and subsequent issues. In September 2019, Hipgnosis joined the Premium segment of the Main Market and in March 2020 it became a constituent of the FTSE 250 Index. Hipgnosis has produced a 37.9% Total NAV Return since IPO and with its annual dividend target of 5.25 pence per share is one of the highest yielding shares on the FTSE 250 Index.
The company now owns rights to about 60,000 songs. It has acquired shares in nearly 3,000 number ones and a third of the 30 most played songs to date on Spotify. It adds to its impressive song collection regularly, carefully targeting purchases across vintage and genre. Its collection appealing to both young and old. In 2021 alone it has announced deals covering the writing and publishing rights to almost 1,200 songs composed by rock icon Neil Young, alongside Lindsey Buckingham, Beats co-founder Jimmy Iovine and global icon Shakira.
A song for our times: the factors behind the growth of music as an alternative asset
Founded by Merck Mercuriadis, former manager of recording artists such as Elton John, Guns N' Roses, Morrissey, Iron Maiden and Beyoncé as well as a slew of hit songwriters, Hipgnosis is intent on changing the paradigm of the music industry. “We are considered by the songwriting and artist community as the most important new company in the music industry in the last few years,” says Mercuriadis, describing the company as one in the “song-management business.” Songwriters, he says, have been “the lowest on the totem pole in the industry and I wanted to change that.”
There are several factors that have led to the creation and growth of Hipgnosis. The global Covid-19 pandemic halted live music performances, closing off a major income stream for musicians and making musicians look more closely at the value of their recordings.
Combined with the pandemic, the explosive growth of streaming services has changed the landscape. It has replaced illegal downloading, which had threatened to decimate the music industry, and provided a convenient, ubiquitous and legal means for individual consumers to pay for music and listen to it whenever and wherever they want. Not only that, says Mercuriadis, streaming has meant that millions of people, who previously had not spent money on music, have become monthly subscribers. Music has become a necessity purchase, not a discretionary one.
With more middle-aged people subscribing to streaming services – and listening to evergreen favourites from their youth – royalties linked to proven hits are proving an increasingly valuable asset. Similarly, streaming is taking old songs to every corner of the world, transcending culture or language and breathing new life into great cultural works.
Allied to this is the song management approach that Hipgnosis has adopted. “We manage the songs better, working hard to put them into movies, commercials and video games, and to be on the right playlists,” says Mercuriadis, “and we bring efficiencies of collection of the monies for these songs.”
Why Hipgnosis chose the investment fund structure, and why in London
When deciding on the most effective structure for Hipgnosis, Mercuriadis did consider private equity but ultimately chose the closed-end investment trust because it provided access to permanent capital.
“I want to change the place where songwriters sit in the economic equation of the music industry. That will take time to reach fruition so the private equity model did not suit that ambition – at some point they would have wanted their money back.
“Most of our shareholders are large institutions looking for dividends and Net Asset Value (NAV) growth. They will stay with you if you deliver that with predictability and certainty. The investment trust structure provided the perfect solution.”
Mercuriadis says that Hipgnosis chose to list in London because of the prestige of London Stock Exchange and because “the consumption of music and its importance in the daily life of the average Brit is far greater than anywhere else in the word. It is the most progressive music market in the world. It was the natural venue for a pioneering fund.”
Being in tune: London’s markets accept new asset classes
“The investment trust structure has allowed us to establish songs as a serious asset class in a high-profile and prestigious way. Institutions such as the Church of England, Investec, Aviva, Axa, Newton all recognise the true power of songs as an asset class. That is not just good news for us but for any songwriter who owns their rights.
Mercuriadis says that he was impressed by the response of the financial community to his novel proposition. “I held 177 meetings with different investors before the listing, educating the financial community about songs as an asset class. The vast majority were fascinated by the thesis and were willing to put in the hours and effort to learn more. This was very refreshing.”
One key attraction of this new asset class is that income is not correlated to other traditional investment classes, explains Mercuriadis. “As an asset class, song revenues are uncorrelated. If you are living your best life, you are doing it to a soundtrack of music. If things are not good and you are living in a pandemic, you escape and take comfort in music. In addition, it is an asset class that is protected by rule of law, with rights that last 70 years after the death of the last co-composer, so songs provide very long income streams.”
I wasn’t asking the financial community to invest in my own track record or in new songs – I was asking them to invest in the track record of great proven songs whose income was reliable, verifiable and went back decades. And that predictable income would be positively impacted by streaming and by our active management of the songs.