KKR has enlisted Raine Group to explore options for its music assets following expressions of interest from potential buyers. The move poses a challenge to Wall Street’s appetite for song catalogs amid increasing interest rates affecting valuations.
The focal point of the potential sale is a catalog of 65,000 songs, acquired by the private equity group for $1.1 billion in October 2021, during a period when music valuations were high due to low interest rates.
While KKR was an early investor in music royalties, its activity has slowed over the past year, and music royalties have become less attractive to investors as interest rates have risen.
The decline in music publishing valuations, down 14% from their 2019 peak, reflects this shift, impacting debt tied to music royalties. KKR, having secured bonds backed by its catalog, has experienced a slide in value as interest rates increased.
Over the past five years, the global music industry has experienced rapid growth fueled by the surge in streaming service users. However, traditional revenue streams, particularly royalties, have faced challenges due to elevated interest rates.
Other institutional investors like KKR entered the music scene, competing with industry giants and investing billions in song copyrights, making it lucrative for artists like Stevie Nicks and Bruce Springsteen to sell ownership rights.
Still, while some traditional music publishing companies grapple with limited share price growth, music streaming services have thrived, contributing to a surge in recorded music revenue to $10 billion in 2022 from around $5 billion in 2019.
According to Goldman Sachs, the global music industry is projected to generate $153 billion by 2030.
Spotify reported an increase in revenue, attributing it to a $1 price hike on premium plans, a rebound in the ad market, improved podcasting trends, and reduced operating expenses following cost cuts in their q3 earnings report. The company expects continued growth in monthly active users and premium subscribers, projecting a boost in total revenues and gross margin.
Revenue from premium subscriptions rose by 10% to 2.9 billion euros ($3.08 billion) while revenue from ad supported users rose 16% to 447 million euros ($475 million).
Spotify’s free cash flow increased, and it disclosed a reduction in its workforce. The company transitioned its podcasting strategy, focusing on a vast content library. Ad-supported revenue and user metrics also saw positive growth, contributing to an 11% rise in total revenue. Operating income increased, driven by higher gross margin and cost reductions. Apple, and Amazon have also seen substantial stock gains in 2023.
Meanwhile, the MUSQ Global Music Industry ETF, launched in July, provides a comprehensive view of the industry ecosystem, including streaming services, distribution, live events, and ticketing, though it has experienced a 2.8% decline since inception.
