Hipgnosis Songs Fund Ltd. along with other financiers like Blackstone Inc., Primary Wave, HarbourView Private Equity, KKR & Co., and BlackRock Inc., invested billions in acquiring rights to hit songs from artists like Neil Young, 50 Cent, Nelly, Chrissie Hynde, Bruce Springsteen, Bob Marley and Bob Dylan, capitalizing on the value of music catalogs and the growth of streaming platforms like Spotify.
When Richie Sambora was dressed as a giant baked potato on The Masked Singer in February, performing hits by Fleetwood Mac and The Pretenders, it was a lucrative opportunity for investment fund Hipgnosis Songs Fund Ltd. They hold the rights to Sambora’s music and make money when his songs get exposure on TV and streaming platforms like Spotify. This led them to invest $2 billion between 2018 and 2021 in various music catalogs including a whopping 200 million Justin Bieber’s share of his catalog.
However, the situation has changed for Hipgnosis as the music copyright deals market has faced challenges due to rising interest rates, resulting in lower prices. Song copyrights are now relatively less appealing to investors who can earn similar returns from government bonds. The company is now trading at a substantial 50% discount to their net asset value, partly due to scrapping a dividend payment. Hipgnosis itself faced a 12.5% decline in net revenue, and losses widened in the year ending in March 2023, reflecting overly optimistic royalty payout expectations and the need to control debt. An indication that profiting from streaming is more complex than expected.
This week the company is facing criticism for attempts to boost their share price by selling assets to a Blackstone-owned sister fund.
Major investors in the U.K. based Songs Fund, which includes the Church of England Fund CCLA are gearing up to thwart the sale of a $440 million music rights portfolio to a private sister fund owned by Blackstone, as the UK-listed business fights to stay afloat according to the Financial Times.
One of the top 10 investors informed the FT that Blackstone’s offered price was inadequate. “It’s all about the price—if it were 30 percent higher, it might make sense. We don’t really want to part with these assets.”
Hipgnosis has suggested selling about a fifth of its music portfolio to fund a share buyback program and reduce its debt.
The investor also expressed dissatisfaction with the perceived lack of transparency regarding deal costs, tax implications, and the agreement that income accrued since the beginning of the year would go to Blackstone as part of the transaction.
Another source with knowledge of the voting intentions of other major investors stated that there is strong opposition to the current deal structure: “I would be surprised if it doesn’t get voted down.”
Round Hill Music Royalty Fund, another UK-listed music group, is in cue to be taken over by Concord, backed by Apollo for $469 million, at an 11.5 percent discount to net asset value.
“Shareholders are frustrated with the process. It seems heavily skewed in favor of Blackstone,” said Stifel analyst Sachin Saggar. “People feel a bit insulted by how it’s been presented. Optically, I’m not sure what Blackstone was thinking,” he added.
Andrew Sutch, the Hipgnosis’ chairman, has announced his retirement. This, alongside the departure of another non-executive, is seen as a concession to shareholders who are unhappy with the management.
Saggar anticipates that most investors will vote in favor of continuing the fund.
The shareholders have yet to cast their votes on the Blackstone deal, so it remains uncertain whether there is enough dissent to block it or the company’s continuation.
A senior executive from a company that discussed buying song rights with Hipgnosis remarked, “There are specific circumstances with Hipgnosis, and the way potential sales are structured makes them unattractive.”
The complexities go beyond economics. Not all music rights are equal, and their value is not solely determined by predictable consumer preferences. Different types of rights involve songwriters, performers, and producers, and some are more passive in nature. This complexity has led to challenges in estimating the true value of music catalogs.
The future remains uncertain according to Bloomberg . Investors are angry and may oppose Hipgnosis’s proposed deal, potentially leading to the company’s eventual closure. Private equity firms might find opportunities in acquiring undervalued music rights, but even they face uncertainties, such as changing metrics and evolving technologies like generative artificial intelligence. Music streaming growth is slowing, and the industry faces unknown challenges in the years ahead. However, music publishing has survived various boom-and-bust cycles, and it’s likely to adapt to the changing landscape.
Kudos to the artist who sold their rights while the market was at the top.
