Analysts at Investec Securities Research believe the tenure of Hipgnosis Song Management (HSM) as Hipgnosis Song Fund’s (SONG’s) investment adviser is now “impossible”, following Shot Tower Capital’s due diligence report published last week (28 March).
Investec’s research note said the valuation of SONG’s portfolio as part of the report is “slightly higher” than its previous valuation of $1.93bn, at $1.95bn, but warned the “severe condemnation” of HSF should be “of greater concern to investors”.
Shot Tower’s report had found, among other failings, that the investment adviser had “failed to perform to music publishing industry standards” in terms of underwriting acquisitions and managing those rights; providing investors with accurate financial statements; and managing conflict between the adviser and its board. It also confirmed HSF was in a “conflicted position” when recommending the sale of its higher-valued catalogues to Hipgnosis Songs Capital (HSC); an investment company also owned by the same adviser.
Both HSF and HSC are majority owned by private equity giant Blackstone, the CEO of which – Steve Schwarzman – was awarded an honorary knighthood by Prime Minister Rishi Sunak earlier this year for services to philanthropy.
Investec’s research team said: “The key question for the board is therefore not whether it should dismiss HSM, but on what basis (ordinary notice or asserting breach of contract), and when.
“In this instance, HSM (and by extension Blackstone) will then have a decision to make on whether to bid for these assets in order to continue managing them.”
If HSM does not make a bid the the beleaguered investment trust, Investec believes an orderly wind-down is “the most likely outcome. However, it added: “It is not clear exactly how this would be managed, and any potential incoming manager would need to be appropriately incentivised.”
Amid the announcement of a double-counting error of the trust’s accrued revenue on 18 March, which led to a 7.6% reduction in its operative NAV, the board confirmed that its prevailing NAV, using Shot Tower’s valuation, stood at 107.7 cents, or 85p, per share. Investec said this could be revised slightly higher after the finalisation of Shot Tower’s report, which is due to be published later this month.
Since the publication of Shot Tower’s due diligence report, SONG’s share price has risen by 7.7%.
“There remains considerable upside to the company’s share price, and we retain our Buy recommendation,” Investec concluded.
‘Serious questions’ for HSF
Not every analyst team remains bullish on SONG, however. Stifel has downgraded shares in the company from ‘Buy’ to ‘Neutral’ following the damning report.
First, it said the report is “very thorough” with a “detailed description on the methodology used and underlying data”. “We do not believe any stakeholder can say that the conclusions are not impartial or fact based.”
This is despite the fact HSF issued a statement on the day of the report’s release, stating aspects of it are “accurate and misleading”.
Stifel continued: “As we suspected, the findings may surprise some to the downside. The language is also direct with no wiggle room for ambiguity.”
One of the key aspects in the report that Stifel found troubling was that passive catalogues grew at a faster rate than those managed by HSF. The team said this implies the infrastructure at the manager is “sub-par” – something they have “suspected from the start”.
“The difference in historical operative NAVs and the Shot Tower valuation is a decline in cash flow and not multiple,” Stifel stated. “This implies underwriting or management of assets were poor.”
