Hipgnosis prodded to diversify away from Bieber to the classics

The concentration in revenues of the Hipgnosis Song Fund from popstars such as Justin Bieber and Ed Sheeran has prompted Stifel to initiate coverage on the music royalties investment trust with a neutral rating.

The £417.4m investment trust launched in July 2018 and is currently trading at a 1.2% premium, according to the Association of Investment Companies. It invests in the songwriter’s share of a song, meaning they receive revenues from any cover, rather than the recording artist’s share, which pertains to one version of the song.

Analysts said in a 27-page note that they expected “music-savvy individuals will be keen to invest in their favourite songs” from well-known artists such as Chic and Ed Sheeran.

The note’s publication coincided with an announcement from the investment trust that Sylvia Coleman has been added as a non-executive director. Coleman has worked in senior legal roles at EMI Music and Sony Music and earlier this year launched an intellectual property boutique focused on urban music.

Hipgnosis’ top-earning songs from this millennium

But Stifel said while it likes music royalties as an asset class, the fact that 43% of revenues come from just 0.5% of songs in the catalogue raises concentration concerns.

It noted rival funds, in the private space, have focused on songs released before 2000, whereas Hipgnosis is focused on more “recent-vintage pop and Hip-Hop” where it is more difficult to estimate the revenue decay rate.

Top earning songs in Hipgnosis Song Fund

Source: Compiled by Stifel/Company data, Spotify. As at August 2019

Of the top-20 revenue earners in the investment trust, just three are from the pre-2000 era: ‘Sweet Dreams Are Made Of This’ and ‘Would I Lie To You’ by the Eurythmics and ‘Don’t Stop Believin’ by Journey, all of which were released in the 1980s.

‘Something Just Like This’, released by The Chainsmokers in 2017, is the biggest earner for the trust delivering 7% of revenues.

Outsourced sync managers and potential conflicts of interest

Beyond portfolio concentration, Stifel raised concerns about a third-party administrator used by Hipgnosis launching its own competitor fund.

Kobalt, the so-called portfolio administrator, which is responsible for registering songs around the world, should not be competing in the core business of its clients, Stifel said, and faces a conflict when it comes synchronisation, whereby songs are licensed to movies, commercials and TV.

Synchronisation is key to Hipgnosis’s investment thesis and it plans to achieve this via sync managers each responsible for around 500 songs each, a number Stifel said was low compared to competitors where sync managers can be responsible for around 40 times that.

But the analyst was concerned nine out of 15 managers were external with no transparency on who these managers are.

Active management helpful in homogeneous pop music scene

Stifel was still positive on the asset class, noting it is uncorrelated to other financial assets and that music streaming is expected to increase between five and 10-fold over the next decade. Although a lack of granularity on this data, in terms of what countries and genres will drive this growth, makes discount cash flow modelling difficult, Stifel said.

The investment trust structure made sense for the long time horizon on music royalties, which last for 70 years after the death of the last living author involved in any song, unlike private competitor funds that have a limited life span.

Active management of the song catalogues was also helpful, particularly in light of pop music becoming increasingly homogeneous and saturated resulting in less evergreen hits.

In this regard, it is helpful to have CEO Merck Mercuriadis, promoter of Elton John, Guns N’ Roses, Beyoncé and others, although Stifel noted all rival funds in the space tend to be attached to reputable figures in the music industry. Mercuriadis’ background meant the portfolio is skewed towards pop and hip-hop.