Shot Tower Capital, the firm which has been undergoing an independent valuation of Hipgnosis Songs Fund’s (HSF’s) assets, has confirmed the valuation of its portfolio stands at $1.948bn – 26% lower than HSF reported in its half-year results in December 2023.
The final valuation report, which comes as part of Shot Tower’s due diligence work on the beleaguered trust, therefore concluded its portfolio is valued at the midpoint it provided in its preliminary valuation report, of between $1.83bn and $1.02bn. This puts HSF as trading on a multiple of 16x retained net revenue as at 30 June 2023.
HSF’s share price responded positively to the news, jumping 7.9% from the time of the announcement to time of writing (midday, 28 March).
On the 18 March this year, it was confirmed that a double-counting error in Hipgnosis’s accrued revenue had occurred, with the trust’s board subsequently announcing a further 7.6% reduction to its operative NAV.
Due diligence
Shot Tower Capital’s due diligence review concluded the trust’s adviser “failed to perform to music publishing industry standards” in three notable ways: first, on underwriting acquisitions and putting the resources in place to manage those rights after they were bought; second, on providing investors with accurate financial statements and public disclosures; and third, managing conflicts between the investment adviser and the trust.
Shot Tower’s analysis suggests that 67 out of 105 acquisitions in the fund are worth less than the price they were bought at. The firm called HSF’s projections “aggressive” and stated that 75% of the trust’s catalogues missed their growth forecasts by an average of 23% on an annual basis.
The report also found HSF’s acquisition underwriting was “below music industry standards” and that it was “often relying on statements of expectation in lieu of actual analysis… with a base case assuming 100% of the growth forecast and an exit multiple equal to the entry multiple”.
Shot Tower Capital said the trust’s investment adviser did not have the systems and services in place to effectively manage its catalogue of some 40,000 songs and noted that, while all royalty data has been obtained by HSF for six years after the trust’s inception, it is still not tracking its catalogue at a song level – which it said is “standard for the music publishing industry”.
The report also found that acquisition files were missing key documents, that data provided during the due diligence process was inconsistent and that, with some listed catalogues, it was “difficult to ascertain whether these items were not obtained or just unable to be located”. Shot Tower Capital added the trust’s public reports implied “greater ownership control over songs, higher revenue and EBITDA, stronger growth, and a greater net asset value than would have been the case if more accurate information was presented”.
Cherry-picking
Earlier this year, allegations were made that HSF ‘cherry-picked’ 29 music catalogues to be sold to Hipgnosis Songs Capital (HSC), a fund managed by the same investment adviser, and which were growing at “materially higher rates” than the overall portfolio.
On these allegations, Shot Tower Capital concluded that HSF held a “conflicted position” when recommending the transaction to its shareholders.
“The economics presented in the 25 September 2023… suggests the net multiple after deducting RTI was 17.6x,” Shot Tower stated. “The analysis based on information reviewed in due diligence… suggests the multiple was closer to 14.9x; ‒ HSC’s offer represents a 10.5% and 5.% discount to the high and midpoint of our valuation range and a 1.2% premium to the low end of our range.
“Additionally, our analysis indicates that the weighted average historic growth rates for the selected catalogues are 5.9% versus 2.7% for the catalogues which were to be left with the fund (excluding recently divested catalogues), with future growth projected to be 5.4% versus 4.3% for the catalogues which were to be left with the fund.”
