Why investors are increasingly drawn to the music industry in 2021

Since blue-chip financiers rediscovered the music industry in 2018, interest has steadily grown.

No doubt it escalated after this week’s report from UK’s MIDiA Research that despite the pandemic, the global recorded music market reached USD $23.1 billion in 2020.

That signified a growth rate of 7% and a fresh income of $1.5 billion year-on-year. It was a lower rate than the 11% growth of 2018 and 2019. But it won’t alarm investors.

After all, growth was primarily fuelled by streaming, and streaming revenues were up faster than the previous year – by 19.6% to $14.2 billion and bringing in a fresh $2.3 billion.

BuyShares expects streaming revenue to grow to $23 billion in 2021 –rising by 50% in comparison to pre-COVID numbers.

Statista data saw music streaming users rise from 425.6 million in 2019 to 626.2 million in 2021, with 900 million within the next four years.

The industry’s revenue in Q4 2020 expanded 15% YoY, suggesting “a strong 2021 may lie ahead” if the momentum continues, according to MIDiA.

“The recordings business managed to deliver a strong performance due solely to the growth of streaming,” its director Mark Mulligan went on to explain.

“Streaming has been the engine room since the recorded music business returned to growth.

“But the fall in performance and sync revenues due to the pandemic highlighted just how overly dependent the global music business has become on streaming.

“With lots of private equity money now pouring into creator tools companies like Native Instruments, expect this space to hot up even further in 2021.

“The recorded music business is changing, and it is changing fast.”

The strong investor response to IPOs by Spotify and Warner Music are a sign of things to come.

“There’s been an enormous resurgence in the valuation of music assets,” according to Aaron Siegel of Goldman Sachs, who handled the Warner Music IPO.

“We saw strong investor interest in Warner Music’s initial public offering — which priced in the upper half of the expected range and has since traded higher.

“Despite the COVID-19 disruption, we were able to execute the roadshow virtually and reach a strong investor base in a shorter period of time.”

Siegel reiterated why growing streaming revenue will attract more investors.

“It is easy to use, many services have free tiers which encourage people to try especially in new markets, and Spotify and Amazon Music are testing higher pricing.

“The industry is primed for overall growth as well as the potential for higher pricing over time.”

Why music royalties are an ‘attractive asset class’

Music royalties are considered an attractive asset class.

“Everyone realized that publishing catalogues were assets you could finance, like a building,” Martin Bandier explained, Sony/ATV Music Publishing’s former CEO and chairman.

The forecasts the investment banks are making for the number of streaming subscribers during the next 10 years are extraordinary.

“So investment bankers, hedge funds, private equity – they all look at this as an asset class.”

Investing in music royalties is attractive because it is stable, provides recurring income and attractive relative yields, and tends not to be affected by fluctuating economic conditions.

Two current examples of investment funds making global headlines for successfully offering access to song royalties are Hipgnosis and Round Hill Music Royalty Fund.

Hipgnosis was set up in 2018 by Merck Mercuriadis, the one-time manager to Elton John, Beyoncé and Guns N’ Roses.

By aggressive fundraising, it bought 117 catalogues and 57,000 songs, including those by Neil Young, Lindsey Buckingham, Dave Stewart of The Eurythmics, The Dream, Barry Manilow and producer Bob Rock.

Its prospectus today reads that Hipgnosis is currently eyeing “pipeline catalogs [with] a combined purchase price of over £1 billion” (AUD $1.79 billion).

Round Hill Music Royalty Fund, launched last year, has 128,000 songs related to The Beatles, Frank Sinatra, Rob Thomas, Black Sabbath, The Dropkick Murphy’s, Craig David, Kiss, Limp Bizkit, Blues Traveler, Bruno Mars, Skid Row, Bachman Turner Overdrive and Night Ranger.

These are songs still played on the radio or profiled on streaming services, and used in sync.

Hipgnosis offers a yield of 4.17%. Round Hill is targeting total returns of 9–11% per annum, with a dividend yield of 4.5%.

“You’ve got pension funds and global asset managers looking at music as just another asset class to put within their portfolios of assets with a certain risk and opportunity profile,” MIDiA’s Mulligan told World Finance.

“Institutional investors have looked at music publisher catalogues in particular, at how the value of that asset class has augmented over the last half decade-plus.”