Music royalties are gaining momentum as an attractive asset class for family offices due to the ... [+]
Driven by continued market volatility and the quest for higher risk-adjusted returns, family offices are increasing their direct investments into alternative asset class allocations to boost portfolio performance. Private equity, private credit, hedge funds and real estate have traditionally taken center stage as preferred alternative options. However, emerging alternative asset classes like music royalties are rapidly gaining momentum as their potential to offer greater stability and recurring revenue has captured the investment spotlight.
In recent years music royalties have attracted investment from Blackstone, KKR, Kobalt Capital Limited and Dundee Partners. Dedicated private equity and investment groups like Lyric Capital Group and Round Hill Music Royalty Fund have even been formed to focus on this asset class. In 2023 there is no sign of this trend slowing as a growing number of artists sell the rights to their royalties and investors snap them up.
For family offices interested in exploring music royalties' investment, it is worth understanding the drivers behind this asset class's ongoing attractiveness, how music royalties work and the available access options.
Why music royalties are an increasingly attractive asset class
The rise of smartphones, smart technology and digital streaming has revolutionized the music industry, transforming it from a transactional economy to a subscription one. The conscious consumer decisions that once drove the purchase of albums have been replaced by subscriptions that allow users to sample songs or entire albums on demand for a set monthly fee. As a result, year-on-year industry growth projections are smashed at a stunning rate.
In 2017 Goldman Sachs estimated that streaming would be valued at $14.1 billion by 2030; just eight short months later, the firm changed the forecast, doubling it to $34 billion. Since then, Goldman Sachs has revised this figure annually. Their 2022 'Music in the Air' report indicates ongoing upward trends in the global music industry and streaming. With every smartphone, speaker or connected car, subscriptions and revenues rise. These facts make music royalties a very attractive asset class.
What is more, music royalties are relatively stable investments as they are unaffected by broader economic activity, offer recurring revenue and attractive yields as long-term assets as royalties are paid for the lifetime of the artist, plus 70 years after their death. There is little counterparty risk, and with streaming culture firmly in place, they have the potential for capital appreciation.
How music royalties work and why they're available
Music as an asset class has existed for as long as there has been copyright law. Traditionally, ownership and control have been the purview of only a handful of companies. However, in recent years, record companies and investment firms have discovered the value in offering a piece of the action to retail investors. In doing so, a level of wealth is created for stakeholders that doesn't cannibalize or replace existing industry structures but builds on these. But how exactly does this work?
Each song (a piece of intellectual property) has a copyright. The copyright may apply to the composition of the song – things like the melody, notes and lyrics, or the sound recording of the performance of these. In addition, the copyright grants certain rights – synchronization rights (licenses for film, advertisements, TV), reproduction rights (when the song is sold or streamed) and performance rights (when played in public or on the radio) for either the composition or sound recording elements. The ownership of these rights allows rightsholders the benefit of collecting royalties. In the music industry, several parties, including songwriters, artists, record labels and publishers, may have a claim to royalties and all resulting future income.
While it may seem counterintuitive to sell off recurring, passive income streams, recent years have seen high-profile artists like Justin Bieber, Taylor Swift, Jay-Z, Bob Dylan and even Bruce Springsteen doing just that.
The COVID-19 pandemic was the initial driver of this trend, halting all touring and tour-related income, which left artists looking for alternative ways to fund their lifestyles. Since then, however, the momentum has continued, driven by tax implications, particularly for U.S based artists, for various personal reasons, including retirement, health, and legal battles, as well as artists' desires to minimize future risk.
Music royalty investment vehicles – how to get in
When adding music royalties to an investment portfolio, family offices have several investment vehicles to choose from. Before getting started, it is vital to clearly outline the family's preferences regarding investment size, liquidity, growth versus dividend yield, and active or passive ownership, as these factors will influence the type of investment and vehicle selection.
A family office may decide to invest indirectly through the purchase of shares in prominent industry players like the Sony Group or Universal Music Group or independent digital companies like Believe Music, or streaming platforms like Spotify.
Another more direct route is to invest in the intellectual property rights of music through trusts like the Hipgnosis Songs Fund or Round Hill Music Fund, which are publicly traded on the London Stock Exchange. With Hipgnonsis and Round Hill Music, the family office will buy into the fund, and the artists it predicts will produce returns.
Alternatively, platforms such as ANote, Royalty Exchange, Songvest and Royal offer unique, often more direct opportunities to investors that differ slightly from fund offerings. ANote, for example, offers investors the opportunity to use their platform to select their investments and buy directly from sellers and allows them the opportunity to invest through fractional ownership in music catalogues. It is a far more hands-on investment approach where the family office will need to know how much they want to buy, when and identify whom they want to buy from, ANote offers a dedicated family office service to ease the process and align with investment objectives.
Royalty Exchange offers buyers the opportunity to purchase royalties of different sizes and scopes. This allows artists to raise money and fund their careers without incurring debt, while giving investors portfolio diversification through access to this asset class. Investors have full control over the assets they place offers on and can do so as they please. Songvest, on the other hand, offers the opportunity to purchase fractional shares of music royalties. In contrast, Royal.io offers 'Song Tokens', limited digital assets (their version of a non-fungible token) that gives purchasers the right to share in certain royalties generated from the exploitation of the sound recording itself.
Music royalties as an alternative investment class is an interesting one when it comes to diversifying the family office portfolio. Still, as with any investment, it should be aligned with the family office's overall investment objectives. Undoubtedly, it will appeal to young and old generations alike, making it an asset class that may help bridge the generational divide in many family offices.
