Alternative Asset: Music royalties

Investing / Portfolios
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Once upon a time…

My continuing deeper dive into managed futures has also motivated me to also look for other profitable things I don’t know. Because if there is one thing I learned here, it is: There are strange things out there, you don’t know about them, but they would be very beneficial to you.

Looking for “interesting investments other than stocks”, I found a Youtube video by a guy trying to sell his advice. The suggestions where some form of real estate (Farmland, Private Infrastructure, Private Storage (Units), Private Real Estate), and stocks (Private Equity). But there was one more: Music Royalties. I found that interesting, because unlike paintings, wine and vintage cars, there is actually someone who uses it and pays money for it.

Existing markets

I went looking for this, and it turns out there is a handful of companies trying to make it a thing (for institutions and retail). Examples:

  • royaltyexchange.com has a full blown exchange and auction going, where you can buy and sell rights to (parts of) royalty streams. They also seems to do movies and trademarks(?). There are royalty streams based on newer and older underlying copyrights on offer (you normally don’t buy the copyright proper).
  • songvest.com offers royalty streams from music as fractional shares. It seems to mostly sell new songs, and I am not sure you can sell again.

Hip-Hop royalties from Hoodie Allen Ft. Ed Sheeran (link)

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You buy public performance royalty streams (there are others like streaming). The streams are a dollar weighted 10.24 years old. The earnings seem to be dropping by about 15% per year recently, and the last 12 month yielded 1670. You could buy it right now for 7479 USD. The contract runs out in 4.72 years.

Some back-of-napkin calculations assuming:

  • 4.35% risk free rate (treasuries) during those 4.72 years.
  • Reinvest earnings into risk free rate.
  • The stream continues dropping at 15% annually.

I get about 5750 USD without reinvestment and 6450 USD with quarterly reinvestment. Discounting that final total again to today, it would be worth 5220. That is, if it was risk free and liquid, which it is not.

Cursory looks over the other offerings didn’t look much better. But maybe I just didn’t look in the right place for the right things. My overall knowledge about this is really low after all. Maybe some of you know one or another thing about this?

tl;dr: This doesn’t seem profitable, but it was fun finding it.

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This also had a boom and bust. I think https://www.hipgnosissongs.com/ has now been bought by private equity (or at least a deal was in the air).

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Music royalties is a profitable business with the people holding said royalties being wealthy enough to get more profits from holding them than from selling them. I would see any deal passed on to random schmucks like us as fee gathering second grade stuff and not touch it with a ten foot pole.

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I make my own music with royalty income and produce on the side does that count as an alternative asset class? Lol.

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Probably, can its royalty streams be sold on an exchange?

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I second this. No entity would sell the rights to profitable royalties at a potential loss. In my opinion, it makes more sense to invest in the stocks of music industry players with good growth potential.

Crowdfunding new, promising artists and productions is another ballgame, and I can see that making sense if you have a good knowledge of the market.

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I sometimes wonder why someone would sell a profitable stock at a potential loss.

Of course, if the market is liquid enough to make the spreads small, nobody is supposedly losing anything from a transaction.

On the other hand, is it impossible to make money in an illiquid market? I could imagine the sell side also having to cross the spread sometimes. They could be overexposed to this asset class. Maybe they only have a smaller stake and also don’t have full copyrights. Alternatively they could invest in marketing/promotion, but here it would benefit them only at a diminished rate. Maybe they need cash right now, not in 10 years. Maybe instead taking a loan is expensive because the collateral is discounted for being too exotic.

Why would you then not use a public exchange? It should give you a better price and be easier to find a buyer.

But yeah, I’ve not seen that any of this is the case. On the other hand, I’ve also not analyzed this too deeply.

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Artist heirs might face the dilema of deciding between a constant stream of earnings or a one time large payout. I would assume that the latter is quite attractive, therefore we see more activity in the music royalties space.
But as the example of the Hypgnosis fund shows, valuation opinions differ.