What do Bob Dylan, Brue Springsteen, Red Hot Chilli Peppers, ZZ Top, Neil Young, John Legend, and Justin Timberlake all have in common?
They represent a growing list of prolific recording artists liquidating some or all of their music catalogs to investors or record labels for big bucks.
This chorus of exits has piqued the interest of retail and institutional investors exploring ways to generate income and returns from non-traditional investments (e.g., alternatives). As a music lover and investor, the action certainly piqued my interest.
Here’s how to get started investing in the music industry via music royalties.
What Are Music Royalties?
Music royalties come from the copyrights (intellectual property) that are created from written or recorded music. There are two kinds of song copyrights:
- Sound recording copyrights (masters): copyrights on the song’s original recording.
- Composition copyrights (publishing): copyrights related to a song’s lyrics or melody.
A “royalty” then, is a payment that results from copyrights. These payments are made to those who own the rights to use the intellectual property.
There are many types of rights that are attached to the two types of copyrights, which guide where royalty payments ultimately end up. It’s a web of intellectual property that gets complicated:
As you can see, every time a song is used that’s protected under a copyright, lots of people can get paid. Since every artist has structured their respective copyrights differently, the way royalty payments are distributed, who gets what, and how much is always different.
Where Did Music Royalty Investing Come From?
Investing in music royalties first gained notoriety in 1997, when David Bowie used the income stream from his royalties to raise $55 million at a 7.9% annualized return. Dubbed “Bowie Bonds,” they enticed investors with the passive income generated by his music.
Over time, more people began to see the opportunity at hand with music royalties, due to the sheer number of people who hold income-producing rights to music copyrights and their ability to be bought and sold.
Today, major investment firms like BlackRock, Blackstone, and KKR have formed partnerships to invest in music royalties while big music stars like Bob Dylan, Neil Young, Fleetwood Mac, and others have started to sell their catalogs for estate-planning purposes.
Why Would I Invest in Music Royalties?
Historically, investors have been attracted to music royalties due to their predicable cash flow and lack of correlation to traditional capital markets. The thought was that great music will be played no matter if the economy is good or bad, and so, if an investor held the royalties to great songs, they would make money no matter what.
With the advent of things like Spotify, Tik Tok, Peloton, and video games, more music is being played now (and in different ways) than ever before. Since interest rates have been so low for the last decade (well, until now), music royalties have gained a reputation for providing investors access to cash flow that’s not bonds, stocks, real estate, etc.
Read more: 3 Cool Passive Investment Ideas
While accessible, verified and complete returns data on this asset class is difficult to find and varies significantly. Some publicly available sources suggest investors can generally earn anywhere from ~4% to ~15% annualized. (But keep in mind that past performance does not guarantee future returns.)
How Can I Invest in Music Royalties?
Given the web of complexity around music rights, there are several ways to begin investing in the space, which have different risk and return profiles.
Public Companies / Public Investment Firms
Investing in public entities is one of the most accessible ways to gain access to music royalties. Options to explore include:
- Warner Music Group.
- Universal Music Group.
- Hipgnosis Song Fund.
- Round Hill Royalty Fund Ltd.
- Reservoir Media.
However, they don’t all trade on U.S. stock exchanges.
Private equity firms like KKR and Blackstone are also options to consider for gaining some exposure to music royalties, but it is a very small part of their overall business.
As the space has increased in popularity, several tech platforms have emerged that enable the sales and trading of individual song royalties or fractional shares of song royalties.
Some options to explore if you want to dig into individual royalty investments include:
Private Royalty Investment Funds
While few and far between, there are some private music royalty investment funds popping up that are being offered by boutique wealth and asset management firms.
However, these investment opportunities are typically reserved for accredited investors with substantive starting financial assets. ICM Asset Management’s Crescendo Music Royalty Fund is an example of these types of investment products.
They also tend to be much more expensive than your traditional investment fund product like an ETF.
Risks to Consider
Despite the promise of investing in music royalties, there are many risks to consider.
Complexity and Opacity
Music royalties by nature are a complicated form of intellectual property with a lot of moving parts. To invest confidently in the space, you need to understand the different types of royalties, their lengths of ownership, the structure of their cash flow, and any buy-back rights that might be built into individual royalty deals. It’s no wonder why lots of lawyers get involved when it comes to the IP.
In addition to being complicated, it’s also difficult to gain full transparency on what’s really happening in the market, deal valuations, and the true long-term income generation potential of individual royalties.
For example, some industry experts suggest it’s possible some of the most recent high-profile acquisitions of famous artists’ catalogs are more for show versus being truly good investments.
Additionally, since royalty streams are subject to the popularity of an artist, big, short-term spurts in listening activity due to things like one-off events or Tik Tok trends can drive large fluctuations in income that may not continue in the future.
Since royalty streams are typically bought to be owned over a specific length of time, you’ll need to be discerning about if the income stream you are buying will perform similarly as it did in the past — or drop off.
For all these reasons and more, you should be very educated on the minutiae of how these investments work before diving in.
Pricing and Valuation
Because music royalties are hot right now, they may be getting richly priced. Like any asset, the sexier, more in vogue, or more hyped something is, the more likely it is to become unjustifiably expensive.
Since investing in alternative investments as a whole versus in the stock market has also become a popular theme, it’s important to be aware of how those factors could play into the pricing of music royalty investments.
Music royalty investments are typically priced based on a multiple of their last 12 months’ earnings (LTM) and as of 2021, top artists were receiving more than 25x the annual income (4% yield) of their song catalogs while other firms dished out ~15x LTM (~7% yield).
Interest Rate Risk
Since one of the main draws of music royalty investing is its ability to provide consistent cash flow, it’s natural to compare these investments to bonds or REITs (for rental income). In fact, KKR recently issued an asset-backed security that was secured off streams of music royalty income!
When it comes to income- or “yield”-generating investments though, how valuable those investments are is in part based on where interest rates are and how much additional yield or “spread” can be generated per amount of risk that is taken.
As interest rates go up and investors can earn more yield via safer assets, the spread earned on music royalties can be impacted and demand for music royalties could fall.
Looking ahead, music royalties present an interesting and unique investment proposition for all types of investors. Given their unique qualities, they are certainly not for everyone, but if you are looking for an alternative way of generating income while investing in the things you enjoy, they are worth a look.
However, before you start singing your way to the bank, make sure you understand all the risks involved. Music royalties are a cool and emerging space, but successful investing requires lots of time and attention.
Featured image: hurricanehank/Shutterstock.com