It was a good idea: capitalise on the booming interest in “alternative” asset classes and launch a quoted fund to buy music rights. The bulk of the royalty income would flow to shareholders as dividends. Every addition of a new back catalogue would bring diversity to the portfolio. Thus Hipgnosis Songs Fund debuted on the London stock market at 100p a share in 2018, with the music industry veteran Merck Mercuriadis setting the beat as the deal-doing investment adviser.
For a while, progress was harmonious. Shareholders were tapped regularly to fund purchases of the back catalogues of the likes of Blondie, Red Hot Chili Peppers and Neil Young. The share price peaked at 129p in late 2021. Since then, though, it’s been downhill fast, to the point where the gap between the fund’s view of the worth of the assets – or, rather, the external valuer’s view – and the share price is huge. The official value is 150p-ish compared with 65p in the market.
There are reasons: outsiders’ distrust of the valuation model; a feeling that the rights market had become frothy; and the rise in global interest rates that has reset the relative value of income funds. And the specific problem for Hipgnosis, and others like it, is that the fund cannot issue shares below asset value (a sensible measure to protect existing shareholders). So the choice was either to sit tight or attempt a traditional trick for investment trusts and flog a few assets at a decent price to prove their worth in a real-world transaction.
The critical ingredient, though, is that the price has to be excellent. Hipgnosis’s proposal in September to sell a fifth of its catalogue, including songs by Kaiser Chiefs and Barry Manilow, for $440m (£360m) was a stinker. The headline discount to book value was 17%, which became more like 24% when fees and forgone royalties were included. That compares to a discount of only 11.5% at which the smaller Round Hill Music sold itself recently. And the twist was the identity of the buyers – a Blackstone fund also managed by Mercuriadis’s company. Cue a chorus of complaints about conflicts of interest.
The probability that shareholders will reject the deal became a near-certainty after Monday’s latest shocker. A quarterly dividend is being cancelled because the accrued cash from US royalty payments will come in $12m lower than expected. The backdrop to that subplot is an industry-wide quarrel between rights-holders and US music streamers. But the scrapping of the dividend also illustrates that Hipgnosis’s borrowings don’t give it room to smooth out bumps. The one thing that is meant to be reliable with royalty funds is income.
What’s the best way out of the fix? Well, the vote on the deal is also likely to produce a rebellion on the parallel “continuation” poll over whether to wind up the fund. Yet winding-up would surely be self-defeating because the most likely buyer would be Blackstone, which has already demonstrated how hard-nosed it can be on price. So the next best answer is to get some robust governance in place on the Hipgnosis board.
Half the problem here, say rebellious investors, is that the current directors can’t imagine life without Mercuriadis as their well-paid adviser (his firm got $12.5m in fees last year via a formula based on the fund’s market capitalisation). Revealingly, the September announcement presented Mercuriadis’s overview before that of the fund’s own chairman, which is surely the wrong order.
Andrew Sutch, that chairman, is on his way out anyway, which creates a vacancy at a good moment. Get an independently minded chair in place and then review the options. Despite the current mess, a quoted royalty fund for music remains a viable long-term idea. But it has to be seen to work for the owners, not just the hired advisers.
