The chair of the Hipgnosis Songs Fund slammed the fund’s investment advisers for “ongoing failures in the financial reporting and control process”, as the music rights investment vehicle discovered contract drafting errors that he said could cost millions.
The comments came alongside monthly results that showed the world’s best-known songs fund, which owns hits by artists from Beyonce to Neil Young, crashed to a $63.7 million loss in the year to 30 September. Revenue declined due to lower-than-expected receipts from a US Copyright Board ruling on retroactive payments from streaming services like Spotify.
After a catastrophic year, Hipgnosis shareholders voted in October to wind up the fund. The board, under new chair Robert Naylor, has one last chance to keep the fund alive when it presents its plans to turn things around to shareholders by April.
But Naylor said that since he joined, there had been “ongoing failures in the financial reporting and control process” from investment adviser Hipgnosis Songs Management (HSM), which manages the portfolio of songs and is led by Merck Mercuriadis. Mercuriadis, who has managed many of the biggest names in music, founded the fund.
The latest failure, Naylor said, was a “contract drafting error”, which he said could have cost the fund as much as $21 million. The contract was renegotiated, but with potential liabilities now around $4m higher than they had been before the renegotiation.
Naylor said: “Whilst we consider substantial progress has been made in identifying and rectifying these issues, we have had to suspend the dividend for at least the remainder of the year in order to ensure compliance with our banking covenants.”
Naylor suggested that, while the fund should have enough money to meet its requirements to creditors, opinions about the topic were “qualified” by the history of reporting errors.
He added that since Dan Pounder became CFO of Hipgnosis Songs Management, the financial reporting has improved, but this has led to “short-term negative impacts” as problems are discovered.
The latest error comes after Hipgnosis pushed back these results over questions about the valuation of its portfolio. The fund’s board said that the valuation given by an independent appraiser was “materially higher” than it had actually been able to sell the songs for. When it reached out to HSM for an explanation, it said HSM’s opinions were “heavily caveated”, meaning the board of the fund could not be confident in the value of its assets.
HSM has now begun due diligence on the value of the assets with specialist music rights practice Shot Tower, a business founded by veteran media industry bankers David Dunn and Robert Law.
Hipgnosis shares are down 1.2p, or 1.7%, to 69.50p today. They’re down 20.7% for the year.
