Music may soothe the savage beast, but it also calms the wealthy fund investors who earn double-digit returns on the rights to some of the world's most famous melodies.
Round Hill Music Royalty Partners, Kobalt Capital and Bicycle Music all offer private equity funds that allow high-net-worth investors to share in the revenue-generating potential of some of the most popular songs ever recorded, across multiple generations and music genres. The investment model is simple and has been used by some of the world’s largest pension funds and private equity firms, including the Ontario Teachers Pension Fund and KKR. The funds acquire the rights to catalogs of music and individual songs, which they own for a specified number of years. Every time one of those songs is played, purchased or used for any commercial purpose—anywhere in the world—the fund collects the royalties and investors earn returns.
Multiple sources drive income to the funds. Among them, downloads from Apple’s iTunes service, which surpassed 25 billion song purchases in February 2013. A 99-cent download on iTunes generates 9.125 cents to the owner of the song’s publishing rights, according to Round Hill CEO and Chairman Josh Gruss.
Income streams also include radio plays, CD purchases, live performances, music-streaming services, cell phone ring tones and even the Muzak played in an elevator. If a filmmaker, television producer, advertiser or video game developer wishes to license a song, it must negotiate a fee with the publishing rights owner, who then receives royalty payments every time the film, TV show or commercial is shown and on every game unit sold.
For example, Round Hill owns the rights to Land of a Thousand Dances, written by Chris Kenner and popularized by Wilson Pickett in 1966. The song appears in the movie Forrest Gump and various video games, and still receives significant radio play. That one song generates royalties of $300,000 to $400,000 a year, according to Gruss.
Those royalties enable music funds to produce “annuity-like cash flow streams,” said Gruss, whose $200 million Round Hill Music Royalty Fund raised $52 million in its first closing. “Much like an MLP or REIT, we are set up to have the royalty income distributed down to the investor. It’s uncorrelated to the stock market or the price of oil or real estate. It’s its own beast and that’s why investors are interested,” he said.
The Round Hill fund has 15 investors, including limited partnerships, family offices, foundations, and wealthy individuals, Gruss said. The fund’s portfolio includes more than 4,000 songs recorded by artists such as Frank Sinatra, Billie Holiday, the Beatles, Aerosmith, and Bruno Mars.
Kobalt Capital started its investment fund in 2011 and has attracted more than $70 million, mostly from family offices, foundations and ultra-rich investors. The fund owns a catalog of more than 4,000 songs, including popular works by the B52s and Fleetwood Mac, and takes a two-pronged approach to investing in music publishing rights, according to CEO Johan Ahlström.
“We buy copyright catalogs and we also make royalty advances, which effectively become secured loans collateralized by catalogs, so we have great diversification,” said Ahlström. “We also have the ability to get active songwriters who have ongoing future music deliveries, which offers some interesting upside,” but poses more risk.
Founded By Neil Diamond