Bicycle Music Co.’s pedigree dates back to 1974, when it was founded by Neil Diamond and his business partner, David Rosner. The company changed hands a few times, but, through its investment manager, Alchemy Copyrights, it is currently raising money for its third music royalty investment fund.
Bicycle CEO and Chief Investment Officer Roger Miller declined to disclose the amounts invested in the funds. More than 40 investors, including wealthy individuals, pension plans and insurance companies, are participants, he said. Bicycle’s funds have acquired about 100 catalogs of all sizes, including songs by Tammy Wynette, Cyndi Lauper, Marvin Hamlisch, and Nine Inch Nails.
“The primary purpose of the funds is to acquire the underlying rights, primarily publishing rights, but also master recording rights, likeness rights and other rights that underlie classic music that’s been around for a while and will continue to be around for a while,” said Miller. “We pass through all the net cash to our investors, so it’s a true cash-flow product for pension plans and other investors who need income to meet liabilities or cost of living needs.”
Returns exceed 10 percent, Miller said. The minimum investment is $1 million.
Rock Hill’s Gruss declined to discuss his fund’s returns but noted that industry expectations are in the 10 percent to 13 percent range. “It’s a current income vehicle, so we expect a high coupon type of yield,” said Gruss. Round Hill distributes all royalty income to investors semiannually, in cash.
Kobalt’s Ahlström said his firm offers investors a choice between two share classes. One allows them to stay invested and roll up their value for an exit; the second pays ongoing dividends. The firm targets an internal rate of return of 12 percent to 14 percent and “high single-digit” ongoing yields. The firm has reopened its fund and is raising capital, with a minimum investment of $3 million. Ahlström expects the capital raising to close by the end of the third quarter.
In addition to stable income and returns, music royalty funds also offer tax advantages for U.S. investors. “Extremely tax efficient. You can amortize the copyrights over 10 years so the amortization expense shields the royalty income. You defer your tax payments until the time you sell the asset,” Gruss said.
All three firms also try to maximize income by administering the royalty and publishing rights of the songs they control. Each has creative, marketing and accounting teams that seek out licensing opportunities and ensure that all royalties owed are paid. Each firm administers publishing and royalty rights for a roster of artists whose songs are not necessarily owned by the investment funds.
“We’re at a very opportunistic time to get into this space because the digital world is allowing music to go places where it was never distributed before,” Gruss said. “Growth is coming from the international market. Seventy percent of the royalties we earn are from outside the U.S. If you think about a country that 10 years ago maybe had 10 TV stations, today it may have 100. All that programming requires music and we earn a royalty every time one of our songs is used.”
“Music is the engine of the digital world,” he said.