Stephen Marley comes from music royalty. Sean Garrett has written and produced smash hits for Beyoncé, Usher and Ciara.
Even so, when they and hundreds of lesser-known names in the world of hip-hop and rap needed cash, one Wall Street figure emerged as an unlikely source behind the financing: hedge-fund titan Jamie Dinan.
In a few short years, Sound Royalties, a West Palm Beach firm started within a unit of Dinan’s York Capital Management, has become ubiquitous in the music industry. Proudly billing itself as “artist friendly,” it offers cash advances to musicians, who often have to tide themselves over between royalty checks that can take months to arrive. A big selling point is that unlike a loan, it’s quick and easy. No credit checks or hassling with banks. Just your money, fast.
There’s just one catch. While Sound Royalties doesn’t disclose how much it earns from cash advances, its fees are usually far higher than the “industry-leading” 4 percent rate it advertises online, according to court filings and interviews with ex-employees and industry insiders. Those who have reviewed the contracts say they’re hard for non-financial types to understand, and some artists can end up paying rates of 30 percent or more. And because they’re structured as advances instead of loans, state usury laws don’t apply.
Not a Loan
“That’s why they call it a fee,” says Charles Koppelman, a former financial adviser to the late Michael Jackson. He now heads C.A.K. Entertainment, which counts Jennifer Lopez and Nicki Minaj as clients. “What they are taking is more than the law would allow if it were treated as a loan.”
It’s not hard to see why demand for royalty financing has jumped. With the possible exception of bona fide superstars, people in the music world regularly live paycheck-to-paycheck for months at a time. Many face trading away their rights to fund their careers.
And Wall Street’s interest is part of a growing trend, says Diane Standaert, director of state policy at the Center for Responsible Lending. More and more, hedge funds and private equity firms are looking to consumer finance to reap big profits, whether it’s by charging sky-high rates, lobbying to roll back regulations or exploiting a hodgepodge of state laws.
“We certainly haven’t seen them changing the predatory nature of these practices,” Standaert says.
Royalty Financing