Amid an uncertain economy, family offices are continually turning toward alternative assets such as music royalties to ride the revenue wave created by digital streaming. Because of the opportunities for cash flow, the attraction of owning tangible assets and the booming growth of digital streaming, music royalties have become increasingly attractive.
Giant deals in recent years included the $1.1 billion purchase of Kobalt Capital’s music rights portfolio by the family office of former Goldman Sachs partner Stephen Hendel and the private equity firm KKR & Co. The portfolio, according to Reuters, had more than 62,000 copyrights at the time of the October 2021 deal.
Not all recent deals have been quite that large, but they have quickly drawn interest.
- Music royalties have become increasingly attractive to family offices.
- Music revenue from recording, live music and publishing is expected to more than double from 2017 to 2030.
- The long life span of songs makes them steady sources of cash flow.
- Their noncorrelation to the market is particularly attractive to some investors.
A year and a half ago, Cresset Partners, a Chicago-based investment firm, decided to raise $25 million through a special-purpose vehicle to invest with a company called Open On Sunday, which purchases music catalogs including publishing rights and masters.
'MUSIC IS SEXY ... RIGHT?'
Jordan Stein, a director at Cresset, said that within 12 days of announcing the raise, the company had drawn $65 million of interest from its clients.
“People were really excited about that as an opportunity,” Stein said. “Music is sexy to some degree, right? People like investing in things that are tangible and that they can experience and say, ‘I am a part-owner, effectively, in this song.’ That drove a lot of interest as well.”
Overall, Goldman Sachs has forecast music revenue from recording, live music and publishing to more than double between 2017 and 2030, from about $62 billion to $131 billion, concluding that music streaming and spending would remain resilient in an economic downturn.
The life span of songs makes them steady sources of cash flow, said Sean Peace, the founder of SongVest and Royalty Exchange, platforms that allow for direct investment in music royalties. Most music, Peace said, operates on a bell curve: Songs are released, hit their peak in streams and plays, and continue downward steadily until they plateau — “where there is pretty much stability in the royalty.”
The best part about investing in music is its lack of correlation with the market, he said. “As long as people continue to keep their Spotify and Apple subscriptions, then you’re not going to see an impact that’s correlated to any market moves on that income,” Peace said. “So you get the best of both worlds: You get a true alt, where it’s noncorrelated, and you get really good stability in the income continuing to come in over time.”
Besides its enormous growth, streaming technology has broadened listenership to a point that any artist can be heard around the world, said Adam Sansiveri, senior managing director and co-lead of sports and entertainment at New York-based Bernstein Private Wealth Management.
“It also creates more transparency into the actual consumption of a song or artist to a point where it is possible to know how many millions/billions of times a single song has been listened to,” Sansiveri said. “This data insight is incredibly powerful. Sophisticated investors value these insights when making decisions and predicting future cash flow and value.”
THINK BEFORE YOU SING
While the popularity of streaming and growing music consumption has become profitable for family offices that have the knowledge and sophistication to invest at the right multiples and right catalogs, challenges in the space remain, such as ongoing debates about the amount of streaming royalties paid to songwriters and artists, Sansiveri said. A well-versed expert adviser can help family offices navigate this niche asset class, especially as investments can span a variety of funds and platforms, he said.
SongVest, for instance, has fractionalized music and securitized music royalties so that investors and family offices can buy a group of songs or parts of songs, said Peace, who sold Royalty Exchange several years ago but still operates SongVest.
“A family office could come in and say, ‘OK, I want to deploy $500,000.’ And now they can buy $100,000 of this catalog, or this group of songs, another 100 over here,” he said. “So they’re able to spread their risk over multiple catalogs.
“I always wanted to allow fans to buy a piece of their favorite song, and that's what I've finally been able to do at SongVest.”
Many in the industry have a long-term optimistic outlook about the future of music royalties, particularly Cresset's Stein. As long as digital streaming continues, music royalties is an asset class that's here to stay.
“You have lots of these really positive tailwinds and dynamics where it's a recession-resilient industry generating yield on a real-time basis,” Stein said. “And it's growing massively. I think it's a great opportunity and a great place for capital to be put to work."