Oct. 12, 2023: Why investors should take note of the music business
David Schulhoff has grown up in the music industry. A born-and-bred New Yorker, he happened upon the business out of his passion for music. He talked with Crain Currency about his professional journey and how it led him to his latest venture, MUSQ LLC.
Let’s start with your background. You and the music business — how did that happen?
I always wanted to be in the music business. I loved hip-hop and R&B growing up in New York City. I went to tons of shows and fell in love with the music business at a young age. After graduating from Georgetown, I met a producer named Jimmy Lovine, who offered me a job at his new company, Interscope Records. I started learning about the industry working with artists and producers. I later worked at Disney for seven years overseeing music for Miramax and Dimension Films.
I subsequently started my first music publishing company. Evergreen Copyrights, which consolidated 26 music publishing companies and which I sold to KKR — it later became BMG Rights Management. Most recently, I was president of music publishing at Live One, a public company that owns Slacker Radio and Podcast One.
Over my career, I have been an investor, owner, operator and executive across many segments of the music industry, including record labels, music publishing companies, distribution companies, streaming services, and live music and ticketing businesses.
Why would family offices even consider investing in music? What’s the scope of the industry?
The music industry has become an attractive industry for investors to gain exposure in. According to a recent Goldman Sachs report, Music in the Air, the global music industry is expected to more than double to about $151.4 billion by 2030. The industry’s growth is attributable to the rise of paid streaming services (Spotify, Apple), the growth of content and distribution companies (Universal, Warner Music), and live music performances are shattering pre-pandemic levels and are expected to continue growing (Live Nation).
The music industry is also on the cusp of another major structural change, given the persistent undermonetization of music content, outdated streaming royalty payout structures and the deployment of generative AI, according to Goldman Sachs.
JPMorgan has also called music the best content story in the history of the media industry.
Talk to me about music catalogs. Family offices often have an interest in owning such things, but is it a good investment long term?
The acquisition of music publishing catalogs is quite popular today with investors. They provide steady cash flow returns, assuming the catalog acquired had a decent earnings history. In the last several years, we have seen multiples for these catalogs grow quite substantially. Bruce Springsteen, Bob Dylan, Neil Young, Stevie Nicks, Genesis, Justin Timberlake, Paul Simon and just recently Katy Perry have all sold their catalogs for record multiples. I think investors have become quite confident in the future growth of streaming and have factored these projections into their cash flow valuations. Whether or not they are good investments in the long term will be determined by the borrowing costs of financing those acquisitions and whether they are able to improve the cash flows through marketing and better administration. Whether they overpaid for those deals has yet to be determined.
You recently launched the MUSQ ETF. What was your "why" for that?
About one year ago, I thought about starting another music publishing company. I realized there was a lot of competition and capital in the space to acquire music catalogs. I also realized that investors were still investing in limited partnerships at private equity firms like Blackstone, KKR, Apollo, Providence Equity to get exposure to music and their money locked up and illiquid for many years.
I decided that given the number of public companies in the music industry that are available worldwide, there should exist a liquid and portable way for investors to get exposure to streaming, content and distribution, live music and ticketing, equipment and technology, and satellite and radio. I also realized that this would be a great product for the younger generation to enjoy and learn about investing in stocks. And it’s also a great investment opportunity for RIAs and other investors who want exposure to a booming industry like the music industry.
MORE INSIGHTS: How to address the most pressing family office tech and ops-related challenges
By ADRIANA ZALUCKA
Crain Currency is a media partner of MyFOTech’s inaugural conference Nov. 8-9.
How do I compare and choose from all the available solutions out there, each claiming they’re the holy grail? Is it better to go with an integrated platform or a best-of-breed approach? How do I compare apples to apples? How much should I keep in-house vs outsourcing?
These are some of the most common questions I’ve come across in speaking to family office execs whose responsibilities include technology, operations and investments. The landscape of family office technology vendors is crowded, dynamic and confusing, surrounded by a haze of marketing collateral, various accolades and sponsored discussions — but little insight that would help narrow the options for a particular office.
The options and solutions will be different for each family office depending on its structure, mission, existing setup and legacy systems, the needs of the stakeholders (wealth owners/clients, investment and finance teams, beneficiaries, trustees, board members), the types and complexity of investments, available resources, the future vision of the office, etc. This is a highly bespoke area where consultants are often pulled in to help, sometimes after costly lessons have been learned.
It is also where MyFoTech is looking to make a difference by bringing a network of experts and practitioners into a forum where they can cross-pollinate by sharing knowledge and experience and learning from peers. One of our key collaborators is Phil Strassler, founder of the Larry Kraus Family Office Tax & Tech-NEW-Logy Institute, which produces noncommercial learning programs based on feedback from his expert committee and his network of family offices on which solutions they want to learn more about.
Phil's focus is on the founders and the why, and the main point of our alignment is a shared commitment to creating a community that helps family office executives and principals choose the best configuration of technologies to help them execute their strategy.
SFOs: QuickBooks and Excel
These are probably the most common technologies used by private family offices and often work well enough to maintain the status quo. The majority (70%) of single family offices lack the time to focus on technology, and half lack an awareness of the key solutions (Forge Community Technology Survey 2022), which makes it difficult to justify spending tens or hundreds of thousands of dollars in annual license fees for purpose-built family office solutions. Therefore, before delving into the strategy and available options, a pivotal choice must be made: whether to invest in new technology.
“SFO financial and investment teams face significant challenges when proposing the purchase of new technology,” says Jon Carroll, a prominent single family office consultant and one of our expert thought leaders. “Beyond identifying business needs and the expected benefits of new or additional technology, most will have to prove the value of the investment in new technology to leadership and family members”
Comparing apples to apples: Search, selection, implementation
Another area where we’re looking to assist is by increasing awareness and making sense of the ever-changing landscape of family office tech, pointing those on their tech journey in the right direction.
For example, one of the projects we have completed is our unique, nonsponsored survey of integrated accounting solutions in partnership with Dr. Tania Neild and InfoGrate, a specialist family office consulting and services firm. Tania explains: “Integrated systems, as their name indicates, offer the ability to provide multiple accounting services, be it portfolio accounting, partnership accounting, general ledger accounting. As the complexity of your accounting needs increases, the value of the integrated approach grows. However, the implementation time, cost and risks also increase. Planning, staffing, training and alike all need to adjust accordingly.”
For both single and multi-family offices contemplating the adoption of these systems, they are looking at a major conversion that, depending on their complexity, can take several years and cost typically between $100,000 and $500,000 annually. Therefore, selecting the right partner — knowing who and how to evaluate, what questions and metrics to ask — is critical. Through our survey, we gathered valuable data on these systems, including pricing models and estimates, type and number of clients, security, specific system features, services and contracting terms.
Supporting private market investments
Another major pain point I regularly hear about from most FOs is the disjointed workflow for private equity that involves a lot of mundane manual work that quickly runs up costs. As allocations to private markets increase, this issue becomes increasingly pronounced. There’s frustration over having to fill out multiple subscription docs and KYC with the same information. There’s frustration with PE managers over the slow delivery of capital statements and K1s, which creates delays in reporting and difficulties filing accurate tax returns on time. The tools that help collect and read data from PDFs are helpful, but they don’t solve the problem because there is no standard format to share the data, and it needs to be reviewed by a human.
There is a lot of room for innovation and automation and, at least from a family office point of view, a great need for standardization. This makes it an interesting space to watch, also from a regulatory point of view. Unfortunately, the highly anticipated private fund rules adopted by the SEC in August disappoint on this front. Even if they do increase transparency for investors through increased reporting requirements, the lack of standardization might increase rather than reduce the burden on operational professionals.
Commercial MFOs at a crossroads
Single and multi-family office personnel often struggle with similar tech and ops-related issues, driven by the complexity of the end client. However, commercial MFOs have their unique strategic considerations, reflecting the convergence of shifting business and revenue models and the cloud-computing revolution bringing down the cost of custom solutions. Increasingly, firms leverage their tech stack as a differentiator and a source of competitive advantage. We are also seeing that it’s becoming increasingly important for those serving in the head-of-technology position to play a role across different business functions.
According to Jamie McLaughlin, a management consultant and co-founder of the UHNW Institute: “The UHNW wealth management industry is at a crossroads. There is a profound, secular shift in demand for counseling, objective advice and information management; but extremely challenging business economics leave most firms undercapitalized and underresourced to exploit the opportunity. Tech-enabled work processes can enhance the UHNW client experience and drive firms’ operating leverage.”
Last but not least: information security
Underlying all of the above issues is a concern for security of information. According to the Forge Community Technology Survey 2022, 59% of FOs do not believe their family members can access their information safely and securely anywhere at any time, whilst our survey of integrated vendors shows that data encryption in transit and at rest is not a uniform standard and that access to client data can vary widely, introducing potential vulnerabilities into family offices. From anecdotal information, there is a lot that families and their offices can do to proactively improve cybersecurity, including training staff and eliminating basic vulnerabilities such as insecure email. Protecting personal data is crucial, as cybercriminals are increasingly harnessing advanced AI technologies to exploit it.