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This is an audio transcript of the Behind the Money podcast episode: How Wall Street became infatuated with the music industry

Michela Tindera
On a recent Sunday night I was watching TV when this commercial came on.

[CLIP FROM CHEVROLET COMMERCIAL PLAYING]

Michela Tindera
It shows different groups of people driving around in brand-new electric trucks and SUVs. The sun is shining, and everyone’s bobbing their heads or dancing in their seats or singing along to this one song.

[CLIP FROM CHEVROLET COMMERCIAL PLAYING]

Michela Tindera
And that song, it has this really familiar, effortless, poppy 1980s vibe. And if you couldn’t tell by the signature sound of those twinkling bells at the beginning, it’s the 1987 Fleetwood Mac song Everywhere that’s playing in this ad for Chevrolet.

Clip from Chevrolet commercial
From Bolt to Blazer, Equinox to Silverado . . . Chevy EVs are for everyone, everywhere.

Michela Tindera
Now, of course, it’s nothing new to hear a popular song playing in a commercial. But what is new is who owns the rights to this song and who makes money every time it gets played. You see, just last year, Christine McVie of Fleetwood Mac decided to sell the rights to her entire song catalogue to a UK-based investment trust called Hipgnosis Songs Fund. And now those songs are just a slice of more than 65,000 others that have been bought up by Hipgnosis in the last couple of years. The FT’s private capital correspondent Kaye Wiggins says that means that when a song gets played . ..

Kaye Wiggins
Whether it’s played on the radio, whether it’s played live at concert, whether it’s played on social media . . . Money is coming in every time one of those songs gets played. And what it does is it kind of bundles all of those songs together and uses all of those revenues from the royalty payments to pay investors a dividend.

Michela Tindera
And this process of buying the rights to songs and bundling them up is part of one of Wall Street’s hottest trends over the past few years that is turning music into an asset class. And firms have spent hundreds of millions of dollars gobbling up these song catalogues from popular musicians. It’s a far cry from the early 2000, where piracy and Napster were considered to be the death knell of the music industry.

Anna Nicolaou
I think as streaming money and income grew and grew and grew, the whole industry has enjoyed this kind of renaissance.

Michela Tindera
That’s Anna Nicolaou. She’s the FT’s US media correspondent, and she’s been reporting on the music industry and these sorts of deals for the last few years.

Anna Nicolaou
And as that was happening in the broader economy, interest rates have been, until recently, very, very low historically. And so I think a lot of these companies, these big private equity companies, these big investors that have never really invested in music before, they’re kind of searching around for something to invest in that will give them, you know, a steady stream of income with relatively low risk. And they’re probably seeing all these headlines and bank analyst notes about how great the music industry is doing right now. And so these things happen pretty much at the exact same time. And all of these investors in the past, really in the past two years have all kind of piled in at once.

Michela Tindera
But now, almost as quickly as this all got started, the economy is changing. Fears of a global recession and rising interest rates may pose a threat to these new kinds of investments.

[MUSIC PLAYING]

Michela Tindera
I’m Michaela Tindera from the Financial Times. On this week’s episode of Behind the Money, will Wall Street have to face the music when it comes to its own investments in popular song catalogues?

[MUSIC PLAYING]

Michela Tindera
So we’ve talked about this on the show before. We’ve been in a low interest rate environment for years, and that sort of environment leads investors to look for new ways to generate returns. And so big firms like KKR or Apollo or Blackstone, they’ve all jumped in to invest in these music catalogues. But there’s really one person in particular who got this whole trend started.

Merck Mercuriadis
My name is Merck Mercuriadis, and I’m the founder and CEO of Hipgnosis Songs.

Michela Tindera
Anna and I interviewed Merck Mercuriadis a few months ago.

Merck Mercuriadis
I’d been an artist manager almost all my life since my teens, and I’d had a great career managing people like Elton John and Guns N’ Roses and being part of Beyoncé’s management and, you know, just wonderful artists.

Michela Tindera
And during our interview, he explained to us his own pitch for his business, Hipgnosis, which, by the way, is named for an agency that designed album covers for groups like Pink Floyd.

Merck Mercuriadis
So at the end of the day, I came up with this idea of creating songs and establishing songs as an asset class in the financial community, because obviously people have been buying and selling songs for a long time, way before I ever came around. But they never focused on establishing them as an asset class and in turning songs into something that the investment community could realise was a very powerful and potent source of income. And also crucially, the, the revenues were uncorrelated to what was happening in the world. If people are living their best lives, they’re doing it to a soundtrack of great songs. Equally well if they’re experiencing the sort of challenges that we’ve experienced over the last couple of years, they’re taking comfort in escaping with great songs.

Michela Tindera
That does sound like a pretty persuasive pitch. So, Anna, how did he actually put this idea into action?

Anna Nicolaou
So he starts this company called Hipgnosis, and he basically set out to raise hundreds of millions of dollars from various investors. Basically, the pitch was, if you give us your money, we will use that to invest in buying songs. And I’ve been this industry for a long time and I have the connections to be able to really do this, that you wouldn’t be able to buy these songs on your own. But I know what to buy and I know how to get people to sell them. He really was, I mean, on top of the things I mentioned, which is the industry itself turning around and interest rates, Merck was pretty much the third factor because he was doing these deals, you know, literally every week he’d have various artists selling their catalogue to him, and people see this and then it starts to become a thing. And you’re wondering, why don’t I do this?

Michela Tindera
So in 2018, Merck get started by creating this investment trust that lists on the London Stock Exchange. So, Kaye, let me come back to you for this. What’s an investment trust, and how does it work?

Kaye Wiggins
It’s basically a pool of money. So the way that it works is that Merck goes out to shareholders and says there’s loads of great artists whose copyrights I want to buy. I’m going to raise some money. And so they all put some money into this big pool effectively. And then he takes that money, and he uses it to go and buy the catalogues. And what the shareholders are left with is kind of a stake in this pool that owns all of these different songs.

Michela Tindera
So, Anna, you’ve spoken with a lot of people in the music industry to report on this story, including different artists. What does all this mean for them, the musicians or songwriters who are actually selling their copyrights to this kind of fund?

Anna Nicolaou
Unfortunately, the answer is it’s very complicated just because basically every musician has a different situation. I guess the simplest example would be, let’s say you’re an older musician, you wrote all of your songs alone, no other co-writers to share with, and you own both the publishing rights, which is the songwriting and the recording rights, which is the actual recording. So you basically, if you fully own the copyrights to all of your music and then you decide, you know, I’m getting older, I want to plan for my retirement and what I can pass down to my family. I’m going to sell this off to Blackstone or whoever it might be, and they do it cleanly and you just transfer all the rights over. That would mean they get this one payment and that’s it. In reality, a lot of these deals are more complicated than that because you’ll have, I mean, a lot of pop stars don’t write their own songs so they can’t actually sell their catalogues anyway.

Michela Tindera
OK. And Kaye, let me come back to you for this. What happened with Merck’s Hipgnosis fund? How has it performed since it first listed.

Kaye Wiggins
In the early days, in the early years of this fund, it looked like he was making these phenomenally successful bets and the fund was just growing and its revenues were growing. So like, the revenues went from £7.2mn in 2019 to $168.3mn by March of this year. So on the surface, it looks like this thing is going great guns, and it’s just hugely successful.

Michela Tindera
On the surface, yeah, it definitely does. That’s a really big increase over just a couple of years. But it sounds like there is possibly a catch then to what you’re saying?

Kaye Wiggins
The thing that you have to look a little bit closer at is what they call the pro forma revenues, which is a bit of a jargon term, but it basically means like the vast majority of that growth was coming from acquisitions. So the catalogue was getting more valuable because Merck Mercuriadis was constantly tapping shareholders for more money and using that extra money to buy more songs. So when you’re constantly adding new songs to the portfolio, of course, the value of the revenues is increasing and the value valuations of the songs are increasing because, you know, there’s just so much more in there.

Michela Tindera
OK, so then what was actually happening?

Kaye Wiggins
When you use a measure that strips out the effect of acquisitions and just looks at all of the songs that listed fund currently owns and how much revenue those songs have generated in royalty payments in the last few years that actually those numbers have been falling for the entire time that they’ve been disclosed. And that’s because when a song gets released, it’s obviously being played on the radio all the time. Maybe the artist is going on tour, they’re playing at all sorts of gigs, everyone’s listening to it. And then over time that interest fades, right? And the song revenues will sort of decline as the reach have sort of more steady level over time.

Michela Tindera
And so now Merck has stopped acquiring new songs for his Hipgnosis fund. So what happened there?

Kaye Wiggins
It reached a point last year where it basically had to tell shareholders that it was going to take a pause because the shareholders wanted to be able to understand what the kind of steady state of this fund would be and what it would look like if it wasn’t doing deals so often. So July of 2021, Merck Mercuriadis says to the shareholders, OK, we’re raising some money now, and then we’re not going to raise anymore for another year. So he raises all this money and then within like weeks he spent it all. So by the end of August of last year, he spent all of the money that listed fund has, and he’s got like almost a year to go before he can raise anymore because he’s told the shareholders he’s not going to do it for that time.

Michela Tindera
OK. So then what happened?

Kaye Wiggins
Like a couple of months later, he announces this deal with Blackstone, where Blackstone is going to (A), they’re going to buy control of his company and (B), they’re going to provide a separate pool of money through which he can carry on doing deals. But, you know, very much under the watchful eye of Blackstone. At this point, there’s a sense that at least Blackstone is trying to apply some kind of, you know, some spreadsheets, some Wall Street-style financial engineering. They probably got an analyst sitting there trying to calculate the projected future cash flows of Nelly Furtado’s song catalogue. So ever since, like this time last year, pretty much, all of the deals that Merck Mercuriadis has been doing have been, were using Blackstone’s money, not using his original listed vehicle’s money.

Michela Tindera
OK. So just to recap, Merck started this fund. He raised a bunch of money to acquire loads and loads of songs. And then when he spent all the money, the big investment firm Blackstone came along. So what does all that mean for Hipgnosis going forward?

Kaye Wiggins
So the listed fund is in a really difficult spot at the moment. The reality is it still can’t raise any more money because the share price has fallen so much that if it were to raise new money now at this share price, it would dilute the existing shareholders way too much. And that’s just not a thing that these types of vehicles realistically will do. So the listed fund is effectively frozen. Meanwhile, its revenues, the actual revenues that it, the stuff that it currently owns, generate have been falling ever since they first started disclosing the numbers a few years ago. And as interest rates rise, the cost of its debt is going up.

Michela Tindera
Well, that sounds like a precarious situation. What’s going on with their debt now?

Kaye Wiggins
Well, actually, they’ve just refinanced it. So they’ve taken out this new, what’s called a revolving credit facility, which is kind of a little bit like a credit card, but this one is worth $700mn. So they used to have a similar facility from JPMorgan, which was worth $600mn. This new one is with Citi National Bank, which calls itself the Bank to the Stars. So, they’ve got this new debt. The thing that remains true is that the cost of servicing that debt will rise as interest rates rise. So the new debt is 2 per cent above a sort of daily interest rate that’s based on transactions in financial markets. So it does go up when interest rates go up. Meanwhile, obviously, the revenues from the existing song portfolio have been falling for the last two years. So basically they’re in this situation where if those interest rates keep going up and if the revenues from the songs continue to fall, then it’s going to be difficult for them to figure out how to pay their dividend, which is basically what the shareholders are really interested in.

Michela Tindera
So what are Hipgnosis and Merck say about all this?

Kaye Wiggins
I mean, people at Hipgnosis seem so far to be able to see a few different ways that it could start generating more money, like they would point to the kind of Covid and of Covid restrictions. And as people are playing more concerts and as pubs and bars are back open again, there’ll be more music that’s getting played. So maybe that improves things. And also they point to like the general growth of streaming. More and more people are, you know, downloading Spotify and using it to listen to music. But my point really is that as interest rates rise, that’s going to ratchet more and more and more pressure on them to increase revenues.

Michela Tindera
And then the next step here is actually borrowing money and using the songs as collateral. So the listed Hipgnosis fund has done this, and then KKR and Blackstone have gone one step further and issued securities based on the royalty revenues. So how does that all work?

Anna Nicolaou
Structurally, those securities are the same thing as subprime mortgages. Obviously, there’s difference when you’re talking about a mortgage versus a song, but they are, I mean, there is definitely kind of a parallel there in terms of just Wall Street getting creative, if you want to call it, with, you know, how they’re creating strategies and what kind of things can actually be used as collateral, which is very interesting.

Kaye Wiggins
Yeah, it’s kind of crazy, right? Like in the same way that like, you know, if, if a person doesn’t keep up with the mortgage repayments on their house, then, you know, the lender can come along and, and take control of the house. Like, think about what’s going to happen if this goes wrong. If people don’t repay these debts, then the lenders are going to take control of, of what? Like the right to make money when people listen to Leonard Cohen songs. You know, it’s a very kind of interesting piece of Wall Street financial engineering that’s been applied to music here.

Michela Tindera
So like we talked about earlier, you know, this idea of investing in song catalogues worked as an investment opportunity in a really low interest rate environment. But obviously, you know, times are changing here. Where do you see all this going in the future?

Kaye Wiggins
I mean, right now, it’s very hard to see this doing well in the next few years. It’s much more difficult as a proposition now to investors because basically if you’re talking to an investor now and you’re offered to them is, hey, we can we can offer you a steady recurring revenue, they’re going to say, well, I can get that from government bonds these days, you know, at a much higher rate than I ever have been able to in the past few years. So what they call a risk-free option is much, much more attractive than it has been for a really long time. And the other reason why it’s a problem for them is because all of these models, whether it’s the Hipgnosis listed vehicle, whether it’s the Blackstone funds, they’re using debt, right? And so the cost of that debt is just becoming much more expensive the more that interest rates rise.

Michela Tindera
Well, Anna and Kaye, thanks for coming on the show.

Anna Nicolaou
Thank you for having us.

Kaye Wiggins
Thank you.

[MUSIC PLAYING]

Michela Tindera
Behind the Money is hosted by me, Michela Tindera. This episode was edited by John Buckley. Topher Forhecz is our executive producer. Sound design and mixing by Sam Giovinco. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.

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