One could dismiss the concept of investing in music copyrights as too unconventional an option.
A closer look at the sector reveals how it could be an ideal match for pension funds, family offices and high net worth individuals seeking low volatility returns coupled with a long-term income stream.
The definition of ‘alternatives’ has evolved over time. Decades ago most investment funds were overwhelmingly invested in bonds, a time when even an allocation to equities would have been considered an ‘alternative’.
Gradually, investing in asset classes such as international equities and real estate became thought of as the next set of core alternative strategies.
More recently the investment community has begun to consider collectables such as vintage wine, fine art and rare stamps as alternative investment opportunities. However, investors desire consistency and income and, like the financial markets, prices of these assets can experience peaks and troughs as well as entail relatively large entry and exit costs. Investments in music copyrights bring the same diversification benefits yet tend to avoid the asset price ‘bubbles’ associated with fine art or vintage motor cars.
Music copyrights refer to the right given to the creator of an original music work granting the creator exclusive control over the work’s production, reproduction, manufacture, sale or performance, among other factors. By assembling a portfolio of music copyrights which offer diversity across geography, genres and time periods, more chances of generating revenue can be captured, which in turn provide investors with a clear prediction of future income. A single song could provide income for its use in a TV commercial, which may then result in downloads, radio play, CD sales and potentially touring royalties, as well as generating what could be a significant one-off license fee. Unlike the record label side of the music industry which traditionally has relied on CD sales and downloads, music copyrights generate income from multiple sources, creating a diversified income stream that can be reliably predicted based on the performance of ‘back catalogues’ (collections of older, more mature songs).
Music copyrights have long offered stable, predictable long term income streams but it remains a relatively undiscovered investment area. Because music and its underlying copyrights are uncorrelated to wider market movements there is an indication the sector is broadly recession-resilient.
Although the music publishing sector has existed for more than 100 years, it has mainly tended to attract interest from individual investors and private equity firms over the years. Now its clear potential is starting to be discovered by more mainstream institutional investors, certain of which have allocated hundreds of millions of dollars to the asset class in recent years.
While the high street has recently seen a drop in retail sales, listening to music, attending festivals and cinema-going remain relatively immune to the economic storm. No matter the condition of the economy, music is still being played at radio stations, supermarkets, bars and clubs. With every song played on the airwaves, at a live gig or in any shop, steady royalty revenues are generated.
Music copyrights can generate income in a variety of ways including, but not limited to, royalties associated with live performance royalties, radio play, songbooks, CD sales, digital downloads and streaming or the use of a song in a film, commercial or videogame.
A portfolio of music copyrights can deliver consistent royalty cash flows which can be easily and accurately valued through simple discounted cash flow techniques. They can also have a maturity profile far in excess of any fixed interest investment (usually 70 years after the death of the last surviving song writer) making them perfect for a long term liability match and those investors seeking long-term and consistent cash yields. For example, the Beatles back catalogue, one of the world’s more desirable music catalogues, has been generating royalties for more than 40 years, yet the maturity of the catalogue is still decades away.
Amid the current market conditions, investors wanting to diversify away from traditional equity markets need to choose carefully from the many and sometimes exotic alternative options available to them. Music copyrights present an opportunity to invest in an uncorrelated asset class, combining economic resilience with the predictability of long term cash yields. Investing in music could prove the new alternative which provides real diversification in an increasingly correlated investment universe.
