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9Questions is our Q&A series featuring key decision-makers in the corporate credit markets — get in touch if you know who we should be talking to!

Perhaps you heard last week that it’s official — it’s Taylor Swift’s world and we’re all just living in it.

Whatever her cultural impact, her tours, records, and films are an economy unto itself — and this thriving ecosystem shows how much wider the entertainment and sports sectors have grown in the past few years. 

Whether you’re manufacturing audio visual equipment for concerts or printing sports uniforms for football teams — there is a huge number of ancillary businesses that support these flourishing sectors. 

So 9fin spoke with Alex Popov, head of private credit at Carlyle, to get a lay of the land of the opportunities in sports and media and why they are attractive sectors to private credit.

1. Carlyle Global Credit has deployed $3bn into sports, media, and entertainment rights since 2018. What attracted Carlyle to those three areas?

Over the last two decades, the way we consume content has changed dramatically. We previously relied on television, radio, print media, and live events to stay informed and entertained. Fast-forward to today and we’re able to consume content on-demand, almost anywhere, and at any time. 

This proliferation of distribution platforms and shift in how we consume content has created a supply-demand imbalance. In our view, content creation cannot keep up with content consumption, and that presents an attractive opportunity for investors. By investing in high-quality content as intellectual property, and supporting the ecosystem around this content creation, we think these assets can generate attractive risk-adjusted returns.

2. Would you say music, sports and entertainment are a recession resilient business — part of the lipstick effect — that people spend money on during an economic downturn, as pick-me-ups?

We view sports, media, and entertainment assets as recession resilient businesses, especially with the shift in economics from a one-time consumption-based model to the subscription based-nature of content consumption. Today, subscriptions to platforms like Netflix, Hulu, and Spotifyare commonplace and are considered manageable for most budgets. 

With the trend of individuals valuing experiences over things, we think the sports, media, and entertainment sector has strong long-term trends where we’re seeing increased value in these assets. Therefore, we consider the demand drivers to be uncorrelated to underlying macroeconomic conditions and pricing is fairly inelastic.

3. Some of the deals you’ve done in the sports, media and entertainment space are equity investments, or have an equity component. Why does it make sense for these investments to sit in your credit business versus your private equity business?

These investments fit well into private credit portfolios, as we believe they mirror the yield profile of a bond-like instrument. Music, TV, film, and sport content is intellectual property, and it is being “leased” to distribution platforms, often in exchange for contractual, predictable cash flow streams. Think songs streamed, tickets bought, and movies watched. 

We believe these investments generally exhibit consistent, predictable, and long-term returns that are high yielding with stable cash flow, and are uncorrelated with traditional assets. We think existing high-quality content can rise in value and increase in yield as it faces higher demand across a range of different distribution platforms. 

We’re focused on identifying embedded growth opportunities — such as future partnerships for content creators, new distribution channels, and alternative ways to commercialize work — to potentially enhance an investment’s existing value.

4. A lot of capital is flooding into sports — what is Carlyle doing to differentiate itself as a provider?

While a lot of content can be consumed anytime anywhere, sport is one of the remaining areas where content has to be watched live. As a result, TV broadcasting and cable have focused their resources on securing this content and the value of sports media contracts has significantly increased. 

That value has trickled down to teams, player contracts and demand for auxiliary businesses and technology. Leagues in the US, in particular, are actively considering the role institutional investors can play on the side of the team. We believe it is still very early innings (no pun intended) in this evolution and having flexible capital that is solutions oriented could present substantial opportunities as the leagues evolve their policies.

Of note, we have done several transactions in the ecosystem of sports, including providing financing to Infront, a global sports marketing company, and Deltarte, a technology and media solutions provider to the sports and entertainment industries. We also led the acquisition financing for a majority stake in Atalanta Bergamo, a family-owned professional football club competing in the Italian Serie A League.

5. A key risk to investing in music is the so-called “decay curve”. How does Carlyle manage this risk?

This is definitely a risk in the industry and something we are very focused on when evaluating opportunities. 

We typically focus on more mature content where ongoing cash flow generation is more predictable, as well content where we believe additional value can be generated. However, some portions of the catalogs we acquire will be younger, so we are acutely focused on modeling individual vintages to understand how the expected decay curve will impact future performance. Content is very much a data driven business. 

Historical performance can be analyzed and sensitized to variables of interest to an investor. For example, how long has a song been in release; what does the initial 1-year, 5-year, 10-year curve look like? How does the artists commercial activities influence older content? 

Carlyle has partnered with music industry veterans to found Litmus Music, which acquires and manages music rights. The Litmus team leverages its collective history in the music industry, in addition to significant third-party data, to arrive at a view.

6. How much do you worry about the reputational risk for artists, actors, movie makers and sportspeople in your portfolios?

Hollywood and the entertainment business is a relationships business. It’s all about who you know and being in business with the right people is paramount. Just like investment firms evaluate the reputational risk of businesses, this also has to be taken into account for the individuals we invest in and management teams we partner with. 

We construct highly diversified portfolios and we avoid relying solely on any individual piece of intellectual property. At Carlyle, we pride ourselves on partnering with businesses and individuals with a strong-track record of performance, of which reputation is a key factor.

7. Music royalties have been a contentious area for nearly 25 years, first with peer-to-peer file sharing diverting revenue and then music streaming. Is the constant evolution of how people consume music a concern for Carlyle?

We think the evolution of how people consume music presents a tremendous opportunity for investors in this space. As I mentioned, with the shift in economics from a one-time consumption-based model to the subscription based-nature of content consumption, we have seen a significantly decreased consumer spend on music over the years. 

In the past, $15 bought you a CD. Today it buys monthly access to millions of songs and performers. We believe streaming, mobile devices, and globalization of music consumption has changed the value proposition in music and made it an asset class that can be evaluated with concrete data.

8. In addition to sponsor-backed borrowers, the firm has invested in family-owned businesses — for example, New Regency, an independent film production company, and Clair, a media tech company. Are family-owned businesses particularly attractive to provide debt to?

When you think of companies in the sports, media, and entertainment ecosystem, many are established family and founder-owned businesses. We believe these companies have historically been under-banked and have a more challenging time accessing the traditional capital markets. When they need capital for M&A or to fund a growth initiative, we observe that they often seek out debt capital because they do not want to give up equity or lose control of their companies. 

These businesses usually are the lifeblood of the families and founders, and so they have a lot of pride in their businesses. The management teams have experience navigating different market cycles and they are managing the business for the long run. Therefore, we see an opportunity to fill the void for these companies and be a true capital partner to help fund their next phase of growth.

9. Looking forward to the future of music, a big part of entertainment right now is the creator economy — is Carlyle thinking about investing in any of our favorite TikTok stars in the near future?

As we’ve said in the past, content is king. There is a huge demand for high quality content and content creators are the most important part of this ecosystem. It’s an exciting time to be investing in this space and the opportunities are constantly evolving. Never say never!

9Questions — Alex Popov, Carlyle — Private credit’s Hollywood moment

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