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Shubham Saharan

This article is part of our forthcoming service, 9fin Private Credit. If you're interested in a free trial, contact subscriptions@9fin.com

Taylor Swift is adding billions to the US economy, and her new documentary could be a record-breaker for movie theaters. But just a few years ago, she was making headlines for a different reason, as she fought with music manager Scooter Braun over ownership of her master recordings.

Eventually, Carlyle was dragged into that tussle. As an investor with an interest in Swift’s catalog, the private equity firm was intensely aware of the value of her songs — as was Swift herself, who has gone to the lengths of re-recording them so she can own the rights herself.

Four years later, the financial world’s interest in the world of music rights has only intensified.

Funds like Hipgnosis Song Management, which is backed by Blackstone, have struck deals to buy the rights to music from giant artists like Justin Bieber. Private credit is also getting involved: as we recently reported, direct lenders including Oak Hill, Blue Owl and JP Morgan have discussed backing New Mountain’s efforts to purchase music-rights behemoth BMI.

“The nature of the income streams coming from music is that it's predictable, recurring and recession resilient,” said Matt Settle, a managing director on Carlyle’s credit opportunities team, in an interview with 9fin.

“People consume music, whether or not the economy is good or bad. Therefore when you’re buying a music royalty stream, it functions almost like you’re buying a bond,” he said.

Music rights have been seen as a valuable resource for some time. David Bowie, for example, blazed a trail many years ago with the ‘Bowie Bonds’ deal to securitize royalties to his catalog.

Bowie was quick to spot the eventual transformative power of the internet. But the first wave of music digitization was not exactly welcome — it sent the industry into a tailspin, as music-sharing sites like Napster and Pirate Bay fought with record labels over piracy concerns.

That initial free-for-all enabled the growth of streaming services like Spotify, which eventually evolved from being seen as an enabler of piracy to becoming the way of the future. As Spotify and other streamers struck deals with the record labels, they became part of the industry they once scorned.

If pre-digitization music rights were a jolly campfire, streaming has turned them into a raging industrial furnace — not just via ubiquitous platforms like Spotify and Apple Music, but also through emerging partnerships with other tech-enabled companies like Peloton and Twitch. Goldman Sachs recently estimated that the global music market’s revenue will reach $92bn this year and increase to $151.4bn in 2030.

Those projections have institutional investors excited for what’s to come.

“If you think about the content that still hasn't been monetized, there's still an enormous runway,” one private credit manager told 9fin. “Think private equity 30 years ago: there's a whole bunch of private mom-and-pop businesses that were very valuable that have since transitioned to private ownership. With music royalties, it’s the same thing.”

There are a few different ways to access that ballooning market.

One is to buy artists’ catalogs and make a steady stream of income from royalty and licensing fees. Another is to create your own music rights or royalties company, akin to what Carlyle has done with its $500m investment in Litmus Music.

A third way is to buy an existing, established platform that already collects royalties and licensing. This is essentially what New Mountain is trying to do with BMI.

Buying a catalog directly is a great investment if you know that the songs or the artists in question have a long runway. This can mean seasoned stars with decades of releases and tours under their belt (Stevie Nicks, The Killers) or newer artists with enormous fanbases (OneRepublic).

Basically, investors prefer material that is proven to stand the test of time. There’s a whole science and lexicon behind this: generally, the most prized assets are songs that have remained in the zeitgeist for about seven to 10 years, the middle to tail-end of the “music decay curve”.

As with any investment, there are risks. Some of them are popularity-based: for example, any portfolio entirely dependent on one artist is risky, so diversification is important. What happens if your favored artist simply goes out of style, or — like Michael Jackson — has a posthumous reckoning with history?

Other risks are less immediately apparent, such as the different tax implications based on how catalogs are managed.

If it is managed passively, the investment is not considered a US trade or business, and is a more tax-advantaged structure for foreign investors (this is the same distinction that private credit funds have used for ‘season and sell’ stakes, which are now under threat). If the portfolio is actively managed by a US entity, foreign investors may have to pay tax on the investment.

“There is some tax hair, depending on what the [firm] says they're going to do with the catalog,” said Stephanie Breslow, a partner and co-head of the investment management group at Schulte Roth & Zabel.

From a tax perspective, backing a platform like Hipgnosis or Litmus can be simpler than buying a catalog of music. On top of that, it’s potentially more valuable in the long term, as you are investing in a company with expansion potential as opposed to a static collection of assets. The flip side is that the platform’s growth will depend on its continuing ability to collect new assets; it’s possibly a riskier investment than a catalog.

The third option, of course, is to buy a large licensing firm that already exists. This enables access to a large existing selection of musicians and assets both new and old — all of which will already be generating revenue — and probably a reliable pipeline of incoming talent as well.

BMI is the largest music rights manager in the US, representing artists like Taylor Swift, Rihanna and Ed Sheeran. In the past, it has operated similarly to its slightly smaller peer ASCAP — as a non-profit (SESAC, the third largest music rights manager, has been for-profit for years; it was bought by Blackstone in 2017).

Last year, BMI reported record revenue as it struck more digital and audiovisual agreements.

The majority of that revenue is still being distributed back to artists, but in October, the firm announced that it would be transitioning to a for-profit business model. Since then, it has also boosted the strength of its balance sheet, making its financial profile more attractive to bidders.

BMI was still a non-profit (owned by a group of radio and TV broadcasters) when it explored a sale last year. If the company has more success in its latest sale efforts, it may be down to its decision to pivot to a profit-seeking model, according to a private credit executive who looked at the company last year.

“In order for any private equity investor to invest, it needs to be able to make money,” the executive said. “Last summer, the company had only initially floated plans to become to become profitable, but they were not yet formally for profit. It was very difficult for investors to wrap their their heads around that element.”

If BMI gets acquired, there are a few different ways it could further boost profitability, the executive said. These include charging licensees higher prices, paying copyright owners less, or streamlining business operations, which could include reducing headcount.

The potential for a wholesale change in BMI’s business model has already raised the ire of some artists. They recently wrote to its chief executive Mike O’Neill to express fears over potential changes in the company’s business model.

There are potential regulatory headwinds to think about as well. The company may have transitioned to a for-profit model, but it still operates under the same consent decree with the DoJ from when it was a non-profit, which limits how much it can raise fees.

Quite aside from that, the rush of investment into the music rights sector over recent years has also increased competition. And that competition isn’t just between rival firms — it’s also a fight for streams per artist.

While streaming revenue has steadily increased in the last few years and is projected to continue, the Goldman report we cited earlier also shows the market is more saturated: the average revenue per user on paid streaming music services has fallen by 40% since 2016.

“Mainstream royalties have become a very crowded space,” Paul Lisiak, Founder and CIO of Metropolitan Partners Group, told 9fin.

“In addition to the field of well-funded incumbents, there are many new entrants all of whom seek to employ similar aggregation and exploitation strategies. It is getting a lot harder to find fundamental value outside of lesser-known niches in the marketplace.”

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