Inflated growth figures and overvaluation of the music catalogues led Hipgnosis Songs Fund to lose hundreds of millions over the last few years, an independent valuation of the trust has revealed.
The independent valuation put the assets held by Hipgnosis as being worth $1.95bn, within the $1.8-$2.06bn range initially published by Shock Tower Capital earlier this month.
This is 26 per cent lower than what it had valued its own portfolio at on 30 September. Its market capitalisation is currently $830m.
The report revealed the details of how much Hipgnosis had overpaid for its catalogue, with the purchase price of its entire portfolio totalling $2.2bn.
Hipgnosis especially overvalued more recent music, with songs less than 10 years old currently being valued at $155m, compared to an initial purchase price of $256m.
The problems of valuing how much a library of songs is actually worth has long plagued Hipgnosis, leading to accusations of inflated prices that initially started the independent report.
The fund also lost over $70m on inflated growth projections, with 75 per cent of its catalogues missing growth projects by an average of 23 per cent every year.
In total, 67 of its 105 acquisitions are currently worth less than what was initially paid for them, the report revealed.
Taking aim at the fund’s investment advisor, Hipgnosis Songs Management, the report said it had “failed to invest in systems and provide the services required to effectively manage a catalogue of 40,000+ songs generating £120 million of royalty income annually”.
It later slammed the advisor for falling “below industry standards”.
In a statement, the investment advisor said it “strongly disagrees with” aspects of the reports and considers it “to be factually inaccurate and misleading”.
Shock Tower’s independent report also blasted the fund for “excessive spending”, such as dishing out $2m a year for awards shows and public relations, “including significant payments to multiple music industry periodicals”.
Despite the scathing report for the trust, its stock price has actually soared on the news, jumping 8.2 per cent this morning. The trust still sits on more than a 50 per cent discount.
The board of Hipgnosis, which is separate from its management, said it was continuing to assess “all options” for the future of the company and will announce the conclusions of its strategic review by 26 April.
A shareholder vote for any proposals is intended at an extraordinary general meeting soon after.
“Ultimately we believe that this provides the board with more ‘ammo’ in the ensuring blame game between board and investment adviser, especially coming from an external party,” said Numis analyst Gavin Trodd.
The shares spiking may suggest that the market thinks the report makes a sale of the fund’s portfolio more likely, meaning it is more likely for them to exit their holding close to the value of the assets.