The bidding war between Blackstone and Concord for Hipgnosis shows that the music asset class has not lost its allure, Jess Jones writes
Six months ago the mood music surrounding Hipgnosis Songs Fund had shifted to a minor key following a heyday for music royalty investments.
Analysts were pouring doubt on whether the business model, which worked well when interest rates were next to nothing, could still be successful at a time when rates are higher.
Higher rates prompted the fund’s management to suspend dividends last October to avoid breaching the terms of its debt covenants.
There were also questions surrounding how much Hipgnosis’ music assets were really worth.
Recently, an independent valuation of the trust by Shot Tower Capital revealed that inflated growth figures and overvaluation of the music catalogues led Hipgnosis to lose hundreds of millions over the last few years.
But the real problem with Hipgnosis was not the assets or the underlying business model. The problem was the fund’s founder Merck Mercuriadis and his alleged mismanagement of the fund.
The Shot Tower report said Hipgnosis Song Management (HSM), the fund’s investment advisor which Mercuriadis is chair of, 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”.
Shock Tower’s withering report also blasted the fund for “excessive spending”, such as dishing out $2m a year for awards shows and public relations. It later slammed the advisor for falling “below industry standards”.
HSM has said it “strongly disagrees” with aspects of Shot Tower’s report and considers it “to be factually inaccurate and misleading”.
Some have also argued that because Mercuriadis does not own any shares in the Hipgnosis fund, his interests have never been properly aligned with shareholders.
Once the bidding battle is settled, many Hipgnosis shareholders will be hoping to exit with a premium – much in the same way shareholders in music rights fund Round Hill Music did after it was bought by Concord last year.
However, the war between Blackstone and Concord for Hipgnosis ultimately shows that the music asset class has not lost its allure.
While the glamour and trendiness of Hipgnosis’ fund may appeal to some investors on a superficial level, music assets are also a strong financial bet, offering steady returns in a high-inflation market.
One industry source told City A.M. that there is still tonnes of money being raised in the space and the macroeconomic environment is promising given that there is still significant growth happening in streaming.
“The interest in the portfolio demonstrates that private investors believe the portfolio is attractive, at current valuations,” analysts at Numis wrote in a recent note on the Blackstone bid.
Winterflood analysts agreed, saying Blackstone’s interest “signals the continued attraction of the asset class”. They even went as far to say that it can be viewed as “a vote of confidence in the manager, following alleged governance issues and administrative lapses.”
And, as Mercuriadis pointed out in 2022, music assets can withstand more uncertain economic climates.
“If there’s political upheaval,” he said, “or indeed, if there’s a war the way that there is now, the price of gold, the price of oil will be affected, whereas great songs are always being consumed.”
Perhaps this corporate jukebox was valuable after all.