4 issues we realized from Merck Mercuriadis’ Q&A with Hipgnosis Songs Fund analysts

Earlier this month, UK-listed Hipgnosis Songs Fund (HSF) printed its newest fiscal outcomes, and so they have been speckled with up-pointing inexperienced arrows.

Living proof: HSF’s gross revenues have been up 7.5% YoY within the six months to finish of September 2022, whereas internet income was up 5.8% YoY.

Following the publication of these outcomes on December 8, the corporate held a Capital Markets Day on the Maxwell Library in Savoy Place, London.

Displays on the day got here from varied senior members of Hipgnosis Music Administration – that’s HSF’s funding advisor – together with Ben Katovsky (President/Chief Working Officer), Ted Cockle (Chief Music Officer) and, in fact, Merck Mercuridadis, CEO & founding father of the Hipgnosis group of firms.

Bon Jovi’s Richie Sambora even appeared to carry out an intimate acoustic rendition of Livin’ On A Prayer.

For MBW’s eyes and ears, maybe probably the most fascinating a part of the morning’s occasions got here when Mercuriadis and his group have been grilled by varied funding analysts about HSF’s half-year outcomes, and its future.

Listed below are 4 feedback from Mercuriadis that stood out…

1) “I’m at all times going to be the supervisor of those catalogs…”

The primary query confronted by Mercuriadis touched on HSF’s standing in comparison with its sister $1 billion non-public fund – Hipgnosis Songs Capital – whose investments are additionally managed by Hipgnosis Music Administration (HSM).

The identical query additionally touched on the present share worth of HSF, which continues to commerce at a big low cost versus the corporate’s printed ‘Operative NAV (Internet Asset Worth)’, which most not too long ago got here in at $2.2 billion (primarily based on a good worth of $2.67 billion).

Mentioned Mercuriadis: “I believe as most buyers will know, I’ve a ‘put’ in my settlement, the IA [investment advisor’s] settlement with [Hipgnosis Songs Fund] that if the fund have been ever to be bought or somebody have been to ever take it over, I might have the primary alternative to [acquire it].”

“It’s essential to me after I have a look at these songwriters within the eye and successfully purchase their metaphorical kids, that I’ve integrity and credibility [to oversee] the success of the corporate.

“I’ve made positive, maybe at industrial sacrifice to myself and to the IA [investment advisor], that each on the [HSF] facet of issues and even with my non-public fund with Blackstone, that I’m at all times going to be the supervisor of those catalogs.”

“I’ve made positive, maybe at industrial sacrifice to myself and to the IA, that each on the [HSF] facet of issues and even with my non-public fund with Blackstone, that I’m at all times going to be the supervisor of those catalogs.”

Mercuriadis has this month already touched on his disappointment in HSF’s present share worth, which has dropped by round 32% YTD..

He famous when asserting HSF’s outcomes on December 8: “I share the frustration of Shareholders that the true worth of our iconic Songs shouldn’t be mirrored in at present’s share worth. As Songs are a brand new asset class, we perceive that the market has considerations about each valuation and low cost price, significantly when our NAV is secure in a macroeconomic surroundings by which the worth of many different property are declining.”

Mercuriadis additionally famous his optimism sooner or later worth progress of Hipgnosis Songs Fund, nonetheless, commenting that the agency’s present share worth in his eyes represented an “unbelievable funding alternative”.

On the Capital Markets Day in London, Mercuriadis continued on this theme, stating: “[T]right here’s unbelievable worth right here, and that unbelievable worth is one thing I’m decided goes to be mirrored within the share worth.

“I’ll work tirelessly together with our individuals – [Hipgnosis Song Management] is now greater than 50 individuals robust within the UK, with extra individuals in America – to [insure] that the share worth displays the true asset worth of this firm as quick as we probably can, by at all times telling the reality, working exhausting, and including worth.”

2) Persons are nonetheless writing “very important checks” in music’s M&A world…

There’s little question about it: with macroeconomic pressures swirling, acquisitive exercise in music rights in 2022 has been far slower than in 2021, when over $5 billion was spent on copyrights.

Nevertheless, that doesn’t imply issues have floor to a halt.

“We’re seeing multiples being paid which might be considerably above the place [Hipgnosis Songs Fund’s] NAV is.”

At HSF’s Capital Markets Day, Mercuriadis pointed to a Genesis and Phil Collins catalog not too long ago being bought to Harmony for a nine-figure sum, in addition to Major Wave hanging a $2 billion take care of Brookfield – $700 million of which was instantly deployed to purchase present Major Wave-managed property.

Continued Mercuriadis: “However a whole lot of the those who have come alongside within the final couple of years which have competed in opposition to us are on the market [today] writing very important cheques.

“I can’t touch upon the person catalogs. However what I can inform you is that we’re seeing multiples being paid [in 2022] which might be considerably above the place [Hipgnosis Songs Fund’s] NAV is. I’m not speaking about the place our share worth is, however the place our NAV is.”

3) Youthful songs are making up a smaller share of HSF’s portfolio – however have a singular benefit

Hipgnosis Music Administration’s group have been requested on the Captial Markets Day in regards to the common age of songs in HSF’s portfolio which might be lower than 10 years previous. Such songs, versus these over a decade previous, are sometimes anticipated to see a decline in annual earnings – a ‘decay curve’ – till they hit an annual income plateau.

Chris Helm, the CFO, of Hipgnosis Music Administration, revealed that, of the songs owned/part-owned by HSF which might be lower than 10 years previous, the common launch date was 2016 (i.e. six years in the past).

Merck Mercuriadis famous that youthful songs “proceed to make up a smaller a part of [HSF’s] portfolio”. Nevertheless, he then acknowledged that these under-10-year songs include distinctive benefits: Specifically, you’ll be able to typically purchase them cheaper than the ‘classics’… and so they may simply find yourself making a living for longer.

“It’s no secret to anybody that the Pink Floyd [recorded music] catalog was on the market not too way back, and in the long run that catalog received’t commerce.”

“[We] solely purchase songs which might be terribly profitable and have what we imagine is cultural significance,” stated Mercuriadis, pointing to Senorita, carried out by Camila Cabello and Shaun Mendes. Launched in 2019, that music has over a billion streams on Spotify; Hipgnosis owns a slice in its by way of its acquisition of Andrew Watt’s catalog in 2021.

Mentioned Mercuriadis of shopping for sub-10-year songs: “These are songs we purchase on low multiples relative to the remainder of the portfolio, generally single digit [multiples]. We all know they’re going to decay. However on the similar time we all know we’re additionally going to get better than the baseline [figure used for an acquisition multiple] for a few years past what we’ve purchased them at. Then they’ll trough and stage off.”

Added Mercuriadis: “It’s no secret to anybody that the Pink Floyd [recorded music] catalog was on the market not too way back, and in the long run that catalog received’t commerce. [With] a catalog as iconic as that, on the floor it seems superb, however under the floor, you’ve received unbelievable data which might be going to enter public area – as a result of it’s a catalog that’s over 50 years, hitting 60 years, previous.”

Mercuriadis then stated to a JP Morgan analyst within the room: “You’ve additionally received an viewers [for Pink Floyd] that features me and also you; Want You Had been Right here is my favorite file of all time. However [in investment terms] it’s an viewers with a restricted life left to it. Whereas in case you’re the 14-year-old woman that was listening to Senorita three summers in the past, you’ve hopefully received one other 70 years of life left in entrance of you, and one other 70 years of consuming these unbelievable songs that turn out to be a cloth of your life and a part of the material of society.”

4) “The sync division of Sony, Common, or Warner… will inform you we’re the perfect”

One of many highlights inside Hipgnosis Songs Fund’s latest half-year numbers (to finish of September ’22) was its end in sync revenues, which have been up 32.0% YoY to $9.78 million.

Whereas answering a query about when HSF catalogs will finish their administration agreements with the three main music publishers, Mercuriadis gave a nod to what he believes is his firm’s distinctive standing in sync – and the working relationship it enjoys with the majors for syncs on copyrights HSF owns or part-owns, however the ‘Large Three’ administer.

“We have now important catalogs [administered by] Common, Sony, Warner, Kobalt and so forth,” he stated. “All of them have their strengths, all of them have their weaknesses, and we all know these in all probability higher than anybody. Our chief concern is so as to add worth for our shareholders; on the similar time we’re usually including worth for Common, Sony, and Warner as properly.”

“The sync individuals [at major music companies] love us, as a result of we’ve created a stage of effectivity amongst these iconic catalogs they’ve by no means [seen] earlier than.”

He added: “On the advocacy entrance, I’m very essential of these firms as a result of [Mercuriadis believes] they maintain again how songwriters are being paid. However in the end in case you get previous the senior management of these firms and also you get to the sync individuals… they love us, as a result of we’ve created a stage of effectivity amongst these iconic catalogs they’ve by no means [seen] earlier than.

“On the similar time that we’re working aggressively to actively handle our songs and add worth, [the major music companies are] sending us [sync] requests on a regular basis. In most arms these passive requests not often get answered and acted on in a well timed vogue as a result of there’s a lot paperwork [in music rights]. However after they ship us one thing they’ve solutions in seconds.

“You possibly can go to the sync division of Sony, Common, or Warners and I assure you that they may inform you we’re the perfect [partner] there may be as a result of they’ve been ready to earn more money on the similar time we’re making extra money.”Music Enterprise Worldwide