You might not be a Justin Bieber or Beyoncé fan, but you could stand to gain every time Baby or Single Ladies is played.
Investors are making money via an interesting and unusual source – the Hipgnosis Song Fund Ltd.
The fund pays royalties to investors each time hits from its extensive catalogues are played on the radio, bought on CDs or vinyl, streamed online or featured in the media.
The move comes as the investment management sector has sought ways to differentiate in a volatile market.
Abigail Day, Associate Director at Manchester’s Sellick Partnership believes that the “sector is diversifying as a protection measure against a downturn in interest rates, equity or fixed income markets.”
She says that one of Sellick’s clients, north west-based Seneca Investment Managers, was one of the first to invest in the Hipgnosis fund.
Despite initial problems generating funds from investors, Hipgnosis Songs Fund Limited raised enough to fund the acquisition of copyrights in June 2018, commencing trading on the London Stock Exchange as SONG in July.
It was founded by music industry executive and entrepreneur Merck Mercuriadis, who has managed world famous artists including Nile Rodgers, Beyoncé, Elton John and Guns N Roses.
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Richard Parfect, a fund manager at Seneca, says the company found it to be a compelling investment proposition. “We have been investing in the alternative space for some time as we like ideas that are different from the vanilla asset classes that most investment industries will focus on.”
Gary Moglione, also a fund manager at Seneca, explains that the vast knowledge and experience of Hipgnosis’ team of music industry veterans was also a major pull.
“Merck Mercuriadis knows the industry inside out. We feel that he can identify the best catalogues and complete the purchase at the right price in an industry that is renowned for being difficult.”
Another attraction is the upturn in the music industry since 2015, sparked by the emergence of streaming services such as Spotify.
“From 1999 to 2014/15 the music industry total spend was in decline,” explains Moglione.
“This was driven by the rise in internet usage and people working out that they could download music for free from the net.
“As there was no legal alternative to downloading from the internet, you found a lot of people who wouldn’t normally act illegally, doing so.
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“The emergence of Spotify provided a reasonably priced alternative to downloading music illegally with the same availability to the music universe, so it completely changed the dynamics.
“Now piracy is in decline and subscription to streaming services is growing rapidly.
“A whole range of people are now buying music via subscribing to streaming services, from teenagers to grandparents to travelling salesmen who have Spotify in the car.
“They are subscribers to music rather than consumers so it’s a complete disruption to a market which had been in decline for 20 years and this is what we like about it.”
There are further prospects for the fund due to potential new legislation.
In January 2018, The US Copyright Royalty Board (CRB) ruled to increase songwriter rates for interactive streaming from 10.5% to 15.1%.
Though this is currently under appeal by Spotify, Google, Pandora, and Amazon, if upheld this would constitute a 44% rate increase in songwriter royalties over the next five years.
“If the legislation were adopted this would provide a major revenue uplift in the worlds biggest music market,” says Moglione, who also predicts that YouTube will eventually have to pay more for royalties, providing another lucrative uplift.
In further music to investor’s ears, Moglione also points to the growth opportunity presented by emerging markets such as China in the future.
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“As these markets become more wealthy, digitise, and more people get mobile phones, there will be access to billions of people who historically didn’t spend before on services such as Spotify.
“ The market can potentially grow in a big way and will it driven by emerging markets.”
Day believes that the move into more relatable investments offers major opportunity for the investment management sector here in Manchester, especially in terms of talent.
“People who were previously unknowledgeable about investment management will find this type of investment more interesting, understandable and appealing.
“Going forward, not only could we see the sector grow, but also the need for highly skilled fund managers who want to think outside of the box in cities such as Manchester, attracting talent from places like Edinburgh and London.”