Music may soothe the savage beast, but it also does wonders for the wealthy fund investors who earn double-digit returns on the rights to some of the world’s most famous melodies.
Round Hill Music Royalty Partners, Kobalt Capital and Bicycle Music all offer private equity funds that allow high-net-worth investors to share in the revenue-generating potential of some of the most popular songs ever recorded, across multiple generations and music genres. The investment model is simple and has been used by some of the world’s largest pension funds and private equity firms, including the Ontario Teachers’ Pension Fund and KKR.
“We’re at a very opportunistic time to get into this space because the digital world is allowing music to go places where it was never distributed before,” said Round Hill CEO and Chairman Josh Gruss. “Growth is coming from the international market.”
The funds acquire the rights to catalogs of music and individual songs, which they own for a specified number of years. Every time one of those songs is played, purchased or used for any commercial purpose—anywhere in the world—the fund collects the royalties and investors earn returns.
Multiple sources drive income to the funds. Among them, downloads from Apple’s iTunes service, which surpassed 25 billion song purchases in February 2013. A 99-cent download on iTunes generates 9.125 cents to the owner of the song’s publishing rights, according to Gruss.
For example, Round Hill owns the rights to Land of a Thousand Dances, written by Chris Kenner and popularized by Wilson Pickett in 1966. The song appears in the movie Forrest Gump and various video games, and still receives significant radio play. That one song generates royalties of $300,000 to $400,000 a year, according to Gruss.
Those royalties enable music funds to produce “annuity-like cash flow streams,” said Gruss, whose $200 million Round Hill Music Royalty Fund raised $52 million in its first closing.
The Round Hill fund has 15 investors, including limited partnerships, family offices, foundations and wealthy individuals, Gruss said. The fund’s portfolio includes more than 4,000 songs recorded by artists such as Frank Sinatra, Billie Holiday, the Beatles, Aerosmith and Bruno Mars.
Kobalt Capital started its investment fund in 2011 and has attracted more than $70 million, mostly from family offices, foundations and ultra-rich investors. The fund owns a catalog of more than 4,000 songs, including popular works by the B-52s and Fleetwood Mac, according to CEO Johan Ahlström.
Bicycle CEO and Chief Investment Officer Roger Miller declined to disclose the amounts invested in his firm’s funds. More than 40 investors, including wealthy individuals, pension plans and insurance companies, are participants, he said. Bicycle’s funds have acquired about 100 catalogs of all sizes, including songs by Tammy Wynette, Cyndi Lauper, Marvin Hamlisch and Nine Inch Nails.
“The primary purpose of the funds is to acquire the underlying rights, primarily publishing rights, but also master recording rights, likeness rights and other rights that underlie classic music that’s been around for a while and will continue to be around for a while,” said Miller.
Returns exceed 10%, Miller said. The minimum investment is $1 million.
Round Hill’s Gruss declined to discuss his fund’s returns but noted that industry expectations are in the 10% to 13% range. “It’s a current income vehicle, so we expect a high coupon type of yield,” said Gruss.
Kobalt’s Ahlström said his firm offers investors a choice between two share classes. One allows them to stay invested and roll up their value for an exit; the second pays ongoing dividends. The firm targets an internal rate of return of 12% to 14% and “high-single-digit” ongoing yields. The firm has reopened its fund and is raising capital, with a minimum investment of $3 million.
Gruss, meanwhile, paints a positive outlook for this investment niche.
“Seventy percent of the royalties we earn are from outside the U.S. If you think about a country that 10 years ago maybe had 10 TV stations, today it may have 100. All that programming requires music,” Gruss said.
“Music is the engine of the digital world.”
—Anthony Greco
