Yield-hungry private credit investors press play on music royalties deals

Although overall leveraged finance activity appears to be hitting low notes, in the potentially lucrative niche of entertainment financing, the music hasn’t stopped.

Media financing, specifically investing in music royalties, constitutes a type of asset-backed lending, an area to which the burgeoning private credit sector has been paying more and more attention. Indeed, private credit investors in the entertainment royalty space say their pipelines are robust. Some used the words “unlimited” to describe opportunity.

The fervor around purchasing rights to music catalogues is nothing new. Since 2018, investing in song royalties “has exploded,” according to Billboard.

Owning royalties on a song, catalogue, or soundtrack means investors see a return whenever that media is licensed for commercial use. Catalogues of songs from well-known artists, including those from Bob Dylan, Sting, Bruce Springsteen and Justin Bieber, have fetched well into the hundreds of millions of dollars. Institutional investors such as Blackstone, Apollo, KKR, Carlyle, TPG, BlackRock, and others have poured into the space, investing billions via debt and equity in buyers of music catalogues.

This year, for example, MetLife Investment Management purchased Raven Capital Management, a private credit firm focused on specialty assets such as music.

“Despite a rising interest rate environment, investments in an expanding market that offer a stable yield and are largely uncorrelated to the greater economic environment remain attractive,” said Andy Moats, Pinnacle Financial Partners EVP and director of music, sports, and entertainment. Pinnacle serves as a lender and commercial bank for the entertainment industry.

“The first quarter of 2023 has been as strong of a quarter as we’ve ever had. I expect activity in our space to slow throughout this year. But then again, I’ve been saying that for five years,” Moats added. “It hasn’t happened yet.”

Music streaming platform Spotify announced that as of March, the company’s all-time payouts to music rights holders was approaching $40 billion.

Of course, the niche is not without risk. Managers say that the complexity of underwriting the deals means that both a depth of knowledge in the credit markets and music space are necessary. Also, audience loyalty can be fickle. As well, exogenous events, such as the Writers Guild of America strike, can stall or cancel the production of content from which investors might have expected to earn royalties.

Facing the music deals
Investors typically characterize royalties as high-quality, durable, uncorrelated, risk assets.

“The returns are similar to a bond-like investment, since you receive steady cash-flow from owning the royalties,” said Alex Popov, head of credit opportunities at Carlyle. “If the artist becomes more popular, and demand for their content grows, you also have the possibility of expanded growth.”

Carlyle Global Credit serves as capital partner to Litmus Music, a music rights investment firm that launched last year with a $500 million commitment from Carlyle. The firm characterizes media and entertainment investments as part of its private credit strategy.

Deal structures within the space typically involve one dollar of debt for every dollar of equity, private credit providers say. Specialties of investors can vary. Some invest in the rights to musicians’ catalogues, betting that they will see a return on investment as the audience of the song or artist grows.

One such entity is HarbourView Equity Partners, which focuses on investing in the entertainment and media space. With an initial $1 billion backing from Apollo, the two-year old investment firm has been active, counting catalogues of Brad Paisley, Lady A, and Florida Georgia Line among its investments. Last year the firm raised $115 million for the first close of its second royalties vehicle, HarbourView Royalties Fund I, according to a November 2022 financial filing.

Pension fund Ventura County Employee’s Retirement Association allocated $30 million to the fund in January of this year. As of Dec. 31, 2022, financial statements showed the company with $1.3 billion in AUM. In February, Fifth Third Bank served as lead arranger, sole bookrunner, and administrative agent on a $200 million senior secured credit facility to support HarbourView Equity Partners’ acquisitions of music royalty assets. Other joint lead lenders included California Bank & Trust, MUFG Bank, Regions Bank and BankUnited.

Another firm is Lyric Capital Group, owner of music publisher Spirit Music Group, which houses songs from artists such as Frank Sinatra, Elvis Presley and Mariah Carey in its portfolio. Lyric received a $400 million debt financing in March, part of the company’s raise of a $800 million fund to aid music asset acquisitions. Truist Financial served as lead left arranger and Pinnacle Financial joint lead arranger.

Other firms invest in the rights to the soundtracks of films and television shows. They make money as the audience of the media grows and is consumed more frequently.

In February, Pinnacle led a $100 million debt facility to media investment firm and record label Cutting Edge Media Music to support the company’s acquisition of artists’ catalogues. Cutting Edge owns the rights to music from films and shows such as Stranger Things, Drive, Whiplash, and The Walking Dead. Following the transaction the company announced a strategic partnership with holding company Village Roadshow Entertainment Group.

A similar firm, Multimedia Music, also recently upsized its existing $100 million fund with another $100 million of debt financing, according to the company. The firm, led by film and music veterans Phil Hope and James Gibb, counts music from The Hunger Games, The Dark Knight, Pretty Woman, iCarly, and Emily in Paris among its investments.

Lenders for the fund included Pinnacle Bank, Regions Bank, Bardin Hill, and Metropolitan Partners Group. According to the company, the fund is a standard mix of senior debt, mezzanine debt, and equity. The new fund has been partially deployed, with the company spending eight figures acquiring STX Entertainment’s film music library, which includes music from composers like Hans Zimmer and Cliff Martinez.

“Our deals typically range from $5 million on the low end to the high eight figures,” said the firm.

In addition to the upsize in March, Multimedia Music acquired the rights to composer Sean Callery’s catalog and income streams. Callery’s body of work includes Homeland, 24, Marvel’s Jessica Jones, Bones, and more. Details of the transaction were not disclosed.

“We are working in a very exciting, but niche, part of the music catalogue business that is starting to attract more investor attention,” said Multimedia Founder and CEO Phil Hope.

“The differentiator is being able to understand the needs of both sides in a deal — the creative and the financial. These catalogues are frequently the artists’ life works and they'll want them going to the right home,” said Multimedia Founder and US Partner James Gibb.

Stream on
Even though valuations have come down slightly, investors believe that the expansion of music streaming and subscription-based services in recent years continues to drive growth, which can offset the rising cost of capital.

“We identified media and entertainment as a sustainable long term investment theme on the premise that we are seeing a structural shift in the way that media is being consumed through distribution channels and globalization of content,” said Matt Settle, Carlyle managing director and Litmus Music board member. “Streaming alone is growing at double digits, and that’s expected to continue for the foreseeable future.”

The exploding popularity of short-form video apps that utilize music like TikTok and YouTube, or gaming apps like Roblox or Twitch, have also created economic upside for investors. Artists can experience resurgences in popularity, like Kate Bush, whose 1985 song “Running Up That Hill” was featured in the latest season of Stranger Things and subsequently went viral on TikTok. The song was the number one streamed song in June 2022, according to music data provider Luminate. The firm estimated that Kate Bush, who owns her music, made $3.75 million in royalties between May 27 and June 8.

“In terms of predicting the next ten years, people didn’t point to Spotify before the streaming era and say that it would drive growth in the space, because it didn’t exist yet,” said HarbourView CEO Sherrese Clarke Soares. “But ten years from now, something else will be here that will expand the way we consume content, and that’s why we say that we’re bullish on IP.”

Featured image by hurricanehank/Shutterstock

This article originally appeared on PitchBook News