With all of that, indie publisher valuations are on the rise at a “level we haven’t seen since the mid-2000s," said Miller, who asked the panel whether these types of multiples are sustainable -- and if not, what might put a stop to the good times.
While there are some things that could derail the music asset valuation outlook -- say, if one of the major digital platforms blew up and fell apart; or if multiples continued to rise and became a runaway train; or interest rates were to rise suddenly and swiftly; or leverage discipline weakened and the amount of debt to equity in deals went out of whack -- the panelists said they don’t really see any of those things happening yet.
“There are a lot of 'ifs' out there, but from where we sit today, everything looks good,” offered David Dunn, a partner at Shot Tower Capital, a boutique investment bank that advises on the sale of music publishing assets. Even with those 'ifs,' there seems to be plenty of runway, maybe as much as five years, before the growth from streaming begins to slow down, other panelists added.
Addressing some of the specific things that have the potential to derail valuations, Massarsky Consulting partner Nari Matsuura said that while there's still lots of room for interest rates to rise, “right now we are not seeing any storm clouds” on the horizon. And if interest rates do rise or investment discipline breaks down, there are ways to hedge against those eventualities. For example, lenders can build covenant mechanisms into their loans to trigger cash flow sweeps that would help them de-leverage, said Denise Colletta, senior VP and team leader in the City National Bank entertainment division.
Next, Miller asked the panelists what’s driving valuations.
Morgan Stanley managing director and global head of entertainment media and sports structured solutions Sherrese Clarke observed that the low interest rate environment, coupled with the volatility in the public markets, makes the stable cashflow provided by music attractive to institutional investors.
“You are seeing streaming driving cashflow,” which is driving valuations, Colletta agreed. Not only is streaming not yet slowing down, but the metadata that comes with it offers investors more transparency. Matsuura noted that streaming growth is further enhanced by the addition of more platforms like Netflix, which needs music, and growing acceptance in markets around the world.
While the multiple can range from 14 times NPS to 20 or 22 times NPS, not all deals are made at those rates. Some catalogs are trading at 8 to 10 times multiples, some of the panelists allowed. Dunn provided an average, saying that on deals he was familiar with, music publishing valuations in the last two years have grown to 15.2 times NPS, whereas in the preceding five years, multiples on publishing asset transactions averaged 10.2 times.
Also driving higher multiples is the fact that, as streaming grows as a component of the industry’s revenue base, the decay rates for song revenues are less dramatic than they were in times past. Previously, decay might have measured at 50% in the second year of a hit song's lifecycle, or half the revenue of the first year. But with streaming platforms, that decay rate may only be 15-20%.
With the decay rate dropping, the question remains: when will that change? As Clarke pointed out, there simply isn't enough data to answer that question yet. But by 2020, noted Dunn, there will be five years of streaming data, which will allow investors to better assess decay rates and even break them down by genre.