Guernsey FAQ: A Primer On the New 'Royalty Fund' Model for Music Publishing

Guernsey
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Guernsey

Guernsey, a small island off France's Normandy Coast, is having a moment in the music business. The self-governing British Crown dependency has accounted for well over $1 billion in music publishing rights acquisitions over the last two years. It's not a location typically associated with hyper-funded publishing catalog buyers, but its light regulations and proximity to the London Stock Exchange make it an attractive home for a new breed of music publishing companies.

Two Guernsey-based companies, Hipgnosis Songs Fund Limited and Round Hill Music Royalty Fund Limited, aren't typical publishing companies. They are collective investment schemes, a way for investors to buy into long-term assets that produce steady returns. Such funds typically have a board of directors but no employees to locate and exploit publishing catalogs. Instead, the funds make acquisitions based on the recommendations of investment advisors, separate companies that act like publishers but don't own publishing rights.

It's a lot to wrap your head around. If reading Billboard's article on Guernsey and music royalty funds left you wanting more, here's a FAQ covering the island's collective investment schemes, the royalty fund founders and the roles played by Guernsey's financial services industry.

What is a collective investment scheme?

A collective investment scheme pools money to invest in long-term assets that generate a predictable revenue stream -- infrastructure projects like bridges, wind and solar farms and pharmaceutical royalties, for example. One type of collective investment scheme is well known in the U.S. with over 200 of them listed on U.S. stock exchanges: the real estate investment trust.

How does a collective investment scheme work in music publishing?

The model seen in Guernsey differs from the normal ways companies monetize publishing rights.

A collective investment scheme has two distinct businesses. A music royalty fund raises money specifically to buy publishing rights, not to fund operations and scale the company. A complementary party, the investment advisor, looks and feels like a publishing company but mainly provides investment advice to the fund's board of directors and exploits the publishing rights through sync licensing and other means. By the time the Guernsey corporation raises funds, the investment advisor has a pipeline of catalogs prepped for acquisition and recommended to the fund's board of directors. Although the investment advisor looks and feels like a publisher, it makes money by charging an annual fee to the royalty fund.

Why incorporate in Guernsey?

The island is a “regulatory-light jurisdiction” compared to London's “significantly onerous” regulatory burden, says Philipp Saure, chief investment officer of Tailwind Entertainment, another Guernsey-based music royalty fund launched in 2018. Corporations are also attracted to “[the] speed and certainty on approvals, which is a lot more nimble and faster than in the UK,” says Mariana Enevoldsen, director at Ocorian, Hipgnosis Royalty Fund Limited's administrator on the island. After an administrator is satisfied with the due diligence process, a business registration process usually takes just three days.

Are the royalty funds led by their founders?

No, the founders of the Guernsey-incorporated royalty funds are not led by their founders. While Merck Mercuriadis founded the Hipgnosis Songs Fund Limited, pitched it to investors and remains the face of the company, he is neither a director nor an employee. Rather, Mercuriadis is the CEO of the investment advisor, The Family (Music). Likewise, Round Hill Music founder Josh Gruss is not on the board of the Round Hill Music Royalty Fund Limited. Still, the founders are instrumental in the Guernsey-based royalty funds. “A lot of credit goes to Merck,” says Enevoldsen. “He's the person behind all the fundraising. He talks to investors and promotes the funds. The success of the fund has been driven by him."

Do the companies have employees in Guernsey?

No, a collective investment scheme typically does not have employees. The three music royalty funds are incorporated in Guernsey but hire one of the island's many administrators to handle corporate duties such as day-to-day administration, accounting and corporate secretarial services. (Technically, the Hipgnosis Songs Fund Limited has employees because it acquired Big Deal Music, a traditional publishing company based in the U.S. with employees. But the fund is still administered in Guernsey.) With no support staff, the royalty funds also hire accountants, auditors and attorneys that understand local laws and regulations.

Who watches over the royalty funds?

The funds are overseen by independent, non-executive directors. One of Round Hill's three directors is Francis Keeling, a former head of global publishing at Spotify and executive at Universal Music Group. Hipgnosis's five directors include longtime Sony Music executive Paul Burger and Sylvia Coleman, a former senior vp legal and business affairs at EMI Music. The directors provide a number of important functions: review investments and returns, issue shares, oversee audits, purchase music rights, maintain and grow dividend payments, convene general meetings and supervise the fund's administration and other service providers, among others.

How is the investment advisor paid? 

The investment advisors to Hipgnosis and Round Hill have a remarkably similar, two-tiered fee. The advisor fees are based on a percentage of the fund's net asset value, a reflection that an advisor's workload increases as the catalog grows. Both advisors may also earn a performance fee. Hipgnosis, which did not receive a performance fee in the six-month period ending September 30, 2020, is usually paid in shares of the royalty fund with an 18-month lock-up period, according to the company's Jan. 21, 2021, prospectus.