Less than a month after a $54 billion stock spinoff by Universal Music Group (UMG), three of the world’s biggest private equity players — KKR, Blackstone and Apollo Global Management — are making billion-dollar bets on the music business.
KKR, which has $429 billion in assets under management and in March announced that it would partner with BMG on a $1 billion fund to buy recording and publishing rights, on Oct. 19 closed its own deal to buy Kobalt Music Royalty Fund II, a package of recording and publishing rights, for $1.1 billion, with a group of investors called Chord Music Partners.
Blackstone, which has $684 billion in assets under management, is also doubling down on the music business. After purchasing performing rights organization SESAC in early 2016 for what sources say was $1 billion and then spending another $385 million earlier this year to buy eOne Music — which was just renamed MNRK — Blackstone has bought a stake in Merck Mercuriadis‘ investment management and publishing administration company, Hipgnosis Song Management (renamed from The Family (Music) Ltd.), plus earmarking $1 billion to buy music assets for a private fund separate from the public Hipgnosis Songs Fund.
Apollo Global Management, which has $455 billion in assets under management, is also getting into the music industry by committing up to $1 billion in funding to Sherrese Clarke Soares‘ newly launched HarbourView Equity Partners, which will buy entertainment assets such as recording and publishing rights.
Together, these three investments amount to “a game-changer,” according to Guy Blake, managing partner at Granderson Des Rochers, which advised on the sale of Timbaland’s producer royalties to Hipgnosis, among other deals. “This is the highest level of investors coming into the music market,” says David Pullman, the investor who did the “Bowie bonds” deal in the 1990s and now runs The Pullman Group, which buys music publishing rights and other entertainment income streams. “The industry doesn’t get any more accepted by Wall Street.”
Even bigger funds could be waiting on the sidelines, say sources — including PIMCO (with $2.2 trillion in assets under management and currently sniffing around music asset deals; and BlackRock (with $9 trillion in assets under management), which invested $300 million with Primary Wave Music in 2015.
Smaller private equity players have been investing in the music business for years. That list includes the likes of Northleaf Capital, with $18 billion under management, and Caisse de dépôt et placement du Québec (“CDPQ”) entering a strategic alliance just last week with the Spirit Music Group and bringing $500 million to the table; Providence Equity, with $45 billion in capital commitments, backing Tempo Music to the tune of $1 billion. While besides having backing from Blackrock, earlier this year Primary Wave did a deal with Oakview Capital Management, which invested ing $350 million in Primary Wave Music, buying an undisclosed piece of the company as well as providing funding for music asset acquisitions.
What’s drawing the bigger investors now into the music space are the number of recent deals that near or exceeded the $100 million mark. Some executives believe big players like these won’t be interested in transactions smaller than $25 million; and some, like Barron International Group chairman/CEO Lisbeth Barron, think they’re aiming for deals worth $250 million or even $500 million. And while they may be initially committing $1 billion to the market, Pinnacle Financial Partners executive vp music sports and entertainment Andy Moats says they can afford to pull the trigger on bigger acquisitions should a deal prove attractive enough. “They don’t have maximum investment ceiling,” he says.
Other factors attracting big equity is the search for higher returns. “Interest rates are so low that institutional investors have no ability to invest in bonds, which leaves investment managers with a mountain of cash that needs to go somewhere,” says a music asset trader. Or, as Moats puts it, “There is a ton of liquidity in the market looking for a place to invest when they can find yield.”
When investors look around, they see music as a growing marketplace, with steady and reliable income streams that are recession proof and are not correlated to the stock market — as was proven during the pandemic.
“Where better to invest that to put their money in an industry that is recession proof, with reliable and growing revenue,” asks Lisa Alter, partner with the law firm Alter, Kendrick & Baron, which often handles the legal aspect of many music asset deals. Or as the investment banker Barron puts it, the private equity investors “see positive cash flow in a growing industry unrestricted by geography and unhindered by political events or how the economy is performing.”
Over the last five years, the music industry has experienced changing circumstances that have attracted private equity firms, Barron elaborates: The growth of streaming has transformed consumer behavior and whereas the music industry was once concentrated in Europe, North America, Japan and a few other territories, “it is now undergoing globalization with a growing presence in China, India, Korea and throughout South America.” On top of that, she adds, millennials are spending more money on music than past generations, while technology advancements in smart phone and speakers are boosting music’s availability. And new income streams are also coming from social media, gaming sites and fitness businesses like Peloton.
At a time when music assets are already trading for historically high multiples, it’s possible that this influx of more potential buyers with even deeper pockets could turn out to be too much of a good thing. “That has to cause pricing to go up in the short term,” says one music asset buyer. As demand grows, there’s also a question of whether supply can hold up. “It seems like now we have a lot of money chasing a finite amount of assets,” says another music asset buyer.
It’s also possible an increase in the capital gains tax could slow music assets coming up for sale. President Biden seems intent on raising taxes and some fear any increase to the capital gains tax might be retroactively applied, affecting deals already made this year. This would diminish the payout rights holders have been receiving and, if that increase is large enough, sources say it will absolutely impact the sales of music assets. In fact, if the capital gain tax is raised too high, songwriters who want to cash out might instead revert to taking loans out against their publishing rights and royalty payments or even look to securitize debt similar to Bowie bonds, according to financial sources.
The bigger question, though, is whether one or more of these private equity firms will try to roll up its investments, either by combining recording and publishing rights or matching them with a distribution or technology platform. (Blackstone and KKR could already be making tentative steps in that direction.) While it would be difficult to buy any of the major labels, there are plenty of smaller companies that would make tempting targets for a roll-up, says Barron.
And when private music companies are trading at 20 to 22 times EBITDA (earnings before interest, taxes, depreciation and amortization) and UMG now trades at 30 times EBITDA, the market is obviously rewarding scale, notes Round Hill Music founder/CEO Josh Gruss, who says, “That is quite an arbitrage there.”