Round Hill Music is preparing a public offering on the London Stock Exchange to raise $375 million to cash out its Music Royalty Fund I LP. That fund, since its launch in 2012, has so far made $115 million in royalties, mainly from acquired music publishing assets and some master recordings.
Music Royalty Fund I LP closed — i.e., stopped taking in new money — in 2014 after raising $209 million from institutional investors, according to the company’s website. It subsequently spent over $250 million buying music assets, according to a 2018 Round Hill press release, that now have an appraised value of $363 million, according to an intention to float document on the planned initial public offering filed with the U.K.’s Companies House.
Round Hill is expected to register the stock on the Specialist Fund Segment of the Main Market of the London Stock Exchange in an offering that will be overseen by Cenkos Securities PLC. (If this offering is successful, this deal will be the third biggest IPO run by Cenkos, besides a $1.285 billion initial public offering back in 2014 and a $393 million IPO in 2017. The investment bank has run two other hundred-million-dollar IPOs, one for $350 million in 2016 and a $100 million IPO in 2015. All other IPOs it ran were well under the $100-million mark, according to the tombstone page on the firm’s website.
Round Hill Music, which administers the music rights for the fund, plans to continue in that role after the offering. News of the Round Hill offering was first reported by Music Business Worldwide.
The planned acquisition of the Fund I portfolio of music assets consists of some 40 catalogs and includes classic tunes like “What A Wonderful World,” “She Loves You,” “Happy Together,” “Total Eclipse Of the Heart,” “When A Man Loves A Woman,” “Stop! In The Name of Love,” “You Can’t Hurry Love,” “I Feel Good” and “Santa Baby” to somewhat more recent hits like “Just The Way You Are (Amazing),” “Pretty Fly (For A White Guy)” and “Need You Now.”
Within the portfolio of music publishing, master recordings and neighboring rights, the to be acquired assets — according to a December 2015 Round Hill investor presentation used to raise capital for its Royalty Fund II — included then the Big Loud Shirt catalog, which was acquired in November 2014 for about $34 million in equity funding; the Eddie Holland song catalog, acquired in December 2013 for about $22 million in equity funding; and the Adage V catalog, which includes “The Land of 1000’s Dances,” “Mercy Mercy Mercy,” and “I Like It Like That,” for nearly $12 million in January 2011. It’s unclear if additional debt financing was used to make those acquisitions. Since the company raised $209 million and spent over $250 million in buying assets, it implies the company either used $40 million in debt or re-invested income from its previous acquisitions, or a combination of both debt and cash flow, to make some of its Fund I acquisitions.
While providing a lucrative and steady income flow, older classic songs also carry termination risk for the U.S. rights and thus royalties paid in that market, due to the country’s Copyright Act of 1976 (which gave creators of songs written in 1978 or later the right to reclaim copyright ownership after 35 years, subject to certain requirements; and after 56 years for songs written prior to 1978). On the other hand, older songs are considered a more sure bet than newer hit songs, because you can never tell which tunes are going to stand the test of time to one day be considered iconic classics.
According to the Intention to Float document, Round Hill says the music properties owned by its Royalty Fund I has generated over $115 million in net royalty income, also known as net publisher’s share or gross profit, after paying songwriter royalties. In a January 2018 Round Hill press release, the company said that fund’s holdings had generated more than $55 million since its inception, which means that the fund made $60 million of that $115 million total in the last 2 years and 10 months.
Currently, that portfolio’s gross profit comes 32% from the rock genre, 24% from country songs, 23% from pop tunes and 6% from R&B, with other genres combined coming in at 15%, according to the document filed with Companies House. Royalty Fund I holdings are further broken out out by licensing type, with 38% of gross profit coming from performance royalties, 22% from synchronization, 16% from mechanical, 2% other, while another 22% of gross profit comes from master recordings owned by the fund, which include the Offspring catalog and the older albums in the Bush catalog.
Going forward, Round HIll’s document says the Fund I company, when public, intends to continue to make further acquisitions, which will likely consist of small to medium sized catalogs with 100 to 1,000 songs of classic older songs that are diversified by artist, genre, decade and royalty type. It also includes the possibility of acquiring outright or an interest in other companies that own catalogs. In addition, the company says it may use debt or additional stock shares to pay for such acquisitions. All future acquisitions would be subject to the approval of the public company’s board of directors and its shareholders, and subject to other restrictions/guidelines that will be outlined in the prospectus, expected to be filed later this month.
Besides Royalty Fund I, Round Hill Music has also raised an additional $263 million for its Royalty Fund II LP, which closed in December 2017 and among other assets, made the $245 million Carlin America acquisitions. To date, Round Hill says that between Fund I and Fund II it has spent over $650 million in acquiring more than 70 catalogs comprising more than 128,000 musical compositions; and it adds those assets have generated over $175 million in net publishers’ share, which it says calculates to a gross internal rate of return in excess of 17% of capital outlay. But that return is based on an assessment of the value of the assets and won’t turn into an actual payday until the assets are actually sold. The company says in the future, with regards to Fund I, it is targeting total returns of 9-11% of revenue per year; and a dividend payout yield of 4.5%.
In looking at the deal, some industry financial executives speculate on why Round Hill, which is based in New York, decided to do a public through the London Stock Exchange. Those sources suggest going public in the U.K. in particular and in Europe in general is easier because it’s less expensive and there are less stringent reporting requirements. Another consideration in using the London exchange: Thanks to publicly traded Hipgnosis Songs Fund Limited, potential U.K. investors probably will more easily understand the Round Hill offering.
What’s more intriguing to industry observers is how Round Hill has chosen to deal with providing current investors, some of which have been in the fund for 10 years, with a return on their investment. As one music industry financial executive familiar with buying and selling music assets puts it, “Round Hill has got a tricky situation with different funds that have different investors with different expiration dates. The question is how do you provide investors an exit out of one fund and not the other?”
“But if you can align everybody into a similar class of stock that is publicly traded,” then the investors themselves can make the decision on if and when they want to cash out, that source says. So while the IPO will initially provide a way for Fund I to wind down, it may also be a vehicle for investors in Royalty Fund II to also realize the value created by their investments. In fact, the filing says the plan for the planned soon-to-be-public entity may also include making acquisitions from Round Hill’s already owned other music assets — which implies those owned by Royalty Fund II, including its $245 million Carlin America acquisition.
According to sources, both Royalty Fund I and Royalty Fund II have an early asset liquidation period of five years and outside wind down dates to sell off assets and provide investor returns of 10 years. Based on when they were each launched, that suggests Royalty Fund I outside date is 2022 and Royalty Fund II’s early unwind date is 2021. Meanwhile, the company also says it has also been raising funds for Royalty Fund III.