In her song “Blank Space,” Taylor Swift sings the line, “I’m a nightmare dressed like a daydream” — a fact the new owners of her recordings are learning the hard way as she uses her pulpit to warn the music industry of “potentially harmful” private-equity companies.
The object of her scorn: Ithaca Holdings chief executive Scooter Braun, who bought her former label, Big Machine, for $300 million with financing from private-equity companies including The Carlyle Groupa minority stakeholder, and other parties.
Her criticism of private equity, made Dec. 12, 2019, at Billboard’s Women in Music gala, highlights the sector’s percolating interest in publishing and recorded-music rights, now spurred by a fast-growing music business and low interest rates that are driving record amounts of money to private markets.
1) Even though creators typically don’t speak up when their record label is acquired and ownership of master recordings change hands, music rights could change in value when the artist or songwriter stands in opposition — especially when it’s a superstar with millions of social media followers. The additional media attention could increase consumption of the catalog, but the artist could limit licensing possibilities.
2) Low interest rates have helped private equity raise record amounts, while demand for assets like music rights has caused valuations to spike.
3) A hot music market isn’t necessarily bad for musicians: Creators who own their rights can find willing buyers at attractive prices.
Rocketing consumer demand and streaming service’s global scale create “almost a perfect storm” that’s “very unique and attractive,” said Rob Amir, partner at Vine Alternative Investments, a 13-year-old firm that provides financing to music and film clients. An optimistic Goldman Sachs forecasted 1.15 billion global subscribers by 2030 and a recorded music market of $45 billion — 2.35 times greater than 2019 revenue (1.65 times 2019 revenue assuming three percent annual inflation through 2030). Developing markets will help the long-term growth investors prize. In China, for example, Tencent Media Entertainment’s four services have 35.4 million subscribers and 661 million users while NetEase Cloud Music claims to have more than 800 million users. In India, Gaana and JioSaavn both top 100 million users, according to reports.
Swift’s claim that she had not yet been contacted by investors is problematic from a business perspective, if it’s true, said Liz Zavoyskiy, principal at MEP Capital, a New York-based investment company. “She absolutely should have been contacted by the investors to make sure the creator approved of the transaction,” she said.
Private equity is one player in the massive “shadow banking” sector that includes hedge funds, pension funds, insurance companies and investment banks, many of which aren’t constrained by the regulations imposed on publicly traded companies and traditional banks. (Some private equity companies, though, are publicly traded, including the Carlyle Group.)
Low interest rates are one factor driving record amounts of money to private markets. A royalty-backed asset — even though buying and selling isn’t easy — looks attractive when the Federal Reserve Bank’s 10-year Treasury bill’s yield is just 1.92%. Not even rising prices and lower yields — the two are inversely related — are turning away investors. Private markets have also consistently outperformed the stock market for several years, sparking added excitement: the average private equity index return is 13.3% and average equity index return is 6.5% over a 25 year period, with more companies choosing to stay private.
Private equity funds raised almost $600 billion in 2019 and ended the year with $1.43 trillion of funds not yet invested, according to Prequin figures released Jan. 10. This amount of money is like chum in the water for entrepreneurial money managers, although there’s not enough funding to go around. As of Jan. 2020, 3,524 PE funds, up 153% from 2015, were seeking a total of $926 billion — more than 50% greater than 2019’s haul.
Private investors’ exuberrance may have become irrational, to borrow the famous phrase from former Fed chairman Alan Greenspan. “A lot of analysis has gone by the wayside by institutions that have a lot of pressure to put capital to work,” said Andrew Kotliar, general partner at MEP Capital. In other words: Private equity funds cannot invest their money fast enough.
But is private equity as deleterious as Swift claims? On one hand, Barry Massarsky, head of Massarsky Consulting and an expert in valuing songwriting and recording catalogs, says the “fierce acquisitions market” is actually a boon for creators that leaves them “in a very comfortable position.” To whit, recent purchases by publishing roll-up Hipgnosis, funded by offerings offerings on the London Stock Exchange, includes rights of The Chainsmokers, Timbaland, Blink-182’s Tom DeLonge, Jack Antonoff, Benny Blanco and songwriter Johnny McDaid (Ed Sheeran’s “Shape of You,” P!nk’s “What About Us”), among others. Sellers are taking advantage of the sellers market.
But some experts fear private investors have created a bubble that’s ready to burst. Private equity deals hit a record high of 11.2 times earnings before interest, tax, depreciation and amortization and public companies are being taken private at record rates, according to Bain & Company. More diversified banks are less susceptible to any one risk than unregulated investors. But the bubble “is bound to burst,” Financial Times’ Patrick Jenkins argued in April. “If recession forecasts materialise, even in the still booming US, overpriced, overleveraged private equity acquisitions could quickly tip into negative equity.” he wrote. “A rash of zombie companies would result” as debt-laden companies lay off workers to stave off, or postpone, bankruptcy.
Private equity deals in music are rare, but it’s also not entirely new. Such firms backed the acquisitions of Warner Music Group in 2003 (by Thomas H. Lee, Bain Capital and Providence Equity Partners) and EMI Music in 2007 (by Terra Firma), although both were later sold. Lately, private investors are funding the growth of midsize publishing companies. Music publisher Primary Wave’s multi-year spending spree was helped by $75 million investments from both the State of Florida and the City and County of San Francisco’s retirement funds. And Ariana Grande’s hit “7 Rings” pays publishing royalties to the Concord Music-owned “My Favorite Things” by Rodgers & Hammerstein — and to the Michigan Retirement Systems’ pension fund that owns 90% of Concord.
While artists have long criticized music’s financial dealings, Swift speaks from an especially effective bully pulpit. “It’s hard to criticize someone who’s hugely successful,” Spotify CEO Daniek Ek told Billboard a year after Swift pulled her catalog and began a public spat with Ek. This time, Swift’s comments received such widespread news coverage, it spurred Carlyle Group co-CEO Kewsong Le to plead his case live on financial news channel MSNBC. “I do think private equity is a misunderstood industry,” he said.
But is it? Private equity firms often buy or invest in a struggling company, cut costs, lay off workers and flip the company in a sale or IPO. Last year, on average, private equity firms held a company for just 4.4 years, according to Bain. And because private equity deals are often highly leveraged, lenders end up taking a financial hit when the business does not produce expected gains.
This scenario played out in the debt-fueled, public-to-private purchase of iHeartMedia by two PR firms, Bain and Thomas H. Lee in 2007 for $18.7 billion, at the peak of the pre-recession buyout bubble. When the broadcast radio business stalled and iHeart buckled under $19 billion of debt, lenders took over the company, converted debt to equity — at a loss — and sold their shares in an IPO. Private equity firms limit their exposure by placing the debt on the company’s balance sheet. Bain and Thomas H. Lee, reportedly broke even on the deal.
Fortunately for Kewsong, history shows the rancor will subside. The Carlyle Group has withstood controversy about its investments in defense contractors in the late ’90s and early ’00s, and the 2008 bankruptcy of nursing care chain ManorCare after a Department of Justice probe into cost-cutting business practices at the expense of the elderly. Carlyle has also had quieter successes, such Beats Electronics, the maker of Beats by Dre headphones acquired by Apple in 2014 for an eye-popping $3 billion.
In recorded music, though, investors are increasingly seeking growth opportunities rather than distressed assets.
The music industry has only a few examples of labels dominated by powerful superstars with personal grudges against their buyers. Before social media allowed Swift’s fan to lambaste Caryle online, Radiohead spoke out against Terra Firma’s 2007 purchase of EMI Music and left Parlophone Records to release a string of successful, self- and independently-released albums. But Taylor Swift and Radiohead are outliers. Well-known artists occasionally have public spats with record labels — Prince and Warner Music Group, Courtney Love and Universal Music Group — over contractual matters. But artists rarely speak about acquisition and financing.
Sources say that investors and lenders would have worked with Swift if she was interested, helping her to bid on her catalog using alternative financing. If she had borrowed against her catalog of recordings, she could have retained ownership of her masters and licensed them to a record label for distribution, marketing and promotion. 23 Capital provides this type of financing for companies such as Vice Media. So does Vine Alternative Investments, whose film and music clients have nontraditional options “that can supplement senior bank loans,” says Amir.
Vine Alternative Investments’ latest fund gives them “several hundred million to deploy,” according to Amir. 23 Capital, one of the firms Swift has called out, aims to deploy $15 to $20 billion over roughly the next four years, the co-founders said in a February 2019 interview with WIPO magazine.
Big Machine doesn’t need Swift’s permission to re-release albums or greatest-hits compilations, though as a songwriter with full or partial rights, she can veto potential synch licenses for TV, film and ads. That could diminish the value of her recordings to some extent. Swift has said she plans to re-record her entire catalog, too, but some industry sources say that such a sweeping re-release could actually end up spurring more interest in the original catalog, rather than diminishing its consumption. Still, the lesson for future investors is that an artist’s catalog — generally viewed as a stable asset — may come with unforeseen challenges and opportunities once it’s not in the artist’s hands.