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It’s the biggest story in the modern music business, certainly for those whose eyes are drawn to dollar signs: acquisition funds buying up music rights.
From Blackstone to KKR and beyond, recent months have seen some of the world’s most powerful investment institutions throwing billions at the music market to quickly capture market share.
Many investors presumed that year zero for this trend began when Hipgnosis Songs Fund floated on the London Stock Exchange in summer 2018. And it’s certainly true that Merck Mercuriadis’s then-flamboyant-looking move to publicly list his fund was a swift accelerant of the rush to buy and sell music rights.
But Hipgnosis wasn’t the first player in this space.
In the United States, for one example, Primary Wave, led by Larry Mestel, was acquiring music rights using institutional investor money from as early as 2006.
Michaelson started his career in the music industry in the 1990s as part of the management team for a number of rock acts including The Smashing Pumpkins, Echo and The Bunnymen and others.
Later, he would work at the likes of Virgin Music, and at Sir Elton John’s artist management company, Twenty First Artists, where Michaelson was part of the executive management team.
It was during his time at Elton John’s company, which he joined in 2008, that Michaelson first encountered Spotify – an experience that completely shifted his perceptions about music and its potential appeal as an investable asset.
After leading a bunch of activity in the music rights space – including the establishment of his own fund manager in 2016 – Michaelson co-founded the Barometer Music Royalties fund in 2018, partnering with Toronto’s Barometer Capital.
Barometer Music Royalties fund acquired hits made famous by the likes of Jason Derulo, Chris Brown, Notorious B.I.G and more, before the fund (and its portfolio) was sold on to a Swiss Fund of Funds earlier this year, having delivered a internal rate of return of 24.5% to investors.
Most recently, Michaelson, born in Liverpool UK, has additionally acted as a broker for some major deals in the music industry and in Hollywood, including Primary Wave’s acquisition of Sun Records.
Michaelson is also an advisor to the fast-growing, blockchain-powered music tech company Utopia.
Here, Michaelson tells us what he’s observed from his front-row seat to the music M&A market in the past half-decade – and explains why he’s so bullish about music’s growing value in the future.
Listen to the podcast above, or read a handful of the abridged highlights from our Q&A below…
There’s a very positive story for music rights investors playing out right now, not just around streaming’s growth but also around revenue coming into music from “alternative platforms” like Roblox and Facebook. Warner Music Group boss, Steve Cooper, has PARTICULARLY TALKED UP this trend of late. But how real is this idea that there’s going to be meaningful income – really meaningful income – for music’s investors coming from platforms that aren’t Spotify, or Apple Music or YouTube, etc?
Very real. Steve Cooper puts the arguments across very well.
These alternative income streams are emerging with serious intent. The beauty of them is that when we are acquiring [music] catalogs, and I’m assuming everyone in the catalog acquiring universe is [doing the same] – you’re not modelling this [extra] revenue into valuations. So it’s effectively, at the moment anyway, cream on top of the cake.
You mention your excitement over fungible securitized tokens in music – which is a bit different to non-fungible securitized tokens (i.e. NFTs). Why are you excited by this prospect as a music investor?
Tokens are the way forward. But to make them more democratic and egalitarian – allowing fans to invest in the favorite artists’ catalogs – that to me is the way, moving forward.
I believe [we’ll see] the tokenization of not just new artists, but also established artists too.
That [trend] to me has already been evidenced by BTS fans investing in the management company [Big Hit / HYBE, on the Korean stock exchange].
These fans are so rabid, they want a piece of the band so they invest in the management company, which IPO’d for billions of dollars.
MBW ran a headline the other week – ‘Here come the giants’ – about the arrival of multiple billions of dollars in the music rights space from the likes of Blackstone, KKR and Apollo. What impact do you think this is going to have on the power balance in the industry going forward?
The important question is why are these giants of finance coming in at this point? They can see what I and a lot of other people in the industry have seen – that music as an asset has been totally undervalued for years.
The fact is that even at the exaggerated multiples going on in the marketplace today, music is still undervalued.
For example, if you look at Universal [Music Group] as they floated, they were trading [as a market cap valuation] at 23 or 24 times EBITDA.
But there are brand new tech companies out there being acquired for 40 times revenue, who are not even not even making any earnings. When you examine it from that perspective, it shows you that music assets are undervalued, and there’s still plenty of room to grow.
One of the big stories that we’ve seen recently is Kobalt selling its second fund on to KKR’s Chord for over a billion dollars. It looks like we’re seeing the start of a trend where entities that have been buyers – acquisitive forces in this new music rights era – are now becoming sellers. Do you think that that’s going to accelerate?
Absolutely, without a doubt, because we believe that there’s still far more growth to come.
I think there will be an awful lot of consolidation in the coming years.
What are a couple of other headline trends that you’re seeing in the acquisition space of late?
The trends are changing all the time. I guess the biggest trend that I’m noticing are multiples rising, as we’ve discussed, but I’m also seeing newer artists looking to find a route to the market.
The [newer artists] are entranced by the press and the publicity of how to monetize their rights and they’re taking advantage [of] various tax perspectives globally – especially in the US – for estate planning purposes.
And just because we’ve had COVID [lockdowns], of course, and [artists] not being able to tour for the last year-and-a-half, this [feels] a prime time for them to sell, or partially sell, their assets.
Do you have any other observations on the way that the market’s going and the catalog acquisition space ?
Yeah, I have an interesting way of looking at it: If you’d have said to the man on the street a few years ago – and ignore what Sid Vicious thought about the man on the street! – if you’d said: ‘How much do you spend on music In an average year?’ He or she would say: ‘I buy one CD a year at Christmas – that’s £10 pounds a year.”
Now people are paying 10 pounds a month to stream and they’re more than happy about it. Music has changed from a luxury purchase to now a utility, where people do not mind paying a monthly subscription to have access to it. It’s become such an important part of their everyday life.
For more insights from Darren Michaelson into the future of music rights, Taylor Swift’s re-records, the potential of TikTok and the metaverse and much more… listen to the full MBW Podcast interview above, or on Apple Podcasts, Google Podcasts, Spotify, Stitcher, iHeart etc. via this link.
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