There are multiple reasons why Round Hill Music plans to float a new $375m royalty fund on the London Stock Exchange next month.
The first reason is purely financial. Back in 2012, New York-based Round Hill became an industry pioneer by categorizing music rights as an asset class, and launching a fund (‘Fund One’) for institutional and private investors. That fund closed two years later, having raised $209m from private and institutional investors.
Fund One, which today owns a catalog of 120,000 songs, is currently worth $363m, according to an independent valuation. Yet it was only ever intended to have a life of 10 years – before being sold on to a new buyer and deliver its original investors a nice return.
Following a successful IPO, Round Hill’s new fund will become that new buyer, acquiring Fund One’s copyrights in their entirety… for a modern-day valuation.
The second reason behind Round Hill’s IPO plans – specifically, its plans to float in London – is down to a name that’s frequented MBW’s headlines in the past two years: Hipgnosis Songs Fund.
Round Hill Music CEO and Founder, Josh Gruss, is happy to acknowledge that Hipgnosis has blazed a trail for music rights on the stock market and that, as a result, the UK investment community is arguably more clued up about the industry and its prospective value than other key markets might be.
But the third reason behind Round Hill’s IPO is perhaps the most surprising: the company believes that its intention to IPO its new fund, and to raise $375m on the stock market, will spell significantly good news for songwriters.
That’s songwriters both on its roster, and those looking to do business in future.
“With the IPO, we can look a songwriter in the eye, and tell them that Round Hill can be the home for their rights forever,” Gruss explains to MBW.
“There was always a duration of 10 years to the life of our private funds. And although that’s a long time, we couldn’t guarantee songwriters that they would be with Round Hill forever.
“Now, with this permanent capital in place [via the IPO], it extends our ability to manage these rights way into the future.”
Once Round Hill’s newly IPO’d fund is done buying up assets from Fund One, says Gruss, the intention is for it to raise more money, and start buying up assets from Round Hill’s two other managed Funds.
“The permanent capital in place [via the IPO] extends our ability to manage these rights way into the future.”
Josh Gruss, Round Hill
Fund Two closed in December 2017, raising $263m. This money was used to snap up the biggest acquisition in Round Hill’s ten-year history, when the firm acquired Carlin Music for around $245m, including the Elvis Presley catalog, amongst over 100,000 copyrights.
Little is known about Round Hill’s Fund Three, but the firm’s investor site suggests that it’s anticipated to close anytime soon, and is believed to raising around $300 million.
(To be clear: Round Hill Music, the company, manages the copyrights within these Funds, acting as a service partner to maximise returns from the owned assets.)
Round Hill’s investor site also reveals that Round Hill Music’s management team “has been responsible for over $1.4 billion of music copyright transactions across 128 catalog deals” down the years – including $650m spent on copyrights by its investors before Round Hill officially became Round Hill in 2012.
According to Round Hill Music President, Neil Gillis, the firm’s flexibility in how it deploys its money helps it to stand out for songwriters looking to sell their rights in a deeply competitive modern M&A marketplace.
“I’ll use Rob Thomas as an example [who struck a deal with Round Hill earlier this year for his songwriting catalog]. He could have joined any publisher”,” explains Gillis, a veteran of publishing houses such as Warner Chappell, S1 Songs and Alfred Music Publishing.
“But Rob wanted to keep a certain portion of his rights, he didn’t want to sell [100%] and we’re a shop that can get into that world. Our job now is to exploit his works, especially the deeper catalog works; stuff that has laid dormant at his previous publisher. And I’m very confident that if you called Rob, he’d tell you he’s been loving the job Round Hill has been doing even in the short amount of time he has been on board.”
Adding to Round Hill’s control of its destiny is the fact that the firm handles its own administration in the US, UK and Scandinavia, with an admin partnership with Warner Chappell in place in other territories around the world.
Here, Gruss and Gillis answer a few more of MBW’s questions – on the IPO, the value of catalog vs. frontline music, and their plans for the future of Round Hill Music…
Kobalt and Downtown might be selling soon. You’re raising money to keep on buying. Why?
Josh Gruss: Our business model is very different to Kobalt’s. Our strategy is extremely sustainable, because it’s very simple. We own the content. We own this wonderful, irreplaceable catalog of songs, including six Beatles songs;. We have a very long-term view on these rights. And we get so much enjoyment working with them and our songwriters.
“our content is just starting to hit its stride. Just now, is it starting to catch up with the streaming growth that other genres have received.”
We have so much left that we want to do. Plus it seems like the demographic that’s now adopting streaming subscriptions the fastest is a slightly older demographic, and what are they listening to? Straight down the fairway, it’s our repertoire.
So our content is just starting to hit its stride. Just now, is it starting to catch up with the streaming growth that other genres have received.
Our limited number of investors in those original funds need an exit; now we’ve created this [IPO solution] that means they can exit, but that Round Hill can still continue to manage the rights.
You’re not just in the classic catalog world, though: especially in country music, where you’ve had a string of US No.1s, you do invest in frontline music too. What does the split of that frontline vs. catalog investment look like?
Neil Gillis: We don’t play heavily in the chart-focused world. About 5% of our capital goes towards that – but we have built an amazing track record with that 5%.
Gruss: One thing I don’t think many people recogize is Round Hill’s success in frontline comes from a very small pool of capital. Every quarter except maybe three in the last five years, Round Hill has ranked between No.6 and No.9 on the Billboard quarterly market share charts [which measure publishers’ performance against the biggest songs on US radio in the period]. We’ve had 50 No.1-charting songs, most of them country songs, and that’s been a very intentional strategy for us: country is growing as a genre and is now nipping on Pop’s heels as a top genre in the US [after hip-hop].
Yet, as Neil says, the amount of capital that we’ve invested in [frontline signings] has never exceeded more than 5% of any of our funds. Do the math on that, and you can work out that we’ve not spent more than $10m or $20m of investment from each fund on [frontline signings]. That’s compared to the hundreds of millions spent by the majors on their A&R budgets.
So with a very small amount of capital, we’ve been tremendously successful, and get ownership of these rights from the ground level in a very organic way.
Talking of the Billboard publisher charts, which reflect only a certain number of hits on radio… are you tempted to start playing the chart market share game?
Gruss: No. Our investors want predictable cash flow, and that means proven music catalog. Call it luck or the skill of our great management team, but our investments in front line music have turned out great – but that doesn’t mean [A&R] isn’t a risky place to invest your capital.
We love that we’re even mentioned in those charts considering the little amount of capital we spend. But those charts don’t actually represent a lot of music consumption of catalog, and [they’re] definitely not indicative of who the biggest publishers really are.
Gillis: The market share aspect that’s more important to us is the market share of the entire industry, catalog included, not just chart positions.
Why did you decide to IPO in London?
Josh: Let’s not kid ourselves: Hipgnosis’s success in the marketplace is a main reason for the London decision, because they’ve spent the time educating the marketplace. There’s awareness of music royalties in the UK market that is at a much higher level than in the US. That fact takes a lot of risk out of the process for us; the path has already been paved.
“Let’s not kid ourselves: Hipgnosis’s success in the marketplace is a main reason for [Round Hill’s decision to IPO in the UK], because they’ve spent the time educating the marketplace.”
It’s also important to remember that we’re not just a US business. Carlin, for example, has always had a large UK presence, with a lot of tradition and history within the UK market.
Today, we have a London office, we have guys like Steve Clark and Robin Godfrey-Cass – we’re not just a US-based group. So it made as much sense for us to be in London as anywhere else.
Your future setup and Hipgnosis’ current setup might not be too dissimilar: A publicly-traded fund that owns the copyrights, and a services/management company that maximises the returns from those copyrights. That’s not the setup of the major music companies, however, who house a business structure that merges services with their owned copyright catalogs. One idea out there is that investors may increasingly pressure the majors to spin off those catalogs into ‘pure’ copyright vehicles to maximize their value, separating out their services/operating entities and ending up with a Round Hill-style model. What are your thoughts on that?
Gruss: It reminds me exactly of what happened in the timber industry in the United States maybe 10 or 15 years ago. You had all these timber companies like Weyerhaeuser and International Paper that were primarily viewed as manufacturing companies. But the [most valuable] assets these companies owned was actually forest land, and tons of it.
So when timber investing became a thing, with its own private equity managers, there was this dislocation in value, where the timber companies realized that if they spun off their [forestry] assets into a REIT [Real Estate Investment Trust], it would create these heavy cash-flowing, steady assets that were also tax-advantaged. So what did all these companies do? They turned into timber REITS; their manufacturing assets were separated and went somewhere else.
“It’s about unlocking equity value. This is happening now in terms of Vivendi taking public Universal. It’s called a carve-out.”
In music, what you’re talking about would be a similar idea. It’s about unlocking equity value. This is happening now in terms of Vivendi taking public Universal. It’s called a carve-out. By taking Universal public, they are highlighting the value of Universal, which has been somewhat obscured sitting amongst Vivendi’s other businesses.
But this could go a step further ,which would be to spin off just the [UMG] catalog and leave the A&R investment, the technology investments, the merchandising, the touring income etc in the remaining company. If the spinco distributed cash in a tax efficient way and traded off of yield it could trade higher than it would otherwise.
It might also put more focus on the other parts of the business, reflecting whether those investments were achieving good returns on equity.
The financial press has made much of “Round Hill vs. Hipgnosis” – and it should be said you’ve been nothing but respectful of Merck Mercuriadis here. But one idea is that Hipgnosis can leverage Merck’s contacts in his little black book – as well as those of Nile Rodgers, L.A Reid etc. – to snaffle deals others don’t know about. What’s your pitch on that score?
Gruss: Round Hill’s done close to 80 deals over the last 10 years. So I would say that, if you’re a lawyer selling a catalog, then it’s your responsibility to properly shop the deal and get the most money for your client. If you don’t include Round Hill on your shopping list, you’re probably not doing the job that you’re supposed to be doing.
Round Hill is aware of many of the deals that Hipgnosis does, and they’re probably fully aware of many of the deals that we do. But at the same time, there’s enough out there to go around for everybody.
“Of course you have deals that end up being proprietary, that come through relationships, and [Merck Mercuriadis] has his relationships – but we also have our relationships.”
Of course you have deals that end up being proprietary, that come through relationships, and he has his relationships – but we also have our relationships.
That’s one reason why, when you open up MBW one day, you see, “Oh, Merck’s closed a deal.” And then the next day, you see Primary Wave’s closed a deal, Spirit’s closed a deal, or that Round Hill’s closed a deal, and so on and so forth. Long may that continue.Music Business Worldwide