What do Blackstone’s billions mean for Merck Mercuriadis’ mission for songwriters?

Merck Mercuriadis now has a platinum-plated reputation for irritating some of the most powerful players in the modern music business. He wouldn’t have it any other way.

With the $2 billion-backed Hipgnosis Songs Fund, Mercuriadis has consistently admitted to two motives: (i) Getting his shareholders a nice return while growing the value of music rights; and (ii) Changing, as he always puts it, “where the songwriter sits in the economic equation”.

Songwriters have, understandably, loudly cheered motivation (ii) – demanding, as it does, that more of the music industry’s streaming revenue ‘pie’ be tipped in their direction.

Major record companies are a little more wary. After all, a recalibration of how the ‘pie’ gets divided might not ultimately work in their favor.

Mercuriadis has continued to poke the bear through this cage, openly alleging that the major music companies – Universal Music Group, Sony Music Group, and Warner Music Group – are incentivized to maintain the current balance of fiscal power in the business to the detriment of songwriters. (A controversial claim – for which he has his opponents.)

Now, Mercuriadis has a colossal new partner backing both sides of his mission.

As MBW reported Tuesday (October 12), Blackstone – one of the world’s largest alternative investment houses – is pumping a billion dollars into a new private fund, Hipgnosis Songs Capital.

In addition, Blackstone is investing an undisclosed amount into Mercuriadis’ Hipgnosis Song Management, the investment adviser that ultimately chooses how to deploy the money in Hipgnosis Songs Fund… and now, in Hipgnosis Songs Capital, too.

Hipgnosis Song Management is also responsible for maximising each fund’s return on their investment in music rights – i.e. the money that comes back via royalties, sync licensing deals and so on.

(MBW understands that Hipgnosis Song Management can never actually lose its management contract of the rights acquired via the Blackstone fund, even if long into the future Blackstone sells some or all of these rights to another party. Likewise, we’re told that HSM has first refusal to acquire any rights that the public fund – Hipgnosis Songs Fund – decides to dispose of in the years ahead.)

MBW recently sat down with Mercuriadis and the man who struck the Blackstone deal with him, Qasim Abbas, to quiz them on the new music biz alliance that’s got everybody talking.

London-based Abbas, the Senior Managing Director of Blackstone’s Tactical Opportunities Group, is very bullish on the future value growth of music rights.

As you’ll read, he believes that we’re still in the “first innings” of an explosion in the worth of songs – with the biggest uptick still to come…

Qasim, in short, why is Blackstone doing this deal now?

Abbas: Broadly, we regard music rights and catalogs as an already attractive asset class with very strong potential for future growth. It’s an asset class which is still in the early innings of its development.

We all realize that recorded music and publishing went through a disruptive phase with the emergence of various digital platforms. But that digitization is now driving a lot of growth in the sector.

That has created a context and a framework for songs as an asset class to emerge as a means of providing long term, predictable, model-able returns for institutional investors.

Why pick Merck and Hipgnosis as your partner?

Abbas: We as a firm has some history in investing in music broadly. And we used a lot of that [experience] that exists within Blackstone, to really do a deep dive and figure out who we wanted to work with.

Frankly, the conclusion for us was quite definitive: partnering with Merck, and building a new concept with him through which [Blackstone’s private capital] can come into the space, was the way to go. We have a lot of respect and a lot of awareness of the fact that Merck has been very instrumental and pioneering in bringing this asset class to the fore.

“We have a lot of respect, and a lot of awareness, of the fact that Merck has been very instrumental and pioneering in bringing this asset class to the fore.”

At this point in time what we’re looking to do, as a starting point really, is acquire about a billion dollars’ [worth] of catalogs. I would emphasise that’s just the start. Our ambition is much more substantial than that.

We’re going to invest in Hipgnosis Song Management to scale up and build its various capabilities to the next [level]. The shared vision is to create the best-in-class platform [to maximise returns from music rights], of substantial scale and of a skill-set that is unrivalled in the market.

How does the initial billion-dollar investment break down in terms of where the money’s going?

Abbas: We have two things that we are investing in: we are investing in Hipgnosis Song Management, and the purpose of that is to further develop and scale up the capabilities of the song management platform; then there is a commitment to create a new vehicle [Hipgnosis Songs Capital], which will acquire about a billion dollars in catalogs.

As I mentioned, that billion dollars in our mind is just the start.

When you say it’s just the start, how much additional money are you going to invest in the future? Are you open to committing multiples of the billion dollars in Hipgnosis Songs Capital down the line?

Abbas: If you consider Blackstone as a firm, if you look at many other things that we have done in the past, you know that when we go into a space, and we excel in that space, our ability to source capital, bring capital and bring sophistication is substantial.

Merck, how does this deal affect your objectives in the music industry?

Mercuriadis: I had a mission: (i) to establish song as an asset class; (ii) to use the success of that to change where songwriters sit in the economic equation; and (iii) to take what I consider to be a broken publishing model, and to replace it with ‘song management’, where these songs are managed with great responsibility and where their legacy is really brought to its full potential.

The relationship with Blackstone is one that I think ensures that we succeed on every level. They have a level of expertise and sophistication that you’ll see show up in how Hipgnosis Song Management operates going forward.

What does Blackstone’s level of commitment to this operation mean for your personal level of influence in the business?

Mercuriadis: It means a lot. At a simplistic level: In the last three, almost four years, I’ve probably had to spend 30% to 40% of my time raising money. Now, that 30% to 40% of my time will go into management of these assets, overseeing the team that manages these great songs, as well as the ulterior motive of changing where the songwriter sits in the economic equation. All because I don’t have to worry about raising money anymore.

I will still continue to raise some money for Hipgnosis Songs Fund [which can co-invest in rights with the new private fund], working in conjunction with our public market shareholders, but this will be a [relatively] small amount of my time.

“we’ve now got a platform with what I consider to be the gold standard of partners. That has to be reckoned with, regardless of where you sit in this business.”

This additional time will allow me to establish the Songwriters’ Guild that I’ve talked about, that will bring songwriters together to make a difference. It will also allow me to call on some very important relationships that the Blackstone team has that can have a big impact as well.

From our early conversations straight through till now, the whole design of all this has been to build a platform that no-one [in the industry] can come along and sort of swat like a fly. In order to fight that good fight.

That’s the most important thing here: we’ve now got a platform with what I consider to be the gold standard of partners. That has to be reckoned with, regardless of where you sit in this business.

Qasim, why did Blackstone decide to put this money with Merck and into the private rights acquisition space, as opposed to making an institutional investment in a large-scale music company that is currently on the public markets like Universal Music Group or Warner Music Group?

Abbas: [Those] music companies do many different things, right? It’s not just exposure to catalogs in that sense.

What we wanted to do, working with Merck, was create a very specific exposure to a catalog-oriented cash flow.

Mercuriadis: One of the things that’s also important here is to create an operating company that can make a difference. Because if you look at the Hipgnosis public fund, it is structurally a classic Investment Trust construct, where you’ve got assets that sit in a holding company, but everything is done by the [investment] manager.

Because of that, Hipgnosis Song Management has now become one of the most recognized and preferred money managers and investment advisors in the [UK’s financial world] and on the public market. Yet before the Blackstone [deal] it only had one client [Hipgnosis Songs Fund], which is very unusual.

I doubt that HSM will ever have more than two clients now because we have the best of both worlds: we have our public fund with Hipgnosis Songs Fund, and now we have Hipgnosis Songs Capital with Blackstone.

That gives us everything that we need, particularly with Qasim and Blackstone’s [additional] backing of Hipgnosis Songs Management, which we can really build into… I don’t want to talk about ‘building an alternative to Universal Warner or Sony‘, I’m much more interested in characterising [HSM] as being a new company, a new paradigm.

It’s a ‘song management’ company. It’s something that hasn’t existed in this business before. And I believe that our success will be something that will see this model emulated elsewhere in the future.

Qasim, do you think you’re coming into this market at a time still filled with opportunity? It’s getting competitive out there – the Giants Are Coming! – with KKR pumping a billion dollars into buying Kobalt‘s catalog, plus Apollo Global Management backing the new music-centric venture, HarbourView.

Abbas: We’re in a market today where every [type of] asset class is highly competed and priced quite aggressively. Our point of view on this is that we’re not driven by price action at any one point in time in a market. Our objective, always, is to be committed to the markets that we choose to go into for the long-term, and that deliver a superior risk-adjusted return for our ultimate investors.

Markets can price in very different contexts across different cycles: We’re never focused upon how much money exists or doesn’t exist at any one point.

The second thing that I would say is that, despite all those numbers that are being bandied about, there is a very significant market opportunity [in music], which will play out over the next few years.

“The numbers you mention don’t dwarf the market opportunity in music; in fact, I would say it’s probably the other way round.”

The numbers you mention don’t dwarf the market opportunity; in fact, I would say it’s probably the other way round.

And then lastly but definitely not least, this is a market where your partners, the artists, require a counterpart – if they’re acquiring and managing what is ultimately a very important legacy for them – to be very trustworthy and very close to them.

That’s why we couldn’t think of a better partner than Merck, because the philosophy Merck brings to the whole setup is critical to how we think about our success in this market: giving those artists a positive and meaningful relationship as a manager of their legacy going forward.Music Business Worldwide