Why music is hitting the right notes with investors

Royalties is one of the speciality finance strategies attracting increasing interest from investors as they look beyond the traditional choices.

We all know about its war with US President Donald Trump but another significant development relating to Chinese video sharing app TikTok went relatively under-reported. Towards the end of July, the firm reached a deal with the National Music Publishers’ Association for the “past use of musical works” that also encompassed a “forward looking partnership”.

The settlement came after threats were aired of a possible lawsuit relating to alleged copyright infringement. While this type of thing is nothing new in the music industry, what gives the pursuit of royalties added urgency is the ban on live music in the covid era. Denied that particular revenue stream, artists are chasing after royalties, including from back-catalogues, that they may otherwise not have bothered with.

The growing collection of royalties is of interest not just to producers but also to investors, keen to lend against guaranteed long-term income. It’s the type of thing which fits under the “speciality finance” umbrella, used to describe pretty much any strategy that isn’t considered part of private debt’s mainstream.

Given the upheaval in the market as a result of the global pandemic, a lot of investors are still taking stock. Despite talk of trouble in portfolios, there is no immediate sign of the direct lending market (which has accounted for most private debt fundraising since the global financial crisis) being abandoned. Nonetheless, we also hear from market sources that there is more of an open-minded attitude towards strategies that are unorthodox but also appear relatively well placed in the current environment.

Music royalties aside, there appears to be increasing interest in areas such as asset-based finance and sale and leaseback transactions where owning collateral gives investors more comfort. If what we hear is true, it’s not just the usual suspects prepared to consider these types of strategies – such as families and endowments – but institutional investors as well. This is significant since they can only really scale up and become a significant part of portfolios with the backing of large LPs and the bigger cheques they can write.

One potential stumbling block is whether organisations may need to amend their investing guidelines to incorporate new strategies into the portfolio. Furthermore, there is the question of whether this can justifiably be done in a world where it’s either difficult or impossible to physically meet with managers. Reconfiguring a portfolio is a challenge in normal times, never mind in today’s ‘remote’ era.

Write to the author at andy.t@peimedia.com.