Hipgnosis investors urge sale of music catalogues to shore up stock – Financial Times

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Investors in Hipgnosis Songs Fund, the London-listed investment trust that owns rights to music by artists including Nirvana, Rihanna and Britney Spears, are urging the company to shore up its stock price by selling off catalogues and buying back shares.

Shares in HSF, which pioneered song copyrights as an asset class, have tumbled over the past year, leaving it trading at less than half of the $2.2bn valuation the company ascribes to its songs. 

Ahead of a shareholder vote in September on whether to continue the fund in its current form, several top investors told the Financial Times that they would like HSF, which is managed by a vehicle owned by US private equity group Blackstone, to sell off non-core assets.

“The big thing to get the share price moving would be to dispose of less attractive catalogues in the portfolio and give a meaningful return to shareholders,” said Solomon Nevins, portfolio manager in alternatives at CCLA, a top-10 HSF shareholder with a 4.9 per cent stake.

“Where the shares are trading today, there must be something in the portfolio that makes sense selling, to buy shares back.” 

Company executives have recently spoken to at least one potential bidder to gauge interest in buying some of their catalogues, according to two people familiar with the details. 

Nevins did not specify which catalogues he thought HSF should sell. “I’d be disappointed if they were selling the family silver to buy shares,” he said. 

“A nice way to do it would be a vertical slice of the portfolio, ie selling 5 per cent of the book.”

HSF “has a problem, which is its discount and the knock-on impact on the continuation vote later in the year,” said Caspar Rock, chief investment officer at Cazenove Capital, another top-10 investor, with a 6.2 per cent stake. “For some investors, validation of the valuation through a transaction . . . would release equity and reduce gearing.”

But he warned that asset sales are “somewhat double-edged: in the short term they would get money in . . . but in the long term does it compromise the value of the business?” He added: “I would prefer them to carry on and let revenues grow and eventually the valuation should reflect the performance of the portfolio.” 

Blackstone owns a majority stake in HSF’s management company — Hipgnosis Song Management — after it partnered with music mogul Merck Mercuriadis in a $1bn bet on song copyrights. When Mercuriadis founded HSF in 2018, he pitched it to investors as a way to cash in on music streaming, attracting money from groups such as the Church of England’s investment manager.

It was a particularly attractive investment when interest rates were low because song copyrights generated consistent cash flow.

The fund delivered fast revenue growth by repeatedly raising new money from investors and using it to snap up the rights to more than 65,000 songs.

But since last summer, rising interest rates have reduced red-hot growth in music valuations, and HSF’s falling share price has stopped it from buying song rights because it cannot raise cash for purchases without diluting existing shareholders. Investment trusts in many other sectors have also suffered falling net asset values.

With publicly traded HSF in effect frozen from making deals, Blackstone and Mercuriadis have used a separate fund, Hipgnosis Songs Capital, to buy the catalogues of stars such as Justin Bieber and Justin Timberlake.

In October, HSF used debt to buy its own shares after they fell 30 per cent in six weeks. When Mercuriadis was asked by an analyst in December if he would consider catalogue sales, he responded he would “do whatever was necessary” to deliver shareholder value.

“A catalogue sale now appears likely and it would be good to see insiders (Blackstone or senior employees of the manager) purchase stock,” said Sachin Saggar, an analyst at Stifel. “You need to do it before the continuation vote.”

For the financial year to the end of June 2022, underlying royalty revenue from HSF’s songs rose about 4 per cent to $121mn.

“We don’t think the current share price is a true representation of the value of the company,” said Paul Flood, head of mixed assets at Newton Investment Management, HSF’s second-largest shareholder, owning just under 10 per cent. 

“We continue to see a recovery in performance revenues, as consumers return to concerts and the tailwinds benefiting the music industry from music streaming.”

Hipgnosis, which will publish its results for the year to March 31 on Thursday, declined to comment.