After his car broke down on the way to work in Idaho last October, Nathan Apodaca took his skateboard the rest of the way, filming himself as he drank cranberry juice and mouthed lyrics to “Dreams” by Fleetwood Mac.
He then uploaded the video to TikTok — where it would go viral, create a multimillion-dollar windfall for members of the band and contribute to warnings that the booming market for music copyrights was running too hot.
Movies and adverts have long given older songs such as “Dreams” the chance of a fresh lease of life, generating years of new royalty revenues for the holders of their publishing rights. But the explosion of music streaming on platforms like Spotify has transformed the scale of the business, increasing the appeal of music rights as an investment in an era of ultra-low interest rates.
“Dreams” was streamed more than 230m times in the fortnight after its TikTok renaissance, a 40-year-old hit becoming the sixth most popular song on Spotify, wedged between new tracks by Drake and Cardi B.
Within a few months of the amateur TikTok video, Fleetwood Mac band members cashed in. Stevie Nicks sold most of her songbook to a specialist fund, Primary Wave, for $100m, Lindsey Buckingham sold the rights to his catalogue to London-listed Hipgnosis, and music company BMG acquired drummer Mick Fleetwood’s share.
Among those watching carefully were executives at some of the private equity industry’s biggest names including KKR, Blackstone and Apollo Global Management.
“Every week there are new products coming off of the conveyor belt from all of the major labels,” said Sherrese Clarke Soares, founder of HarbourView Equity, a music buyer that has received a commitment of up to $1bn from Apollo. “We can’t even anticipate all the ways that music will be consumed 20 years from now.”
The trio of Fleetwood Mac deals at the turn of the year was held up as an example of how hot the market had become, with Warner Music chief executive Steve Cooper warning the Financial Times in February that some transactions “lack a certain amount of discipline”.
But the amount of money pouring in has only accelerated as private equity groups join the party, betting that the resurrection of music as an asset class has further to run.
In the past month Blackstone, KKR and Apollo have poured more than $3bn into buying song copyrights, as a revived music industry hums back towards CD-era revenue levels.
A KKR-led group agreed to buy a song catalogue with hits from The Weeknd for $1.1bn, while Blackstone and Apollo each committed $1bn to new funds.
“There is a new class of investor that’s interested in music rights that didn’t exist before,” said Matt Pincus, who founded music publisher SONGS, the group which created much of the catalogue that was sold to KKR last week. Pincus in 2019 started a new holding company, MUSIC, with US bank LionTree.
Goldman Sachs predicts music revenue will nearly double over the next decade, to more than $140bn.
According to Pincus, when private equity groups had previously looked into music publishing assets before the streaming era, they were seeking 20 per cent returns, which songs do not provide.
“All of us in the business knew that it wasn’t going to work and we would just wait for them to fail,” said Pincus, whose father founded private equity group Warburg Pincus.
“Now, you have these giant structured vehicles at these huge financial institutions . . . that have yield targets that are in the single digits,” he said. “Sometimes low single digits. And are willing to accept a return horizon that is super long.”
Their entrance has ushered in a new level of financial interest in music, say industry executives.
As recently as last year, auctions for a hot song catalogue would typically attract bids from the major music labels and small specialist funds that have emerged to buy rights, such as Hipgnosis, Round Hill and Primary Wave. Now these players are competing with groups overseeing hundreds of billions of dollars in assets.
“The earlier folks in this space, like Primary Wave, saw something interesting and piled in, but it’s been a very boutique space”, said an executive involved in these deals. “They might say, oh this guy’s hot, I like his music, which I assure you is not the way KKR is viewing it.”
KKR and Blackstone declined to comment.
Wall Street’s push into music is in some respects similar to efforts by investment companies over the past decade to diversify. For private equity groups, many of whom now manage large credit investing businesses, these speciality finance platforms offer an alternative to corporate bonds and a growth opportunity.
Music catalogues, in a sense, are hardly different than financing a nationwide portfolio of Taco Bell franchises, or loans made by Honda and Volkswagen dealerships. They generate consistent cash flows, are diversified, and relatively uncorrelated to financial markets or the global economy.
In the digital era the catalogues have an extra, if untested appeal as intellectual property.
Firms such as KKR and Blackstone have morphed into conglomerates with investments in almost every sector. These range from dating app Bumble, to digital media companies ByteDance and Epic Games, which they believe will help create new royalty streams for the catalogues they buy.
Universal Music, for example, is licensing its catalogue to a therapeutics company that uses music to help stroke victims walk again.
One of private equity’s last high-profile forays into music ended in disaster, with Guy Hands’ buyout of British label EMI losing his firm Terra Firma £1.5bn while the veteran investor personally lost £200m.
Longtime music executives speak about the current frenzy with a mixture of awe — and scepticism. Some fret about whether this period of dealmaking will inevitably end with a thud.
In recent years Hipgnosis and other specialist funds had been paying three to four times the historic value for music publishing assets. Hipgnosis has on average paid 14.8 times songs’ historic annual income to acquire the rights to hits by artists such as The Pretenders, Chic and Bon Jovi.
For the Kobalt catalogue, KKR is paying nearly 20 times the asset’s historic annual income, said people with knowledge of the situation.
In comparison, a year ago Taylor Swift’s back catalogue was sold to investment firm Shamrock Capital at a multiple in the “low to mid teens”, said people familiar with the transaction, although the deal was mired by her threats to make a duplicate copy of the songbook. Top songbooks, such as Bob Dylan’s $300m sale to Universal Music, have required buyers to accept low single-digit returns.
“It’s mind numbing,” said Barry Massarsky of Massarsky Consulting, who has valued many of the recently announced deals. “Right now, making a return of 8 or 9 per cent is attractive. What happens when rates start to rise? Then investors will want to demand a higher return. That will lower the value of these deals.”
The chief executive of one private equity-backed song rights fund told the FT he “certainly liked the market a lot better a year ago”.
“These asset classes are pretty stable most of the time, but you don’t have someone making you a promise to pay, like a bond does. It’s like real estate. It’s generally predictable, but if you’re hit with a pandemic, real estate isn’t predictable any more.”
