There is some uneasy reading for Hipgnosis Songs Fund in an article published this morning by the Financial Times, although the piece may be more of a schadenfreudian read for some of the music industry companies whose feathers it has ruffled in recent years.
“To fuel its growth, HSF has repeatedly tapped investors for cash to make new acquisitions, but it has since burnt through its funds and is unable to raise more because its stock price has fallen,” is how the FT summarised the situation.
“Pro forma royalty revenues from its catalogue — a measure that strips out the boost from acquisitions — have fallen for the past two years and the cost of servicing its $600mn of debt is rising. It has not bought a new song for more than a year.”
The article also claims that in 2022, Hipgnosis has “failed to complete potential transactions that were being discussed” with several musicians. That’s partly a function of the wider economy, including interest rate rises in the US, according to CEO Merck Mercuriadis in his statement to the FT.
“We have a fiduciary responsibility to our investors to always ensure our underwriting is accurate. Changes in interest rates has meant some deals have had to be underwritten again and re-priced. This is not unique to Hipgnosis or the music industry,” he said.
The bigger concern appears to be whether the decline in the company’s share price will hamper it from raising more money to complete those deals and/or seek new catalogues to buy. The FT also floats the prospect of one of Hipgnosis’s key backers, private equity group Blackstone, opting to “buy its portfolio either outright or in parts” if the company falls into financial difficulties.
As we said, Hipgnosis and Mercuriadis have ruffled some feathers in the music industry since he founded the company, which may lead to some chuckling of the ‘told-you-so’ variety in boardrooms of traditional rightsholders who’ve taken potshots (both publicly and privately) at the business models and capabilities of the new breed of music-rights investors.
Who will laugh last, though, if Hipgnosis struggles or even falls? After a couple of years of confident proclamations about music being a marvellous, predictable and un-risky asset class, we’re sensing the potential for a change in the investor winds: fears that music rights are riskier than they thought (or were led to believe).
This could be seen as a welcome perception correction from the standpoint of traditional music rightsholders, swinging the pendulum of power back in their direction. The danger is that any loss in investor confidence becomes a chill wind that stymies those rightsholders’ ability to invest and expand too.
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