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In the midst of the global financial crisis, one US banker likened his role to continually dancing while the music played. However, it seems that the music is now coming to a halt for the Hipgnosis Songs Fund, an investment fund specializing in pop and rock song rights.
Shareholders are demanding the sale of assets and share buybacks as the fund, which aggressively expanded during a period of low interest rates, now faces a significant and persistent devaluation.
Five years ago, Hipgnosis entered the market with the promise of providing investors with stable long-term revenue through music rights, including emerging platforms like Spotify. The fund was fronted by investment advisor and music mogul Merck Mercuriadis, who was as popular as any stadium rock star.
By the end of last year, the net asset value of the fund had surged from a few hundred million dollars to $2.2 billion. However, the current share price is only approximately half of that value, consistent with Lex’s previous assessment of Hipgnosis as an extremely high-risk investment.
While most investment trusts have faced challenges since the beginning of 2022, Hipgnosis and its peer, Round Hill Music Fund, have significantly underperformed in this sector.
The valuation of song rights remains a niche market, hindering price discovery. The US agency, Citrin Cooperman, largely responsible for valuation, failed to adjust its discount rate last year, despite rising interest rates.
The fund’s gross book valuation of $2.7 billion represents a 20 times multiple of net royalties, compared to a 16 times multiple for acquisitions, indicating an immediate premium. The portfolio has expanded twentyfold within a few years, now comprising 65,000 songs. However, it is difficult to believe that such rapid growth can truly enhance value.
If the fund decides to sell substantial rights portfolios, it is unlikely to realize anything close to book value. A complete liquidation would only magnify the losses at an unfavorable time.
Shareholders will have to confront this dilemma when voting on the continuation of the fund in September. They are reminded of the age-old lesson that assets with great allure often come with a higher risk of overvaluation.
The Lex team looks forward to hearing your thoughts on Hipgnosis in the comment section below.
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