New Tunes: How Private Equity Increasingly Turns Towards Music Content Investing

The music industry, a dynamic and ever-evolving domain, has witnessed a notable shift in its financing landscape with the rising influence of private equity investments. Traditionally associated with sectors such as real estate and manufacturing, private equity firms have increasingly turned their attention to the music industry, recognizing the immense potential for profit generation within this creative field. This paper delves into the realm of private equity investments in the music industry, examining the motivations, implications, and the transformative effects these investments have on artists, record labels, and the broader music ecosystem.

Portrait of Selected Transactions

A compelling example, illustrating the complexities and challenges that can arise in this realm, is the conflict surrounding Taylor Swift’s master rights. The battle for control over these crucial assets has shed light on the complex dynamics between artists, record labels, private equity funds, and the broader implications for artistic expression and ownership in the digital age.

Taylor Swift, one of the world's most successful recording artists, made headlines in 2019 when she publicly voiced her frustration over the control of her master recordings. Having released six highly successful albums under the label Big Machine Records, Swift discovered that the rights to her early catalogue had been acquired by a private equity firm named Shamrock Holdings for US$300 million. This revelation ignited a contentious battle over ownership and control, leading Swift to embark on a quest to regain her master rights (Music Business Worldwide). This multifaceted conflict underscores the complex web of relationships and interests within the music industry, as artists, record labels, and private equity firms navigate the evolving landscape of ownership, control, and the pursuit of profitability.

However, after highlighting the complexity of private equity involvements within the industry, there are also numerous examples that showcase the positive impacts of the involvements of private equity funds. Exemplifying the positive impact private equity investments can have is global investment firm Kohlberg Kravis Roberts & Co. (KKR), which has made notable strides in the music industry.A compelling instance of KKR's involvement in the music industry is its acquisition of the Tedder catalogue, highlighting the potential benefits that arise from such investments.

In 2020, KKR made a strategic move by acquiring a majority stake in the music catalogue of Ryan Tedder, a renowned songwriter and lead vocalist of the band OneRepublic. The term “music catalogue” refers to the collection of musical compositions and their associated rights, including the rights to reproduce, distribute, and perform these compositions. These catalogues serve as valuable assets and generate income through licensing, royalties, and synchronization in various media, including films, advertisements, and streaming platforms. The Tedder catalogue comprises an impressive collection of hit songs penned by Tedder, including chart-toppers for prominent artists including Beyoncé, Adele, Ed Sheeran, and Taylor Swift. By acquiring the Tedder catalogue, KKR gains ownership of the underlying musical compositions and associated publishing rights, opening up avenues for monetization and future licensing opportunities.

KKR's involvement brings significant advantages to both Ryan Tedder and the broader music industry. For Tedder, the transaction provides a substantial financial injection and unlocks the value of his creative output. The partnership with KKR grants Tedder the ability to leverage the private equity firm’s expertise and resources to further promote his songs, explore new collaborations, and expand his influence within the industry. Moreover, KKR's involvement can facilitate strategic collaborations and partnerships within the music industry. The firm's extensive network and industry knowledge can open doors to new opportunities and connect artists, songwriters, and music publishers with potential collaborators, brands, and platforms.

From a broader perspective, KKR's acquisition of the Tedder catalogue demonstrates how private equity investments can drive innovation and foster growth within the music ecosystem. By injecting capital into established catalogues, private equity firms provide financial stability and enable artists and songwriters to reinvest in their careers, pursue new creative endeavors, and explore uncharted territories.

The acquisition of the Tedder catalogue by KKR underscores the potential for private equity investments to create mutually beneficial outcomes for both artists and investors. While financial gains are a key consideration, it is essential to strike a balance between commercial interests and artistic integrity. Preserving the artist's creative control and ensuring fair agreements are crucial aspects of fostering a sustainable and equitable relationship between private equity firms and music industry stakeholders.

Key Considerations from the Owner’s Perspective

Selling music rights to a private equity firm can present both advantages and disadvantages for the owners, typically artists or record labels.

PROS

• Immediate Financial Gain: One of the primary benefits of selling music rights to a private equity firm is the potential for significant upfront financial gain. Private equity firms are often willing to offer substantial sums of money in exchange for ownership rights, providing owners with a injection of capital. This influx of funds can be utilized for various purposes, such as financing new projects, expanding their creative endeavors, and even personal financial stability or prosperity. 
• Access to Expertise and Resources: Private equity firms often possess extensive industry knowledge and expertise, as well as vast networks and resources. By partnering with a reputable firm, owners can tap into these valuable assets and gain access to strategic guidance, professional management, and marketing capabilities. Such support can amplify the reach and commercial potential of their music and open doors to new opportunities and audiences.
• Risk Mitigation: The music industry is inherently unpredictable, and financial stability can be elusive, particularly for independent artists. Selling music rights to a private equity firm can provide a certain degree of risk mitigation. The infusion of capital and support from the firm can help stabilize an artist's financial situation, alleviating the pressures of self-funding and allowing them to focus more on their creative pursuits.

CHALLENGES

• Loss of Control and Creative Freedom: Perhaps the most significant concern for artists or labels selling their music rights is the loss of control over their artistic creations. Private equity firms, driven by profit maximization, may exert influence over creative decisions, potentially compromising an artist's vision and artistic integrity. Decisions regarding song selection, album releases, marketing strategies, and more may be influenced by the firm's commercial objectives, thus creating a potential for conflicts between artistic expression and commercial viability.
• Limited Long-Term Benefits: While selling music rights can provide an immediate financial boost, the long-term financial benefits may be limited. Private equity firms are often focused on short- to medium-term returns on their investments. Once they have recouped their initial investment and earned the desired return, they may be inclined to exploit the catalogue commercially, without prioritizing the artist's best interests. As a result, the owner may miss out on potential future earnings and the value appreciation of their music rights.
• Lack of Transparency and Communication: Owners may find themselves in situations where important decisions are made without their input or knowledge, diminishing their ability to actively participate in the management and strategic direction of their music catalogue.
• Potential Conflict of Interest: There is a risk of conflict of interest arising when the private equity firm’s financial motivations clash with the artist’s or label’s creative aspirations and long-term vision. This misalignment can strain the relationship and impede the pursuit of artistic growth and development.

Overall, it is important for owners to carefully consider these pros and cons and weigh the immediate financial benefits against the potential loss of control and long-term implications for their artistic career. The decision to sell or not to sell depends on what the artist wants to accomplish and the impact they want to achieve.

Market Segmentation

When taking a step back and looking at manifold content investment opportunities across a range of categories, music constitutes only a small fraction. To gain a better overview, the different investment opportunities within the market can be segmented along two dimensions. The first is portfolio breadth, whereby investments may purely include content, such as TV shows and/or podcasts, and may extend to also include components within the content ecosystem, like merchandise, for example.  The second dimension is value chain coverage, which encompasses content creation and platform to content rights.

The figure below shows types of content in which private equity funds have invested or could invest, placed in the described matrix:

Figure 1: Content investment market segmentation by portfolio breadth and value chain coverage

Out of the mapped content types, private equity investments in song catalogues have appeared to be the most popular in recent years due to a number of reasons: 

1. Predictable Revenue Streams
   Song catalogues generate reliable revenue streams. Song royalties come from a variety of sources, including streaming platforms and media placements. The rise of digital music platforms and streaming services has particularly led to the music industry's resurgent growth. Streaming has made it easier to monetize music catalogues, as each stream contributes to the revenue stream. Private equity sees potential for continued growth in this sector.
    
2. Tangible and Recognizable Assets
   Songs are well-defined assets with established copyrights, making them relatively easy to value and monetize, and artists with passionate fan bases can be considered as well-recognized brands.
    
3. Diversification
   Song catalogues offer diversification benefits to private equity firms, as they are not closely tied to the performance of traditional financial markets. This diversification can help balance the risk profile of a private equity portfolio.
    
4. Long-Term Value
   Song catalogues have intrinsic value that can appreciate over time. A classic song can maintain its value and relevance for decades, making it appealing for long-term investment strategies. (One recent example is Nina Simone’s “Sinner Man” from 1965, which experienced a revival in the 2000s thanks to a remix by Felix Da Housecat.
    
5. Established Market Practices
   Over time, established market practices have developed for acquiring song catalogues. This includes valuation methodologies, due diligence procedures, and industry-specific expertise.

While song catalogues have demonstrated their attractiveness for private equity investment, it is worth noting that investments in other types of content, such as professional sports teams, especially soccer, film, television, gaming, and digital media, have also been growing. These sectors’ unique characteristics, specifically asset structure, revenue models, and industry dynamics, potentially explain why they may not (yet) be as established in the private equity investment landscape:

1. Asset Structure
   While song catalogues have a clearly defined asset structure determined by a song’s individual copyright and royalty streams, other types of content often involve more complex projects. These projects may have multiple contributors (writers, actors, directors, and developers), and their value may be tied to the success of the entire project rather than to individual components.
    
2. Revenue Models
   As explained above, song catalogues have predictable revenue streams via royalties and/or ticket sales, etc., while revenue models for other types of content can be more diverse and complex. For example, revenue may come from box office sales, subscription services, advertising, in-game purchases, licensing deals, and partnerships. Additionally, monetization in these sectors can be influenced by changing consumer preferences, piracy, platform competition, and the increasing demand for original and diverse content.
    
3. Industry Dynamics
   The music industries have established structures and practices that have evolved over many years. While these industries have been impacted by digital transformation, they still operate within recognizable frameworks. The media and entertainment landscape has experienced rapid and ongoing disruption due to technological advancements. Digital distribution and changes in consumer behavior have significantly altered traditional business models in these sectors.

Given the relatively long history of private equity investments in song catalogues, the potentially higher suitability for private equity funds not currently engaged in this area, and the fact that investment sizes can vary depending on the artist as well as the size of the song catalogue, we will continue to focus our analyses on this market segment.

Empirical Evidence 

The quantitative analysis is based on transactions captured in the database of PitchBook Data, Inc., utilizing key search terms, such as album rights, music catalogue portfolio, publishing catalogue, music album rights, and music asset catalogue. The analysis includes the time period from 2014 to 2023.

Prior to 2020, the number of deals in the music rights sector was relatively limited, consistently ranging below 10 deals per year. However, in 2020, a notable shift took place when 27 transactions were recorded — a significant surge in deal activity. This uptick in deal count continued in subsequent years, with a consistent level of at least 25 deals per year. Transactions were conducted by both corporate acquirers (often music labels) and private equity firms. 

Private equity firms were responsible for approximately five to 10 deals per year, while corporates engaged in 15 to 20 deals per year. The majority of these transactions were centered around catalogues featuring artists predominantly from the United States. Consequently, the traded rights primarily comprised works by well-known U.S.-based artists, including John Legend, Swedish House Mafia, Sting, and David Bowie (all in 2022 / Source: PitchBook Data, Inc.).

One significant factor contributing to the substantial increase in deal activity, particularly in 2020 and later, was the potential impact of the COVID-19 pandemic. The global health crisis and subsequent changes in consumer behavior and media consumption patterns prompted investors to recognize the resilience and potential of music rights as an attractive alternative asset class. The music industry's adaptability to digital platforms and streaming services, along with the stable income streams generated by music catalogues, have made these investments increasingly appealing to private equity and corporate investors.

Deal sizes in music rights transactions are often undisclosed, providing limited insights into the magnitude of investments. Notably, the largest publicized transaction in recent years was the acquisition of 50% of the Michael Jackson Estate by undisclosed investors in February 2023, with a deal size of US$784 million.

Private equity investors in the music rights sector include globally renowned funds such as KKR and Oaktree. Corporate investors actively participating in these deals include notable music labels, such as Sony Music Entertainment, BMG, and Universal Music.

Among the prominent investors in this space is the Hipgnosis Songs Fund, a British music intellectual property investment and song management company founded in 2018. Since 2019, the fund has been involved in 17 deals, demonstrating its strong investment activity and prominence in the sector.

Figure 2: Number of deals by Hipgnosis Songs Fund

The Hipgnosis Songs Fund strategically positions itself as a leader in music asset private equity investment. It acquires valuable song catalogs to benefit from steady income streams through streaming, licensing, and more. This approach aligns with digital music trends and fosters artist relationships, making Hipgnosis Songs Fund a pioneering and adaptable player in the evolving music industry landscape.

Due Diligence Implications

Music rights offer an attractive investment opportunity for private equity funds due to their potential for reoccurring revenue streams. However, investing in music rights requires a thorough due diligence approach to ensure that the investment is financially viable and aligns with the fund's investment strategy. In this section, we will explore the key factors that make a good investment in music rights and the strategic core questions that must be raised during the due diligence process. Additionally, we will highlight the potential risks associated with music rights investments that need to be considered before making a final investment decision. By implementing a comprehensive due diligence approach, private equity funds can make informed investment decisions and maximize returns in the music rights market.

HOW TO IDENTIFY ATTRACTIVE PRIVATE EQUITY INVESTMENT OPPORTUNITIES

• Global Appeal and Accessibility: The content should be easily digestible, with broad appeal to a diverse international audience. Additionally, the content should be free of any political messages or other controversial elements that could create headline risk and negatively impact revenue growth or stability, e.g., like pop music from Taylor Swift or Katy Perry.
• Audience Size and Engagement: A loyal and engaged fan base is a key factor that can help ensure a stable and predictable revenue stream, particularly in the case of reoccurring revenue models such as music streaming or broadcast rights. The artist’s level of engagement with their fan base is also an important consideration. This engagement can be measured by metrics, such as social media followers, ticket sales, merchandise sales, and fan interactions. For example, a music artist with a strong social media presence and high levels of fan interaction may be more likely to drive revenue growth through merchandise sales and live performances.
• Predictable and Diversified Revenue Streams: A portfolio of music rights investments should not be heavily reliant on one specific market or geographic location, as this can increase risk and limit revenue growth potential. Additionally, a diverse range of income streams, including revenue from streaming, social media, advertising, movies, and more, can provide a stable and predictable revenue stream that is less susceptible to market fluctuations.
• Favorable Market Trends and Growth Potential: The rise of streaming services has created new revenue streams for music rights holders. International markets, such as the growing Asian market for K-pop, also offer significant growth opportunities.
• Value Creation Potential: Negotiating higher compensation rates and licensing media rights for use in movies and/or video streaming services are strategies that can create new revenue streams and increase the value of the investment. These tactics can also increase predictability of cash flow and revenue growth while reducing risk. Launching exclusive streaming services can also provide additional revenue streams and increase the value of music rights investments. More information on value creation potential will be provided in the following chapter.
• Type of Right: Investors must carefully understand the type of music right they are acquiring, as it will affect cash flow and potential returns. The ownership of master rights to a sound recording is different from owning mechanical rights to reproduce and distribute a musical work. While master rights pertain to control over a specific recording, mechanical rights relate to the reproduction and distribution of the underlying musical composition itself. Continuous support by designated lawyers is a prerequisite to minimize the risk of material legal issues.
• Timing: Timing is an important factor to consider, specifically for music rights, as income tends to reach its peak within the first three to twelve months after the initial release, followed by a sharp decline over the subsequent five years. Beyond this five-year period, the listenership stabilizes, resulting in a more predictable income stream. Investors looking to acquire music rights must consider the implications of this trend on their potential return on investment. Overvaluing music rights early on could lead to disappointing returns.
• Historical Performance: To make informed investment decisions in music rights, it is crucial to analyze the historical performance of these assets. This analysis provides insights into revenue stability, growth potential, and potential risks. For instance, a careful evaluation of the performance of music catalogues can help investors understand the revenue trends and opportunities. The COVID-19 pandemic disrupted the revenue streams of live music events, highlighting the need for investors to diversify their portfolios and consider alternative revenue streams. Virtual events and pre-recorded content may offer more predictable revenue streams.
• Secure Exit Opportunity and Regulatory Landscape: Ideally, the investment should have a clear path to liquidity, whether through an initial public offering (IPO), a sale to a strategic buyer, or another exit method. Additionally, it is important for investors to have a thorough understanding of the industry’s regulatory landscape, as changes in regulations can impact the exit strategy and potentially disrupt the investment's value.
   

POTENTIAL RISKS TO CONSIDER IN MUSIC RIGHTS DUE DILIGENCE FOR PRIVATE EQUITY

• Legal Risk: Legal risk is a major concern for investors in music rights. Copyright infringement lawsuits and disputes over ownership can arise, leading to potential legal costs and penalties. Legal disputes can impact revenue stability and cash flow predictability and can also create uncertainty around exit opportunities.
• Regulatory Risk: Regulatory risk refers to the potential impact of changes in laws and regulations related to music rights, which can affect the stability of royalty revenues, cash flow predictability, and exit opportunities for investors.
• Concentration Risk:Concentration risk is a significant concern for investors in music rights, as investing in a single artist or catalogue can be risky. Changes in the popularity or relevance of that artist or catalogue can significantly impact royalty revenues.
• Technology Risk: Technology is constantly evolving, and new innovations can disrupt the way music is consumed and royalties are generated. Investing in outdated technology or platforms can lead to a decline in royalty revenues. For example, the rise of digital music streaming services disrupted the traditional music industry, and investing in physical music formats such as CDs or vinyl records could lead to a decline in royalty revenues.
• Royalty Calculation Risk:  Royalty calculation risk is another factor that can impact the revenue stability and cash flow predictability of media rights investments. Royalty calculations can be complex and can vary depending on the type of usage and the terms of the agreement. Mistakes in royalty calculations can lead to legal disputes and loss of revenue.
• Reputation Risk: Reputation risk is a crucial factor to consider in media rights investments, as it can significantly impact revenue stability, cash flow predictability, and exit opportunities.
• Performance Risk: Performance risk is another factor that can impact the revenue stability and cash flow predictability of media rights investments. Royalties are generated when music is played or when sport events are held, but there is no guarantee that the music will be played or that the events will be popular. Investing in untested or unproven artists can be risky.

Value Creation Throughout Holding Period

The crucial part of value generation over the holding period begins after the initial investment into a rights portfolio. For a private equity fund, management of an IP rights portfolio is fundamentally different from the management of other asset classes such as private companies. Likewise the goal of a financial investor is to combine their financial acumen and operational expertise to enhance the value of the acquired music rights portfolio. Key thinking about all measures is that the economic value of music flows from the copyright associated with original works, their performance and dissemination and the royalties which accrue from these events. Hence, the overarching goal for value creation is to maximize opportunities for royalty generation and long-term reoccurring revenue potential while at the same time optimizing royalty collection. 

Levers can be categorized into four main avenues:

A) OPTIMIZE MONETIZATION POTENTIAL THROUGH ACTIVE RIGHTS MANAGEMENT

• Licensing and Synchronization Opportunities: Actively seek out opportunities to license music for synchronization in film, television, advertisements, and video games. Strategic placement of music can amplify its exposure and generate additional revenue streams. Hipgnosis Songs Fund acquired Journey’s hit single “Separate Ways (Worlds Apart),” and worked with Netflix to prominently feature the song in the TV show “Stranger Things”. Subsequently, in 2022, this song’s year-over-year average number of weekly streams increased by 68%, and year-over-year royalty earnings increased by 184%.
• Digital Streaming Optimization: Work closely with digital platforms to optimize the streaming of music from the portfolio. This involves curating playlists, utilizing data analytics to understand consumer behavior, and employing marketing tactics to increase streaming frequency.
• Monetizing Untapped Assets: Some music rights may be underutilized or overlooked. Explore avenues to revitalize these assets, such as re-releasing classic tracks, organizing tribute concerts, or collaborating with contemporary artists to create new renditions.
• Strategic Partnerships: Collaborating with established music labels, artists, and industry influencers can lead to innovative marketing campaigns and cross-promotional opportunities that expand the reach of the music rights portfolio.

B) OPTIMIZE ROYALTY COLLECTION AND COST STRUCTURES

• Payment Collection Enhancement: Employ technology-driven solutions to streamline royalty collection processes. By ensuring accurate and efficient collection of royalties from various sources, the full revenue potential of the portfolio can be unlocked. Royalty collection is a complex flow of funds with multiple middlemen and lag in payment timing of up to six to 12 months. Technology can improve tracking, transparency, and collection of royalties which improves returns.
• Optimizing Organizational/Legal Structures: Rights distribution on a global level is complex process with multiple legal differences across regions. Streamlined organizational and legal setup can eliminate cost inefficiencies and improve global distribution.

C) INCREASE CATALOGUE ATTRACTIVENESS

• Rights Bundling: Bundling of rights can increase the attractiveness of a catalogue, as an extensive rights portfolio can be managed more efficiently via synergies in synchronization and payment collection.
• Development of New IP: Market know-how and access can be leveraged to identify talented performing artists and songwriters. Utilization of data analytics can help with identifying trends and key success factors of top performing artists. Generative AI provides a further upside, as AI can be leveraged for music generation, for example (as was done with “Drake AI songs”).

D) GROW BEYOND THE PLAN

• Value Chain Coverage Extension: Extend coverage of value chain from pure IP management to other areas, such as from initial content development/production to pure sales/licensing distribution.  A recent example in an adjacent vertical could be KKR with Leonine, where investors across multiple steps of the value chain established an integrated visual media company.
• Grow into Infrastructure:  Invest in complementary infrastructure surrounding the generation, management, and distribution of IP rights, such as distribution technology platforms that optimize costs and provide an upside to pure IP handling.

Monitoring value creation activities is important. In addition to reviewing generic metrics, such as total revenue and profit, it is also recommended to consider KPIs of revenue distribution by source and/or channel, and dividend yield (for song funds), along with the portfolio content’s impressions, streams, and engagements. Given distribution’s global reach and multifaceted channel landscape, song analytics are a key driver for identifying underlying reasons for successes, failures, and long-term value maximization.

Conclusion

The relatively mature example of music illustrates how content investing constitutes a valid alternative for financial investors seeking to diversify their portfolio and unlock value creation opportunities off the beaten path.

The significant amount invested by industry leaders, such as KKR, and the specific complexities outlined in this study highlight the need for tailored due diligence when investing in music-related and/or other content categories. The substantial benefits associated with these types of investments appear to warrant further investigation on the part of potential investors.

Authors: 
Dr. Nima Ahmadi, Partner, (Email)
Alexander Reitmann, Partner, (Email)