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Welcome to season

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two of the Outthinking investor,

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an award winning podcast from

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to the underappreciate challenges and

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not a guarantee of future results.

0:33

On a recent Sunday night, I was

0:35

watching TV when this commercial

0:37

came on.

0:40

It shows different groups of people driving

0:42

around in brand new electric trucks

0:45

and SUVs. The sun's

0:47

shining and everyone's bobbing their

0:49

heads or dancing in their seats

0:51

or singing along to this

0:53

one song.

1:01

And that song, it has

1:04

this really familiar, effortless, poppy,

1:07

nineteen eighties vibe. And

1:09

if you couldn't tell by the signature sound

1:11

of those twinkling bells at the beginning,

1:14

it's the nineteen eighty seven Fleetwood

1:16

Max song everywhere that's

1:18

playing in this ad for Chevrolet.

1:21

From Volt's a blazer, Equinox

1:23

to Silverado, Chevy these

1:25

are for everyone everywhere.

1:30

Now,

1:31

of course, it's nothing new to hear a

1:33

popular song playing in a commercial.

1:35

But what is new

1:38

is who owns the rights to this song

1:40

and who makes money

1:42

every time it gets played. You

1:45

see, just last year, Christine

1:47

McVeigh of Fleetwood Mac, decided

1:49

to sell the rights to her entire song

1:51

catalog to a UK based investment

1:54

trust. called Hypnosis songs

1:56

Fund. And now

1:58

those songs are just a slice

2:00

of more than sixty five thousand

2:03

others that have been bought up by hypnosis

2:05

in the last

2:05

couple of years. BFT's

2:08

private capital correspondent Kay

2:10

Wiggans says that that means that

2:12

when a song gets played. Whether

2:14

it's played on the radio, whether it's played

2:16

live a concert, whether it's played on

2:18

social media, money

2:21

is coming in. every time one of

2:23

those songs gets played. And

2:24

what it does is it kind of bundles

2:27

all of those songs together and

2:29

uses all of those revenues from the royalty

2:31

payments to pay investors

2:34

a dividend.

2:35

And this process of buying the rates

2:37

to songs and bundling them up is part

2:39

of one of Wall Street's modest trends

2:41

over the past few years. That is

2:44

turning music into an

2:46

asset class. And

2:48

firms have spent hundreds of millions of dollars

2:51

gobbling up these song catalogs from

2:53

popular musicians. It's

2:55

a far cry from the early two thousands

2:57

where hierarchy and Napster

2:59

were considered to be the death now of the music

3:01

industry.

3:03

I think as streaming

3:05

money and income grew and grew and grew.

3:08

The whole industry has enjoyed this kind of

3:10

renaissance.

3:11

That's Anna Nikolao. She's the FT's

3:14

US media correspondent. and she's been

3:16

reporting on the music industry and these

3:18

sorts of deals for the last few years.

3:21

And as that was happening, in

3:24

the broader economy, interest rates

3:26

have been until

3:27

recently very, very low historically.

3:30

And so

3:31

I think a lot of these companies, these big private

3:34

equity companies, these big investors

3:35

that have

3:37

never really invested in music before.

3:39

they're kind of searching around for something to

3:42

invest in that will give them,

3:44

you know, a steady stream of income with

3:46

relatively low risk. and

3:48

they're probably seeing all these headlines

3:50

and bank analysts' notes about

3:52

how great the music industry is doing right now.

3:54

And

3:54

so these things happen pretty much at the

3:56

exact same time and all

3:59

of these investors

3:59

in the past, really in the past

4:02

two years, have all kind of piled in at once.

4:04

But now almost as quickly

4:07

as this all got started, the

4:09

economy is changing.

4:11

Fear of a global recession and

4:13

rising interest rates may pose a

4:15

threat to these new kinds of investments.

4:30

I'm Mikaela Chandera from The Financial

4:32

Times.

4:34

On this week's episode of Behind the

4:36

Money. Will Wall Street have

4:38

to face the music

4:38

when it comes to its own

4:39

investments in popular song catalogs?

4:49

So we've talked about

4:51

this on the show before. we've

4:53

been in a low interest rate environment

4:55

for years, and that

4:57

sort of environment leads investors to

4:59

look for new ways to generate

5:00

returns.

5:02

And so big firms like KKR

5:05

or Apollo or Blackstone, they've

5:07

all jumped in to invest in these music

5:09

catalogs. But there's

5:12

really one person in particular

5:14

who got this whole

5:15

trend started. My name

5:17

is Merck Murriadis. and I'm

5:19

the founder and CEO of

5:21

Ignosys songs.

5:22

Anna and I interviewed Merck Mercury Addis

5:25

a few months ago. I've

5:26

been an artist manager almost

5:29

all my life since my teens,

5:31

and

5:31

I've had a great career managing people

5:33

like Elton John and Dunton Rosses

5:35

and being part of Beyonce's management

5:38

and, you know, just wonderful artist.

5:40

And during our interview, he

5:42

explained to us his own pitch for his business,

5:44

Hypnosis, which by

5:46

the way, is named for an agency

5:48

that designed album covers

5:49

for groups like Pink Floyd. So,

5:52

you know, at the end of the day, I came up with

5:54

this idea of creating

5:56

songs and establishing songs as an

5:58

asset class in the financial

5:59

community because obviously

6:02

people have been buying and selling songs for

6:04

a long time way before I ever came

6:06

around. But they've never

6:09

focused on establishing them as an asset

6:11

class and and and and turning

6:13

songs into something that

6:15

the investment community could realize

6:18

was a very powerful and potent

6:20

source of income. And

6:21

also crucially, the

6:24

revenues were uncorrelated to what was happening

6:26

in the world. If people are living

6:28

their best lives, they're doing it to a soundtrack

6:30

of rates, songs equally well.

6:32

If they're experiencing the sort of challenges that

6:34

we've experienced over the last couple of years,

6:36

they're taking comfort and escaping with

6:38

great songs. That

6:41

does sound like a pretty persuasive pitch.

6:44

So, Anna, how did

6:46

he actually put this idea into action?

6:48

So he starts this company called

6:50

Hypnosis, and he

6:52

basically set out to raise

6:55

hundreds

6:55

of millions of dollars from various

6:57

investors.

6:58

basically the pitch was, if

7:00

you give us your money, we will use that

7:02

to invest in buying songs.

7:05

And I've been this industry for a

7:07

long time. and I have

7:09

the connections to be able to

7:11

really do this that you wouldn't be able to buy these

7:13

songs on your own, but I know what to buy and I know

7:15

how to get people to sell them. he

7:17

really was, I mean, on top of

7:19

the things I mentioned, which is the industry itself

7:22

turning around and interest rates.

7:24

Merck was pretty much the third factor

7:26

because he was doing these deals, you

7:29

know, literally every week he'd have

7:31

various artists selling their catalog

7:33

to him and people

7:34

see this and then it starts to become a thing and

7:36

you're wondering why don't I do this?

7:38

So in twenty eighteen, Merck started

7:41

by creating this investment trust that

7:43

lists on the London

7:44

Stock Exchange.

7:45

So, k, let me come back to

7:47

you for this. what's

7:49

an investment trust and how

7:52

does it work? It's basically

7:53

a

7:55

pool of money. So the way that it

7:57

works is that Merck

7:59

goes out to

7:59

shareholders and says, there's

8:02

loads of great artists whose

8:04

copyrights I wanna buy, I'm gonna

8:06

raise some money. And so they

8:08

all put some money into this big pool

8:10

effectively. And then he takes that

8:12

money and he uses it to go and

8:14

buy the catalogs. and what the shareholders

8:16

are left with is kind of a

8:18

stake in this

8:19

this pool that owns all

8:21

of these different songs.

8:24

So, Anna, you've spoken with a lot

8:26

of people in the music industry to report on

8:28

this story, including different artists.

8:30

What does all this mean for

8:33

them? The musicians or songwriters who

8:35

are actually selling their copy rights to this

8:37

kind of fund? Unfortunately,

8:39

the answer is it's very complicated just

8:42

because basically every musician has a

8:44

different situation. I guess simplest

8:47

example would be,

8:49

let's

8:49

say, you're an older musician,

8:52

you

8:52

wrote all of your songs alone, no other

8:54

co writers to share with.

8:56

and you own both the

8:58

publishing rights, which is the songwriting,

9:00

and the recording rights, which is the actual

9:03

recording. So you

9:04

basically you if you fully own the

9:05

copyrights to all of your music and then

9:07

you decide, you know, I'm getting older.

9:10

I wanna

9:10

plan for my retirement

9:12

and what I can pass down to my

9:14

family, I'm

9:15

gonna sell this off to Blackstone

9:18

or whoever might be.

9:19

And they do it cleanly and then you

9:21

just transfer all the rights over. That

9:23

would mean they get

9:24

this one payment and that's

9:26

it.

9:27

In reality, a lot of these deals are

9:29

more complicated than that because you'll

9:31

have I mean, a lot of pop stars

9:33

don't write their own songs. So they

9:35

can't actually sell their catalogs anyway.

9:38

Okay. And k, let me come back

9:40

to you for this. What happened

9:42

with Merck's hypnosis fund. How has

9:44

it performed since it first listed?

9:47

In the early days, in the early years of this

9:49

fund, it

9:49

looked like he was making these

9:52

phenomenally successful bets and the fund was

9:54

just growing and its revenues were growing. So

9:56

like the revenues went from

9:58

seven point two million pounds in

9:59

twenty nineteen. to a

10:02

hundred and sixty eight point three

10:04

million dollars by March of

10:06

this year. So on the

10:08

surface, it looks like this thing is going

10:10

great guns. Right? And it's just hugely successful.

10:12

On

10:13

the surface, yeah, definitely does.

10:16

That's a really big increase over just a couple

10:18

of years. but

10:20

it sounds like there is possibly a

10:22

catch then to what you're saying.

10:24

The thing

10:24

that you have to look a little bit closer

10:26

at is what they call the pro form

10:28

a revenues, which is a bit of a jargon term,

10:30

but it basically means

10:33

like the vast majority of that growth was coming

10:35

from acquisitions. So the catalog

10:36

was getting more valuable because

10:40

Merck

10:40

McCuritus was constantly tapping shareholders

10:42

for

10:42

more money and using extra money to

10:44

buy more songs. So when you're constantly adding

10:47

new songs to the portfolio, of course,

10:49

the value of the revenues is increasing and

10:51

the value of valuations of songs

10:53

are increasing because, you know, there's just so much

10:55

more in

10:56

there. Okay.

10:57

So then, what was actually

10:59

happening? when

11:01

you use

11:01

a measure that strips

11:04

out the effect of acquisitions and

11:06

just looks at

11:07

all of the songs that that

11:09

listed fund currently

11:11

owns and how much

11:12

revenue those songs

11:14

have generated in royalty payments in

11:16

the last few years that actually those

11:18

numbers have been falling for the entire time

11:20

that they've been disclosed. And that's

11:23

because when a song gets released,

11:25

It's obviously being played on the radio all the

11:27

time. Maybe the artist is going on tour.

11:29

They're playing them in all sorts

11:31

of gig everyone's listening to

11:33

it. And then over time, that

11:36

interest fades, right, and and the song revenues will

11:38

sort of decline as the reach is sort of

11:40

more steady level. over time.

11:42

And

11:42

so now Burke has stopped acquiring

11:44

new songs for his hypnosis fund.

11:47

So what happened there? It

11:49

reached a point last year

11:51

where it basically had to tell shareholders

11:53

that it was gonna take a pause because

11:55

the shareholders wanted to be

11:57

able to understand what

11:59

the kind of steady state of this

12:02

fund

12:02

would be and what it would look like if it

12:04

wasn't doing deals so often. So

12:08

July of twenty twenty one,

12:10

Merck Macuriously says to the

12:12

shareholders, okay, we're raising some money now

12:14

and then we're not gonna raise

12:16

anymore for another year.

12:18

So

12:18

he raises all this money And then

12:21

within, like,

12:21

weeks, he spent it all. So

12:24

by the end of August of last year,

12:26

he spent all of the money that the listed

12:28

fund has and he's got like almost a year to

12:30

go before he can raise anymore

12:32

because he's told the shareholders he's not gonna do

12:34

it for that time.

12:35

Okay. So then what happened?

12:38

Like

12:38

a couple of months later, he announces

12:41

this deal with Blackstone, where

12:43

Blackstone is gonna a, they're

12:45

gonna buy control of his company.

12:48

and, b, they're gonna provide a

12:50

separate rule of money

12:53

through which he can carry on.

12:55

doing deals. But, you know,

12:57

very much under the

12:59

watchful eye of Blackstone at

13:01

this point. there's a sense that

13:03

at least Blackstone is trying to

13:05

apply some kind of, you know, some spreadsheets,

13:07

some

13:07

Wall Street style financial engineering.

13:10

They're got an analyst sitting there trying to

13:12

calculate the projected

13:12

future cash flows of MeliFotaro's song

13:15

catalog. So ever

13:18

since like

13:20

this time last year

13:21

pretty much. All

13:23

of the deals that Merck

13:24

Macquarie Otis has been doing have been we're

13:27

using Blackstone's money, not using

13:29

his original listed vehicles,

13:31

money.

13:34

Okay. So just to recap.

13:37

Merck started this fund He

13:39

raised a bunch of money to acquire

13:41

loads and loads of songs. And

13:43

then when he spent all the money,

13:45

the big investment firm Blackstone

13:47

came along. So

13:49

what does all that mean for hypnosis

13:51

going forward? So

13:53

the list of funds is in a really

13:55

difficult spot at the moment. the reality

13:57

is it still can't raise any more money because

14:00

the share price has fallen so

14:02

much that if it were to raise new

14:04

money now at this share price, it would dilute

14:06

the existing shareholders way too much. And that's just

14:08

not a thing that these types of vehicles

14:10

realistically will do. So

14:13

the listed fund is

14:14

is effectively frozen. Meanwhile,

14:16

it's revenues. The actual revenues

14:19

that it the stuff that it currently owns

14:21

generate have been falling ever since

14:23

they first started disclosing the numbers a

14:25

few years ago. And as

14:28

interest rates rise, the cost of its

14:30

debt is going up.

14:31

Well, that sounds like a

14:34

precarious situation. What's

14:37

going on with their debt now?

14:39

Well,

14:39

actually, they've just refinanced it.

14:41

So they've taken out this new, what's

14:43

called, a revolving credit facility, which

14:45

is kind of a little bit like a credit

14:47

card but this one is worth seven

14:49

hundred million dollars. So they used to

14:51

have a similar facility

14:53

from JPMorgan, which was worth six

14:55

hundred million dollars This new

14:57

one is with City National Bank, which

14:59

calls itself the bank to the stars.

15:01

So they've got this

15:03

new debt The thing

15:04

that remains true is that the cost

15:06

of servicing that debt will

15:09

rise as interest rates rise.

15:11

So the new

15:12

debt is two percent above a

15:15

sort of daily

15:15

interest rate that's based on transactions

15:18

in financial markets. so it does go up

15:20

when interest rates go up. Meanwhile,

15:23

obviously, the revenues from

15:25

the existing Song portfolio

15:27

have been falling for the last few

15:29

years. So basically, they're in this

15:31

situation where if those

15:33

interest rates keep going up, And if the

15:35

revenues from the songs

15:37

continue to fall, then

15:39

it's going to be difficult for

15:41

them to figure out how to pay their

15:43

dividend, which is basically what the

15:45

shareholders are really interested in.

15:48

So

15:48

what a hypnosis and Merck say

15:50

about all this? I

15:51

mean, people at hypnosis seem so

15:54

far to be able to see a few different

15:56

ways that it could start

15:58

generating more

15:59

money. Like, they would point

16:02

to the kind of COVID, end

16:04

of COVID

16:04

restrictions, and as people are playing more

16:07

concerts, and as pubs and bars are back open

16:09

again. There'll be more music that's getting

16:11

played, so maybe that improves things.

16:13

And also they point to, like, the general growth

16:15

of streaming. more and

16:17

more people are, you know, downloading

16:19

Spotify and using it to listen to

16:21

music. But my point really is that as

16:23

interest rates rise, that's gonna

16:25

ratchet more and more and more

16:27

pressure on them to increase revenues.

16:29

And

16:29

then the next step here is actually

16:32

borrowing money and using the songs as collateral.

16:35

So the listed hypnosis fund has done

16:37

this, and then KKR and

16:39

Blackstone have gone one step further and

16:41

issued securities based on the royalty

16:43

revenues. So how does that all

16:45

work?

16:45

Structurally, those securities

16:47

are the same

16:48

thing as the prime mortgages.

16:50

obviously,

16:50

the difference when you're talking about a mortgage

16:53

versus a song. But they are I

16:55

mean, there is definitely kind of a

16:57

parallel there. in terms of

16:59

just

16:59

Wall Street getting creative

17:01

if you wanna call it with, you

17:03

know, how they're creating

17:05

strategies and what kind of things

17:07

can actually be used as collateral, which

17:10

is very interesting.

17:12

yeah,

17:12

it's kind of crazy. Right? Like, in the same

17:15

way that, like, you

17:16

know, if if a person doesn't keep

17:18

up the mortgage repayments on their

17:21

house, then you know, the lender can come along and and

17:23

take control of the house. Like, give out

17:25

what's gonna happen if this goes wrong. If

17:27

people don't repay these debts, then

17:29

the lenders are gonna take control of of what, like,

17:31

the right to make money when

17:33

people listen to Leonard Cohen songs.

17:36

You know? It's it's a very kind of

17:38

interesting piece of Wall Street

17:40

financial engineering that's been applied to music

17:42

here.

17:43

So like we talked about earlier, you know, this

17:45

idea of investing in song catalogs worked as

17:48

an investment opportunity in a

17:50

really low interest rate

17:52

environment. But obviously,

17:54

you

17:54

know, times are changing here. Where

17:57

do

17:57

you see all this going in the

18:00

future? I

18:00

mean, right now, it's very hard to see

18:03

this doing well in the next few

18:05

years. It's much more difficult as a proposition

18:06

now to investors because basically,

18:09

If you're talking to an investor now

18:12

and your offer to them is, hey, we

18:14

can we can offer you a steady

18:16

recurring revenue. they're gonna say, well, I can

18:18

get that from government bonds these days, you

18:20

know, at a much higher rate than I ever have been

18:22

able to in the past few years. they

18:24

call the risk free option is much

18:26

much more attractive than it has been for a

18:28

really long time. And the other the other reason why it's

18:30

a problem for them is because all

18:32

of these models, whether it's the hypnosis listed vehicle, whether it's

18:34

the Blackstone Fund, they're

18:36

using debt. Right? And so

18:38

the cost of that debt is

18:40

just becoming much more expensive than more the interest rates

18:43

rise. Well,

18:45

Anna and Kay Thanks

18:48

for coming on the show. Thank

18:50

you for

18:50

having us. Thank you.

19:11

Behind the money

19:12

is hosted by me, Mikaela

19:15

Tinderra. This episode was

19:17

edited by John Buckley. Topher

19:19

Foreheads is our executive

19:21

producer. Sound design and

19:23

mixing by Samgy of Inko. Carol

19:25

Bromley is

19:25

the global head of

19:28

audio. Thanks for listening. See you next

19:31

week.

19:37

Support

19:41

comes from Simon Schuster, Publisher of

19:44

How to Invest, Master on the

19:46

craft by David m Reubenstein,

19:48

the founder of the Carlisle Group.

19:50

Through a series of thoughtful conversations

19:52

with successful investors such as Stan

19:54

Drucker Miller, San Zelle and Larry

19:56

Fink. Rubin Stein

19:57

distills the secrets to building a

19:59

winning

19:59

portfolio from venture capital, real

20:02

estate, equity to crypto

20:04

and more. How to invest

20:06

by David m Rubin Stein is

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available wherever books are sold.