Investing in Music Royalties can be an attractive investment as part of a diversified portfolio, for investors seeking to diversify into an asset class, based on ownership based of real assets, that provides investors with predictable and consistent cashflow, low correlation to traditional public markets, lower volatility then equities, and potential for double-digit long-term performance.
Suitability
Music royalties are suitable for high net worth investors who have mid to long-term time horizons who seek potential double digit return, low volatility investments, and have the ability to own a portion of their assets in less liquid asset classes.
Why invest in
Music Royalties?
Consistent and Predictable Income
Music royalties is a relatively new asset class that allows investors to earn a predictable and passive income stream of cash flows from royalties paid to musicians, composers and producers who have decided to part with ownership of a song or catalogue for a lump sum payment.
Long-Term Copyright Protection
Music royalties are determined by Federal statutes and as a rule, copyright protection lasts for the life of an artist plus 70 years.
Streaming Services Expanding
Royalties are generally paid to an artist or composer on a regular basis (monthly, quarterly, or semi-annually) when music is played anywhere, such as streaming services (Spotify, Apple Music etc.), when music is played as part of a fitness program (Peloton), or in a public setting.
Royalty Distribution Explained
According to Royalty Exchange “The average per-stream royalty for both the composition and recording on Spotify is around half a penny. The sound recording average is about $0.0038 per stream. That leaves $0.0012 to the composition, which is then split 50/50 between performance and mechanical royalties.”
Professional Acquisition
Professional music royalty fund managers find acquisition opportunities through a variety of ways, including IP lawyers, managers, catalogue brokers, or directly from artists and seek to purchase royalties at reasonable prices for music that has consistent and predictable streaming revenue and that is deemed to maintain a popular following for many years to come.
Low Cost Management
Streaming revenues are growing, carry high margins and have no additional capital expenditure needs once the asset is owned, other than fund manager fees.
Dividend Reinvestment Opportunities
Monthly income streams and dividend reinvestment opportunities are generally available.
Registered Account Eligibility
Depending on the type of purchase, music royalties may be eligible for registered accounts RRSP, TFSA, etc.)
Risks & Volatility
Understanding risks and volatility is critical to being successful investing in both public and private markets and both share similar risks, but others are quite different.
- Manager Risk and Changing Trends
- There is always the possibility that a manager may make a series of bad investments or allow self-interest to put investment capital at risk. Through our due diligence and manager selection process, we work to minimize this risk.
- Trends change over time as was experienced by the demise of Blockbuster (and rise of Netflix) when consumers of videos changed their preference from buying instore to streaming so it is important to stay abreast of industry trends.
- Liquidity Risk
- Investments in Music Royalties are less liquid than traditional investments, such as publicly traded equities and bonds.
- Private investments, such as private debt and equity, are not traded on public exchanges. Their valuation and trading occur less frequently and are often based on third-party valuations. This is advantageous as it removes investor stress caused by volatility of publicly traded securities, but investors should understand and be comfortable with pricing mechanisms.
- Investors may have limited options to sell their shares or exit the investment before the end of the investment term.
- Private funds can be “gated” (investors may be restricted or limited in their ability to add or withdraw funds) mostly due to high volumes of redemptions during short periods of time, which can last for long periods of time. This has happened when the reputation of the fund or manager comes into question or when significant losses are experienced.
- This lack of liquidity could result in challenges if you need to access your capital unexpectedly.
- Valuation and Transparency
- Investments in Music Royalties are not subject to the same level of regulatory oversight and reporting requirements as publicly-traded REITs.
- This can lead to challenges in accurately valuing the underlying real estate assets and a lack of transparency regarding the financial performance and operations.
- Risks are increased when managers use leverage to improve returns but our preferred managers currently use no, and is capped at 25% Loan to Value.
- Limited Exit Options
- Exiting investments in Music Royalties can be more complex and restricted compared to publicly-traded equities, bonds and REITs.
- There might be restrictions on selling your shares to other investors, and the process could be subject to certain limitations or conditions, potentially impacting your ability to realize returns on your investment.
- To mitigate these risks, thorough due diligence and partnering with experienced management teams are essential.
- Volatility
- Private investments, such as private debt and equity, are not traded on public exchanges. Their valuation and trading occur less frequently and are often based on third-party valuations.
- This is advantageous as it removes investor stress caused by volatility of publicly traded securities, but investors should understand and be comfortable with pricing mechanisms.
Liquidity
- Liquidity can vary depending on the type of investment that you choose but investors should have a minimum two-to-five-year timeframe with potential early redemption penalties.
Potential Returns
- Every investment has many moving parts so predicting the future should be used for estimation purposes only.
- As music royalty funds are relatively new for investors, there is no long-term performance data available but returns in the low teens have been generated during the past two to three years.
- Our preferred managers have long term return expectations of 8-12%, net of fees comprised of income generation & asset growth.
Taxation
- Income and growth generated by music royalties may be sheltered in registered accounts.
- Royalty income is typically treated as other income until an asset is sold which may lead to capital gain treatment.
