Round Hill Music Royalty Fund — Expanding horizons

RHMRF listed on the London Stock Exchange on 13 November 2020, with the IPO raising $276.4m. It is the second UK-listed closed-end fund investing in music royalties (following Hipgnosis Song (SONG), listed in July 2018). Its NAV is $396.9m (as reported in the accounts on 31 December 2021) and the market capitalisation is $430.0m. The economic NAV (see the NAV reporting section below) is $459.7m based on the audited $1.12 economic NAV per share at 31 December 2021.

The company seeks to invest in music royalties with a proven track record and wide audience appeal. Exhibit 1 below summarises RHMRF’s catalogue acquisitions to date.

Further details of the investments are given below. It is worth noting that scale is of value in this industry. The more substantial the catalogue, the greater the bargaining power when it comes to negotiating licensing deals.

RHMRF targets an annualised TR to investors of 9–11% over the medium term, after fees and expenses. It also targets an annualised dividend payment of 4.5 cents per share, payable quarterly.

We note that the net publisher’s share (NPS) multiples, at which RHMRF acquires catalogues, have increased over the life of the fund. While the seed portfolio multiples were 16.3x and 16.2x, the latest acquisitions’ portfolio average multiple has grown to 17.9x (see Exhibit 1).

According to RHM LP, active management is often not reflected in underlying multiples. It regards valuations of 16–20x NPS for high-quality, iconic, blue-chip, stabilised catalogues as attractive.

To finance the acquisitions, listed in the Exhibit 1, made between 11 August 2021 and 8 February 2022, the company has fully invested all the proceeds from its July 2021 $86.5m C share issue and had drawn down c $91.7m under its existing revolving credit facility (RCF), using c $178.2m in total, as announced on 11 February 2022.

Consequently, on 11 May the company announced the conversion of 77.5m C shares into new ordinary shares. The current total number of ordinary shares in issue with voting rights is 407.6m. No shares are held in treasury.

Gearing represented by borrowing is allowed for up to 25% of economic NAV, calculated at the point of drawdown, in accordance with the prospectus. As at 31 December, 2021, debt to economic NAV was 15.5%.

On 30 December 2021, the company increased the capacity under the RCF from $82m to $110m. As at 31 December 2021, the company had $82m of cash on hand and circa $60m of debt outstanding. The company had complied (and continues to comply) with all covenant compliances as per the RCF with RHMRF. Gross gearing (defined as total reported debt to the latest reported economic NAV) was 13% as at 31 December 2021.

On 6 May the company announced its economic NAV per share of $1.11 (as at 29 April 2022), down $0.01 from the $1.12 NAV per share audited value reported in RHMRF’s FY21 annual report ($1.07 audited economic NAV per share at 30 June 2021). Citrin Cooperman (incorporating Massarsky), an independent valuer, used an 8.5% discount rate (unchanged from the valuation on 30 June 2021). The movement in the economic NAVs between then and 29 April 2022 was affected by the following:

As stated in the FY21 company’s report, RHMRF’s board believes an economic NAV provides a meaningful alternative performance measure. The directors note the values of catalogues owned directly by RHMRF are based on fair values produced by the portfolio independent valuer.

The company floated at $0.98 economic NAV per share. The IFRS NAV per share was $0.95 at 31 December 2021.

As the company continues to expand, its number of employees has grown from 52 employees 18 months ago to nearly 70 today. RHM has also gone through some business transformation to support scale and position for future growth. This has included relocating the legal team from New York to Nashville, the global home of the music royalty business. Responsibility for digital revenues has migrated to the licensing team to give greater coherence and efficiency, while staffing for income tracking has also been boosted. RHM remains committed to its employees and staff retention, while ensuring it builds plans to help employees on their career path. The company has internal diversity, equity and inclusion (DEI) and ESG teams, drawn from employees across all levels and all departments, to feed input into management decisions. In addition, RHM has hired external ESG experts.

The company has a dedicated IT person, Ed Carnes, based in Nashville and there is also a dedicated human resources person – both new positions created during 2021 to support the larger organisation. Most of the employees are based in Nashville.

RHM is also heavily focused on recordings and neighbouring rights (these rights in 2015 represented zero percent exposure). At end FY21 neighbouring rights exposure was closer to 30%, according to the company. RHM does not disclose the proportion of the neighbouring rights in its reporting. The company added about 12 people in these areas over the last two years.

The group offers a full-service, active management of its catalogues. The market is complex and lacks transparency, with much of the revenue not finding its way to the entitled/intended beneficiaries. To achieve full functionality and optimal returns, it is vital to have an exhaustive and efficient repository of metadata. Round Hill (and others) are focused on getting the full entitlement from their portfolio, which means having a far better handle on the metadata. The data transformation piece, which includes data enhancement and enrichment, is being undertaken in-house, with additional staff brought in to cover the day-to-day activities while this process is ongoing.

Concerns about the subscription model in other forms of entertainment have not been carried through into music, with Spotify’s continued strength testament to the resilience of music streaming and hence the value inherent in music assets. Spotify’s monthly average user (MAU) count was up by 19% year-on-year in Q122 to 422m globally, translating to a revenue uplift of 24%.

Q122 results from both Warner Music (Q222 to end March) and Universal Music Group have highlighted the importance of synchronisation (sync) revenues in driving top-line growth, with the former reporting sync income up 28% and the latter +29% year-on-year at constant currency as commercial licensing continued its recovery. Sony’s music publishing revenues were up 25% year-on-year (with a strong currency tailwind), with streaming revenues ahead 36% and ‘other’, which includes licensing and merchandising income, up 15%. The upsurge in sync revenues may moderate if global advertising spending tempers over the year as economic concerns build.

The number of applications and platforms using music carries on rising, with further expansion opportunities into the metaverse accelerating. Twitch, Triller, Apple Fitness+, Roblox, TikTok, Singa, LiteBoxer and many others are creating a significant revenue stream, now that initial resistance and attempts to circumnavigate licensing responsibilities have been (mostly) sorted. TikTok has recently signed a licensing deal with Pro Music Rights covering rights to over 2.5m works.

The rapid expansion of content creation to refill the hoppers of the streaming and broadcast sectors has also started to come through in sync revenues from TV and film. There is also a burgeoning catalogue of music originally composed for the games industry but now finding a wider audience.

2021 was a bonanza year for music rights acquisitions/deals, with industry estimates suggesting that over $5bn changed hands, split roughly equally between corporate deals and sales by artists/songwriters, fuelled by an inflow of capital into the sector both from private equity and from the proceeds of IPOs. The pace slackened as 2022 has progressed after an initial flurry with the purchase of the Bowie catalogue by Warner Chappell Music for a reported $250m. However, the recent sale of Justin Timberlake’s catalogue to the Blackstone-backed Hipgnosis Song Fund (SONG) and the rumoured sale of Pink Floyd’s catalogue may signal a renewed spate of activity.

With the rise in interest rates (and the prospect of further rises to come), and the resurgence of inflation, asset pricing – and price expectations – is likely to have to adapt.

Since 29 December 2021, the group has announced six acquisitions of music publishing catalogues, master royalty income, recorded music income, neighbouring rights and publishing rights (for definitions, please see our initiation report). These comprise:

In its investor presentation in May 2022, RHMRF disclosed close to $33m worth of current deal pipeline highlights. RHM LP has also seen significant deal flow emerge from within its existing catalogues (including the pipeline investments) and has a proprietary position on those deals.

RHMRF’s portfolio has 49 catalogues with over 122,000 songs (at end-December 2021). Exhibits 2 and 3 illustrate the portfolio is diversified by genre and revenue type as at 31 December 2021. ‘Older’ genre rock (45%) has the largest share, followed by pop (21%) and country (13%). Following the investment manager’s ‘high quality compositions’ approach to primarily acquire songs over 10 years old, more than 75% of all the songs in the portfolio are ‘vintage’, written before 2000. The bias to rock is deliberate, as the attractions cross a wider range of age groups and a wider range of geographies, with hits having a longer ‘shelf-life’. The portfolio is also diversified by revenue type and has over a quarter (27%) of the portfolio’s revenues in masters’ royalties, perceived by the company, as those with the most stable and higher-quality revenues of all highlighted revenue types (Exhibit 3).

RHMRF’s performance track record began on 13 November 2020, the first day of trading of the trust. RHMRF’s share price is shown in absolute terms in the left-hand chart and in relative terms in the right-hand chart of Exhibit 4, compared to the MSCI UK All Cap Index.

A comparison of RHMRF’s and SONG’s performance is presented in Exhibit 5.

RHMRF has the lower market capitalisation of the two funds. Both RHMRF’s and SONG’s track records are relatively short, with SONG launched on 11 July 2018, approaching its three-year anniversary. In performance terms, since launch RHMRF has outperformed SONG on an NAV TR basis, but we note the very short performance period of just over one year. It is typical for new funds to gain momentum over a year as they establish themselves, invest and begin harvesting IPO proceeds, as RHMRF has done. This period largely reflects the set-up stage for RHMRF, as it has now fully invested its IPO proceeds and geared up.

In terms of the premium/discount to NAV, we believe it is still too early to compare the two trusts, and the numbers in the premium/discount column in Exhibit 5 are indicative only. We note that SONG reported its latest economic (or operative) NAV per share ($1.7) on 30 September 2021, and RHMRF’s first post-launch reported economic NAV per share was $1.11 at 6 May 2022.

RHMRF’s primary objective is to reward its investors with a stable income (it also aims for long-term growth of capital). On 9 March 2022, the board confirmed the 4.5% dividend yield target for the financial period to 31 December 2022. This is in line with RHM’s long-term annualised dividend yield target of 4.5%, by reference to the issue price of $1.0.

On 25 May 2022 the company has declared an interim dividend of $0.01125 per share for Q122, payable on 14 June 2022. The company has also declared and paid its initial interim dividend for FY22, totalling $0.015 per ordinary share. This dividend comprises $0.01125 per ordinary share for the quarter to 31 December 2021 together with a further dividend payment of $0.00375 being the balance payable for the initial quarterly dividend to 31 March 2021. This ensures that holders of ordinary shares receive the full 4.5% of the company's initial issue price of $1.00 for the period from admission to 31 December 2021.

The dividend policy is to pay dividends quarterly: declare dividends for the quarterly periods ending March, June, September and December and pay in June, September, December and March, respectively. Dividends are aimed to be paid out of royalties income, but can be paid out of capital, if necessary, within the dividend policy.