Asset manager explains how their music royalty fund is designed to deliver consistent income returns
A Canadian asset manager is offering a new investment vehicle set to deliver income from exposure to music streaming. They’re not investing in Spotify or Apple, though, they’re investing in the royalty rights of songs to generate income every time they get played.
ICM Asset Management is launching their ICM Crescendo Music Royalty Fund. The fund, they say, represents a new step in alternative investing that puts investors at the heart of the modern revenue source of the music industry: streaming. Through rights purchasing arrangements with artists, ICM say they’re able to create a high-margin, low-depreciation asset class that, because of the nature of streaming revenue, can deliver consistent income for investors.
“Investors are getting exposure to the growth in streaming almost directly. We are excited about the diversification benefits to a portfolio as there is little correlation to equities and many other asset classes. Royalties are high-margin assets and we think particularly valuable in what is a very low interest rate environment,” says David Vankka, Partner, Managing director and Portfolio Manager for ICM Asset Management. “Almost everyone is emotionally connected to music and we believe it can be utilized effectively to generate income within a portfolio.”
Vankka explained that the new Canadian Mutual Fund Trust works by purchasing the royalty rights and in some cases the copyrights for a catalogue of songs from an artist or songwriter for a lump sum. From there, all the streaming royalties that would have flowed into the artist’s account, go into the fund, generating steady income. It benefits artists, Vankka says, who might rather monetize certain assets to cover an immediate expenses and focus on creating additional work. The ICM team believe a portfolio of songs and catalogues, particularly older works, can create a reasonably predictable income stream.
To deliver a working strategy, ICM partnered with a firm called Crescendo Royalty which already has a track record of investing in music royalties through data-driven machine learning algorithms. They also brought in New York based DeVon Harris, who goes by the stage name Devo Springsteen, a Grammy award winning music producer who, among other key accomplishments, launched John Legend’s career by connecting him to Kanye West.
ICM is not making a play to bet on massive hits, Vankka says. Rather, they’re using a data-driven approach to identify due-diligence potential acquisitions by using almost 20 different variables to help determine how much the song is likely to be streamed going forward. The algorithm can also provide artists with new information about their own catalogues, making sure that a great hook will translate into streaming revenue.
Streaming now accounts for around half of the music industry’s total revenue, Vankka says, and Goldman Sachs researchers have forecasted subscriptions to streaming services going from around 225 million globally to around 1.1 or 1.2 billion people by 2030. Off the back of streaming, Goldman is forecasting the music industry’s revenue to double to about $131 billion by 2030. Nielson/MRC Data’s recent mid-year report for 2020 showed the music industry posted a 9.4% increase in audio consumption year over year, despite having to overcome a bigger-than-expected drop in physical music formats due to the COVID-19 economic downturn.
As a pure investment vehicle, Vankka stresses that music streaming has great diversification and income generation benefits. He says that with interest rates at their current low levels and the COVID-19 driven crash pointing to the necessity of alts as ballast in a portfolio, the fund innovates what it means to deliver income for clients. Unlike many alts, such as real estate, Vankka says that music streaming amounts to a single up-front cost rather than incremental capital outlays. Once the fund acquires a royalty interest, they’ll hold it until copyright expires, 70 years after the death of the original artist.
The fund is also set up to benefit from any revision of streaming revenue towards intellectual property holders. To date, the Copyright Royalty Board has said streaming services need to allocate 10.1 per cent of revenues towards artists and IP owners. That number is increasing to 15% through 2020, though Spotify and Amazon Music are appealing (while Apple Music has supported the increase).
For the end investor, Vankka sees this as a chance to get into an asset class they’ve never been able to access before. In relatively short order, Canadian investors will have a chance to buy into the fund through an Offering Memorandum exemption. It’s currently available to accredited investors and Vankka says the ICM team is working on getting the product onto multiple shelves for distribution, including through EMD and IIROC channels. For all the novelty and pop appeal of the music fund, Vankka says the core goal of ICM’s strategy is to deliver income to portfolios.
“It's diversified income from what investors already have,” Vankka says. “We're targeting 8 to 12 per cent, unlevered returns at an asset level. Our goal is to distribute 8% through regular and special distributions with the balance being reinvested to grow the portfolio. Capital appreciation could occur when catalogues are sold in the future. The fund also offers a DRIP option for investors that wish to reinvest their distributions as well.”