The Three Paths to Music Royalty Investing
You understand what a music royalty is and how it's divided, but where do you actually go to start investing? In this episode, host Josh Gilliland uses a simple real estate analogy to walk through the three primary paths an investor can take to add music royalties to their portfolio.
You will learn:
Path 1: The Stock Market Approach - Why buying shares in major labels is an indirect, market-correlated investment.
Path 2: The Fund Approach - The pros and cons of investing in a managed fund, using the cautionary tale of the Hipgnosis Songs Fund.
Path 3: The Direct Ownership Approach - The method this podcast focuses on, which gives you the most control and a direct return from the music itself.
Resources Mentioned: Download your free Advanced Investment Calculator: https://www.jgsoundofmoney.com/calculator
Next week on JG Sound of Money: We'll do a foundational deep dive into exactly how these assets earn money by exploring the Four Core Royalty Streams.
The official companion to this podcast, JG Sound of Money: A Modern Investor's Guide to Unlocking Music Royalty Investing, is now available for pre-order on Amazon. Reserve your copy today: https://a.co/d/7132rZv
Next week on JG Sound of Money: Now that you know what the asset is and how the money is split, where do you actually go to get your slice? We'll explore the three primary paths to investing.
Transcript:
Introduction and Episode Context
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Welcome back to the JG Sound of Money. I'm your host, Josh Gilland. ~So ~over the last two episodes, we've established a powerful foundation for music royalty investing. We started by learning what you are buying, the two copyrights that act as the blueprints and the building for every song that exists.
And then last week we saw how the money from those assets gets divided up when we learn how to slice the royalty pie. Now that you know what the asset is and how the money is split in inside of that asset, the next question is, where do you actually go to get your slice today? We're going to explore the three primary paths you can take to start investing in music royalties.
~So ~
Real Estate Investment Analogy
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to make these [00:01:00] paths easy to understand, let's use an analogy from an asset class many investors are already very familiar with, and that's real estate.
~So ~imagine your goal is to invest in a property or invest in proper. You could buy shares ~in a, ~in a massive publicly traded real estate company, like a reit, like a real estate investment trust. You could invest your money in a professional property fund, a syndication, or you could go out and you could buy a rental house for yourself in each path, gives you exposure to real estate, but to control the risk.
The potential returns are vastly different between those three paths. Music royalty investing works in a very similar way. ~So ~let's break down these three paths.[00:02:00]
Path 1: The Stock Market Approach
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Path number one, this is the stock market approach. ~So ~this is the easiest ~and and ~most traditional way. To get exposure to the music industry, but ~it's, ~it's also the most indirect. So in a real estate analogy, this is like buying shares in that reit. In the music world, this means buying shares and publicly traded record labels and publishers like Universal Music Group or Sony Music, or Warner Music Group.
You know, the biggest benefit to this is liquidity. Obviously, you can sell ~your, ~your shares and get instant cash, but the biggest drawback is very high market correlation, [00:03:00] which defeats the diversification goal of music royalty investing. ~So ~let's do ~an, let's, uh, ~dig into an example of this. ~So ~a very clear.
Real world example of this correlation can be seen by comparing the stock performance of Warner Music Group and the s and p 500 during the market downturn of 2022. ~So ~the broader market, the s and p 500 in 2022 was facing high inflation and aggressive interest rate hikes by the Fed. The s and p 500 fell 19.4%.
It was a broadly negative year for the stock market as a whole. Now compare that to Warner Music Group and their stock during that same period of time. Warner Music Group stock price fell from a high of [00:04:00] over $44 per share to a low of nearly $26 per share. Which was a drop of over 35%. ~So ~as you can see, wmg stock price moved in very close correlation with the broader market's, negative sentiment, not in correlation with the actual underlying music industry.
And in fact, according to the IFPI global recorded music revenues grew by 9% in 2022. ~So ~this demonstrates the core issue we discussed in the podcast. When you buy a music company stock, you are buying exposure to the stock market first and the music industry second, which can defeat the goal of diversification.
Path 2: The Fund Approach
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Okay? ~So ~that was path number one. Let's talk about path number [00:05:00] two. ~And ~this is ~a, ~the fund approach. ~So ~this path gets you one step closer to the royalties themselves in, in our real estate analogy. This is like investing in a private real estate fund or a syndication here. You buy shares in a fund that exists for the sole purpose of acquiring music catalogs.
The most prominent, and by far the most cautionary example of this was the Hypnosis Songs Fund, where the public market struggled to price the assets correctly, causing the fund shares to trade at a deep discount to the value of the music inside of it. The demise of the H Hypnosis Song Fund, it wasn't a bankruptcy.
It was, but rather it was a crisis of [00:06:00] investor confidence that caused its stock price to collapse relative to the stated value of its music assets. ~And ~here's some very key financial details of that. The core problem, the fund's primary issue was the massive and growing discount between its stock price and its reported net asset value.
Which is the theoretical value of its catalog ~songs. Catalog of ~songs. At its worst, in late 2023, the fund shares were trading at a discount to nav that approached 50%. This meant investors could buy a share of the company for roughly half what the company claimed the underlying music was worth.
Signaling a very deep lack of trust in the fund's accounting. The next financial detail was the [00:07:00] stock price drop. ~So ~after reaching a high of over 1.2 pounds per share in late 2021, the stock price plummeted to around 0.7 pounds per share. By late 2023, a drop of more than 40%. This wiped out significant value for the shareholders who had bought in during the peak.
And then the third detail is the acquisition. ~So ~this crisis of confidence made the fund a target for acquisition. So after a bidding war, ~uh, ~the private equity firm, Blackstone agreed to acquire the fund. This was mid 2024 for approximately little north of one and a half billion dollars. It is equated to a dollar dollar 31 per share.
So while this price represented a significant premium over the lows of 2023, it was still a disappointing [00:08:00] outcome for long-term investors. So this is the structural risk we referenced in the podcast. The value of the music itself was ultimately validated by Blackstone's billion dollar offer. But the public fund structure failed to accurately reflect the value for its shareholders.
Path 3: Direct Ownership Approach
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This brings us to the third and final path, and the one that we'll be focusing on for the remainder of this podcast. Path number three is the direct ownership approach. So this is the direct equivalent of buying a rental property yourself. Your return is tied directly to that specific asset, not the stock market.
With this approach, you purchase the royalty rights to a particular song, album, or catalog, which is a collection [00:09:00] of songs directly on a online marketplace like Royalty Exchange, anot song vests, some of these that we'll get into through the podcast. The upside of this are total control and direct correlation.
The biggest downside is that the responsibility to research each investment is entirely on you. Luckily, that's what this podcast is here to teach you and what my book is all about. ~So ~to recap, those are the three main paths, the stock market approach, the fund approach. The direct ownership approach, which we'll focus on for the rest of this podcast.
Conclusion and Next Episode Preview
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Now that you know the different paths that you can take, we're going to circle back next week to a foundational topic that is so important. It needs its own deep dive episode. We're going to break down [00:10:00] exactly how these assets earn money by exploring the four core royalty streams. It's an essential episode that you won't want to miss.
And now that we've built this, the foundation, and we've identified the path number three as the direct ownership approach that we're going to be exploring, it's time for us to get into the details. Don't forget to download the free Advance Investment calculator at JG sound of money.com/calculator.
Thank you very much for tuning in to the JG Sound of Money. Please subscribe and leave a review. And we'll see you next [00:11:00] week.
