Dissonance in the World of Music Rights Investments: Hipgnosis’ Troubled Tune

What makes this decision particularly infuriating is the explanation given for the dividend cut. A substantial increase of $23 million, bringing the total to $68 million, in “catalog bonuses” this year is being held accountable. These bonuses, a form of performance-related payment tied to past acquisition agreements, have now created a maelstrom of discontent among shareholders. They rightly question why the mechanics of these payments were not adequately explained and foreseen earlier.

Welcome to the enigmatic world of music rights, where the financial intricacies of acquisitions, let alone the associated add-ons, are often shrouded in secrecy. This mysterious terrain is classified as an “alternative” asset class, where an immense trust is placed in the board and its investment manager. Hipgnosis’ recent predicament is a stark reminder of what happens when this trust disintegrates.

Last month, shareholders dealt two significant blows to the fund. The first proposal, to sell a fifth of Hipgnosis’ extensive catalog of 65,000 songs for $440 million, faced immediate skepticism due to the unappealing 24% discount to book value. The potential buyer, private equity firm Blackstone, shared Merck Mercuriadis as its investment manager, raising concerns about conflicts of interest in the closely-knit world of music rights.

The second, more pivotal vote, focused on the fund’s “continuation.” The rejection signaled the board’s obligation to formulate a new strategy for the fund, including the possibility of a wind-down or the sale of all or part of the portfolio. This demand for radical change was entirely justified, especially considering the fund’s market price languishing at around 70p, significantly below its book value of approximately 150p a share or $2.2 billion.

Initially, the board had until the end of April to develop innovative solutions. However, with the extension of the dividend suspension, this timeline now appears overly leisurely. Investors’ attraction to music rights funds hinges on reliable income from royalty payments. When this income falters, the endgame becomes all too apparent.

The newly constituted board must swiftly adapt its tune to minimize the strain on investors. This could involve parting ways with Merck Mercuriadis and his firm as the fund’s manager, provided the associated costs are transparently outlined. Furthermore, an outright sale of the portfolio is the most straightforward exit strategy. The board should expedite its efforts to assess the possibilities in the open market without unnecessary delays.

Hipgnosis’ tumultuous journey illustrates that in the intricate symphony of music rights investments, trust, transparency, and accountability are paramount to creating harmonious relationships between artists, investors, and the industry as a whole.