Recently, Hipgnosis Songs Fund, a notable player in the music rights investment sector, experienced a significant drop in its portfolio valuation approximately USD 690 million less than it was at its peak.

Why did Hipgnosis’s valuation drop by USD 690 million?

Who are they: Hipgnosis Songs Fund is a British company specializing in music IP investments co-founded by Merck Mercuriadis and Nile Rodgers in 2018. Hipgnosis Song Management, also led by Merck Mercuriadis, serves as investment adviser to HSF and is majority-owned by leading alternative investment management firm and private equity giant Blackstone in a USD 1 billion partnership.

When it comes to the recent valuation drop it all comes down to an external valuation. Hipgnosis was initially appraised at USD 2.62 billion by Citrin Cooperman, their appointed ‘independent valuer’ since 2018. However, following Citrin Cooperman’s resignation amid valuation disputes, Hipgnosis hired Shot Tower Capital for a review.

This led to a revised valuation between $1.80 billion and $2.06 billion as of March 1, 2024. This adjustment, to a midpoint of $1.93 billion, represents a 26.3% decrease from Citrin Cooperman's valuation.

Apart from using a mid-point discount rate of 9.63%, approximately 1.1% higher than the discount rate deployed by Citrin Cooperman, Shot Tower also took into consideration the difference between Hipgnosis’s ‘passive’ vs. ‘active’ assets in their valuation, where they valued their ‘passive’ rights (i.e. assets where Hipgnosis doesn’t control administration, distribution, or licensing of a song and therefore only derives royalties) at a lower multiple than its active rights.

Music rights are still going strong

Did Hipgnosis get a bit too excited and end up valuing their assets higher than they should have? Were the multiples (music lingo for price-to-earnings ratio) too high in 2020-2021? Maybe. However, it is more likely that higher interest rates played a part than a complete valuation miss on behalf of Hipgnosis. Basic financial theory: Increased interest rates decrease the net present value of the future royalty cash flows.

What does this mean for the case of music as an asset? Well, not much. Just because someone made a bad trade with tech stocks doesn’t mean tech stocks aren’t a good asset class. It comes down to what you buy and at what price.

Looking at the underlying numbers of the music industry, they are all pointing in the right direction:

• The industry just reached an all-time high in recorded revenue, and Goldman Sachs forecasts that global recorded music revenues will more than double to around $131 billion by 2030.
• Spotify just increased their prices without recording a drop-off in subscribers.
• Big deals are still happening, only recently Cyndi Lauper sold a majority share of her music to Pophouse Entertainment, and Rod Stewart sold his catalog to Iconic Artists Group for nearly USD 100 million.

It is important to note that the professional music investment market is still young. Hipgnosis has been a key player in moving the needle in a positive direction by professionalizing much of its practices and introducing a lot of investors to the asset class, but both they and the industry as a whole are still learning. Music rights are very well-positioned to deliver reliable valuations. With the vast amounts of data now available in the music industry, big misses in valuation may soon be a distant memory.