December 2020 BR REVIEW: SOVEREIGN IHT SOLUTION Sovereign Media Group / Thompson Taraz Managers Limited Positives Issues ► Strategy: To purchase, develop and ► Diversification: The company is new Why invest exploit music publishing rights. and has a single trading strategy. ► Team: The directors have a strong ► Track record: Although the team has Management track record in the film and music experience of music publishing, this is a industries, and an extensive network of new strategy for Sovereign. contacts. Nuts & bolts ► Governance: The company board will have no independent directors. ► Diversification: With no investments to date, we cannot comment on diversification. ► Valuation: There will be a third-party valuer and trades will take place at audited NAV plus fees. ► Annual fees: Stated annual fees total 1.25% p.a. plus VAT. With no directors’ fees, Fees additional company costs should be limited. Overall costs are at the lower end of the sector. ► Other fees: A 2% entry fee and 1% on exit; no performance fee. ► Target returns: The target return is 3% p.a.. Modelling would suggest that, once Risks invested, the company has a good chance of meeting or exceeding that target. This is unusual within the sector. ► Investment risk: In common with most products in the non-AIM BR sector, Sovereign targets a lower return than the yield on the underlying assets. The fee and expected cost structure keep this gap reasonable. Manager information Manager contact details Analyst ► Fund assets: £0m (Oct’20) Sovereign Media Group ► Fund target: n/a 020 3940 7600 Brian Moretta ► FUM in similar strategy: £0.2m 020 3692 7075 [email protected] ► Total FUM: £50m (31/10/20) [email protected] www.sovereign-group.com ► Launch date: 2020 Disclaimer: Attention of readers is drawn to important disclaimers printed at the end of this document BR Review: Sovereign IHT Solution Table of contents Factsheet ................................................................................................................................... 3 Product aims ............................................................................................................................. 4 Summary of risk areas ............................................................................................................ 4 Risk commentary ................................................................................................................. 5 Investment strategy ................................................................................................................ 7 Governance and product structure ...................................................................................11 Company structure ...........................................................................................................12 Valuation processes ..........................................................................................................13 Fees ...........................................................................................................................................14 Track record ............................................................................................................................15 Sovereign Media Management ......................................................................................15 Other funds ........................................................................................................................16 Team .........................................................................................................................................17 Appendix 1 – due diligence summary ...................................................................................18 Appendix 2 – example fee calculations ................................................................................19 Disclaimer ................................................................................................................................20 Status of Hardman & Co’s research under MiFID II .....................................................20 December 2020 2 BR Review: Sovereign IHT Solution Factsheet Sovereign IHT Solution Product name Sovereign IHT Solution Product manager Thompson Taraz Managers Limited Product advisor Sovereign Media Group Tax eligibility Business Relief Target return 3% p.a. Target income n/a Company type Public Limited Company Term Open-ended Sectors Lending: none Assets: media Diversification: Number of loans n/a Number of assets 0 Fees Amount Paid by Initial fees: Initial fee 2.0% Paid by company from subscription Annual fees: Annual management fee 1% + VAT Company Annual administration fee 0.25% + VAT Company Exit fees: Exit dealing fee 1% Investor Performance fee none Advisor fee facilitation Yes Advisor fee amounts As agreed with investor Reporting Accounts every six months, quarterly updates Financial year end 30 September Expected liquidity method Redeemable shares, six months guaranteed, every month in practice Fundraising: Minimum investment £25,000 Current funds raised £0m Current product size £0m Fundraising target n/a Dealing date(s) Target of 15 days Source: Sovereign Media, Hardman & Co Research December 2020 3 BR Review: Sovereign IHT Solution Product aims Sovereign IHT Solution is a non-AIM/unquoted Business Relief product. It is an Alternative Investment Fund, which will invest wholly into Sovereign Media Management Limited. The latter will purchase and develop music publishing rights. It may add other strategies in due course. Summary of risk areas Note: There are generic risks from investing in unquoted companies, in addition to the specific ones commented on below. Comments on relative risk refer to other BR investments and not to wider investments. Investments Investment strategy risk There is an active market in music publishing rights at a range of sizes and multiples. Sovereign intends to purchase smaller-sized assets at multiples lower than those of the higher-profile transactions. Together with Sovereign’s work on marketing the songs, this should provide a good degree of downside protection. Purchased royalty streams should be fairly stable, although may evolve over time. While these could decline, Sovereign aims to enhance them through marketing and active management and any change across a portfolio would be slow. Portfolio and company risk Sovereign has set no targets for diversification. As a new company, it will be limited at outset but should improve as the company grows. We note that the intended size of each rights purchase is smaller than for other market players, suggesting that diversification should be obtained even when the company is relatively small. The company structure is simple, with almost all the economic activity in the single subsidiary. There will be no borrowings. Governance All the directors will be part of the Sovereign team. While not ideal, this is not uncommon in the sector. We are not aware of any intention to have related-party transactions. Liquidity Formally, liquidity is provided to investors on 30-days’ notice. The aim, in practice, is to provide it within 15 days. The long-run target is for the company to run liquidity of ca.10%. This is likely to be higher in the near future, particularly while assets are small and investments are relatively lumpy. While there will be a market for the assets, if required, they may take two to three months to realise. December 2020 4 BR Review: Sovereign IHT Solution Manager/Consultant Team The Sovereign team brings a huge amount of experience in music and film. Although it has grown recently, the team remains relatively small. While the team seems adequate for the expected scale of operations in the near term, there are plans in place to grow it should the product start to attract significant assets. Track record Sovereign IHT Solution track record FY 2020 CAGR Ordinary shares n/a n/a Source: Hardman & Co Research As a new product, the Sovereign IHT service does not have a track record yet. Regulation Product The product has had no successful BR claims as yet. Sovereign has checked with PwC that the company should be eligible. Given the company will be marketing and exploiting the rights, it would appear to be a genuine trading company. Manager The manager of the Fund is Thompson Taraz. It is FCA-registered (number 226978), with fund management permissions. Submissions to Companies House appear to be up to date. Sovereign Media Group is not FCA-registered. Risk commentary The overall company and product structure appear sound, with no major concerns. While music publishing rights is a new strategy within the unquoted BR market, and is receiving increased interest from other investors, there is already a well- established industry. It offers good prospects of stable income. Sovereign’s active management strategy and a favourable legislative background mean that investors have good prospects of improved cashflows too. Actual returns will depend on Sovereign’s ability to source attractive rights at a reasonable price. By avoiding the large-value and high-profile portfolios that some prominent investors are looking at, this seems a reasonable prospect. Fortunately, the fee structure does give Sovereign some scope to pay up a bit and still reach the target return. If purchase prices are close to target multiples, then the enhancement strategy gives good prospects of materially exceeding the target return. Good purchase prices should also underpin some capital protection. From