INVESTMENT ADVISER THE FAMILY (MUSIC) LIMITED
HIPGNOSIS SONGS FUND LIMITED Proposed C Share Issue Targeting £300 million – Placing, Offer for Subscription and Intermediaries Offer Overview
• Listed on the Premium Segment of the London • At the end of August 2019 Hipgnosis had acquired Stock Exchange’s main market, Hipgnosis has raised 27 Catalogues with a combined value of £314m on approximately £395m of gross equity capital to invest a blended average multiple of 12.84x times average in proven hit Songs with a track record of success and annual net income in the last 3 years cultural impact • The current Portfolio contains 1,061 Songs that have • Hipgnosis provides unique access as the only UK-listed held Number 1 and/or Number 2 positions in the investment vehicle to provide pure-play exposure to global charts, 4,027 Songs that have held Top 10 chart music royalties positions, 15 Grammy Award winners and includes Songs • These songs produce predictable long term cash flows the vintages of which range from the 1960s through to which have low correlation to financial markets 2019 • The Company’s Investment Adviser, The Family (Music) • The Portfolio includes Songs performed by globally Limited, is led by CEO and Founder, Merck Mercuriadis, successful artists including Journey, Eurythmics, Shaun manager or former manager of Elton John, Guns N’ Mendes, Camilla Cabello, Maroon 5, Al Green, Booker Roses, Morrissey, Iron Maiden, Nile Rodgers and Beyoncé T & The MG’s, Rudimental, Jess Glynne, One Direction, Mick Jagger, Tom Petty & The Heartbreakers, Chic, Sister • Hipgnosis is targeting a dividend yield of 5 pence per Sledge, Diana Ross, Beyoncé, Rihanna, Justin Bieber, annum on the Ordinary Shares, with significant capital Chainsmokers, Mariah Carey, Mary J. Blige, No Doubt, upside* Gwen Stefani, Sia, David Guetta, Michael Jackson and Santana • Attractive pipeline identified with £300 million under exclusivity, and over £1 billion under negotiation • Independent Board with investment oversight and relevant fund and music experience Factors influencing market for royalties
• Music revenues are on an upward trend – after a 15 year decline in music revenues, global revenues from recorded music have steadily increased since 2014 • Growth driven by streaming revenues – music streaming has driven the recent growth in recorded music revenues, through the establishment and growth of digital service providers (DSPs) such as Spotify, Apple Music, Tidal, etc. Streaming revenues are substantially replacing revenues from the sale of physical recordings / permanent download. In 2018, global streaming revenues grew c.34% and now constitutes c.47% of global revenues • Synchronisation usage and other technological advances – allows further revenue realisation through licensing songs for use in films, advertisements, TV shows, video games, etc • Cover versions and sampling – where recording artists negotiate payments with songwriters to sample or interpolate part of a song • New growth opportunities – emerging markets, technological advances, social media and integration of DSPs into consumer products provide a number of further growth opportunities to capitalise on royalty income
Pipeline
• The Investment Adviser has identified 9 Catalogues, currently under exclusivity, from well-known songwriters which are well suited to the Company’s investment strategy • It is expected that, if all of these Catalogues are acquired, the total purchase price will be in the region of £300 million • In addition, the Company is in discussions on an expanded pipeline of up to 20 Catalogues (including those under exclusivity described above) with an aggregate purchase price of approximately £1 billion
*The target dividend yield and target total NAV return are targets only and are not profit forecasts. There can be no guarantee that these targets will be met and they should not be taken as an indication of the Company’s expected or actual future results. Potential investors should decide for themselves whether or not these targets are reasonable or achievable in deciding whether to invest in the Company. Ordinary Share price and NAV performance
Per Ordinary 31 March 2019 Company Share Operative NAV £208.8m 103.27p
Note: the Directors are of the opinion that the Operative NAV provides a meaningful alternative performance measure and the values of Catalogues of Songs in the Operative NAV are based on fair values produced by an Independent Valuer. The Company’s IFRS NAV at 31st March 2019 was 98.21p per share. In accordance with IFRS, Catalogues of Songs are classified as intangible assets and measured at amortised cost or cost less impairment.
Portfolio and team
The chart below sets out all Catalogues owned by the Company as at 31 August 2019
Acquisition Interest Songwriters copyright interests Catalogue Date Ownership Total Songs acquired Management team Terius Nash 11-Jul-18 75% 302 All copyright interests (The-Dream) Jason Boyd 16-Nov-18 100% 214 All copyright interests Merck Mercuriadis (Poo Bear) CEO and Founder Bernard Edwards 28-Nov-18 37.50% 290 All copyright interests The Family (Music) Ltd TMS 07-Dec-18 100% 121 Publisher share Tricky Stewart 17-Dec-18 100% 121 All copyright interests Chris Helm CFO Giorgio Tuinfort 03-Jan-19 100% 182 All copyright interests The Family (Music) Ltd Itaal Shur 30-Jan-19 100% 209 All copyright interests Rico Love 21-Mar-19 100% 245 Writers share of performance Björn Lindvall Sean Garren 21-Mar-19 100% 588 All copyright interests COO Johnta Austin 21-Mar-19 100% 249 All copyright interests The Family (Music) Ltd Ari Levine 31-Mar-19 100% 76 All copyright interests Sam Hollander 31-Mar-19 100% 499 All copyright interests Board of Directors Teddy Geiger 09-Apr-19 100% 6 All copyright interests Starrah 23-Apr-19 100% 73 All copyright interests Andrew Sutch Dave Stewart 10-May-19 100% 1,068 All copyright interests Chairman, Non-executive Jamie Scon 21-May-19 100% 144 All copyright interests Independent Director and chair of Asset Management Committee Al Jackson 30-May-19 100% 185 All copyright interests Michael Knox 10-Jun-19 100% 110 Producer royalties Andrew Wilkinson Non-executive Independent Lyric Catalogue 12-Jun-19 100% 571 All copyright interests Director and chair of the Audit and Brian Kennedy 12-Jun-19 100% 101 Publisher share Risk Management Committee Jon Bellion 12-Jun-19 100% 180 All copyright interests Paul Burger Neal Schon 21-Jun-19 100% 357 All copyright interests Non-executive Independent Eric Bellinger 01-Jul-19 100% 242 Master recording royalties and Director, Senior Independent writers share of performance Director and chair of the Portfolio Jason Ingram 01-Jul-19 100% 462 All copyright interests Committee Andy Marvel 26-Jul-19 100% 740 Writer share of performance Benny Blanco 07-Aug-19 100% 93 All copyright interests Simon Holden Non-executive Independent The Chainsmokers 20-Aug-19 100% 47 All copyright interests Director Since IPO, the Company has acquired 27 Catalogues consisting of 7,475 Songs Highlights
The Company • Guernsey incorporated investment company • Premium Listing Segment of the Official List and of the London Stock Exchange’s Main Market Investment Adviser • The Family (Music) Limited Issue size • Targeting £300 million through the issue of C shares (see overleaf for further information on C shares) Investment objective • The Company’s objective is to provide Shareholders with an attractive and growing level of income, together with the potential for capital growth, from investment in Songs and associated musical intellectual property rights, in accordance with its Investment Policy Portfolio • 27 Catalogues consisting of 7,475 Songs for a total cost of approximately £314 million, as at 31 August 2019 Pipeline • 9 Catalogues from well known Songwriters under exclusivity with a total purchase price in the region of £300 million, with an expanded Pipeline of up to 20 Catalogues with an aggregate purchase price of c£1 billion (including those under exclusivity) Gearing • The Company may incur indebtedness of up to a maximum of 20 per cent. of its Net Asset Value, calculated at the time of drawdown. The Company has a £65 million RCF in place with JPMorgan Chase for working capital and short-term bridging for Catalogue acquisitions. NAV • Net Asset Values (both Operative and IFRS) are expected to be published within 60 days of each semi- annual period end Target dividend* • 5 pence per annum on the Ordinary Shares, which the Company seeks to maintain and grow over the long term • Ordinary Share dividends paid quarterly • Dividends will be paid on C Shares in respect of income received and accrued on C Share portfolio Management fees* Advisory Fee: • 1 per cent. per annum of the Average Market Capitalisation up to, and including, £250 million; • 0.90 per cent. per annum of the Average Market Capitalisation in excess of £250 million and up to and including £500 million; and • 0.80 per cent. per annum of the Average Market Capitalisation in excess of £500 million Performance Fee: • 10 per cent. of the Ordinary Share Excess Total Return relating to that Accounting Period. Total fees (advisory and performance) are capped at 5% of lower of NAV and market capitalisation at end of the period Excess Total Return means in relation to each period the amount by which the Company’s market capitalisation (adjusted for dividends paid) exceeds the higher of: a) a performance hurdle of 10% pa compounded annually; and b) a high watermark in respect of the period in which a performance was paid by the Company. See prospectus for full details. *See Prospectus for full definitions Governance • An independent board of four experienced non-executive directors; compliant with the AIC Corporate Governance Code • Continuation vote at the AGM 5 years after IPO and every 5 years thereafter AIFM • The Company is a self-managed AIF Independent valuer • Massarsky Consulting. Founded in 1992, Massarsky provides financial and strategic consulting to the music and motion picture industries and counts the RIAA and SESAC-clients among its well established client base Expected timetable • Prospectus published and Intermediaries Offer opens: 27 September 2019 • Intermediaries offer closes: 11am, 15 October 2019 • Placing closes: 12pm, 16 October 2019 • Publication of the results of the issue: 17 October 2019 • Admission: 22 October 2019
*This is a target only and not a profit forecast. There can be no assurance that the target can or will be met and should not be taken as an indication of the Company’s expected or actual future results. Accordingly, potential investors should not place any reliance on this target in deciding whether or not to invest in the Company or assume that the Company will make any distributions at all and should decide for themselves whether or not the target dividend yield is reasonable or achievable. Please refer to the disclaimer and the prospectus for further information FURTHER INFORMATION ON THE C SHARES
The Company is permitted to issue one or more classes of C Shares (also known as convertible shares) from time to time. C Shares convert into Ordinary Shares only when a specified proportion of the net proceeds of issuing such class of C Shares have been invested in accordance with the Company’s investment policy or, if earlier, within a specified timeframe (prior to which the assets of the Company attributable to such class of C Shares are segregated from the assets of the Company attributable to the other classes of Shares). The issue of C Shares therefore permit the Board to raise further capital for the Company in circumstances where the issue of further Ordinary Shares would have the potential to exert “cash drag” on the performance of the Ordinary Shares already in issue pending the deployment of such issue proceeds. It is for these reasons that the shares being issued pursuant to the Initial Issue are C Shares. The C Shares to be issued pursuant to the Initial Issue will convert to New Ordinary Shares within one month of the Calculation Time, being the earlier of: (i) the close of business on the date on which the Board becomes aware or is notified by the Investment Adviser that at least 80 per cent. of the Net Issue Proceeds has been invested in accordance with the Company’s Investment Objective and Policy; or (ii) the close of business on 21 October 2020 (being the date that is 12 months following Initial Admission). On the relevant Calculation Time, the net assets attributable to the Ordinary Shares then in issue, the net assets attributable to the C Shares issued pursuant to the Initial Issue and the resultant Conversion Ratio will be calculated. Holders of a class of C Shares will receive such number of New Ordinary Shares as results from applying the Conversion Ratio to their holdings in the C Shares on the Conversion Time, with fractions of New Ordinary Shares being dealt with by the Directors in such manner as they see fit. Following the Calculation Time, the Directors shall procure that the Conversion Ratio and the number of New Ordinary Shares due to each holder of the C Shares is calculated and that the Company’s independent valuer prepares the fair valuations of the assets attributable to the Company’s Ordinary Shares and the relevant class of C Shares in accordance with the Company’s latest published valuation methodology. Further information on the C Shares is set out in the Prospectus published by the Company on 27 September 2019.
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