Disclosure – Non-Independent Marketing Communication This is a non-independent marketing communication commissioned by Hipgnosis Songs. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research. Update Hipgnosis Songs 19 September 2019 Summary Hipgnosis Songs Fund (SONG) is a £409m market cap listed fund, aiming to achieve income and capital growth by owning songwriters’ music royalties. The managers (The Analysts: Family (Music) Ltd) believe that, aside from being able to buy these royalties from William Heathcoat Amory songwriters on a gross yield of c. 8%, investors should benefit rf om trends and active +44 (0)203 384 8795 management, which will increase the level of income (and capital value) over time. Pascal Dowling The managers are aiming for total returns of greater than 10%, and have +44 (0)203 384 8869 demonstrated their ability to invest the fund’s capital relatively quickly – no mean feat in a market where there are no formal brokers or “exchange” for royalties. Merck Thomas McMahon, CFA Mercuriadis leads the management team, and he is clearly a music industry +44 (0)203 795 0070 “insider”; we understand his relationships have been key to accessing the quality of the portfolio that SONG has built up so far. William Sobczak +44 (0)203 598 6449 Having spoken to the team, they tell us that royalties from the copyright of songs tend to be relatively predictable – certainly after the first hreet years when the “buzz” has Callum Stokeld largely subsided. We discuss the intricacies of music royalties in more depth in the + 44 (0) 203 795 9719a portfolio section, but it is worth noting that these are long life assets, with copyrights in some cases lasting for 70 years past the death of the writer. The catalogues acquired by 31st August have seen revenue growth (excluding post 2016 releases) of Kepler Partners is not authorised 49% from streaming sources, and 19% overall. to make recommendations to Retail Clients. This report is based on factual Streaming is increasingly being recognised as a huge growth area for the music information only. industry, not only opening up the potential market (by reducing distribution barriers The material contained on this site to zero), but also significantly nci reasing and extending the length of a song’s earning is factual and provided for general potential. JPMorgan predicts that global music industry revenues will surpass the informational purposes only. It is peak of the late 1990s, with 10% p.a. compound growth expected through to 2030. not an invitation or inducement to The number of people paying for a streaming music service is rapidly increasing with buy, sell or subscribe to any product described, nor is it a statement as 255m paying subscribers for streaming services currently (according to the IFPI Global to the suitability or otherwise of Music Report 2019), and which JPMorgan predicts will grow to north of a billion. any investments for any person. Notwithstanding this, the managers intend to apply significant resource towards het The material on this site does not management of the fund’s songs, and to boost revenues and the capital value of the constitute a financial promotion within the meaning of the FCA portfolio using more intensive, active management. rules or the financial promotions order. Persons wishing to invest in In its first year, SONG has delivered what it promised at launch. Recognised net any of the securities discussed in revenues from the portfolio from incorporation on 8 June 2018 to the financial eriodp the website should take their own independent advice with regard to end on 31 March 2019 were £7.2m, equivalent to a 6.1% gross yield on the £120m the suitability of such investments invested component of the portfolio over the period - in line with projections at and the tax consequences of such launch. The company has paid its target dividend of 3.5p over the first year (in four investment. instalments). As we examine in the dividend section, the company has a stated aim to pay dividends of 5p in the current financial year. Since launch to 31 March 2019 (the last reporting date), the fair value NAV has risen from 98p to 103.27p. Including dividends paid, this means that the total NAV return has been 6.4% - a strong performance during a period in which the fund has been sitting on cash as it builds the portfolio up. The shares are trading at a small premium to fair value NAV, which means that total shareholder returns (including dividends) to the end of August has been 8.5%. Kepler Trust Intelligence is written and published by the investment companies team at Kepler Partners. 1 Visit www.trustintelligence.co.uk for new investment ideas and detailed thematic research every week. Disclosure – Non-Independent Marketing Communication This is a non-independent marketing communication commissioned by Hipgnosis Songs. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research. The prospective dividend of 5p per share equates to an formidable “advisory board” (including Nile Rogers of Chic income yield of 4.8% at the share price on 31 August 2019, and Dave Stewart of Eurythmics) who should enable a which compares with the Global Equity Income sector continuing flow of opportunities for investment. average yield of 4.1%, 4.1% for infrastructure funds, and 5.1% for the renewable infrastructure funds (Source: Getting into the specifics, Hipgnosis Songs mainly invests Numis). in songwriter’s royalties. These are generally copyrighted for 70 years after the death of the writer or last surviving co-writer. Of all revenues generated by a “song”, the Portfolio songwriters’ share is the largest part. Illustrating how enduring and significant these royalties are, Slade Hipgnosis Songs Fund (SONG) aim is to achieve income reputedly earns several hundred thousand pounds every and capital growth by owning music royalties. The Christmas from its song “Merry Christmas Everybody”. management team’s main target for investment is Clearly, not all songs have such an enduring appeal, but songwriters’ royalties. The managers believe that, aside it is the managers’ role to acquire songs that do have from being able to buy these royalties directly from continuing earnings power (in one form or another) but songwriters on a gross yield of c.8%, investors should also to “manage” that song to achieve its full potential. It benefit from trends and active management which will is worth noting that Hipgnosis does not buy or take risks increase the level of income (and capital value) over time. on new songs that haven’t yet been published or recorded. The managers are aiming for total returns over the medium As we touch on above, royalties from songs tend to be to long term of greater than 10%. relatively predictable – certainly after the first three years when the “buzz” has largely subsided. We understand that the cash flow from music royalties is relatively predictable and reliable, and likely uncorrelated Click here for some of their best known tracks... to equity markets. As investments, royalties are esoteric but not a new concept: witness David Bowie’s “Bowie As a glance at the diagram below will illustrate, the ways Bonds” which were issued – backed by a portfolio of that songwriters are paid for their copyright are many and royalties - in 1997. However, it is very much a private varied. The more successful and popular a song is, the market, and typically royalties have hitherto been bought more the songwriter will be paid. However, depending on by private funds or individuals. SONG is the first publicly which source it comes from, the linkage is not necessarily traded vehicle (globally) that is doing so, and thereby as direct as when CD’s (or physical copies) were the main extending the long-standing tradition of the London listed way consumers bought music. For example, streaming fund market in enabling “the investor of moderate means (via Spotify or Apple Music) attracts royalties, but a song’s the same advantages as the large capitalists in diminishing entitlement to royalties depends both on the number of the risk of spreading the[ir] investment” (Foreign & streams that it has attracted, but is also dependent on the Colonial Investment Trust, 1868). proportion of total streams that the song represents. In SONG’s case, the company is Guernsey domiciled and is Streaming is a huge growth area, and one that the traded on the Specialist Fund Segment of the London Stock managers believe not only opens up the potential market Exchange (although it is in the process of migrating to the (by reducing distribution barriers to zero), but also premium segment of the main market). It initially raised significantly increases and extends the length of a song’s £200m and listed in July 2018, with a further fundraising earning potential. This is simply because the streaming raising c. £140m of capital. At the time of that fundraising, model is so different to the physical format music business the managers stated that they aimed to be fully invested of selling records. First of all, the number of people by the end of July 2019. Given the August placing of c. paying for a streaming music service is rapidly increasing £51m worth of shares and recent announcement of a with 255m paying subscribers for streaming services prospective C share, the company looks to have achieved (according to the IFPI Global Music Report 2019), which that ambition.