Why are hedge funds pushing songwriters to sell their catalogs right now? Think about it.
The following MBW editorial comes from Randall Wixen (pictured), the founder and CEO of Wixen Music Publishing. Family-owned Wixen provides publishing and royalty administration services to over 2,000 clients, including stellar songwriters (and/or their estates) such as Tom Petty, Missy Elliott, The Doors and The Black Keys.
I bet no songwriter ever told you that selling her songs was the best thing she ever did. It’s almost always been a mistake to do so – and it’s no different now.
Even writers who sold their songs only five or ten years ago realize that they could have done the same today and earned at least twice as much as they did then.
Media reports that catalog multiples are now at historic highs. That’s certainly true, but that doesn’t mean these all-time highs accurately reflect the true value of these song catalogs.
Just because you’re paying $10,000 more than a sticker for a Kia Rio at your local dealership doesn’t mean that’s a fair price for that car. And, unfortunately, some people might benefit if they can find a way to get you to sell your music catalog.
Selling prices for the most important music catalogs widely reported today are usually given as anonymous estimates. Who exactly makes these estimates – and why?
I have been aware of a few of these branded sale deals, and I must say that all the prices I have seen have been much lower than the unattributed estimates that make headlines in the financial pages .
So why and how are all these investment vehicles getting into buy catalogs?
Well, companies like JP Morgan, BlackRock, and Oaktree Capital are smart investors and think music catalogs are undervalued. For them, a multiple of 20 times paid on an excellent musical catalog represents a safe return on investment of 5%.
Additionally, these investors are likely to uncover a huge amount of previously earned income, as the current owners of these catalogs are held back for a variety of reasons. This will be an exceptional advantage – an advantage the seller will miss – that could significantly increase that 5% return.
And the potential fallout for the buyer – not the seller – doesn’t end there:
- We’ve already uncovered $424 million in previously unpaid publishing money that streaming services have been unable (how hard have they searched?) to give to the right publishers. This money will now be paid out through a “claims portal” operated by the MLC (Mechanical Licensing Collective). Catalog owners will receive this money; those who have sold will not.
- The Music Modernization Act of 2018 will change the way the two major U.S. performing rights organizations — ASCAP and BMI — operate under consent decrees for antitrust purposes. ASCAP and BMI will now have the rates they receive from broadcasters determined by a rotating panel of judges. Each of their payouts is expected to increase significantly in a less handcuffed free market environment.
- In early 2018, the Copyright Royalty Board’s tariff-setting hearing (CRB Phonorecords 3, covering tariffs from 2018 to 2022) awarded publishers a 44% increase in streaming royalties. Companies like Spotify appealed the increase and the increase is still pending appeal four years later. If part or all of the 44% award is upheld on appeal, there will be a huge one-time retroactive payment to publishers for the differential increase that was not paid while the appeal was pending.
- Additionally (and ridiculously), the next CRB tariff-setting tribunal (CRB Phonorecords 4, covering tariffs from 2023 to 2027) is already underway, although the CRB’s previous decision is still on appeal. This court may well result in another one improved royalty rates paid to publishers and songwriters.
Catalog shoppers bundle their catalog purchases and count the minutes until the aforementioned deals become real.
They might protest otherwise, but the guys running these funds don’t really care about your inheritance. Almost all hand over their purchased catalogs to third-party administrators who manage millions of songs and probably don’t know who you are or what your song is worth.
Most major catalog owners have heard the same line from five or ten of the same potential buyers: “Let’s take a look at your income, tell you what we’d pay, you don’t have to lose by simply learning what the market will bear.
Sometimes your own advisors (lawyers, managers, business owners, etc.) start pressuring you to sell because it could also make a big buck for them.
Let’s say you finally get an offer of 20 or even 25 times your average annual salary for the last three years. That might seem like a lot — until the fine print of the letter of intent kicks in.
First, you may need to spend $100,000 on a professional who can organize three or five years of income into spreadsheets showing things like domestic income versus foreign income, income earned by type, your top 10 songs, your revenue trends, your top sources of revenue, and more.
After asking your business manager to prepare this material, your buyer will then want to remove the non-repeatable/extraordinary income to bring down the “average annual income” for which he pays a multiple of 20 times. An example: they might insist on waiving a huge ad sync fee because they thought it was an unrepeatable fluke (even if you get syncs to the same song all the time).
They will also remove your part of a large copyright infringement settlement from a streaming or social media service because it was a one-time event, and why should they pay 20 times that one-time event when it will never happen again?
At the end of this process, the offer on the table might be only 80% the size of the “20-25 times multiple” number you heard when you first went down the rabbit hole.
And of course, after the additional costs incurred for your business managers, personal managers or lawyers, you will still have to deal with capital gains tax.
If you decide to structure your catalog sale as a loan, you can shift the tax burden onto your family. And here’s something no one in the catalog game seems to want to discuss: There are already proposals from the current administration to raise the US capital gains tax. retroactively for asset sales after April 1, 2021. The potential increase would raise capital gains from the current top tax rate of around 23% to around 43%.
Basically, you may not know what your tax bill is for your catalog sale until your catalog sale ends.
So after your buyer has reduced your average annual income, after you’ve paid your advisors, and after you’ve paid your taxes, you’re left to sell an asset that might have a cash value of just 60% of its market value.
It is a high transaction cost. And given some of the factors I’ve listed above, keeping that catalog could give you or your heirs something that pays double – and is worth double – in five to seven years.
Finally, let’s look at the current economic climate. We seem to be entering a period of accelerating inflation. From my years at UCLA (BA Economics 1981), I remember that inflation advantages net economic debtors (you pay off loans with lesser dollars) but kills people with money in the bank (your principal is worth less and the interest you get on bonds and savings grows more slowly than costs of goods and services).
Bloomberg reported inflation of 7.5% for the United States in January 2022. A cash lump sum will be affected by inflation; the value of your own catalog will appreciate match inflation.
Additionally, the Fed announced that it would raise interest rates.
Do you know what that means? All financial players currently buying catalogs with nearly 0% borrowed money will no longer get the desired returns. They may even need to return those assets.
Here’s what I say to songwriters considering a sale:
- Get great advice from paid financial advisors and estate planners who aren’t ready to make money off your sale.
- Look at what your catalog revenue has been over the past decade and what the revenue trend has been for you. Is it really better for you or your family to get a lump sum of money available now, or is it a better financial plan for you to get the milk and keep the cow too?
- Tell people about the types of alternative investments you could make with your net proceeds if you sold, and how they would compare to the increases in value and annual income you’ve enjoyed in the past (and can expect in the future). future) of ownership of your music.
Will you be able to re-tour and bring in significant funds to pay your bills? If not sure, should you liquidate one of your biggest assets? What kind of rate of return and value risk might you be exposed to in the future?
Just ask yourself: why are all these strategic investment banks and hedge funds trying to convince you that you’re getting the deal of your life if you sell at present?The music industry around the world