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Next time you go for a jog and stream music off of Spotify or Apple Music, it's increasingly likely a Wall Street private equity firm will be collecting some money. Music is one of the hottest new asset classes, drawing interest from PE giants like Blackstone, Apollo, and KKR, who poured more than $3bn into buying song catalogues recently.
KKR is particularly active, purchasing catalogues like songwriter Ryan Tedder and One Republic and separate portfolio with hits from Lorde and The Weekend for over $1bn. Big-ticket catalogues sold in recent years include those from Taylor Swift, to Paul Simon, Neil Young, and Bob Dylan.
The deal-making is driven by two factors, firstly, a music industry recovery from the dark days of illegal Napster downloads and the collapse of CD sales, secondly, a decade of rock-bottom interest rates that has forced music investors to hunt for yield far from corporate bonds in esoteric assets like music.
Fueled by streaming, industry-wide music revenue increased 7.4 per cent to $21.6bn in 2020, the sixth consecutive year of growth after over a decade of decline. Analysts at Goldman Sachs predict revenues will nearly double by 2030, which is why PE has grown interested.
Based on streaming growth and the ability to generate new revenues by embedding songs in video games or TikTok videos, firms expect to earn double-digit returns. Music catalogues, in this sense, are hardly different than new-yield plays, such as owning portfolios of Taco Bell franchises to pharmaceutical royalties or automotive loans.
As the music money pours in multiples are skyrocketing from three to four times the historic value of the catalogue to upwards of 20 times in assets' historical annual income in some recent deals. Risks are everywhere, from overpaying to the threat of rising interest rates.
There's also the risk the songwriter simply does not gel with their private equity overlords. In 2020, Taylor Swift's music catalogue was sold for about $300mn amid a bitter dispute with its owners, Scooter Braun and Carlyle Group. To strike revenge, Swift rerecorded the music in the portfolio, putting it back under her control. Her album, Red, Taylor's Version, had 26 songs make Billboard's Hot 100 list in November.