Hipgnosis Songs Fund, the troubled publicly traded music rights company that owns full or partial rights to song catalogs from the Red Hot Chili Peppers, Shakira, Justin Bieber and Neil Young, issued a damning report on Thursday (March 28) written by a third party that Details are missteps by the fund and its investment adviser that led to a 26% downgrade in the portfolio earlier this month.
The London-listed fund, which has become the poster child for music as an asset class, slashed the value of its portfolio earlier this month and told investors not to expect a resumption of dividends “for the foreseeable future” while the company focuses on paying reduce debts.
The report compiled by the board's lead independent advisor, Shot Tower Capital, found that Hipgnosis Song Management, run by Hipgnosis founder and music director Merck Mercuriadis, grossly overstated the fund's revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) and supported catalog acquisitions with financial analysis that did not meet “music industry standards.” The Hipgnosis Songs Fund itself overstated the breadth of its music assets — the types of royalties and management rights it held and its share of those rights — in disclosures to investors and regulators. And in an offer last September to investors to sell about 29 catalogs to a sister company Hipgnosis, the fund included a better-than-expected valuation after the deal, according to the report.
In a statement announcing the report, the fund's board said it was exploring “all options for the future of the company” and would release its strategic review and proposals by April 26.
Hipgnosis Song Management said it was still looking into the report, which it received late yesterday. “However, there are aspects of the report that HSM strongly disagrees with and considers to be factually inaccurate and misleading,” the company said.
“Throughout the life of the company, HSM has worked constructively and in good faith with the board and other advisors to the company to deliver the best outcome for the company's shareholders,” the company continued. “Each consultant was hired by the company's board to advise in their specific area of expertise and with clear areas of responsibility.”
Investors found heart in the report. at the close of London markets on Thursday, Hipgnosis Songs Fund was trading at £0.69 ($0.87), up 8.3% on the day and 30.43% above its 52-week low of £0.53 ($0.69) that was set on March 4th.
Here are some of the most revealing findings from the Shot Tower report:
“The Fund overpa(id) for the majority of the lists it acquired.”
The Hipgnosis Songs Fund, under the direction of the investment adviser, famously paid top money for music assets — more than $2.2 billion in total. Today, those assets are worth $1.948 billion, with 67 of the 105 buyout deals currently worth less than their purchase price.
The investment adviser's “diligence and underwriting standards” are the reason.
Hipgnosis Song Management predicted aggressive growth, but three-quarters of its catalogs missed those expectations “by an average of 23% annually,” and total annual royalties the fund earned from catalogs fell to $121.6 million from 134, 2 million dollars.
“Passive lists grew significantly better than lists managed by the Investment Advisor.“
A significant portion of the rights that the fund had in its portfolio included passive rights. However, Mercuriadis and the Hipgnosis Songs Fund board often argued that their industry expertise would be a valuable tool in making those rights go beyond passive catalogs.
“The fund's public disclosures contain disclosures that imply greater ownership control over songs … than would otherwise be the case.”
Multiple reports from the fund showed it had a 100% “ownership interest” in acquired catalogs, indicating ownership and control. “In reality, a significant number of catalogs represent only a fractional, unregulated income stream in compositions without any copyright ownership,” the report states.
Despite his promotion as a custodian of artist and songwriter projects, Mercouriadis' investment advisory team “failed to invest in systems and provide the services needed to effectively manage a catalog of 40,000+ songs generating +120 million in royalty revenue annually.”
Hipgnosis Songs Management has not tracked or managed the catalog at the song level, and the legal bookkeeping included numerous omissions and missing records that could create complications in collecting royalties.
The report found “multiple areas where the fund's costs appear irrelevant to the fund and/or are excessive.”
Those costly items included $1.5 million to $2 million spent annually on awards and PR, “including significant payments to multiple music industry magazines.” $1.2 million in fees in 2023 from deals the fund ultimately did not make. and $5.7 million in fees related to the abandoned deal to sell catalogs to its sister fund, Hipgnosis Songs Capital.
