Hipgnosis Songs 27 October 2022

Hipgnosis Songs Fund (LON:SONG) came to the market four years ago at an inflection point for the music industry. After more than a decade of recorded music revenues declining, the streaming model was beginning to show that there was a new revenue model that could potentially lead the way to a significant re-rating of the value of music royalties. Around the time of SONG’s IPO the streaming industry had a subscriber base of around 35 million, whereas today this figure is over 500 million. Therefore, what now seems like an obvious opportunity was much less obvious to many investors and owners of royalties at the time of SONG’s launch.

Against that backdrop SONG was able to acquire a world-class catalogue of songs at prices the manager believes did not factor in the extraordinary growth of streaming. SONG is, however, more than just a financial investor, and has positioned itself as a careful steward of each of its songwriters’ creations (see ESG).

Although the manager believes that there are very strong tailwinds for revenues, SONG’s discount has widened significantly in 2022 against a backdrop of rising interest rates. One of the market’s concerns may have been the rising expense of the floating rate debt of the trust, but SONG has recently completed a refinancing package that hedges most interest rate exposure and gives much greater certainty over interest costs (see Gearing). It has also initiated a share buyback programme designed to address the discount.

SONG has come a long way in the four years since its launch, assembling a unique portfolio of songs with an impressive list of awards and achievements. There are strong tailwinds behind revenues and the industry has gone a long way towards transforming itself from a pure consumer discretionary business to a subscription model. Evidence is also emerging that the songwriters’ share of revenues is improving, which will directly benefit SONG (see the Performance section). We think more predictable and growing revenues should attract a higher rating but SONG, in common with other alternative asset funds, has seen a significant share price de-rating as investors worry about the potential for valuations to fall in a rising interest rate environment.

Longer term, we believe that SONG has assembled a portfolio with strategic importance that could be of interest to other players in the private equity and music industries. We therefore think it unlikely that the disparity between its share price and net asset value will permanently persist. Additionally, we believe the refinancing has reduced a major source of near-term uncertainty, which together with the buyback facility may provide some protection against the discount widening further – although dire general market sentiment is likely to play a role in the short term too.

The next scheduled event is due to occur in mid-December and will be the announcement of the September NAV and half-year results, and there will also be an accompanying capital markets day for SONG investors.