Rising interest rates rock private equity’s billion-dollar bets on music

In the span of just one week in October 2021, some of the world’s biggest private equity groups — Blackstone, KKR and Apollo — collectively poured more than $3bn into buying music. 

Blackstone announced that it had set aside $1bn to buy music in partnership with Merck Mercuriadis’s Hipgnosis investment trust, noting his “vision and dynamism”. KKR said it was “thrilled” to acquire some 62,000 songs for $1.1bn, which followed a $1bn fund it had arranged with music group BMG earlier that year. Apollo put up $1bn to buy songs with a new investment group called HarbourView.

These were relatively trivial amounts for the three giants, which command more than $2tn in assets across investments ranging from fast-food chains and toy retailers to dentistry practices and prisons.

But for the music business, it was a watershed moment, seeming to signal that investors were interested in the industry again after it had spent a decade and a half in the doldrums. Longtime music executives described the interest coming from the Wall Street establishment as “unprecedented”. Musicians saw their opportunity, too, with artists like Stevie Nicks and Shakira taking advantage of the bullish mood to sell their life’s work at eye-watering prices.

A little over two years later, however, the Wall Street giants have still not spent the full sums they had committed to the music business, according to several people familiar with the matter and a Financial Times analysis of the transactions.

Most of the investment groups had planned to lend the vast majority of the capital they promised. But as interest rates climbed, catalogue prices fell and they could no longer justify loading the assets with as much debt as they had once contemplated. As a result, several slowed their buying considerably.

KKR, an early investor in music royalties, has not bought music for at least a year, according to a person familiar with the matter. Its $1bn partnership with BMG has only struck “a handful” of deals, this person said, including for songs by ZZ Top and John Legend.

Shakira was one of the artists to take advantage of investors’ hunger for music rights © AP

The private equity pioneer, which bought a catalogue from Kobalt Capital worth $1.1bn in October 2021, recently hired advisory firm Raine Group to evaluate options for its music assets after receiving interest from possible buyers, four people briefed on the matter said.

Apollo has not made a new equity investment in song royalties for at least two years, according to a person familiar with the matter. HarbourView’s initial fund quietly stopped buying music last year, having spent $200mn of the equity Apollo contributed, but only about $450mn of the $800mn debt the group had considered providing. HarbourView has turned to other investors for a new fund.

Blackstone has remained active, spending a bit less than $700mn of its $1bn target on catalogues like Justin Bieber and Justin Timberlake. But it has also been ensnared in a shareholder revolt at Hipgnosis, whose investors voted in October to restructure the business and rejected a proposal to sell Blackstone some of its assets.

Nat Zilkha, a former KKR partner who had led the firm’s recent music push, said higher interest rates had increased the attractiveness of non-music investments “that are closer to home for lots of these traditional financial players”.

“As a result their interest in less liquid, less well-understood asset classes has waned. Music is near the top of that [list],” said Zilkha, who left KKR at the end of 2021 but is still an adviser. 

Merck Mercuriadis
Blackstone set aside $1bn to buy music with Merck Mercuriadis’s Hipgnosis investment trust © EPA-EFE

Many of the financial buyers that pledged to invest in music planned to put only a sliver of new capital in to buy song rights on their own account. Instead, they agreed to provide a mountain of debt to would-be buyers or owners. 

It is a similar strategy to how traditional private equity deals are financed — put up just a portion of the cash to fund a deal, and borrow the rest.

But the rise in borrowing costs depressed the value of the future cash flows music owners could expect to earn, meaning that those catalogues could no longer support as much debt as firms such as Apollo and KKR had expected. 

One investor argued that — even without the change in interest rates — the cash flows were not large enough on their own to support the level of debt envisaged in the 2021 transactions. Another added that credit rating agencies would generally not tolerate debt exceeding 1.5 to 2 times the equity buyers were investing if they were to assign pristine ratings. That point is critical to insurance companies buying such debt, which typically must own safer assets.

The funds’ bets on music rights have similarities to their wagers on commercial real estate. While they are lending against a fixed cash flow, they are also making a bet on the future value of an artist’s catalogue, which is highly sensitive to interest rates.

They face the same problem in their core private equity businesses, as higher rates knock valuations of businesses they already own. That has made it harder for them to sell companies and recoup their initial investments.

The firms have instead been pushing deeper into the hottest corner in finance: private credit. Lending, they believe, is what will power their growth in the decade ahead, particularly as banks retreat from much of the lending they once did. 

It is a philosophy that is core to their music industry investments. Catalogue owners in the past often financed themselves with credit facilities from banks. But many banks have curtailed the types of lending they offer since the global financial crisis, opening the door to so-called non-bank lenders.

It was on view in an Apollo deal with Concord Music late last year, at a time when the music publisher needed to refinance its existing debts.

Apollo raised $2.3bn in debt for the group in deals secured against a catalogue worth roughly $5bn. The asset manager kept a portion of the debt for itself and Athene, its insurance arm, before selling the rest on to other investors and insurers. Hipgnosis and KKR have also raised debt in securitised markets for their music catalogues.

“We remain very bullish on music as an asset class and with our focus on high-grade credit, this is a natural way for us to play it,” said Apollo principal Paul Sipio. “The recent upsizing of Concord’s asset-backed securitisation is a great example and we expect to do more financings where we can lend against valuable assets at attractive costs of capital for music and entertainment companies.”

As interest rates have risen from near zero to above 5 per cent, prices for songwriting catalogues have fallen by 14 per cent from their 2019 peak, according to David Dunn, partner at investment bank Shot Tower Capital, who has advised on high-profile music transactions in recent years. 

Music publishing assets have this year averaged a price of about 17 times their historic annual income, compared with 20 times in 2019, Dunn said. 

Katy Perry performs on stage
Carlyle recently acquired Katy Perry’s catalogue for $225mn © Leon Neal/Getty Images

Even so, some investments are still happening. 

Carlyle recently acquired Katy Perry’s catalogue for $225mn, fending off rival bids from HarbourView and Blackstone’s Hipgnosis fund, according to several people familiar with the auction. Blackstone offered $205mn, said one of these people. Separately, Morgan Stanley’s credit arm last month committed $700mn to buy song copyrights with music company Kobalt. 

Many investors still view music copyrights as a reliable source of income that is uncorrelated to the broader economy, which should keep a floor on their value even in a changed interest rate environment.

But the financialisation of music has turned out to be a more nuanced picture than it seemed in the heady days of 2021.

“It’s in everyone’s interest to make it seem fine. These headline iconic deals will continue to get high multiples, and you’ll continue to see these announcements,” said one active participant in the music rights market. “But on the inside of it, anything that’s below that upper crust [of repertoire] is experiencing a major correction.”

Drama at Hipgnosis, the London investor that had helped build the recent hype around the music market, might make some investors more wary, several executives said. 

“Lots of money was raised in unstable hands, in funds that promised massive multiple expansions, and that’s going to create instability,” said one large investor, who added that this instability could prompt asset sales, weighing further on valuations.

“The Wall Street money that came in . . . has receded a bit. So there’s not quite the [same level of] froth,” said Bob Valentine, chief executive of Concord.

“But the fundamentals of the music business haven’t changed,” he added. “For years we were doing this with very few people involved. It was a niche . . . music royalties have always been esoteric.”


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