Hipgnosis: discordant feedback gives Merck a tough gig

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As long as the music is playing, you have to keep on dancing. That was one US banker’s description of his role in the global financial crisis. The music now seems to be stopping for the Hipgnosis Song Fund, which invests in pop and rock song rights.

Shareholders are calling for asset sales and share buybacks. The fund expanded fast through expensive rights purchases during the era of low interest rates. Now it has a steep and persistent valuation discount.

Hipgnosis came to the market five years ago. Music rights were supposed to offer investors stable long-term revenues alongside growth from such new outlets as Spotify. Investment adviser and music mogul Merck Mercuriadis was a frontman as crowd-pleasing as any stadium rocker

The net asset value rose from a few hundred million dollars to $2.2bn at the end of last year. Shares now trade at about half that value, consistent with Lex’s prior characterisation of Hipgnosis as highly risky.

Most investment trusts have wilted since the start of 2022. But Hipgnosis and peer Round Hill Music fund have underperformed that sector.

The valuation of song rights remains a niche activity and that is bad for price discovery. Citrin Cooperman, the US agency largely responsible, did not adjust its discount rate last year despite a backdrop of rising interest rates.

The fund’s $2.7bn gross book valuation represents a 20 times multiple of net royalties compared to a 16 times multiple for its acquisitions, an immediate premium. The portfolio expanded 20 fold in a matter of a few years to 65,000 songs. It is hard to believe such rapid growth can have been value accretive.

It is unlikely that the fund could realise anything resembling book value when selling substantial rights portfolios. A complete break-up would crystallise losses at the worst possible time.

Shareholders will have to face that dilemma at a continuation vote in September. They may have learned an old object lesson: the more glamorous an asset, the greater its propensity for overvaluation.

The Lex team is interested in hearing more from readers. Please tell us what you think of Hipgnosis in the comments section below.