Hipgnosis sticks to song catalogue valuation as shares slide

Hipgnosis, the London-listed investment trust that owns rights to songs by Nirvana, Rihanna and Britney Spears, has maintained the value of its music catalogues at $2.2bn, even as its shares trade at a steep discount to that.

At a two and a half-hour presentation on Thursday, music mogul and chief executive Merck Mercuriadis sought to soothe nerves over the investment trust he founded.

Mercuriadis promised that “we’re gonna get this fund to number one” while trotting out Bon Jovi band member Richie Sambora to perform Living on a Prayer to a room of investors and analysts.

“I consider ourselves to be entering the top 10 of the charts as a company at the moment, and this is a company that’s going to go to number one, this is just the beginning,” Mercuriadis said.

“Yes, [the] share price doesn’t reflect value, yes the discount is unacceptable, but we’re going to fix those problems.”

Underlying royalty revenue from Hipgnosis’s songs increased about 4 per cent to $121mn in the year to June, the company said on Thursday. The figure has been falling in recent years, though it rose 12 per cent in the second half of last year.

The Hipgnosis Songs Fund pioneered the use of song copyrights as an asset class, a concept that was particularly appealing during the era of ultra-low interest rates because songs generated consistent cash flows.

The fund enjoyed explosive growth by repeatedly raising new money from investors, including the Church of England’s investment arm, and using it to snap up the rights to more than 65,000 songs. It is managed by Hipgnosis Song Management, which the US private equity giant Blackstone owns.

But HSF has been in limbo this year. Its falling share price has forced it to stop buying song rights, because it cannot raise cash for purchases without diluting existing shareholders.

Its board said on Thursday that it did not expect to raise any more equity until its shares trade at a premium to the catalogue’s $2.2bn valuation.

Citrin Cooperman, the outside agency that sets the Hipgnosis valuations, has left the so-called “discount rate” — an interest rate used to calculate the catalogue’s value — unchanged for more than a year, even as central banks have aggressively raised interest rates.

Hipgnosis said it hired the bond rating agency Kroll to advise on the “reasonableness of certain assumptions” used for Citrin Cooperman’s valuations. Mercuriadis also said that the Hipgnosis valuation was consistent with multiples fetched in other recent music deals.

But the vast majority of these transactions happen privately, making it difficult to draw comparisons. After an influx of investment in the sector, the prices of songs have declined in recent months due to rising interest rates, according to other participants in the market.

Larry Mestel, whose company Primary Wave has partnered with Brookfield Asset Management to buy songs, told the FT in November that “prices have softened a bit over the past three months or so”.

Sachin Saggar, an analyst at Stifel, said that the hiring of Kroll was “welcome”, but warned that the Hipgnosis’s portfolio’s valuation multiple is still “optically high”.

Shares in HSF climbed more than 2.5 per cent on Thursday but have fallen by about a third this year.