Good times never came for a musical innovation that failed to get the markets dancing
So ends a stock market experiment that is unlikely to be repeated in a hurry: Hipgnosis Songs Fund, the music royalty company with songs by the likes of Beyoncé, Blondie and Shakira, is to be sold to a US fund for less than its starting price in 2018 of 100p.
The immediate point is that 93p a share, or £1.1bn, is a lot better than shareholders were looking at in recent months. The price went as low as 60p during the company’s bust-up with its own investment adviser, a suspension of dividends (unforgivable for a fund designed to turn royalties into income) and a write-down in the value of assets after a tortuous debate about valuation methodologies. Those shareholders voted last year against “continuation” in the lingo of investment trusts, which amounted to an order to the board to find a new strategy and establish some hard value. Robert Naylor came in as chairman last November and has found a credible buyer in Concord Chorus, a fund ultimately backed by state pension money in Michigan; the same fund last year bought Round Hill Music, the only other UK-listed royalty fund.
For Hipgnosis investors, 93p doesn’t represent Good Times, to pick on one song in the portfolio, but nor is it a reason to (Le) Freak out. It’s a smidgeon above the revised asset value; on the other hand, the asset value may increase by a notch or two by the time the deal completes. There is also an entertaining sub-plot whereby the fund is inviting its investment adviser — a firm majority-owned by Blackstone but with Hipgnosis pioneer Merck Mercuriadis on lead vocals — to go quietly by terminating its management contract to allow an extra $25m to flow to shareholders. We’ll wait to see how that request is received given the past toxicity of the relationship.
But the longer-term point demonstrated by Hipgnosis’s entertaining life as a FTSE
250 stock is that this type of “alternative” asset is ill-suited to public markets. As soon as interest rates started to rise, the share price wobbled. Then came the kerfuffle over valuation techniques in an illiquid market for back catalogues, plus the tensions with Blackstone and Mercuriadis. And it all happened within the context of industry-wide lack of transparency over the price at which catalogues are bought and sold.
In the circumstances, Naylor is surely spot on when he says the fund would have to undergo “substantial financial and governance changes” to improve materially its share price under its own steam, and that the alternatives “carry significant risks, uncertainties and limitations”. You bet: in an investment trust sector where discounts to published asset values are already the norm, you don’t want to add complications on top. Selling up at 93p is reasonable. Shareholders with a combined stake of 29% have already backed the decision.
The shame is that the basic idea had appeal: a broad and constantly-refreshed portfolio of music rights should be able to provide a stable source of income. But pension money, with its multidecade investment horizons, looks a more natural owner away from public markets. Hipgnosis was just too noisy.