Music Catalog Market to Remain Resilient Despite Slowing Growth, Says Shot Tower Capital

Table of Contents

1. Key Highlights
2. Introduction
3. The Present State of the Music Industry
4. Valuation Multiples Trends
5. Implications of the Market Shifts
6. Conclusion
7. FAQ

Key Highlights

• Shot Tower Capital anticipates stable valuation multiples in the music catalog market, despite slowing revenue growth across the music industry.
• 2024 is expected to set a record for dollar value in music M&A transactions, with over $8 billion closed.
• The rise of asset-backed securitization (ABS) is facilitating deal financing and attracting investors.

Introduction

In a landscape defined by rapid digital transformation, the global music industry has faced various challenges, including stagnating revenue growth amidst the streaming boom. Yet, within this evolving framework, the music catalog market persists as a lucrative investment opportunity. Remarkably, 2024 is projected to herald the highest dollar value year for mergers and acquisitions (M&A) in the post-streaming era, according to Shot Tower Capital. This boutique investment firm is defying expectations of a market slowdown, indicating a continued interest from investors in music assets while highlighting the unique traits that sustain their value.

This article delves into the insights provided by Shot Tower, exploring the current health of the music catalog market, the dynamics of valuation multiples, and the factors contributing to its resilience in challenging economic climates.

The Present State of the Music Industry

The music industry is at a pivotal moment characterized by paradoxes. While some observers perceive a glass half-empty perspective—marked by lackluster stock performances of major music companies—the analysis from Shot Tower Capital presents an alternate view. The firm argues that the industry is, historically, recession-resistant, projecting that stable valuation multiples will prevail.

Indeed, 2024 bore witness to a contraction in the number of music asset transactions, falling to the lowest levels observed since 2018. However, the dollar value of successful transactions reached an unprecedented high, driving aggregate sales beyond $8 billion. This resilience is largely attributed to high-profile transactions, some exceeding the billion-dollar mark, and a demonstrable confidence in the sustainability of music assets.

Trends in Music Asset Transactions

During 2024, the total dollar volume of music asset transactions encompassed a diverse range of deals, illustrating both the depth and breadth of investor engagement. Shot Tower participated in key transactions, including:

• The sale of 50% of Michael Jackson’s music assets to Sony Music Group.
• The acquisition of a majority interest in Mavin Records by Universal Music Group.
• The sale of the Hipgnosis Songs Fund to Blackstone.

Such transactions underscore the ongoing appetite for music catalog investments, reinforcing assertions that robust assets continue to attract significant interest.

Evolving Investment Dynamics

One crucial aspect of the evolving investment landscape is the influx and exit of various institutional players. While firms such as KKR and Elliot Management have stepped back from music asset investments, others—like Hellman & Friedman and New Mountain Capital—are making significant inroads. Hellman & Friedman’s majority stake acquisition of Global Music Rights exemplifies a shift toward focusing on high-value music rights.

The introduction of asset-backed securitization (ABS) has also transformed the way investors strategize funding of music catalog purchases. By providing favorable financing options compared to traditional bank lending, ABS allows investors to leverage a greater ratio of debt to equity. This shift is noteworthy against the backdrop of rising interest rates, as it affirms the relatively stable income generated from music royalties.

Valuation Multiples Trends

Valuation multiples within the music catalog market are paramount to understanding the worth of various assets. In 2024, typical music publishing multiples for transactions valued over $20 million averaged 16.1 times net publisher share (NPS), a slight decline from 16.7 times noted in the previous year. When including iconic transactions valued over $200 million, these multiples similarly decreased from 18.4 to 17.5 times NPS.

Conversely, recorded music transactions revealed a decrease in net label share (NLS) multiples, indicating that the market is experiencing subtle shifts. The average NLS multiple for transactions—excluding iconic assets—stood at 13 times, down from 13.8 in 2023. Over time, the historical peak for music publishing multiples occurred in 2021, while recorded music transactions peaked in 2022.

Understanding Valuation Dynamics

The declining multiples can be attributed to several key components:

• High Marketing Costs: Exploiting recorded music generally entails significantly higher marketing expenditures compared to music publishing.
• Diversified Income Streams: Music publishing, often characterized by multiple revenue streams, has exhibited slightly higher growth rates in recent years when contrasted with recorded music.

Future Outlook for the Market

Moving forward, Shot Tower anticipates a further decline in average valuation multiples for music publishing, projecting approximately a 15.1 times NPS multiple by 2028. Recorded music is expected to trend downward as well, likely averaging a 12 times NLS multiple in the same timeframe.

Despite these potential declines, the factors contributing to the attractiveness of music assets remain intact. Institutional investors, encouraged by the stable royalty income streams, continue to view music catalog investments favorably, aided by the flexibility afforded by ABS financing as a means to navigate risk in fluctuating interest rate environments.

Implications of the Market Shifts

The implications of these trends are significant and multi-faceted. As institutions increasingly leverage ABS, they exemplify a shift toward financing strategies that can adapt to economic constraints while capitalizing on the stability offered by music catalogs. The resilience of the music catalog sector reflects an evolving understanding among investors—one which seeks stability and long-term growth potential over momentary fluctuations in the broader music industry's economic landscape.

Real-World Examples and Case Studies

Real-world manifestations of these trends can be observed across the industry. For instance:

• Michael Jackson’s Music Catalog: The recent sale of a significant portion of Jackson's catalog signifies the enduring appeal and value of iconic music assets. With extensive historical revenue streams, Jackson's music diversifies risk and ensures continued investor interest.

• Hipgnosis Songs Fund Acquisition: The acquisition of Hipgnosis by Blackstone highlights a trend where institutional investment is aligning with reputable music ownership, thus enhancing asset visibility in the financial sector.

These instances underscore how the music catalog market is not merely surviving but potentially thriving against a backdrop of perceptual downturns in sector profitability.

Conclusion

As the music industry grapples with the stabilization of streaming revenues and evolving consumer habits, the catalog market emerges as a beacon of resilience and potential growth. Shot Tower Capital’s optimistic outlook sheds light on the investment community's sustained interest in music assets, reinforced by innovative financing strategies like asset-backed securitization. This environment could very well lead to continued growth opportunities within the music sector, reflecting both the unique attributes of music catalogs and the evolving landscape of investment philosophy.

FAQ

What is the current trend in music catalog valuations?

The average valuation multiples for music catalogs are slightly declining but remain stable overall amidst a competitive investment environment.

How much did the music asset transactions total in 2024?

In 2024, music asset transactions totaled over $8 billion, marking a record high in dollar value in the post-streaming era.

What role does asset-backed securitization (ABS) play in music investments?

ABS allows investors to finance music catalogs at more favorable rates than traditional bank financing, which is crucial in navigating high interest rates and relatively stable royalty streams.

Are there still large institutional investors in the music catalog market?

Yes, while some institutional investors have exited, others have entered or expanded their investments, indicating ongoing interest in music assets.

What are some examples of recent major music asset transactions?

Recent major transactions include the sale of 50% of Michael Jackson's music assets to Sony Music Group and the sale of the Hipgnosis Songs Fund to Blackstone.

By offering a comprehensive overview and specific insights into current market dynamics, this analysis illuminates key trends while projecting potential developments in the music catalog sector—a crucial aspect of the broader music industry narrative.