We interview a Luxembourg-based music royalties and investments platform about the opportunities for capturing a diverse source of returns – and one that can help shield against economic woes.

With inflation running at double-digit rates in some countries and markets under pressure, it’s tempting for wealth management clients to escape the pain by plugging into some favourite tunes. Markets rise and fall, but our appetite for great entertainment tends not to follow the business cycle. 

The revenues that can be earned from music royalties are certainly worth attention. This is particularly the case now that monetising intellectual property is rebounding after a period when downloading tech disrupted traditional channels, forcing artists to hit the road.

A European investment platform, ANote Music, argues that it can tap into a burgeoning appetite for capturing music IP. Based in Luxembourg and founded in 2018, ANote Music enables music rights owners to list shares to a portion of their music catalogues In turn, these are put up for auction to investors and music fans in return for upfront cash. Investors can then have access to the future royalty income streams from this music as a source of passive income.

ANote, which is more focused on the European market, offers a starting point for investing at a much lower level (due to the fractional ownership of rights) but it offers trading directly between investors on a secondary market. (It has parallels with US platforms such as Royalty Exchange and Songvest.)

“This is just the tip of an iceberg,” Marzio Schena, founder of ANote Music, said, referring to the potential scale of revenues that could be captured. He spoke recently to WealthBriefing about his business model. 

The ascent of businesses such as ANote Music is also an example of how the world of intellectual property (IP) rights continues to evolve. Over the past two decades, the music and publishing industries have had to contend with the impact of downloading technology, for example peer-to-peer channels such as Napster, which threatened traditional copyright models. Businesses such as Spotify and other music download channels have also taken off, replacing traditional music recording models such as compact discs.

Investors are targeting returns of around 7 per cent
“As an alternative income source, in terms of transparency and analytics, music stands out because in the age of streaming you can see how a track or catalogue has performed, and how many times it has been downloaded or streamed, which offers decent insight into how it will perform in the future,” he said.

ANote Music is talking to wealth managers and family offices that are interested in diversifying their portfolios to include music royalties as more and more are turning to alternatives, he said. 

The sums at stake are large. This is a $5.1 billion market, as measured by value of catalogue sales for 2021; industry revenues stand at $70 billion, according to Music Business Worldwide and Goldman Sachs, respectively.

“In terms of transactions of music rights, we expect the record numbers seen in the past years to keep growing in the years to come. Industry analysts expect the amount of dollars invested in the sector to continue growing,” he said. Schena noted the case of major private equity funds, including the likes of Carlyle, Blackstone, Apollo and KKR, committing billions of dollars to investments in music assets.

“Also, looking at the numbers, with the industry generating $70 billion yearly, $5 billion worth of catalogues yearly transacted in 2021 represent a tiny fraction of the total industry current value,” Schena continued. 

Technology is accelerating the process, he said. 

“It was almost impossible 10 years ago to predict that platforms like TikTok would have such an important impact on how music is being promoted. Next to that, we have all the emerging markets where people are getting more and more connected via smartphones and better mobile connectivity,” Schena said. “Last but not least, around the globe there are top-level discussions going on to provide a better protection and fairer revenue model for rights holders. These regulatory changes could have a huge impact and we are already seeing some streaming platforms and service providers who start giving a better payout per stream.”

Business model
So how does the ANote Music platform work?

“Our marketplace connects music rights owners on all levels with a big and fast-growing network of over 15,000 investors and music fans. We’re effectively building the bridge between the financial markets and the music industry,” Schena said. 

“On the music rights owner side, we’ve been partnering with artists themselves, songwriters, producers, record labels and publishers. Each catalogue listing has been adapted in a flexible way to accommodate the specific needs of each of these rights holders. The way everything is done, gives financial freedom to the rights holders, while they maintain full control over all the management power and creative decisions for their catalogues,” he continued. 

There are three types of investors into the platform: Music fans, who mainly want to invest to get closer to the music they love (giving the bragging rights that they own a piece of their favourite music); more financially orientated investors with an emotional connection, and thirdly, institutions, such as family offices.  

ANote Music receives a statement from organisations that collect revenues from copyright owners; valuations are undertaken by using a blend of quantitative and qualitative approaches.

With valuing copyrights, there are some minimum threshold requirements that ANote Music has put in place. At a minimum, the music catalogues that get listed on the platform must have at least three years of financial track record of earning steady royalty income flows and generate at least €10,000 or more per annum.

ANote will collect information and details on the catalogue and suggests a valuation range. This is part of the platform’s due diligence process, which ensures that the catalogue remains properly managed and that objectives are aligned with the original seller, Schena said. 

He said that the music rights owner decides on the initial starting listing price. Once everything has been set up, an auction is launched in which investors can bid to buy a share of the music catalogues. Some listings are for a limited amount of time, others are done for the entire Life of Rights. (Copyrights in countries such as the US run for 70 years after the death of the creator.)
 

Copyright sweet spot
There is a “sweet spot” in the life and ownership period of a copyright. Any song experiences a life cycle that depends on patterns of music listening habits through time. In the months following release, usually corresponding to the peak performance, royalties generated tend to fall for years (at times displaying peculiar seasonality effects) until a maturity phase is reached, Schena said.

The “stability period” Is characterised by lower variability in royalty generation and it usually happens between five to 10 years after the release date. 

“We see most investors target songs with an average life of at least seven years, when historical royalties generated in the last year are assumed to have reached stability,” he said. 

Risks and challenges
There are legal and regulatory matters that investors must take into account, such as a drive to increase how much composers/songwriters are paid.

The revenues for music are different in nature from, for example, films, because people can and do listen to the same piece of music multiple times, and can hear it in the home, in a car, at work or a gym, etc, while with films they tend not be watched so repeatedly and will be seen either on a TV or cinema screen.

This news service asked Schena how many royalty streams ANote Music typically has on its investment platform at any one time in order to be diversified? 

“We now have 12 music catalogues listed on our platform, including songs from a variety of genres, ranging from hard rock, pop and house to soundtracks, jazz and kids' songs, as well as geographies, with French, Italian, Polish, German, Danish, Canadian and US catalogues all represented,” Schena said. “As we keep listing new catalogues (so far one every two months, but we expect the ratio to increase from Q422), the level of diversification offered on our platform will grow, as we have a strong focus on listing catalogues diversified by genres, geographies and age.”

Schena said there is a liquid secondary market, and bid/ask spreads for prices are narrowing amid daily trades.

“Our investors are a mix of angle investors as well as people that have some solid experience in the music industry. From working as CFO to one of Europe’s most important collecting companies or being the director for an important region in Europe for one of the major record labels, the ANote Music team can count on some investors who brought in “smart” money and a lot of experience. Besides, on the board of advisors, the team can count on support from the likes of Matthew Knowles, father to Beyoncé and a real industry mogul,” Schena said. 

Schena, who is an optimist, concluded: “We keep having a particularly strong bullish view on the music sector. We base our expectation on roaring streaming statistics, the bounce back of live music concerts, as well as healthier revenues per stream/play (thanks to favourable regulatory efforts and new online monetisation opportunities).”