The Royalty Treatment
The idea:
We invested in music royalties last year, and you can argue that the income you generate from music royalties is pretty independent of the business cycle. People will listen to “White Christmas” whether it’s a recession or a boom time.
The strategy:
What’s fascinating to me is that music royalties are very tax-efficient. Music royalties are considered intangible assets, and, unlike real estate, are typically amortized over 10 years using a “straight line” method. You’re buying what’s considered a depreciating asset — a song or soundtrack is in style now, and it may be out of style at some point, so you can amortize your cost over 10 years.
Music royalties trade like fixed income — you have this cash flow you expect, and when rates/income from royalties goes down, you can discount them at a lower rate of present value. But unlike with high-yield bonds, the numerator of that bond is pretty consistent — people continue to listen to music. You really need to find someone who can find the right songs and work them — get them into commercials, movies.
We’re invested with a fund called Open On Sunday, and there are other music funds out there. When we bought — this was before the interest rate rise — we were penciling in a current cash return of around 8%. If the manager can work the tunes effectively, that could get to 13% or 13.5%. And when you get that 8% it’s more than offset by that 10% depreciation, so you’re owning something as boring as a building [in how it’s taxed] but as exciting as music. The additional 2% could be used to shelter income on other investments.
Music royalties have gotten popular, and I heard Sony paid a multiple of around 30 for Bruce Springsteen’s book. Sony was perfectly positioned — they have a music business, will put the music in movies, and for all we know Springsteen songs could wind up in video games.
