Firms such as BlackRock’s Alignment Artist Capital and AGI Partners’ Unison Fund see independent and emerging music artists as the next lucrative asset class.
Others, such as Hipgnosis Songs Fund Limited, which invests in legacy catalogues of the likes of Blondie and Barry Manilow, recently had its market capitalisation exceed $1.6 billion. In the last few months, we have seen the entire back catalogue of Bob Dylan being bought out by Universal.
In 2019, Goldman Sachs updated its ‘Music in the Air’ dossier to forecast that, by 2030, the global recorded music industry will be generating $45 billion annually (up on a restated prior forecast of $44 billion).
It also believes that paid streaming will generate $27.5 billion for labels and artists in that year (up on a restated prior forecast of $27.1 billion) and that the overall annual global trade in streaming revenues (including advert-funded) will reach $37.2 billion.
Some music composers and authors wish to realise immediate value in their works rather than recouping royalties over a period of time. David Bowie, always a trend setter, was the first to do this in the 1990s and, since then, many others have followed suit.
Have a cigar
For investors, this is an interesting opportunity. Not only are these returns growing, but they have a predictable shelf life, and are relatively uncorrelated to the market in general. After all, people listen to music all the time, whether the stock market is up or down, whether interest rates are high or low.
The monetary value of music is derived from a number of sources Ð from public performances in pubs and restaurants, to live concerts, to films and TV, and now (more than ever) to online revenues, which are growing exponentially. Whatever the source, however, its legal value lies in the intellectual property (IP).
Music funds provide their shareholders with a desirable and growing level of income, combined with the potential for capital growth, by investing in a portfolio of songs and their associated music IP. These portfolios are established by investing in catalogues of songs from famous songwriters and recording artists, with each song considered a separate asset.
The IP rights from each song deliver periodic payments in the form of royalty payments; generally speaking, the fund will seek to acquire 100% of a songwriter’s copyright interest in each song, which would comprise their writer’s share, their publisher’s share, and their performance rights.
From the fund’s perspective, therefore, acquiring and holding the IP in the best possible way is key, and Ireland is an ideal location for this.
As one of the world’s largest exporters of pharmaceuticals and computer software (industries that are entirely reliant on strong IP regimes), Ireland’s wide range of legal protections have been trusted by the owners of the world’s most valuable IP, for a number of reasons:
- IP management: a 2019 study showed that IP-intensive industries accounted for 27.1% of employment in Ireland, and that 65% of GDP in Ireland was directly generated by IP-intensive industries, compared with just 44.8% of GDP in the EU. In particular, 13% of Irish GDP generated by IP-intensive industries is related to copyright (including the creative sector), compared with just 6.9% in the EU.
- Government support: the Irish Government appears to be strongly committed to the new EU Copyright Directive, and its transposition into Irish law features prominently in the latest Programme for Government.
- Common law jurisdiction: after Brexit, Ireland is one of the last remaining pure common-law countries in the EU. Products whose value depend upon IP rights, like software, books, music, film/video, etc, enjoy strong and practical protection in Irish law, bolstered by common-law jurisprudence and the developing EU law on the area. Being a common-law country ensures Irish cohesion with North American, British, and Commonwealth legal systems, while meeting all relevant international treaties (Berne Convention, TRIPS Agreement, and the 1996 Geneva Copyright Treaties) and EU IP directives.
- Legal framework: Irish copyright law is progressive and allows room for innovation and the development of new technologies. For example, it is one of the few countries internationally that has legislated for who the author can be for a computer-generated work.
- Courts: the Commercial Court ensures an efficient resolution to IP disputes, and is highly respected internationally.
- Tax: Ireland’s network of double taxation treaties generally makes it possible to reduce or eliminate withholding taxes on royalty payments to Ireland’s treaty partners. Irish funds will generally be exempt from tax on their royalty income, and will be able to distribute profits to investors without any withholding taxes.
Be my friend
Managers often select Ireland as the location for their investment funds as a result of a number of factors:
- The companies and individuals working in the Irish industry offer the highest level of service and expertise,
- The regulatory environment is robust but also flexible, well defined and innovative. It also offers a clear and practical framework, including guaranteed turnaround times for regulatory submissions,
- The tax environment is clear and simple Ð in most cases, there are no charges paid at the fund level, and no tax on non-resident investors (Irish-resident investors do pay tax, however).
For all of these reasons, and more, Ireland has long been a leading domicile for internationally distributed investment funds Ð according to statistics published by the European Fund and Asset Management Association, it is the third-largest global centre, and the second-largest in Europe.
When it comes to non-traditional asset classes, such as music IP, Ireland really is the global leader. Of the world’s hedge funds, over 40% are administered in Ireland.
Working for MCA
Music IP funds are regulated in Ireland as ‘qualifying investor alternative investment funds’ (QIAIFs). The QIAIF is a flexible regulatory authorisation that caters for a wide range of investment strategies, including music IP, provided that the fund is only made available to qualifying investors.
Broadly speaking, these are investors who possesses the experience, knowledge, and expertise to make their own investment decisions and properly assess the risks involved. In addition, they must make an initial investment of at least ÿ100,000.
The QIAIF can be established within a number of different legal entities, but the most popular is the Irish Collective Asset-management Vehicle (the ICAV). The ICAV is a corporate body, but not a company under the Companies Act.
Instead, it exists under its own legislation (the Irish Collective Asset-management Vehicle Act 2015) and, while the ICAV has many similarities to a regular company (for example, separate legal personality, board of directors, shareholders), it also has some key differences.
In particular, the ICAV can purchase back shares from shareholders in the normal course of day-to-day business (this is the process by which an investor gets back their money) and can house multiple funds within the same corporate body, simultaneously maintaining the single separate legal personality of the ICAV and a segregation of assets and liabilities as between those funds.
The ICAV is regulated by the Central Bank of Ireland, which, among other things, will approve the offering documents and the appointment of the board of directors, as well as impose a number of requirements on the operation of the ICAV.
QIAIFs typically appoint a management company, called an alternative investment fund manager (AIFM). The AIFM does not have to be Irish, and its own location and regulatory status will affect the QIAIF in a number of ways.
For example, if the AIFM is authorised in the EU, the QIAIF will be able to market its shares across the EU using a simple marketing passport regime and, indeed, that is the most common option.
However, if the AIFM is regulated outside of the EU (typically the US and, in the near future, the UK), then it will not be able to access that passport. This option is most commonly taken by managers who plan to market the fund only outside of the EU or, if inside the EU, only on a limited private-placement basis.
Welcome to the jungle
Typically, a holder of music IP relies on a collective rights management organisation (CMO) to collect and distribute royalties arising from the public performance of copyright works. IMRO is an international CMO based in Ireland.
It administers the performing right in copyright music on behalf of its 15, 000 members (songwriters, composers, and music publishers), and on behalf of members of the 80+ international overseas societies that are affiliated to it.
When you hear a song being played, depending on the circumstances, there can be various rights attached to it, requiring various licences. A song will be subject to:
- A performing right, which allows the song to be performed in public,
- A combination to the public right, which allows the song to be disseminated in the online environment,
- A sound recording right, which allows a recording of the song to be performed, or
- A synchronisation right, which allows a song to be made part of a film or television programme, among others.
Music users, such as broadcasters, online platforms, venues, and businesses, pay for their use of copyright music. IMRO’s role is to administer the music authors’ performing rights, and to collect and distribute royalties arising from them. IMRO does this through its licensing agreements with music users, in line with the Copyright and Related Rights Act 2000.
Funds investing in music as an asset class are partnering with CMOs (such as IMRO), as it means those funds do not need to build up their own internal expertise and systems to collect royalties due to them on foot of their copyright repertoire, and instead can rely on the internationally established mechanisms operated by the likes of IMRO.
Through membership of, and governance by CISAC, and via myriad international licensing agreements, organisations like IMRO ensure that royalties arising from the performance of a work within the repertoire of a fund are remitted to the copyright holder.
Next time you listen to a song on the radio, TV, streaming service, online, or in a pub or restaurant, you’ll know that a royalty is being paid to a CMO like IMRO, which distributes those funds to songwriters, publishers and, potentially, Irish funds that have purchased the IP in songs.
Barry O’Connor is a partner in the asset management department at Matheson
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