Private Equity Firms Want Your Music: Should You Sell?
Artists who have spent years making music are now finding that their life's work may be more valuable than ever—and growing numbers are choosing to cash in.
The 2020 pandemic may have grounded music tours and cancelled live concerts, but music remained a vital part of people's lives. Music streaming continues to grow in popularity, and investors have taken notice that music royalties don't stop paying off during economic downturns.
For example, artists including Barry Manilow, Bob Dylan, Stevie Nicks, Mick Fleetwood and Ryan Tedder of OneRepublic have all sold rights to their song catalogs during the past year, some for hundreds of millions of dollars. Some traditional music companies are pouring money into purchasing song catalogs, but private equity (PE) firms are also investing heavily in music.
Music-focused investment firms such as Primary Wave and Hipgnosis Songs Fund have been snapping up music rights over the past few years, and recently, traditional Wall Street heavyweights are getting in on the action. In January 2021, Kohlberg Kravis Roberts, an investment firm with more than $230 billion in assets under management, purchased a majority stake in the publishing catalog of Tedder, who has written songs for Adele, Beyonce and Stevie Wonder, according to Rolling Stone.
As interest grows in the investment potential of music catalogs, songwriters and artists have to decide whether relinquishing some or all of the rights to their work is the correct move. To make that decision, it's important to understand what rights they own, how timing matters, and how a potential sale could impact their finances and their legacy.
“There are so many considerations that affect the decision to sell or retain music rights," said Joe Goldman, wealth planner at City National. “It really depends on what the artist wants to accomplish and the impact they want to make with the funds from their music. It takes time to make the right decision, and it really starts with a discovery process."
What Rights Are for Sale?
Most catalog sales involve only the publishing rights to included songs, not the rights to the sound recordings. That's because most record labels retain “master rights," which are the rights to the sound recordings, according to Vice.
Artists usually keep the publishing rights to their songs, which includes the lyrics, melodies and arrangements. And publishing rights earn royalty income from several sources. For instance, the owner of the publishing rights earns about 12 % of the revenue a song produces on a streaming platform such as Apple Music or Spotify. The owner of publishing rights also earns copyright fees every time a song is broadcast by radio stations, TV networks, bars, restaurants and others. Finally, when a song is used in a film, TV show, commercial or video game, the production company or ad agency must pay a fee, known as a sync license, to the owner of the song's publishing rights.
If a song is popular over the long term, and especially if it becomes a classic that is embraced by new generations and broadcast again and again, its publishing rights are a lucrative investment. And artists who own publishing rights to an entire catalog of popular songs can likely attract the interest of investors with deep pockets.
Financial Aspects of Selling Your Catalog
As music streaming booms and investment firms have become increasingly interested in purchasing music rights, prices for music catalogs have skyrocketed. In many cases, buyers are competing for rights to music catalogs, according to Forbes. A typical purchase is equal to 10 to 15 times the current annual value of the rights. For example, if an artist's catalog is producing $1 million per year in royalties, an investor is likely to pay $10 million to $15 million for the publishing rights. For top-name artists, the price can go much higher.
Selling rights or partial rights to a song catalog can result in an immediate lump sum rather than smaller royalty checks over a number of years. That can mean artists are able to conduct estate planning more effectively, and it can also mean significant tax benefits. For instance, one big payment from a buyout is treated as a long-term capital gain for tax purposes. Right now, capital gains are taxed at 20%, but the new administration has promised to raise capital gains taxes to 39.6%. In contrast, royalty payments are taxed as ordinary income. For people earning more than $523,600, the ordinary income tax rate is 37% currently.
However, a lump sum isn't the only way to cash in on your music rights. “It could be a lump sum, it could be an installment deal, it could include royalties," Goldman said. “It really depends on the buyer and the seller and what they're comfortable with."
Considering Artists' Goals and Core Values
Even if selling a catalog seems lucrative, it may not be the right choice for every artist. For example, classic songs by Bob Dylan and Fleetwood Mac have been around long enough to prove they have staying power—and therefore, they have been able to command high prices. However, younger artists whose catalogs have not been around long enough to prove they will be long-term money makers cannot command the same prices, Guillermo Page, a former record label executive and a music business professor at the University of Miami, told Vice.
Less established artists may fare better by earning royalty income for several more years and then looking to cash in on their catalogs' success. However, the decision is personal and depends on the artist's particular needs and goals.
Many artists have charitable or family goals they hope to accomplish by selling rights to their music, said Jeffay Chang, senior trust and estate advisor at City National. They may also want to gain access to the equity they hold in their song catalogs, or set up a trust to leave cash, instead of songs, to their heirs. Still others want to sell their music rights while they are living in order to control their legacies, Chang said.
“Selling a catalog creates liquidity and allows the artist greater flexibility to plan for what they want to do with those funds," Chang said. “But it's important to have the right team of advisors in place who can set up the right structures to accomplish their goals while minimizing tax liability and prioritizing their personal concerns."
What's Right for You?
Selling a music catalog is not a private event; often, these sales are widely publicized. As a result, artists may have many advisors clamoring to help them manage—and spend—their windfall, said John Brouillard, CFA, entertainment wealth advisor at City National. “It's crucial to identify a team of trusted advisors who are interested in helping develop a long-term plan for you and your family, not just pitching investments that will benefit the advisor immediately," he said.
The right advisors will be experienced in working with professionals in the entertainment industry and have an understanding of their needs. “Many of the clients we work with don't have a level income every year, their income streams can fluctuate quite a bit," Brouillard said. “Capital preservation and reliable income generation are typically the two most requested investment objectives in these cases."
For artists who are considering selling rights to their music, the first step should be learning more about the sales process and the resulting financial ramifications. The second step should be assembling a team of informed advisors who can help you make the right decisions for the right reasons, building in the right structures to maximize your sale.
“There is a lot you can do to ensure that a sale will work effectively to meet an artist's goals, but it takes time and advance planning," Goldman said. “The earlier advisors can get involved, the better the outcome will be."
Learn more about how to effectively manage the sale of a song catalog by reading our latest whitepaper, Ready for the Second Act? And contact us to learn more about how City National can help with the planning and execution of a successful catalog sale.
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