April 15, 2020
The wider world is unsettled and upended – but, in the music industry, the deals keep coming.
In the past few weeks, we’ve seen the likes of Primary Wave and Hipgnosis Songs Fund announce major new agreements – not to mention the completion of a Tencent-led consortium’s $3.4bn acquisition of 10% of Universal – in what remains a fierce music rights M&A market.
Last week, we learned that New York-based Round Hill Music had acquired the songwriting catalog of Johnny Rezenik of The Goo Goo Dolls, including the monster smash, Iris, for somewhere around the $18m mark.
Round Hill Music was formed in 2012 by its CEO, Josh Gruss, with an initial fund of $200m to play with. Six years on, it raised again, this time for $263m, bringing its total spending power close to $500m.
The biggest acquisition made by Round Hill to date was its buyout of Carlin in January 2018 for circa $245m, believed to represent somewhere around a 15-times multiple on that company’s gross profit. At the time, this level of spending shocked elements of the music business, with the likes of BMG bowing out of the publishing M&A race while labelling it a “feeding frenzy”.
Since then, of course, things have scaled up even more, thanks to the aggression of players like Primary Wave, Concord, Reservoir, Kobalt Capital and Downtown – and the recent metamorphic introduction of forces like Hipgnosis Songs Fund (which has spent over $650m on an array of global hits to date), as well as Scooter Braun’s Ithaca Holdings.
At the end of last year, a new operator came out of the blocks in the shape of private equity firm Providence, which is bankrolling a $650m fund – Tempo Music Investments – that has partnered with Warner Music Group to handle administration (for acquired publishing rights) and distribution (for acquired master rights).
Round Hill has been doing this some time now: in addition to Carlin’s 100,000-plus copyrights, the firm has also acquired rights to songs made famous by the likes of The Beatles, The Rolling Stones, Bruno Mars and Florida Georgia Line, as well as master catalogs created by the likes of The Offspring and Bush (whose catalog is co-owned by the company alongside the band’s frontman, Gavin Rossdale).
Last year, Round Hill inked a global sub-publishing partnership with Warner Chappell Music – but, interestingly, RH continues to handle its own administration in territories such as the US, UK, Canada and the Nordics.
This mission to establish itself as a ‘proper’ publisher, rather than just a buying house, explains why not everything Round Hill has acquired has been entirely copyright-related: in 2017, the firm majority-acquired sync agency Zync, in a bid to maximise the commercial potential of music assets under its control. (Zync, it should be noted, also owned/owns its own basket of sync-leaning music rights.)
Here, MBW catches up with Gruss (pictured) to discuss the changing dynamics of the music M&A market, why Round Hill has largely avoided the recent rush to buy “modern pop hits”, and ask when we can expect another big funding round at his company…
BEFORE THE UNCERTAINTY OF THE PAST MONTH, THERE WAS A LOT OF NEWS HAPPENING AROUND WHAT YOU MIGHT CALL THE ‘MUSIC INDUSTRY’S NEW PLAYERS’: PROVIDENCE ANNOUNCED TEMPO, HIPGNOSIS CONTINUES MAKING NOISE, AND THEN THERE ARE THE CARLYLE GROUP-BACKED MOVES MADE BY SCOOTER BRAUN. WHAT’S YOUR TAKE ON THAT FLURRY OF ACTIVITY?
It’s good that other groups are recognizing the value in copyright. After all, if it was just us out there, one might question whether our determination of the value was correct, or there was some unforeseen risks in the assets. It validates the asset and helps shine light on what is really a new asset class that Round Hill along with these other players have created.
The fact that there are other players who are entering the space is a sign of how good of an asset music is – and that’s something we’ve always thought from the beginning.
Speaking of the beginning, we feel our first fund, which started fundraising in 2012 and actually made its first investment before that in 2010, pioneered the dedicated music royalty fund space.
That being said, I have to give credit to groups like Hipgnosis for exploring the London Stock Exchange and finding new areas of demand for the supply. I also give credit to Primary Wave for aligning with such a venerable name as BlackRock.
WHAT TO YOUR MIND DIFFERENTIATES ROUND HILL FROM SOME OF THE NEWER PLAYERS IN THE MUSIC M&A SPACE?
We have a proven 10 year track record of actually creating a return on investment.
Anyone can, given the financial backing, go out and spend $1 billion dollars. The real trick is spending $1 billion and earning a good return for your investors at the same time. We’ve been able to demonstrate that we can do that.
I REMEMBER WHEN THE CARLIN DEAL WAS DONE, A NUMBER OF INFLUENTIAL PUBLISHERS WERE SAYING BEHIND THE SCENES, “THE MULTIPLES HAVE GOT OUT OF CONTROL – THIS IS A CRAZY DEAL!” YET SINCE THAT POINT WE’VE SEEN PUBLISHING ACQUISITION MULTIPLES RAMP UP, APPARENTLY TO 20X-PLUS NET PUBLISHER SHARE, ACCORDING TO SOME SOURCES. DO YOU NOW FEEL JUSTIFIED IN THE FIGURE THAT YOU ATTRIBUTED TO THAT CARLIN TRANSACTION?
Yes, but I don’t want to throw that back in anyone’s face. One should always feel comfortable paying a little bit more if it means you’re attaining quality – and [the Carlin catalog] is super high quality. So you have to look at everything from a risk-adjusted standpoint.
There’s a big difference between paying a 16-multiple on Carlin and paying even a 12-multiple for a [single] modern pop writer’s catalog – that’s kind of night and day.
Carlin’s rights have stood the test of time, for a very long time, while if you’re [buying] any big hit from the last four years it’s going to obviously be headed towards a very steep decline.
No matter how high-growth streaming is at the moment, it’s not powerful enough to stop the drastic natural decline of a hit [modern] song from its release peak.
YOU’RE OBVIOUSLY QUESTIONING WHAT PERCENTAGE OF HITS FROM THE PAST DECADE WILL STILL BE PLAYED IN 20 OR 30 YEARS VERSUS THOSE EVERGREEN HITS. BUT WHAT’S YOUR GENERAL TAKE ON THE MARKET TODAY CONSIDERING HOW AGGRESSIVE IT’S BECOME? IS THERE ENOUGH OPPORTUNITY LEFT OUT THERE?
We as Round Hill sit in an interesting space. We raised these funds, but we raised them in a manner that saw our investors make commitments that mean we can draw down capital as opportunities arise.
That’s very different from raising a lot of money on the London Stock Exchange, for one example, where I imagine your shareholders are scrutinizing your cash burn and worrying about you sitting on a pile of cash if you’re not spending. That could put you under some sort of time pressure to spend that money, and we don’t have that. We’re not completely [pressure-free], because we still are charged with making investments, but we can be more patient about it.
We are doing more in areas that others are not, whether that’s masters or other things. And then many of these [newer] players don’t have the infrastructure – the established songwriter and artist client services – that we do.
Again, anyone can go out with a check-book and buy these assets, but a big part of this is about what you do once you own them.
WHAT DO YOU MEAN BY THAT?
It’s not like everyone is out there buying things completely proprietarily: when these deals get done, there may have been three or four other players who probably passed on those same assets.
So the trick really is, okay, you’re going to buy this thing, you’re maybe going to pay more than others would be willing to, but where are you going to take it from there?
To really stand out from the crowd, you have to have the tools to do creative things around those [copyrights] to earn more than others could. To find opportunities that others might not be seeing.
There is another element to this kind of situation: the seller should know they may be able to get more money from another player, but do they really want to fully liquidate? If so Round Hill may not be for you.
But what happens [after you sell your full catalog]? Are you walking off into the sunset, or do you have more [creativity] to give? If you have more songwriting and the muse is still very much alive, you may want to have a partner who can bring in new opportunities not just for your music, but your brand as an artist.
We hope that the value our team can bring will lead to a discount on price, or some other incentive, to engage in all that.
SPEAKING OF INFRASTRUCTURE, HOW MANY OF YOU ARE THERE AT ROUND HILL NOW?
We have 55 people, including a full royalty and administration team, eight people in London, plus 15 people dedicated to sync. We bought the Zync platform, which within the US business was universally known as really the top salesforce for synchronization. So we have a lot of infrastructure at our disposal to add value [to catalogs Round Hill acquires].
One of the things people don’t think about so much is that there’s a lot of administrative work that goes on once you acquire an asset; you have to send out letters of direction; you need a team that works to redirect the money from the prior owner to you; you have to notify ASCAP, BMI, PRS, and all the different vendors that, ‘We’re the new owners of this catalog. Please send the royalties here.’ And so on.
So if you’re out there just doing ten deals at a time, you can see how there’s a danger those things could get lost in the shuffle.
We’re often understandably asked why we don’t outsource the administration [of Round Hill’s catalog] to Kobalt or other companies [who offer low-margin admin services to fund-led rights acquisition houses] in our key markets. And we answer that by saying like, ‘Well then the cash wouldn’t come to us. Our catalog would sit next to hundreds, thousands of other catalogs and not necessarily get any special type of attention, and we wouldn’t be in the driver’s seat.’
It’s not like you can call up a partner like that and say, ‘Hey, could you perhaps put more focus on my stuff more than your own stuff?’
If [a hypothetical publishing admin partner] has your catalog and is earning 8% from it, but also has their own repertoire where they’re earning 100%, which one do you think they’re going to focus on? That’s why I believe there needs to be proper financial incentive for any partner who works on your stuff – you don’t get that with some low commodity-type admin rates.
TALKING OF ADMINISTRATION PLATFORMS, WARNER IS THE ADMIN AND DISTRIBUTION PARTNER FOR THE NEW FUND, TEMPO MUSIC INVESTMENTS, WHICH IS BEING BANKROLLED BY PROVIDENCE. WARNER GETS THE RESULTANT MARKET SHARE, BUT IT’S INTERESTING TO SEE THAT STORY PLAY OUT – WARNER PARTNERING WITH SOMEONE ELSE’S FUND RATHER THAN SPENDING THEIR OWN MONEY ON MUSIC ASSET OPPORTUNITIES.
Definitely. I think that’s a natural reaction to the majors becoming frustrated that the cost of capital for them is just a lot higher than their competitors in the marketplace; the majors have passed on so many deals because they couldn’t make the numbers work given their higher cost of capital.
This type of setup I think allows [Warner] to just simply lower their cost of capital by using someone else’s balance sheet, and to be able to capture opportunities that they, up until now, may have had to pass on.
That said, a lot of songwriters who are selling right now are fed up with having been within a big company for a long time. They want someone who is nimble – who, if they’re going to buy the catalog, doesn’t need seven sets of approval from a board, or approval from headquarters in Japan, that kind of stuff. And at the same time they want a boutique level of service. In that regard, I think Round Hill really stands out from the crowd.
For one thing, we don’t hang our hat on technology. Kobalt’s technology was superior for a long while, but Warner, Sony and Universal have spent tens of millions of dollars to try and catch up. We’ve always claimed that what we stand for is a personal level of service and having the right people, and the right type of experience, to really focus. We couple that with an extreme value-add, especially in the synchronization world.
HOW ABOUT YOUR OWN FINANCIAL SITUATION, ARE YOU GOING TO BE GOING IN FOR ANOTHER RAISE ANY TIME? WHAT’S YOUR SPENDING POWER CURRENTLY?
It’s publicly known that we’ve had two funds but we’re in the middle of fundraising for a third fund.
ARE YOU EXPECTING ANOTHER NINE-FIGURE RAISE?
YOUR INTEREST IN MASTERS HAS INCREASED IN RECENT YEARS. IS THERE A BIT MORE OF A MARKET OPPORTUNITY THERE AT THE MINUTE VERSUS PUBLISHING?
We’re going to have more news for you on that at some point soon, but I can tell you we have a whole strategy that involves stepping it up a notch on the master side. We’ve already hired a team that used to work together at Red Bull Records to help push that forward and expedite that process.
WHAT OTHER UNIQUE STRATEGIC MOVES ARE YOU MAKING?
We’ve been very busy within country music, having tactically shifted into establishing ourselves in Nashville in 2015 when not many others [in Round Hill’s lane] were focused on it. We’re always just trying to be a little contrarian and shift to areas where others aren’t really thinking about.
WOULD YOU SAY THAT YOU’RE MORE FOCUSED ON THE CATALOG SIDE THAN MODERN HITS?
We’ve always made frontline [modern] signings here basically no more than about 5% of what we spend. So the fact that we’ve been able to consistently be at No.6 or No.7 in terms of US market share on radio, with only 5% of what we spend, is amazing.
We’ve had well over 40 No.1 songs in the last five years, mostly within the country marketplace. The current number one at HOT AC in the U.S the last two weeks (The Bones by Maren Morris) is our latest No. 1.
AS WE ALL KNOW, THE STREAMING AUDIENCE FOR COUNTRY ISN’T WHERE IT COULD BE – BUT PLAYERS LIKE AMAZON ARE ACTIVELY TRYING TO IMPROVE THAT SITUATION. THE FACT THAT SCOOTER BRAUN’S JUST PAID $300 MILLION FOR BIG MACHINE IS INTERESTING; HE’S NO FOOL AND THAT DEAL, DESPITE THE HEADLINES ABOUT THEIR FALLOUT, IS NOT ALL TO DO WITH TAYLOR SWIFT. AS A COMPANY, YOUR FOCUS ON COUNTRY AND CATALOG SUGGESTS YOU HAVEN’T BEEN DRAWN TO THE RAZZMATAZZ OF NEW BLOCKBUSTER ARTISTS AND BLOCKBUSTER SONGS.
Right – that’s true. Because that’s where the majors really spend all their focus. That’s partly because of the dynamics around how top [major execs] are incentivized, which has to do with market share. So for us it’s about competing in the areas where it makes sense, which is why we moved into country back when we did. However in the last 12 months or so catalog deals in country have not made any financial sense and so we’ve shied away from doing them.
I want to say something specific about the Taylor Swift thing: there’s so many, I don’t know how to say it, perks to the world of investing in music, but you have to remember that these are living and breathing artists. To a degree, it’s an asset just like real estate, yes – but those living and breathing artists are part of the mix, so it always amuses me when people who don’t come from the music world step in and then something they didn’t really think about causes them a problem. [To remind you: in November, Taylor Swift publicly called out Carlyle Group to her fans as the monetary source for someone else buying her music – while vowing to re-record her hits in 2020.]
A lesson that we learned a long time ago when we bought the Bush recordings is that, if you’re going to buy recordings of a major artist, it’s often best to have that artist as your partner – and therefore for them to be incentivized not to re-record their albums. It makes for a much simpler, cleaner partnership.
There are so many lessons in this industry that you can only learn from being around and having the experience. I’m very happy that our team, just between Richard Rowe, Neil Gillis, Robin Godfrey-Cass and the other five top people, there’s probably 200 years-plus of music publishing and record industry experience.
That, plus our 10 years of running Round Hill, means that, sure, we’ve all naturally made our mistakes along the way, but we’ve [collectively] learned so much about this business as a result. There’s a lot of value in that.
WHAT ELSE, SPECIFICALLY FROM YOUR PERSPECTIVE, SETS ROUND HILL ASIDE IN THE CURRENT ‘NEW MONEY’ RACE OF THE BUSINESS?
One important factor, going back to people raising lots of money, is having skin in the game yourself. I am always going to be very careful about Round Hill’s investments because, at the end of the day, I have made my own significant, very significant, investment in this company and its funds.
It’s not just other people’s money that I’m spending. And, as anyone in business knows, real incentives have a very powerful connection to real results.
WHAT’S YOUR MESSAGE WHEN IT COMES TO CORONAVIRUS AND THE CURRENT STATE OF THE WORLD – ECONOMICALLY SPEAKING, BUT ALSO BEYOND THAT?
My initial feeling about announcing our new deals and doing this interview, frankly, was that it wasn’t sensitive to all the suffering happening in the world right now. And that it should wait. Everyone is riding on hope that this virus is extinguished soon, and hope that we can get back to business as usual.
But then I thought: why not highlight a bright spot in the world of business, and why hold back the positive message that Round Hill is doing business as usual?
Many businesses are suffering; restaurants and really any kind of brick and mortar retail probably most. The unique nature and the diversification of our sources of income mean music publishers are well protected compared to most businesses – but we are certainly not fully protected.
In the last downturn in 2008 music publishing was barely affected. However the unique and unprecedented nature of the response to COVID-19, with the closure of so many retail establishments, will have a prolonged negative effect. Live obviously will take a hit; so will general licensing from bars restaurants etc. Audio streaming should hold up, and audio visual streaming is likely up.
Terrestrial radio is problematic because of the loss of advertisers, however, that might get boosted by increased rates from radio with BMI. Sync will be down. Yet there is new revenue this year from non traditional digital sources like Peloton Facebook and as soon as they license with the independent community, Tik Tok. With all of that in mind, you can see how the diversification of income is key to maintaining revenue.