Songs Sold for a Song

In our principles textbook, Modern Principles, Tyler and I discuss securitization and give the interesting example of music securitization with the picture at right (I’m pretty proud of the caption.)

But what has happened to these big purchases of song portfolios? Ted Gioia runs the numbers and finds that the rock stars sold at the top and the financiers are taking a bath!

On Thursday, Hipgnosis announced a plan to sell almost a half billion dollars of its song portfolio. They need to do this to pay down debt. That’s an ominous sign, because the songs Hipgnosis bought were supposed to generate lots of cash. Why can’t they handle their debt load with that cash flow?

But there was even worse news. Hipgnosis admitted that they sold these songs at 17.5% below their estimated “fair market value.” This added to the already widespread suspicion that current claims of song value are inflated.

Hipgnosis’s share price actually dropped after the announcement.

Last year, I predicted the following:

“Don’t be surprised if the folks at [private equity group] Blackstone end up owning all those songs. But if it happens, they will probably acquire the music at a sharp discount to what those songs were worth just a few months ago.”

Can you guess the buyer in the deal announced on Thursday? Yes, it was a Blackstone-backed fund. And they definitely got that discount.

But there’s one part of this story that I love.…It confirms my sense that karma is at work in the universe, and everything tends towards justice and fairness—if you’re willing to wait long enough.

Here’s that element of karma. The old rock stars actually did defeat the system. They screwed the man, and did it big time.

By my measure, Bob Dylan sold out at the top, and gets to laugh at the financiers who overpaid him. The same is true of Paul Simon and Neil Young and all the rest.

When I launch my hedge fund, I’m going to invite them to join me as partners. They are shrewd operators, every one of them.