December 10, 2020- Join us in an interview with special guest David Vankka, Partner, Managing Director & Portfolio Manager of ICM Asset Management and PM of the ICM Crescendo Music Royalty Fund. Today we talk about:

  • His background on the investment business and how he got to where he is today
  • His process with the music royalties investment fund
  • Expectations that investors have coming into this asset class in terms of potential returns and what a typical deal looks like
  • How investors can access and evaluate music royalty investments

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Transcript:

Welcome investors to the Absolute Return Podcast. Your source for stock market analysis, global macro musings and hedge fund investment strategies. Your hosts Julian Klymochko and Michael Kesslering aim to bring you the knowledge and analysis you need to become a more intelligent and wealthier investor. This episode is brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.Accelerateshares.com.

Julian Klymochko: Welcome Dave to the podcast. We’re really excited to have you on today. Specifically, to chat a lot about investing in music royalties. I’m definitely fascinated by that topic, but before we get into the details on investing in music royalties, and that entire industry, streaming, etc., why don’t you give us and our listeners a quick background on what you’ve done in the investment business and how you got to where you are today?

David Vankka: Sure, sure and I don’t think you’re going to find anyone with a straightforward path to the music royalty space, but thanks again for having me, Julian and Michael, and thanks again for the podcast series cause I have really enjoyed a number of the other podcasts and certainly even listening last week about the Supreme takeover, having had an 18-year-old, I’ve had some experience trying to buy things online at Supreme, and it’s fascinating how they create scarcity and brand awareness and I still don’t get it, but a $2.1 billion dollars said otherwise. 

Julian Klymochko: Yeah.

David Vankka: My background you know, I grew up in the interior British Columbia. Came to Calgary to build a career out here for University and started out as a CA, now a CPA, you know, in part because you know, really didn’t have the exposure and understanding of what the finance and banking world looked like and always knew I’d be guaranteed a job of some way shape or form. And I do still think it’s a great background for anybody to have those skills and that discipline to get through the program. But when I was getting married at my receiving line, I was recruited to go work at a company called Peterson & Co in the mid 90s and joined them as part of the investment banking team, which we built up for a number of years and ultimately moved over to the trading business around 2000 when liability trading was just beginning to take hold in the marketplace. And, you know, obviously from a lot of your funds and your long short funds, dealt with a lot of clients in that space and traded a lot of risk arbitrage at the time with clients, particularly in New York and a fascinating time and really before technology had taken over that business.

But in 2002, was looking to spread my wings a little bit beyond what was, you know, quite frankly I was on the executive committee at Peters and it was a great business, but looking at other opportunities and more globally and eight of us came together and started a firm called Tri Stone Capital which was, you know, for better or worse, a competing investment bank to Peters and First Energy. Perhaps with a little bit more of a global focus at the time and built that out through 2002 to 2009. Had a great run, ultimately after 2008, we went through Lehman and Bear and the credit collapse and we’re making some decisions as a partnership because we had built a global footprint, but to really capitalize on it, we needed a lot more capital to do that. So, we’re exploring discussions to bring in incremental capital and ultimately got several offers to acquire the firm. And, you know, it was just time I think, to do that at that particular moment. I was not particularly interested in staying on and having the golden handcuffs, so to speak. So, moved on to the buy side of the business with Gluskin Sheff out of Toronto, working with high-net-worth clients and products for a number of years and got talked back into the banking business when energy was booming again. But you know, really was looking a lot of the way through of considering starting my own fund or vehicle. And, you know, that ultimately led me to ICM Asset Management, which was a firm that had been rooted in real estate starting with some German family offices and through probably about 6,000 individual investors today and focused on value-add real estate in particular.

So, the idea there was for us to follow a model of a Brookfield or a Blackstone in a much smaller way, looking at the alternative space and saying, where can we add value to hard assets through different verticals? Real estate being one of them, but we also see lots of other opportunities in other segments and my focus now is on private equity business, which includes venture capital, where we have some connection to the music space in a number of our portfolio companies as well. And the music royalty fund was a great opportunity. We’ve been looking at for a few years. I’ve been really passionate about the space and ultimately partnered with a group called Crescendo Royalty Corp who had been investing in the space as well as that partner from New York named DeVon Harris. Interesting character, has a few Grammys himself. Was John Legend roommate in college and Kanye West cousin. So deep ties to the music industry and an entrepreneur himself. He runs an interactive video company called Adventure, which is just rolling out in New York City. So that led us to where we are today, career-wise.

Michael Kesslering: And so, with regards to the fund as well, can you talk a little bit with the royalty fund, how you go about identifying the catalogues, a little bit into your investment process with the fund?

David Vankka: Sure, and I might even back it up a little bit and just talk about why you’d even look at the space at all, because 99% of people we speak to haven’t heard of it before, and 1% knows it intimately. And just similar to The Accelerate Funds. You know, we see a lot of investors, you know, idling through this very low interest rate environment, perhaps overexposed on equities and realizing that the 60/40 model isn’t going to fit their needs anymore. You know, and even when they look at their equity positions, some may not aware of concentration and Fang stocks and other stocks along the way. So, we’ve really seen and think we’re going to see more acceptance of an absolute return model, which will include obviously equities and bonds at certain point in time, but obviously real estate, long-short funds, infrastructure, farm land other assets.

And we see pensions, investing music royalties, not all of them, but there certainly are a handful of them. Ontario teachers through a group called Anthem. State of Michigan pension plan is a significant player. The UK railway pension plan is a significant player. And these investors, I think have looked at the space and said, we’ve got our own liabilities and our own payments. We have to make up over a period of time. We can’t get to 6% annuity payments with 50 basis point 10-year treasuries. So, this is a really intriguing way to add some diversification that kind of matches our risk profile. So, and I think the private investor having the same thing looking towards retirement. There’s no easy way to get your guaranteed 6% or 8% or 5% or whatever you need in this marketplace. And as an asset class, music royalties does fit a lot of those needs. And we’re at a spot where we can see and identify and have some transparency on what’s happening in the marketplace and valuations and data, whereas five years ago that might’ve been next to impossible if you weren’t one of the large record labels.

So, to go back to your question about what we’re looking for in catalogues or how we identify them. We’re trying to build a diversified portfolio of assets, just like anybody else. So, we’re somewhat agnostic to the music genre or the artist or the song, but we want to have assets that are saleable down the road. Are not going to be correlated in that, you know, everything we own is subject to the whims of consumer tastes or behaviour. And that’s why as we build the portfolio, we’re going to have representation from a number of different genres, a number of different artists. And really some of the main things to look for are the age of the catalogue. So, the older the catalogue is the more predictable it will tend to be. It almost looks like a horizontal, well, when you look at the profiles of some of the assets. A song comes on strong for the first couple of years and then gets played less or followed less, but there’s a very long tail, which is more predictable. So, for us, we’re looking for catalogues that are maybe coming off that initial hype but maybe not yet 30 years old. So, everything will be over two years old. The sweet spot for us will be catalogues that are probably 5 to 10 years old. And we do think through the use of data and some other factors that we kind of use in our process, it’s helping us identify where the risks are in some of these catalogues, obviously, you know, historically I think the industry has identified talent and looked at what’s been paid over the last year or three years. Taking the back of a napkin and multiplied that by a number and cashflow pretty much equals revenue in these assets. So, a lot of these deals are being done at what you would call revenue multiples, and these revenue multiples get larger. The more well-known the artist is, and the more iconic the songs are as well.

Julian Klymochko: Interesting. We always like to see new asset classes emerge and certainly music royalties seem like one that could be big, but as you indicated, pretty much brand new in terms of the liquidity flowing to investors. And this seems to be like a truly alternative uncorrelated asset class, such that, you know, you go through a recession. I don’t think people will listen to music less. And so, presents a really interesting risk reward stream for investors. And I wanted to get into a bit of the details from an asset class perspective. What are some of the expectations that investors have coming into this asset class in terms of potential returns? If you want to discuss, you know, valuations of specific assets within music royalties, you know, as they increase in popularity, have you been saying valuations go up and while that temper return expectations in the future.

David Vankka: Well, we’re targeting returns unlevered in the 8 to 12% range. So, I’ll start from there because I’m going to give you a much longer answer to a very detailed question. If we look back in the early 2000 to probably 2010, the whole music industry was in a bear market. There were physical CDs. People were copying, pirating.

Julian Klymochko: Napster.

David Vankka: Napster downloads, you name it. And the industry was in a funk. And I think really looking for ways to attach to the consumer and find new revenue sources. And the other thing that was happening with their consumer is, someone would have their CD budget, they’d buy CDs or download or steal CDs, till they were 25 and then they stop. And as a result, we saw this big decline in the entire space. And then really around 2010, streaming started to become a small business. We had the arrival of the smartphones, which, you know, when we think back was really not that long ago. We had Netflix flipping from selling and renting DVDs and in the Red Boxes and mailing them back to taking a chance on this streaming model. And we just had a proliferation increasing bandwidth and availability. And as time moved on this model was being adopted more and more even the exempt consumer software. We all probably remember buying our Adobe or buying our Microsoft at the Best Buy store and plugging in the disc and buying a new one in another two years. And that model is entirely moving to the cloud and the subscription basis, as we all know, so same things happened in music. And I think because of the smartphone in particular, it’s really enabled consumers to change their behaviour. And as time goes on, have instantaneous access to whatever we want. So, the rise in that particular business has really led to the ability to invest in these music royalties as we are today. Streaming now represents 80% of the entire music market. Parts of the music market have been hit by COVID given there’s no live performances, but the streaming side has been strong as well. And, you know, there isn’t a lot of direct coverage. There’s industry coverage, but there are firms like Goldman, you know, they may have their own reasons for doing forecasts and things, but ultimately, they’re calling for the music industry to go from about 20 billion to 130 billion by 2030.

Julian Klymochko: Like you don’t have any sell-side analysts recommending the new Drake portfolio view?

David Vankka: They may have start covering the space when Spotify was listing, but that timing might just be coincidence as well. But the actual inertia is still very, very high. And I think we’re in the first ending of a lot of these things. So, we’ve got consumers looking at their subscriptions to Netflix or Spotify, almost like utility bills now. This is not discretionary capital. They’re almost like utilities. These have pricing power as well. They can push through additional pricing without having a loss of losing customers. And then there are multiple sources as well. And when we think about the broader market, we’re still just scratching the surface on the entire world. If we start looking at foreign countries and as we add bandwidth, whether it’s 5g or whether it’s you know, SpaceX, lower little satellite providing high-speed bandwidth anywhere on the planet. There’s whole larger groups of consumers and international markets will continue to adapt to these. So, the broader macro trend is definitely in a bull market, and we think that’s going to continue for some period of time with catalogue valuations they have certainly gone up in value in some cases. There’s no doubt about that. Back again, before, you know, before streaming really happened, you know, record labels would advance money own half the masters that money would affectively be alone that would get paid off, and it would all be done in an dark room somewhere. And really the artist or song writers didn’t have much leveraged in those negotiations unless they were superstar. But what’s happening now is I think because there’s a bit more transparency on the data. There’re more artists willing to fund some of their own projects as well.

And because we’ve been in the sustained low interest rate there’s more capital looking for other alternative investments. And this is just one when people do roll their sleeves up on it does fit the return profile. You know, the challenges with it, a lot of the deals are one-off deals. So, they require a network effect. And it’s a small community, not dissimilar to downtown Calgary in the oil and gas community, where the lawyers and advisors and writers all seem to know each other. And for us, it’s been really important to have a good reputation and demonstrate we can close on transactions and be easy to deal with and continue to see deal flow. So, we’ve been really happy with the pipeline we’ve seen to date.

Julian Klymochko: Yeah, certainly it seems like that proprietary deal flow is so important. And this is specifically a space I’ve long, been fascinated. Fun fact about me is in University I was a nightclub DJ, so big fan of music, my whole life, and clearly Spotify and streaming, Apple music growing like crazy. I have just a massive collection on both platforms. So certainly, the macro of this asset class makes sense. But from an investor standpoint, I know myself for the past five years, I occasionally go onto these different music, royalty exchange websites. I think there’s at least a couple last time I checked and you can pick up a song or two, if you want. How do you, or how can investors access this asset class? Say when you’re looking at a potential asset, is it a catalogue of dozens or perhaps hundreds of assets, or do you do like one-off deals for a specific song for like 10,000 or $50,000 dollars? What’s your average deal look like? 

David Vankka: Yeah, it’s various and I’ll give you a bit of the market context as well. Well, an easy way for investors access is to come talk to us where it can be found at www.musicroyaltyinvesting.com or through the ICM asset management website as well. But these catalogues range in size from anywhere between, you know, 20, $50,000 dollars are available to hundreds of millions of dollars. And the way I think to look at the opportunities for us is to find a mix of catalogues where perhaps we own a few more rights. We’re at a size where we’re not competing against the large industry players. And there’s a bar bell here in that, you know, the big three players. A small number of funds, which are getting larger by the day. Hipgnosis is a public company. Now in London, there’s a fund called Round Hill, which has been a private LP, not necessarily accessible for your average investor, but they’ve done another raise and they’re actually taking their first fund public in London. So that will be fun to watch the raising capital in the public markets to buy out their first close in, the LP and acquire catalogues and a few other funds and then the pensions through various vehicles and they really need to do transactions that have some scale in them to move the needle. So, our target market right now is transactions from a couple of $500,000 to $5 Million. And that’s the range where we were looking and seeing deal flow. We’ve also had access to two larger deal flow, which we’re just not prepared to chase at this point in time. But because of that, it’s not as competitive as a space and the valuations aren’t as high as say, Taylor Swift masters being sold for the second time to Shamrock in this case. And interestingly without her consent. But that deal was about a $300 million deal and Hipgnosis in their public disclosures talks about paying, I believe it’s around 14 times revenue. We’re targeting catalogues in the 5 to 10 times range. 

Julian Klymochko: Right.

David Vankka: Some of that’s negotiating power you know, and Hipgnosis has a view that they want to own a hundred percent of all the copyrights and really increase the value of the asset going forward. And some industry viewers think they might be overpaying, but the other side of it is as this market continues to improve, they’re continuing to acquire great assets by the looks of it from an outsider. And there aren’t a lot of other ways to play the space. So, you know, Hipgnosis trade publicly, traded about a four and a half percent yield, 4% yield, I think, and for a fund like ours, we’re targeting yields closer to 6 and a half to 8%.

Michael Kesslering: So, a little bit more of a value strategy in terms of not looking at paying those premium multiples.

David Vankka: That’s right. And good assets still have a multiples attached to it. And when I say good, usually a little bit older, better, and better Nolan and better likelihood of the artists continuing to grow and improve their career. You mentioned Royalty Exchange, Royalty Change has done a great job of trying to become a market network place in the space, really providing in particular songwriters, the ability to dispose of some of their rights and for consumers to buy it. And we look at every transaction on there as well. We don’t like to participate in auction like most people don’t and the other point about royalty exchanges, they’re often selling just the assignment of streaming, which doesn’t necessarily include the copyrights. And quite frankly, what they’re selling is predominantly what we’re interested in. But in one-off transactions, we tend to have the ability to get one half of the copyright along the way. And we also think that creates more saleability down the road for their portfolio.

The other thing about royalty exchange, they’ve had a number of artists who have said, well I might not want to sell my rights, or I might not want to be tied up on them forever. So why don’t we carve out the rights to the income for 10 years? And then it reverts back to me, obviously that’s worth less than owning them outright because a copyright is typically for the life of the artist plus 70 years. So, when Julian and Mike create their band or there’s DJ duo, like The Chainsmokers have a great hit, I buy the rights off you. All have them for 70 years after you’re dead until you resell it. So, it’s almost a perpetual asset but kudos to what royalty exchange is doing. And certainly, our partners have bought assets off them in the past as well. And I think they’ve been great about educating the market with providing transparency on how some of these deals work and providing access to it. But for most individual investors, it’s hard for them to get a diversified portfolio when they’re throwing, you know, 100, 200, 500, 50’s on these assets. But I certainly see the appeal of it. And I expect them to have continued success down the road.

Julian Klymochko: Right, and if you could go into a little bit from a high level exactly how the mechanics work on one of these investments, because I understand it, and I’m no expert, but you have different aspects of each song and you can own different parts of it with respect to the copyright, the streaming mechanical, et cetera.

David Vankka: Yeah, well US copyright laws and international copyright laws are a bit of a bowl of spaghetti, even for the IP lawyers out there, but at the heart of it, when somebody creates a song, two copyrights are created, there’s one copyright for the writing of the song or the composition. And you’ll often hear those called publishing rights as well. And that song is only made once. From there, the other side of the copyright is called the sound recording or the masters you’ll hear. And as an example, Taylor Swift masters were resold and those masters can be one individual recording of a song. And there can be several different masters for one musical composition, whether there’s covers, remakes. In the unique case of Taylor Swift, right now, she has said that she is going to be redoing her first six albums which if she does that, I would be, you know, I surprised. That jammer is closing on that because they, you know, they wouldn’t be surprised by that, but she could remake her songs. And if her fans decide to listen and boycott the old stuff, the value of what was just acquired, would go down.

Michael Kesslering: Basically, have two different options if you want to listen to one song, which would be a very interesting story.

David Vankka: Yeah, and she’s the biggest artist in the world. So, she’s unique and I’m sure they’ll come to some agreement to sort that out, but it’s an interesting dynamic. So, there are these two copyrights. If you write your own song and record your own song, you own all of them. Most of what we see has songwriters and multiple songwriters, which may also include the artist and then the artist separate. And then every time a song is played, whether it’s played at a restaurant, whether it’s played on Spotify, whether it’s played in your Peloton class, played on the radio. There’s a royalty due to the holder of these rights. And those royalties get collected by central organizations and distributed to the rights holders. So, our primary interest is in the rights that are driven by streaming, because for us, they’re a little bit more predictable, but it also could include rights for being played and other sources include rights for sales and physical, which isn’t a big part of the market anymore, public performance, et cetera. And in the case, you just, don’t an assignment of the royalty interest. You get paid that cash flow. 

Now, the copyrights themselves, you also have the additional benefit that you can license these for other purposes. And typically, it’s called synchronization. So, you know, companies like Disney, Hallmark, Netflix, everybody else, commercials. They use songs obviously in content and pay upfront fees to do that. Those sync opportunities are fantastic for our firm, which isn’t necessarily a music publishing business. We can describe a lot of value to those, but there is value in those, whereas other firms will be, full-time trying to get these sync opportunities out there, and there’s a lot of pent-up demand, particularly now that production’s coming back, like in a lot of markets after COVID, while we’re still during COVID, but content is being produced again and speaking to one musical supervisor down in LA, and it, you know, it’s remarkable, he’s talking about a six-part pilot of 30-minute episodes. And he asked how many songs does he think we need to license to be in this? I thought, ah, maybe six episodes, 50, 60, 80. No, he said, you know, 500 to 750. And when he actually started to listen to all the sounds and titbits and stuff like that, there’s huge demand for it. And those groups want to easy access to it. 

So, there’s a few different reference revenue sources from the assets themselves that come out of it. And you know, the other part of looking at these opportunities is looking at where the revenues coming from. So even if you’re acquiring a hundred thousand dollars in royalties from last year, and you think it’s going to be 90 or 110 this year. It’s important to know where that’s coming from? Is it coming from streaming services? Is it coming from radio? You know, radio is big payer, but when radio falls off, it falls off fairly materially. And then it’s also gerne-specific. So, we see you know, hip-hop, R&B much more concentrated on streaming, but country music, as an example, still has significant radio play. 

Julian Klymochko: Right. 

David Vankka: So, we have to look at those assets a little differently, just depending on where the assets are and where the revenues actually come from.

Michael Kesslering: So, when I’m looking at the sector as well, and I really do appreciate the fulsome kind of description of how you invest in the music royalty, all the different areas, where you can generate revenue. One thing when you’re looking at say a macro trend, such as streaming, and there’s certain ways that you can play that. You can play that by just by buying Spotify, you can look at owning individual IP on the royalty side or looking at say like the music labels, some of them that are publicly traded. I think the investment case on Spotify has been described a ton, but specifically between owning the actual IP versus the labels. How would you look at those two investment opportunities relative to one another?

David Vankka: Yeah, I mean public ones own a lot of things. You know, the Warner. They have labels, they have catalogues. There’s a lot of different businesses in embedded in there. And it wouldn’t necessarily be a pure play on streaming. But they’re also operating businesses. So, you’ve got employees, you have operating expenses, you may have capital expenses, all those things that come with just running a business which is different. And again, it’s been great for the industry to see, you know, Spotify success. See, you know, Warner IPO, obviously a couple IPO’s in the music royalty space, but still very rare. Whereas if you own the royalty interest themselves with copyrights, once you acquire those, you’re not burdened by incremental operating costs or capital costs. It’s not liked a real estate investment or a business investment where you find you’re over budget or over time, or perhaps something comes up in the project, or perhaps the business has a slowdown in revenue and you’re in an operating loss position. This is top line revenue, which is fantastic. So, you know, you can have some incremental administrative expenditures to try and help increase the value of your assets.

But really once you own one, it becomes passive in certain cases and the way the payments work, these performing rights organizations collect. They’ve been around for hundreds of years. In some cases, we’ve got SOCAN in Canada, BMI in ASCAP are examples. In the US these organizations collect royalties from all these sources and then send you a check. Typically, once a quarter, some are monthly, some are semi-annually. So as soon as you own the asset, you start getting paid, which is great. It doesn’t have the J curve effect of some other opportunities. And unlike commodity-based royalty companies which we’ve got some here, obviously in Calgary and some in the mining space as well. Music royalties aren’t subject to the same commodity price risk or requirements of industry activity. So, really once you own these, you’re reliant on people listening to them and streaming them and relying to a certain extent on the digital streaming providers in the streaming model to continue. If we all go back to buying CDs, it will be catalogue valuations will clearly go down but we don’t see that happening anytime soon with the behaviours are doing so. That’s why it’s a bit of a nice diversifier to the portfolio. We rolled into COVID and, you know, back in March, you know, we saw the blow off, obviously in the equity market, which has recovered in certain cases and not others, once you get granular.

And that’s because people have to put money to work. 

We have seen the music, the streaming side of the business, boom, but it was a little bit different. Out of the gate music streaming actually dropped from an audio perspective, as more people were listening to the news. Video streaming through YouTube, went through the roof, and anytime something’s played on YouTube, the same applies. You still have the royalties being generated. So, and people were listening to different kinds of things for short periods of time, but ultimately streaming has recovered and grow, and through that period, whereas other parts of the market have obviously been down such as live performances, which was zero. The other part of these catalogue valuations as well. We think there’s going to be more capital continuing to move into them as time goes on. And you talked about the copyrights in the US. There’s a group called the copyright board, and they basically set what’s called an all-in royalty pool that said in a simplistic example, Spotify take all your subscription revenue, all your ad revenue, multiply it by this number. And this is what you pay out to the songwriters who hold the royalties. That number is increasing from 10% to 15%. It started and gets to 15% in 2022. So, that should in theory increase the value of all these assets. Now, there is an appeal going on, and there’s a lot of devil in the details, but certainly the trend is to get more money into the hands of the rights holders and perhaps less into the hands of the Amazons and Spotify of the world who were clearly dominating the industry with great business models.

Julian Klymochko: I wanted to drill down a bit into the cashflow profile of some of these assets. You mentioned no steep, initial decline curve. Once a very popular song comes out, gets played, and then sort of trails off into a sort of a steady and flat cashflow stream. But what I find fascinating is on occasion, you’ll have an old song blow up in popularity. For example, a few months ago, it had this viral TikTok video with a Fleetwood Mac and Dreams with a skateboarder in it, where I imagine if you own that royalty, then your cashflow just absolutely explodes because people hear it, you get more streams and the popularity just comes back. Another one that I found interesting was for the new Batman movie, they actually used in the trailer, a Nirvana song from the 1990s. And when people hear that they remember, oh, that was an awesome song. I remember that, and they started playing it more and more. So, is that part of, you know, is that really rare that it happens where something explodes in popularity and the returns are significantly higher than expected? Or do you guys actively manage these assets such that you try to promote them and get various services, whether they’re media et cetera, to use them?

David Vankka: A bit of both, but that’s an interesting example. I’m actually wearing my Nirvana, never mind socks today in honour of this. 

Julian Klymochko: Great album. 

David Vankka: Yeah, fantastic album, fantastic era as well. So, Dreams, it generated 36 million streams in a couple of weeks, right after that. And it was basically some uncle from Idaho riding a skateboard, drinking his ocean spray. And not only did it crank up the volume of the streams, but it also introduced that to other folks. And in this particular case, I haven’t had the data, but it saw a 315% increase in Spotify streams from 23- to 27-year-old who were not alive when Dreams came out. So, these things can go viral and it’s of huge impact. You can’t necessarily predict it. You know, Partner had a secure song that was in a Superbowl commercial and ultimately you know, went up, whatever 800% more than it should have.

So those things can definitely happen. TikTok is an interesting one because there’s new entrance into this market every day, a new revenue sources and, you know, TikTok a few years ago, it wasn’t thought of, and they didn’t have an appropriate license for music and they were playing things that were under 30 seconds. So as a result, there was a long fight for an authorized use of music. And TikTok is finally signed a licensing agreement, but if something goes viral in there, even before they had a licensing agreement to pay directly, it would get listened to and streamed all over the place. We’ve unfortunately had a, you know, a lot of celebrity artists and non-celebrity passed away in the past few years, you know, everything from Eddie Van Halen, to David Bowie, to everybody in between. There’s a study in some of the research groups to follow the space, look at it and look at the impact of how streaming has impacted what’s the artist passed away. And as you would imagine, it goes up by multiples over that period of time. 

Video game streaming is another area that’s topical in the industry, but Twitch, which is owned by Amazon has lots of content and considerable eyeballs on it. And for guys that buy vintage, don’t quite get it, but it’s happening. And there’s a lot of unlicensed music that’s being played on Twitch. So, they finally have a licensing agreement in place, but for some of the older stuff, there’s now fighting because they’re forcing them to take down content and it might be some of their best content. So, there was all of a sudden licensed music being used all over the place.

And I think what we’re seeing now with technology and more and more of these licensing opportunities come in and that just creates more revenue sources for the catalogue holders. 

Certainly, don’t expect that to change anytime soon. And it’s really hard to even keep up, you know, Facebook’s entered, Disney’s recast their entire model towards a streaming model now and just watching this somewhat fascinated, but in the middle of it, just in terms of the way the rest of the world seems to be exponentially picking up in this marketplace. And it’s the reality is they can distribute their content globally very efficiently. And for the inputs to that content, which includes music on video or other sources, there’s only going to continue to be increased demand. And I think that’s part of the reason why the Goldman of the world thinks, you know, this could be 7x revenue by 2030.

Julian Klymochko: Yeah, it’s interesting to note, it’s not just the streaming platforms, Spotify, Apple, et cetera, but you have all these, you know, social media networks, TikTok and things of that nature. And perhaps there’s now business model in there where you could team up with some of the influencers and split the royalty or something like that. So, there’s definitely a lot going on. It seems like a great asset class with these macro tailwinds. A lot of opportunity, you mentioned 8 to 12% potential returns, valuation still attractive, but you also mentioned Taylor Swift and some drama with respect to that asset. There is potential patent changes, so an investor standpoint, where are the risks and what could go wrong?

David Vankka: Well, if you own one particular catalogue and you talked about what’s in catalogues, I didn’t appropriately hit on it. A catalogue is just effectively a group of music that that you’re buying. Our first asset had 109 masters in it as an example, different, unique tracks. We’ve looked at catalogues that have one song in it. 

Julian Klymochko: Right. 

David Vankka: And we’ve looked at catalogues that have up to 200 songs in it and everything in between. And I think in the case of the single song we didn’t ultimately acquire it, but it was a country song. Very well known, very well played, you know, played at weddings and all these other things, a good asset. It was just probably too much concentration in the fund the time it came across our desk, but other catalogues were looking at, they might be a single album from an artist. It could be a songwriter whose written multiple songs for a particular artist through different albums or for a bunch of different artists from different albums. And currently you know, we’re negotiating on a catalogue that’s in the Christian pop space, which isn’t necessarily space a lot of people think about, but very sticky, very growing in certain places and actually great asset. We’re also looking at an R&B catalogue of some significance and a country catalogue. And the country catalogues got three songs in it, which are good songs. Two would be considered very, very good songs. The R&B catalogues got about 135 masters and 75 individual trucks. So, if you think about it, some songs get remade a couple of different times. And when you talk about sync licensing, often artists might make an acoustic version as well as a live version, and the ones who were really good at it might even break out individual instrumental trucks, but we don’t see a lot of that.

And then the Christian catalogue, which I would call it more pop has in around 20 songs in it give or take but a couple of very large hits. So, it’s all over the map and the risk to go and buy a single asset or single song for an individual investor is that if people start listening to it or stop listening to that their revenue streams are going to go down. Now, they’re still going to get paid. They’re just going to get paid for a long period of time. You know, presuming they don’t use leverage on it. They’re not going to have a loss position, but it just may take a longer time to get paid out. The other side of it is if it grows, gets into a commercial, they might get paid out very, very quickly.

So that’s one of the risks is just concentration and for us, we can only mitigate that by owning a variety of different assets. The second risk, I think, applies to every asset class, which is interest rates. If someone has a view that interest rates are going to rise to 7 or 8% in the short term that doesn’t necessarily mean the value of the cashflow coming in is going to change, but the value of the catalogues will change. Cause there’ll be an opinion that the terminal value of the asset when you sell it, if you sell it is going to be less. So, you know, the actual streaming will be agnostic to that. You’ll still be getting paid, but like pretty much all assets, the end value and the end buyer will likely be paying less for those kinds of assets.

And then there is a reliance on streaming and streaming providers and you know, fortunately there’s regulated rates so that artists don’t need to negotiate directly with Spotify or Amazon, because they’re not going to be able to successfully do that. But those providers continuing to have revenue basis, grow their revenue basis and continue to offer streaming is pretty critical part of it. We think the risk of that changing is really low, but it’s important to consider. And it’ll be interesting to watch, or if we’re going to see more consolidation in that space or not, we haven’t necessarily seen price wars. What we have seen is new entrance into the space. Certain groups differentiating themselves such as Tidal, or Amazon’s got a high-quality audio stream now as well, where they’re providing higher quality content or appealing to consumers in different ways.

But during COVID I believe the average consumer had 12 different subscription services and the average millennial had 17. And that would include your video and everything else. So, we keep that in mind, there’s lots of options, but if anything, these companies are continuing to increase the pricing on their subscriptions and that flows to the artist. Now there is an ad supported component to it. And with COVID, we’ve seen advertising revenues, you know, or budgets effectively go down because the corporations on the backend have probably been selling less products. So, a dramatic decrease in advertising revenues can affect the pool as well. But it’s not as material as the subscription revenue what’s going on.

Julian Klymochko: So, certainly, it sounds like if an investor were to approach this asset class, they should have diversification just like you would in any other asset class. And certainly, the fund that you guys run is the way to approach that. I wanted to chat about your music catalogue because you disclose some of the songs that you have in it. And I’m surprised because there are a number of tracks on there, a number of assets that I listened to all the time. Better Now by Post Malone, Coffee by Miguel, River by Eminem. So definitely a lot of high-quality assets within the music catalogue. I have a question for you. I wanted to put you on the spot. If you could choose one investment idea specifically say you know, one individual music asset for the next 10 years, what would you put the chips down on?

David Vankka: Well, my kids have told me the answer to that is Drake. I have told them we can’t afford Drake. Drake’s catalogue traits, it will be north of 20 as a multiple. 

Julian Klymochko: Right. 

David Vankka: But those are the kinds of catalogues I think that are going to be iconic for very long periods of time. You know, I think if  just had one catalogue, certainly some of the tried and true older content you know, you can think of the Led Zeppelin, you can think of the Rolling Stones, The Metallica, you name it. Any of those, which have a lot of history and continue to have a lot of plays over time are going to certainly, I think hold their value, but you do have to pay for those kinds of catalogues if they’re even available for sale.

Certainly, genres that have been growing again, you know, hip hop continues to grow. We’re starting to see country move a little bit away from radio into streaming, maybe not away from radio, but streaming is being more widely adopted. And I think anything we would look at if you own one asset, I just want to make sure it had enough age and enough history and enough opportunities that it was in commercials and all those kinds of things that you could probably hold it and tuck it away forever.

Julian Klymochko: Do you have a personal favourite that you own currently? A song that you hear streaming you’re like, oh yeah, I love this and I own it too.

David Vankka: Hip Hop is not my core music, but there is one song that we’re negotiating on right now that brings back a lot of memories from the early University days. So, if we can get that one across the line, that would probably be the most iconic one that we would have.

Michael Kesslering: I would also like to mention that we’ve been talking about some of the catalogue and for anybody listening right now, you can go to the ICM website and see a Spotify playlist which I’ve been utilizing over this week of your catalogue. At least the ones that are listed on Spotify, which is really cool as well, especially for any of the investors to actually see their investment at work.

Julian Klymochko: And if they play it, then you guys get to get paid a bit, right? 

David Vankka: Yeah, we would encourage everybody to play them for at least 30 seconds at a time, 24 hours a day. But no, it’s a really interesting space. And we want to work with artists and songwriters who are continuing to grow their career and want to work with us as well, to build out the value of these existing assets also. So, it’s great to see, and it’s a unique time in the marketplace as well because with artists being unable to tour you know, live streaming in certain cases as emerging trend but it won’t replace tours. For a lot of these artists there’s an increased willingness to dispose of assets. And we are getting, you know, first-hand discussion about folks worried about changes in capital gains tax with the Biden administration moving in the US and we think there could be an acceleration of deal flow between now and the end of the year, just because some of the vendors are certainly, certainly thinking of that. And there’s been a couple of larger transactions happening in the marketplace are already, so that’ll be a trend to watch between now and the end of the year as well.

Julian Klymochko: All right. And just to wrap things up here, where can investors learn more, whether it’s your website, social media, things of that nature?

David Vankka: www.musicroyaltyinvesting.com is probably the easiest, or you can go to the ICM Asset Management Website. We have a presence on LinkedIn through ICM Crescendo. Our Twitter is not what it should be at this point in time, but probably LinkedIn and the website are the best places to go.

Julian Klymochko: Okay, great. Well, I want to thank you for providing a lot of details, a lot of insights, and just your view on the whole music royalty space, this emerging asset class that I find fascinating, and there’s just so many interesting aspects to it. So definitely thank you for coming on the podcast. It was a real pleasure.

David Vankka: Well, thanks again. And I think everyone’s got an emotional connection to music, which makes it really, really interesting as well, whether you’re hearing it in a movie or listening to directly, and everyone has their own tastes, but it’s definitely an area. We’re pretty excited about and enjoy personally. And thanks again to you guys for doing the podcast. So, you know, there’s a lot of great content on there and I’ve really enjoyed listening to it as well. 

Julian Klymochko: Perfect. Thank you, David. 

Michael Kesslering: Thank you. 

David Vankka: Take care, thanks. Thanks for tuning in to the Absolute Return Podcast. This episode was brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.AccelerateShares.com. The views expressed in this podcast to the personal views of the participants and do not reflect the views of Accelerate. No aspect of this podcast constitutes investment legal or tax advice. Opinions expressed in this podcast should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information and opinions in this podcast are based on current market conditions and may fluctuate and change in the future. No representation or warranty expressed or implied is made on behalf of Accelerate as to the accuracy or completeness of the information contained in this podcast. Accelerate does not accept any liability for any direct indirect or consequential loss or damage suffered by any person as a result relying on all or any part of this podcast and any liability is expressly disclaimed.  

Thanks for tuning in to the Absolute Return Podcast. This episode was brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.AccelerateShares.com. The views expressed in this podcast to the personal views of the participants and do not reflect the views of Accelerate. No aspect of this podcast constitutes investment legal or tax advice. Opinions expressed in this podcast should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information and opinions in this podcast are based on current market conditions and may fluctuate and change in the future. No representation or warranty expressed or implied is made on behalf of Accelerate as to the accuracy or completeness of the information contained in this podcast. Accelerate does not accept any liability for any direct indirect or consequential loss or damage suffered by any person as a result relying on all or any part of this podcast and any liability is expressly disclaimed.

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