====== Hipgnosis Songs Fund ======
Hipgnosis Songs Fund (LSE ticker: SONG) is a [[UK]]-listed [[investment trust]] that pioneered the idea of music royalties as a mainstream [[asset class]]. Launched in 2018 by industry veteran Merck Mercuriadis, its business model was simple yet ambitious: to buy up the copyrights to iconic song catalogs and collect the resulting income streams. The fund's pitch was compelling: songs are like infrastructure, generating reliable, long-term revenue every time they are streamed on [[Spotify]], played on the radio, or used in a movie. This income, the argument went, has little to do with the ups and downs of the [[stock market]] or the economy, making it a fantastic diversifier for an investor's portfolio. Hipgnosis went on a high-profile spending spree, acquiring rights to music by legends like Neil Young, Shakira, Red Hot Chili Peppers, and Justin Timberlake, promising investors that "a great song is a better and more reliable source of income than gold or oil."
===== The Investment Thesis: Songs as an Asset Class =====
The core idea behind Hipgnosis was to transform music from a creative product into a predictable financial asset. The appeal for investors was built on several key pillars:
  * **Predictable Revenue Streams:** Unlike a company whose profits can be volatile, a classic song generates a steady trickle of cash. This income comes from various sources, including streaming royalties, public performance fees (radio, bars, live events), and synchronization fees (use in ads, TV, and films). As global music consumption grows, particularly through streaming, these revenues are expected to rise.
  * **Uncorrelated Returns:** Your decision to stream a Fleetwood Mac song has nothing to do with interest rate announcements or corporate earnings reports. This means the fund's performance should, in theory, be independent of the broader financial markets, providing a valuable cushion during market downturns.
  * **Potential [[Inflation Hedge]]:** The value of royalties could potentially keep pace with inflation. As the cost of living rises, so might the price of streaming subscriptions or the licensing fees for using music, translating into higher income for the copyright holder.
===== A Value Investor's Perspective on Hipgnosis =====
While the story was alluring, a prudent value investor would look under the hood and ask some tough questions. The Hipgnosis saga serves as a masterclass in the importance of scrutinizing valuation, management, and debt.
==== The All-Important Valuation ====
How do you determine what a song catalog is worth? This was the central point of debate for Hipgnosis.
  * **The Magic Number:** The fund valued its assets using a [[discounted cash flow (DCF)]] model. This involves forecasting a song's future earnings and then applying a //discount rate// to calculate what that future income is worth today. Hipgnosis used a very low [[discount rate]] (around 8.5%), which made the future cash flows seem incredibly valuable, resulting in a very high [[net asset value (NAV)]].
  * **NAV vs. Reality:** Critics argued this rate was unrealistic. In a world of rising interest rates, a guaranteed 5% return from a government bond makes an 8.5% projected return from a risky asset like music rights look less attractive. Many believed the market was right to be skeptical, which was reflected in the fund's share price.
==== The NAV Discount: Bargain or Red Flag? ====
For years, Hipgnosis shares traded at a huge [[discount to NAV]]. For a value investor, the chance to buy a pound's worth of assets for 50 pence is usually a dream come true. However, in this case, it was a giant red flag. The market was essentially shouting that it didn't believe the company's own valuation of its assets. The key question for investors was: "Is the share price a bargain, or is the NAV a fantasy?"
==== Debt and Governance Concerns ====
A value investor always scrutinizes a company's financial health and leadership. Hipgnosis raised concerns on both fronts.
  * **High [[Leverage]]:** The fund used significant debt to fuel its acquisitions. This amplified returns when asset values were rising but became a major risk when interest rates rose, making the debt more expensive to service.
  * **Fees and Conflicts:** The fund's manager, also run by Mercuriadis, earned substantial advisory fees. This created a potential conflict of interest, as the manager was incentivized to keep buying assets (and growing the fee base) even if it wasn't in the best interest of the fund's shareholders.
===== The Unravelling and Takeover Saga =====
The combination of rising interest rates, skepticism over the NAV, and governance concerns proved toxic. The fund's share price collapsed, it was forced to cancel its [[dividend]], and shareholders revolted. In early 2024, the board put the fund up for sale, triggering a dramatic bidding war between private equity giant [[Blackstone]] and music company [[Concord Chorus]]. This battle ultimately confirmed that while the song catalogs were indeed valuable, the publicly listed fund structure had failed its investors. Blackstone's final offer, a significant premium to the pre-bid share price but still below the fund's last published NAV, highlighted the chasm between the management's valuation and what a knowledgeable buyer was willing to pay.
===== Key Takeaways for Investors =====
The rise and fall of Hipgnosis offers timeless lessons, echoing the wisdom of legendary investors like [[Warren Buffett]].
  - **Price is What You Pay, Value is What You Get:** The takeover bids provided a real-world test of the assets' value. They demonstrated that even if the NAV was inflated, there was substantial underlying value—just not as much as promised.
  - **Understand What You Own:** Investing in alternative and illiquid assets is complex. An asset is only worth what someone else will pay for it, and for something like music rights, that price can be highly subjective.
  - **The NAV is Just an Opinion:** For investment trusts holding hard-to-price assets, the NAV is an //estimate//, not a fact. Always compare it to the market price and ask //why// a discount or premium exists.
  - **Management Matters:** Scrutinize management fees, incentives, and potential conflicts of interest. High fees and poor alignment with shareholders can destroy value, no matter how good the underlying assets are.