How the City fell out of love with Hipgnosis

At the end of his short set, Sambora received whoops and cheers from his City audience, followed by a hug from Mercuriadis, who told him: “Thank you, brother. I love you, man.” Sambora, who had been paid an undisclosed amount to sell his rights to 186 songs to the Hipgnosis Songs Fund in 2020, went on to thank the Hipgnosis team for “taking care of me”.

The Hipgnosis Songs Fund — an investment trust that buys the rights to songs from artists and then manages their use, cashing in on royalties as they are played on streaming services or used in films and adverts — became a darling of the London Stock Exchange when it launched in 2018.

In its first three years, fuelled by investments from Investec, Aviva, BlackRock and the Church of England’s fund, Hipgnosis used more than £1 billion to buy full or partial rights to about 60,000 songs by artists including Beyoncé, Shakira, Chrissie Hynde and Jay-Z.

But amid scepticism over how Hipgnosis’s assets have been valued, and concerns about the management company led by Mercuriadis, it has had a dramatic fall from grace, with the fund’s share price languishing at a 50 per cent discount to its net asset value. Last week, the firm axed its dividend and announced a “strategic review”. This week, it faces a crunch vote at its annual general meeting on whether to keep the fund going. Is the curtain about to come down on Hipgnosis, or can Mercuriadis stage an encore?

The increasingly bitter relationship between Mercuriadis, his board, his investors and the City stands in stark contrast to the early days of Hipgnosis.

Mercuriadis, 60, is a Canada-born former music executive who started his career at Virgin Records and went on to work as a manager with artists such as Sir Elton John, Beyoncé, Morrissey, Guns N’ Roses and Iron Maiden. He was briefly chief executive of record label Sanctuary but left in 2006. London-listed Sanctuary was acquired by Universal Music Group in 2007 after its share price collapsed.

In 2018, Mercuriadis made his return to the City with Hipgnosis. The wow factor was provided by Nile Rodgers, of disco act Chic, who was named as a co-founder and business partner. Rodgers remains listed as a member of the Hipgnosis advisory board, alongside fellow songwriters Poo Bear and The-Dream.

Mercuriadis’s pitch was the launch of a listed investment trust, managed by his private vehicle, to acquire copyrights of songs from artists. His thesis was that, due to the rise of streaming and technology that could track music use across social media, royalties to song owners would rise and valuations would follow, meaning healthy returns for his investors.

Hipgnosis founder Merck Mercuriadis has Nile Rodgers in his music empire, but now its future is in doubt

ALAMY

The City’s faith in Hipgnosis began to falter in early 2021 after a team of analysts at Stifel investment bank issued a note calling into question the way in which its assets — song rights — had been valued. The analysts noted how, within months of Hipgnosis buying songs, their values were being raised by the firm’s chosen valuation agent. Stifel’s analysts used the analogy of an individual buying a home for £500,000 and then, shortly afterwards, having their house revalued by an estate agent at £550,000.

Hipgnosis’s valuations were calculated by Massarsky Consulting, an independent firm that is recognised in the sector and has several other clients. It was acquired in 2022 and is now part of professional services firm Citrin Cooperman.

Concerns have also been raised about governance at Hipgnosis. The management arm was originally called The Family (Music) Limited and counted Mercuriadis’s three daughters among its staff. Two have since left, but Rosa Mercuriadis remains chief creative, marketing and culture officer. Merck Mercuriadis told The Sunday Times that he had “no regrets” about employing his daughters.

In October 2021, the set-up of Hipgnosis became more convoluted when US investment giant Blackstone bought a controlling stake in the management company and, concurrently, launched a $1 billion sister fund. Since then, the management firm — renamed Hipgnosis Song Management — has administered both the publicly listed Hipgnosis Songs Fund and the Blackstone-owned Hipgnosis Songs Capital.

Sachin Saggar, an analyst at Stifel, said the Blackstone deal had provided some encouragement because “it was clear that the quality of individuals and the management team would improve with someone like Blackstone involved”. But, he added, it also created “lots of potential conflicts of interest”.

Hipgnosis’s share price remained fairly steady until the autumn of 2022 when interest rates began to bite, increasing borrowing costs and driving down investor appetite for the stock. Although its royalty revenues — including streaming payments and fees associated with “synchronisation” of tracks on adverts, social media and games — were up last year, the listed company’s growth was hampered as its acquisition spree fizzled out.

Amid increasing investor disquiet, the fund entered into a new $700 million (£575 million) borrowing facility with its banks and subsequently launched a share buyback.

Looming for much of this year has been this week’s AGM. Because it is five years since launch, shareholders are to vote on the “continuation” of the fund. Investors will also be voting on a deal, announced last month, to sell the rights of some of its catalogue to its Blackstone-owned sister fund for $440 million. Some investors have publicly spoken out against this deal because the price is at a 17.5 per cent discount to the assets’ previous valuation.

Max Haycock, a former Stifel analyst, said the deal was “disconcerting” to investors because it either implies that the rest of the portfolio is overvalued or that the manager is “willing to sell the assets essentially to itself at a discount”.

Amid the chaos, the fund said last month that its chairman, Andrew Sutch, would be standing down once a replacement has been found.

Mercuriadis and his management team went on a tour of fund managers earlier this month to win City support. Asked how Mercuriadis had come across in those meetings, one investor said that he struck an apologetic, but not overly humble, tone: “He seemed to think his biggest mistake was not hiring people who were of the same calibre as him.”

Hipgnosis bought full or partial rights to songs by artists including Shakira

MIKE COPPOLA/GETTY IMAGES

Matters took a turn for the worse last week when Hipgnosis said its valuation agent had written down the value of its portfolio, citing a US copyright legal decision that would cut retroactive streaming payments across the sector. It said it would therefore be cancelling its dividend to ensure it could service its debts.

Hipgnosis’s share price plunged, only recovering when the company announced a “strategic review” that could result in a change in its management company or a sale of the business.

The announcement opened a divide between the directors and Mercuriadis’s management firm. The board said it had considered “serving notice” on its investment adviser but concluded it was not in shareholders’ interests. Doing so without having lined up a replacement, it said, would breach the terms of a debt facility.

The company would have to give 12 months’ notice and pay a termination fee. To boot, Mercuriadis’s management firm would have a “call option” enabling it to buy the company’s entire portfolio. The board said it had asked Mercuriadis to forgo this right but that the management firm had refused.

Despite the board’s efforts, investors remain unhappy. Tom Treanor, of top-ten shareholder Asset Value Investors, sent a letter to other stakeholders last week encouraging them to vote against the Blackstone deal and “continuation” of the fund. He wants a new board to be appointed that could then consider whether Mercuriadis’s management firm should be replaced. He said the strategic review looked like “desperate stuff” .

On Friday, another investor, Metage, wrote to fellow shareholders encouraging them to vote against the reappointment of chairman Sutch, to hasten his departure, and two other board members, Paul Burger and Andrew Wilkinson.

The Hipgnosis Songs Fund board needs 50 per cent approval from voting shareholders to continue. Without that, there would have to be wholesale changes at the top of the company, which could affect the position of Mercuriadis’s management firm. The Blackstone deal, which itself requires 50 per cent approval, would also fall through if the continuation vote fails. Even if Hipgnosis wins the necessary approvals, close observers expect a sizeable revolt to enforce big changes at the fund.

Mercuriadis, who splits his time between the UK and US, was at his home in Los Angeles last week. He said he was “not worried” about his management firm losing its role at the fund due to the call option he has refused to surrender.

Saggar of Stifel, however, believes it is not a foregone conclusion that Mercuriadis could buy back all the songs. Even if he did, presumably with the backing of Blackstone, he would have to match the fund’s net asset value and bids from third parties. But, striking a perhaps unduly upbeat tone from his home in LA, Mercuriadis seemed confident it would not come to this. “The one thing that Songs shareholders know is that I am the best manager of these assets,” he said. “I have the relationships with the songwriters.”