The following is an excerpt from the book “The Music Catalog Sales Guide”, by Silvino E. Díaz, Esq. It’s a comprehensive dealmaking guide for artists, companies, and professionals in the music industry. It discusses current trends, as well as tips on how to: organize your assets; structure your team; attract major investors; value your catalog; and prepare to sell.
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The world of music catalog sales has many moving parts, players and stakeholders. Music rights funds—one of these moving parts—are entities that acquire and manage music catalogs. They provide liquidity to catalog sellers and leverage their expertise in licensing, royalty collection, and music placements in the media, maximizing returns of music assets.
What sort of experience do you need to run a music rights fund?
People who manage music rights funds generally have a background as executives in the music business.
One example is Hank Forsyth, co-founder of New York-based music rights fund Litmus Music, which has acquired music catalogs by artists including Katy Perry and Keith Urban. Previously, Forsyth held executive roles at Warner Chappell Music, EMI Music, and Blue Note Records for 20 years. Meanwhile, Forsyth’s Litmus co-founder Dan McCarroll served as President of Warner Brothers Records and Capitol Records and held executive roles at Amazon Music and EMI Music Publishing. Prior to his executive career, McCarroll worked closely with artists including Katy Perry, Dua Lipa, Duran Duran, Elton John, Mac Miller, and Sam Smith.
Similarly, music executive Merck Mercuriadis—founder of music rights fund Hipgnosis Songs Capital which acquired catalogs by artists like Shakira and Justin Bieber—previously had a career in artist management. Mercuriadis managed artists including Beyoncé, Elton John, and Guns N’ Roses.
What do the music rights funds do with the catalog?
Music rights catalogs make money from the royalties generated by the public performance, publishing, reproduction and synchronization of the musical works contained in them. Music rights funds make money by acquiring the rights to songs or entire catalogs, or the right to collect royalties from them, and by then monetizing them through various revenue streams.
For one, regarding royalties from streaming and downloads, music rights funds earn every time a song is played on DSPs like Spotify, Apple Music, or YouTube, or when it’s downloaded from digital stores.
Second, these funds cash-in when a song is performed live, broadcast on TV, or played on the radio by obtaining performance royalties. These royalties are collected by performing rights organizations like ASCAP or BMI in the U.S, as well as other international rights societies abroad.
These funds also issue mechanical royalties, which are generated from the physical or digital reproduction of songs (compositions), such as CDs, vinyl, or digital downloads. Music rights funds earn a share of these royalties when their songs are reproduced.
Funds also acquire earnings from synchronization licensing, which involves granting permission for a song to be used in films, TV shows, commercials, video games, or other multimedia content.
Additionally, funds can generate additional earnings by monetizing an artist’s name, image and likeness (NIL) alongside the underlying songs they represent. Funds’ catalog acquisitions are often bundled with some level of NIL rights or a branding partnership, allowing the fund to license the artist’s brand for merchandise, biopics, documentaries, virtual concerts, hologram tours, and sponsorship deals.
What private equity firms invest in music rights funds and what do these investments entail?
Often, the money to invest in music catalogs is provided to funds by private equity (PE) firms.
For one, Kohlberg Kravis Roberts & Co. (KKR), an American global investment company that manages multiple alternative asset classes—with assets under management (AUM) at $638 billion and fee paying assets under management (FPAUM) at $843 billion as of December 2024—provides financing to music rights management companies like HarbourView Equity Partners. HarbourView is a music rights investment firm that has amassed roughly $1.6 billion in “regulatory managed assets” and acquired over 50 catalogs, including those of Nelly and Luis Fonsi.
Additionally, Apollo Global Management, Inc. (Apollo) is an American asset management firm that primarily invests in alternative assets with $696 billion of assets under management as of June 2024. Apollo expects to generate $10 billion in annual earnings across its asset management and retirement businesses by 2029. The company also backed HarbourView, providing it with over $500 million in combined funding in 2021.
The Carlyle Group Inc. is an American multinational company with operations in private equity, alternative asset management and financial services. As of 2023, the company had $447 billion of assets under management and $314 billion fee-earning assets under management. One of the largest mega-funds in the world, Carlyle has invested in Litmus Music.
So how does private equity investment in music funds work? When PE firms invest in music rights funds to acquire catalogs, the terms of the investment are often structured similarly to those of other private equity investments, with some specific characteristics tailored to the music industry.
One term is equity investment. The PE firm may take an equity stake in the fund, obtaining shares in the profits generated from music catalogs.
Second, debt financing. In some cases, PE firms provide loans, where the investment fund is responsible for repaying the debt with interest, often tied to catalog performance (e.g., royalty streams from streaming, licensing, etc.).
PE firms expect high returns, often ranging from 15-20%. The investment is structured with an aim to generate steady cash flows through music royalties over time. Since music catalogs are seen as long-term investments, PE firms may agree to a lock-up period of 7-10 years before they can exit or sell their shares in the catalog fund. This provides time for the catalogs to generate consistent royalties. PE firms typically plan an exit strategy after those 7-10 years.
Importantly, private equity-backed music rights funds typically charge management fees (usually around 1.5%-2%) for overseeing the catalogs, tracking royalties, and managing licensing deals. There may also be a performance-based fee or “carried interest” (usually 20% of the profits) once a certain return threshold is achieved.
What do private equity investors consider in determining whether a music rights fund is successful or not?
Investing in music catalogs requires careful consideration of various factors to ensure success.
First, did the fund secure equity or debt financing, and at what interest rate? Equity financing provides the fund with greater flexibility and fewer immediate obligations, but it also means sharing ownership and profits with investors. Meanwhile, debt financing can be more efficient for generating returns, but it introduces regular repayment obligations and the potential risk of default if cash flows don’t meet expectations. Further, a higher interest rate may reduce the fund’s margin, while favorable financing terms can boost the fund’s returns over time.
Second is the fund’s life cycle stage. Early-stage funds may focus on acquiring newer catalogs with growth potential, while mature funds may seek more stable, well-established catalogs with proven revenue streams.
Third, the use of permanent capital in investments. Some music rights funds leverage permanent capital, meaning the fund is not subject to typical exit timelines. Permanent capital allows funds to hold onto assets for the long term, ensuring a steady stream of income from music royalties. This is particularly useful in the music rights market, where revenue streams can take years to fully materialize. It also provides investors with a more stable and predictable return profile. However, the lack of liquidity may be a concern for investors looking for quicker exits or returns.
Fourth is shareholder expectations. Shareholders may have varying expectations regarding the fund’s time horizon, risk appetite, and return objectives. Some investors may prioritize quick returns, while others may be more interested in long-term income.
Fifth is the nature of the music rights acquired. Are the PE firms purchasing the active rights to the works, or just the passive rights to collect royalties? Active rights include intellectual property that the fund may actively manage, such as licensing deals, while passive rights are typically focused on royalties from existing uses like streaming, radio, and licensing. Active rights may offer greater upside potential, but they also involve more management and operational oversight. Passive rights may offer more predictable and stable cash flows, but they could be less lucrative over time if the catalog does not experience growth.
Sixth is the extent and thoroughness of the due diligence process. Due diligence is the buyer’s detailed verification process to confirm that the catalog is exactly what the seller claims it is. This is done by auditors, lawyers, and valuation analysts, verifying documents such as royalty statements, copyright registrations, split sheets, publishing and master agreements.
Seventh, the potential for overpaying in a competitive marketplace. As the demand for music catalogs grows, so does competition for high-quality assets. In highly competitive deal situations, PE firms risk overpaying for assets. Overpaying for a catalog can reduce the potential return on investment, especially if the catalog does not perform as expected.
Eighth is the level of diversification of the music portfolio. A diversified portfolio that spans various genres, artists, and revenue sources can help mitigate risk. Music catalogs, particularly those from one genre or artist, can experience fluctuations in demand due to trends or changes in the market. A diversified portfolio that includes various income-generating rights, such as publishing, master recordings, and performance royalties, can provide a steadier cash flow and help protect against volatility in a single asset class.
And finally, investors should consider emerging market trends and technological innovation in the music industry, such as the rise of streaming platforms, NFTs, and virtual concerts. Technological advancements continue to reshape how music is distributed, consumed, and monetized.
If you have questions or would like to discuss the purchase of music assets, please contact EPGD Business Law in Miami, Florida, at (786) 837-6787 or email us to schedule a consultation.
EPGD Business Law is located in beautiful Coral Gables. Call us at (786) 837-6787, or contact us through the website to schedule a consultation.
