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Shot Tower Capital has been conducting an independent valuation of Hipgnosis Songs Fund’s assets. The firm values the portfolio at $1.94B—which is 26% lower than Hipgnosis reported in its H1 results in December 2023.
The final valuation report comes as Shot Tower wraps up its due diligence work on Hipgnosis, concluding that the value of its portfolio is somewhere between $1.83 billion and $1.02 billion. This follows a report on March 18 that revealed a double-counting error in Hipgnosis’ accrued revenue, with the board announcing a 7.6% reduction to its operative net asset value (NAV).
The final report concludes that the trust’s adviser “failed to perform to music publishing industry standards” in three notable ways. The first is on underwriting acquisitions and putting the resources in place to manage those rights after they were bought. The second is on providing investors with accurate financial statements and public disclosures, while the third is managing conflicts between the investment adviser and the trust.
The Shot Tower analysis suggests that 67 out of 105 acquisition in the fund are worth less than the price they were bought at. Shot Tower calls HSF’s projections ‘aggressive’ and stated that 75% of the trust’s catalogues missed their growth forecasts by an average of 23% on an annual basis.
The report also finds that Hipgnosis Songs Fund’s acquisition underwriting was “below music industry standards” and that it was often relying on statements of expectation in lieu of actual analysis “with a base case assuming 100% of the growth forecast and an exit multiple equal to the entry multiple.”
Shot Tower’s report also reveals that HSF’s investment adviser did not have systems and services in place to effectively manage its catalogue of some 40,000 songs and noted that, while all royalty data has been obtained by HSF for six years after the trust’s inception, it still doesn’t track royalty performance of its catalogue at the song level—which is the standard music publishing industry practice.
The report finds that acquisition files were missing key documents, data provided during the due diligence process was inconsistent, and with some catalogs, it was “difficult to ascertain whether these items were not obtained or just unable to be located.”
Earlier this year, allegations were made that Hipgnosis Songs Fund ‘cherry-picked’ 29 music catalogues to be sold to Hipgnosis Songs Capital (HSC)—a fund managed by the same investment adviser. These 29 catalogs were growing at ‘materially higher rates’ than the overall HSF portfolio. Shot Tower concludes that HSF holds a “conflicted position” when recommending the transactions to its shareholders.
“The economics presented in the September 25, 2023 report suggests the net multiple after deducting RTI was 17.6x,” Shot Tower reveals. “The analysis based on information reviewed in due diligence suggests the multiple was closer to 14.9x. HSC’s offer represents a 10.5% and 5% discount to the high midpoint of our valuation range and a 1.2% premium to the low end of our range.”
“Additionally, our analysis indicates that the weighted average historic growth rates for the selected catalogs are 5.9% versus 2.7% for the catalogs which were to be left with the fund (excluding recently divested catalogs), with future growth projected to be 5.4% versus 4.3% for the catalogs which were to be left with the fund.”
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