The old joke about the definition of “alternative investment” is that it is an alternative to investing. Shareholders in Hipgnosis Songs Fund, after yet another bum note from the boardroom, may fail to see the funny side.
The owner and acquirer of music rights arrived on the London stock market at 100p a share in 2018 on a mission to prove that the back catalogues of the likes of Blondie and Neil Young could be turned into reliable streams of royalty income that would adorn the mainstream portfolios of dividend-seeking investors.
It worked for a while, but the current state of play is disharmony on multiple fronts. Dividends are suspended. Half the board was changed after shareholders in October rejected a deal to flog a fifth of the portfolio to the private equity fund Blackstone for $440m (£345m). Since the Hipgnosis fund’s investment adviser is majority-owned by Blackstone itself, the potential for conflict is obvious. Meanwhile, the share price sits at two-thirds of its listing price, and at a big discount to its supposed value.
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What is that value? That’s the subject of the latest kerfuffle. The appointed valuer, a firm called Citrin Cooperman, came up with a figure that was “materially higher”, as the board put it, than the one implied by actual recent transactions, including Hignosis’s own $23m sale of 20,000 “non-core” songs at a 14% discount. So the board asked its investment adviser – the firm controlled by Blackstone, with the Hipgnosis pioneer Merck Mercuriadis as the main man – for its view and, pointedly, says it only “eventually” received a “heavily caveated” opinion. That jab riled the adviser, which shot back that it acted in a “timely and efficient” manner.
The only obvious conclusion is that relations between board and adviser are terrible. One could take the view that’s actually good news because the board has been widely criticised, here and elsewhere, for being insufficiently robust with Mercuriadis and co (the advisory firm got $12.5m in fees last year). Yet this latest spat looks unnecessary. Why not just attach a disclaimer to the Cooperman valuation? In any case, since the share price is less than half the last official valuation, the market is plainly capable of applying scepticism itself, just as it does with commercial property trusts and many other assets.
The net result is that the Hipgnosis fund has delayed its half-year numbers, which is never a good look. “Our view is that a breakdown in the relationship between board and manager would not be optimal for maximising shareholder value,” commented JP Morgan’s analyst. Oh dear.
There are more rounds of this saga to follow next year when the board unveils the findings of its strategic review, which may or may not include renegotiating or terminating the relationship with Mercuriadis. Maybe that will prove to be the best way to unlock the value that City analysts still maintain lies within Hipgnosis at its current soggy share price. You have to wonder, though, whether this fund ever belonged on the public markets. Income from royalties sounded great in theory; the reality is a musical mess.
