PE investors may like the sound of music deals but complex issues remain.

By Tom D. Evans, Andrew Gass, Kem Ihenacho, David Little, Lisbeth Savill, David J. Walker, Jonathan West, Rachael Astin, Amrita AhujaOscar Hayward, and Catherine Campbell

Music deals, particularly the acquisition of rights to songs and recordings by popular music artists, continue to be attractive investments for PE. Recent transactions underscore the ongoing demand for large-cap music assets.

The continued popularity of global streaming services and the music rental economy have helped to reduce the threat of online piracy, made revenues easier to track and predict, and ensured that strong revenues continue to flow to rights holders. Music rights will likely become even more attractive as revenues are increasingly derived from a growing number of sources, including social media platforms, video games, exercise platforms, video streaming, and virtual reality. As the use of popular music continues to broaden, rights holders will reap the dividends.

Different deal types require a mastery of transaction issues

Investments in the music space are frequently highly complex — target assets can include a mixture of copyright interests to compositions and sound recordings, and/or defined revenue streams from the exploitation of publishing rights or sound recordings. The sellers of music catalogues range from sophisticated publishing companies to individual songwriters, producers, bands, or artists’ estates, which may add further complexity to deal structures and diligence exercises, meaning potential acquirers may require time to determine exactly what they are buying.

Artist specific rights

PE buyers also need to carefully consider the scope of rights being offered in a music investment, as this can vary from artist to artist. In the US, for example, PE buyers need to consider statutory termination rights designed to protect artists and their estates from exploitation — these inalienable rights ensure that a copyright owner may terminate a grant of rights after a set period of time (which varies based on when the grant was made). PE firms need to conduct careful due diligence on music assets to determine whether and when such termination rights may impact the subject catalogue.

Re-recording risks

In an acquisition of copyrights or revenue streams to sound recordings, re-recording restrictions in the underlying recording contract should be verified. Such restrictions prevent the original recording artist from re-releasing recordings that could compete with (and possibly reduce the value of) the assets that are being acquired in the catalogue deal. Although such re-recordings are fairly rare, Taylor Swift’s recent re-recordings show that this risk is more than theoretical.

Growing regulatory interest

In the UK, competition considerations loom on the horizon — in July 2021, the Department for Digital, Culture, Media, and Sport published a report into the economics of music streaming, which prompted the Competition and Markets Authority (CMA) to announce its intention to launch a market study into the sector. The study will examine, in particular, the market position of the major music groups and their contractual arrangements with streaming services, and how these elements may impact the relative value attributed to different musical copyrights and artists’ payment models. PE firms should watch the CMA study closely as it will provide a top-to-bottom analysis of the value chain of the streaming sector.

Managers are not just for artists

Music rights are effectively living, breathing assets that require active management — options may need to be exercised, royalties may need to be paid to artists, and advances may need to be worked out.

When considering this kind of deal, PE teams need to ensure industry experience within management teams and should seek guidance from expert legal counsel.

With a number of deals being actively considered, music investments are expected to remain popular — buyout firms may like the sound of music deals but complex issues remain.