Providence is looking to exit the music market with a $600 million song sale
Providence Equity is trying to sell its catalog of Tempo songs for up to $600 million – a key test for the strength of the music market as interest rates rise.
The deal would be the first major venture capital exit from the scorching music copyright market as inflation soars and the war in Ukraine continues.
Providence has received offers from Apollo’s HarbourView music fund and Pimco, as well as major record labels Warner and Universal, according to people familiar with the matter. The process is expected to continue for several weeks, these people said.
Providence, a private equity firm that manages about $50 billion in assets, launched the Tempo fund in 2019. Tempo has focused on contemporary music, having acquired songs from Wiz Khalifa and Florida Georgia Line.
A few investors said $600 million was too high a price for Tempo’s catalog and felt its value was closer to $400-450 million. A price of $600 million would give Tempo a multiple of around 20 times annual revenue.
Tempo, Apollo’s HarbourView, Warner and Universal declined to comment. Pimco did not respond to a request for comment.
With interest rates at historic lows in recent years, private equity groups and large institutional investors have crowded into the music copyright market. Song prices skyrocketed as rock stars like Bruce Springsteen and Bob Dylan sold their songbooks for hundreds of millions of dollars.
But while earning a 7 or 8% return on music was attractive when interest rates were near zero, some “tourist” investors might start putting their money elsewhere as the Fed raises interest rates, according to some industry players.
“When Tempo and Providence entered, interest rates were historically low, so all their calculations around yields were based on those rates,” said Mark Mulligan, an analyst at Midia Research. “We could well be entering a cycle of recession. . . there’s no doubt that something entertainment-related will be at the very least more vulnerable in the event of an economic downturn.
Blackstone, KKR and Apollo last year pledged more than $3 billion to buy copyrights to songs as music became attractive in an era of rock-bottom interest rates and Spotify resurrected revenue from industry. Music catalog prices have soared to multiples of 20 times their historical earnings, double the multiple of 10 at which they previously traded. At high prices, returns fell to 5% or less for the most coveted songbooks.
Some industry executives have warned that the frenzy has become excessive. “When you . . . pay north of a certain multiple, you start entering the world of finance which lacks a certain discipline,” Steve Cooper, chief executive of Warner Music, told the Financial Times the last year.
A long-time music executive said, “When interest rates are low, people get out the laughing gas and it gets weird, and that’s always been a fact in the music business.”
But industry executives still pointed out that there are many buyers who aim to be long-term investors, with new investors coming in.
Unlike previous eras when private equity groups sought a 20% return on music assets, some of these companies now run large credit investment firms and buy songs as an alternative to corporate bonds. Apollo, for example, purchased songs through its credit arm. Songs have become a way for Wall Street to diversify, as they generate steady cash flow and are relatively uncorrelated to the global economy.
“Has the market peaked? It may or may not be true,” Mulligan said. “The sector has been in flux for a good 7 or 8 years now. So it’s only natural that the majority of investors are looking at 5-year cycles, that we’re going to start seeing the first generation of investors start to exit.
The Tempo auction comes as another music sale was met with less enthusiasm than expected. Concord, a major indie music group, recently put themselves up for sale and were seeking offers of up to $6 billion, but were met with offers between $4.5 billion and $5 billion, Bloomberg reported. .