Round Hill Music Royalty Fund’s initial public offering fell short of its $375 million target (it raised $282 million at $1 per share), which had been earmarked to buy a catalog of song publishing valued at $363 million — but there are contingency plans. According to its Oct. 19 prospectus, the publishing company anticipated the possibility of a gap and planned alternate options, including buying just a portion of the planned catalog acquisition instead of the whole thing.
What’s more, Round Hill now has until Oct. 18, 2021, to issue the 83 million remaining shares, should market conditions support further fundraising toward the $375 million target, according to another contingency provision in the prospectus.
In doing the IPO, Round Hill Music said it planned to use the funds raised to buy the 40 song catalogs with over 120,000 songs that comprise the Round Hill Music Royalty Fund I, which launched in 2012 and today carries an appraised value of $363 million. Such commingled funds are attractive to institutional investors, but they are usually solicited with the understanding of a forthcoming payday. Typically that means the fund’s catalog investments will eventually be liquidated, allowing those investors to capture — hopefully — whatever appreciation has occurred. Round Hill’s public offering allows the institutional investors for its Music Royalty Fund I to cash out, while allowing Round Hill to retain management of the catalog for the new public investors.
But how does Round Hill deal with the gap between the $282 million raised by the IPO and the fund’s appraised value of $363 million? With $7.5 million expected to be deducted from the $282 million for investment banking-related fees — leaving $274.5 million — the company can acquire up to 75.62% of the target catalog. Or, sources suggest, Round Hill could take out a couple of songwriter catalogs, thus reducing the planned acquisition from that catalog to a valuation commensurate with the $282 million raised, among other possible options. Whatever Round Hill decides to do, the due diligence for the target acquisition has to be completed by Dec. 3, when the exclusivity period that the public fund now enjoys, per the deals signed letter of intent, will end, according to the prospectus.
While Round Hill may have fallen short of its $350 million target, some industry finance sources said that was a pretty lofty goal to begin with, while others point out that Hipgnosis Songs Fund Ltd. — which pioneered having a mutual-fund like vehicle allowing retail investors to own shares in music publishing assets — also fell short of its most recent target. Hipgnosis planned to raise up to £250 million ($329 million) in September, but only reached £190 million ($250 million). Between Hipgnosis and Round Hill successfully raising hundreds of millions of dollars but still falling short of target goals, some sources wonder if public investors’ interest has been saturated for the time being.
In other fundraising initiatives, Round Hill Music has been soliciting commitments for its Royalty Fund III and is expected to close on that soon. Sources say Round Hill has privately raised funding commitments from institutional investors in the range of $275 million to $300 million. That means that so far this year, the company has raised somewhere in the neighborhood of $555 million to $580 million from the public and private markets.
With Round Hill Music Royalty Fund III now fully committed, that fund will eventually look to invest in more music assets. Meanwhile, the publicly-traded Round Hill Music Fund could do more public offerings, or use subsequent royalty income to fund future acquisitions, meaning Round Hill could potentially have two funds looking to buy music assets. The Round Hill Music Royalty Fund is already anticipating this scenario, with the company committed to offering at least 50% of contemplated pipeline acquisitions to the publicly-traded entity.
The company says it typically appraises 75 to more than 100 transactions per year, of which 10 to 20 will meet its initial screening requirement. At any given time, Round Hill could have about $200 million in transactions under consideration, according to the prospectus.
If the publicly-traded Round Hill Music Royalty Fund raises more capital or needs to reinvest some of the royalty income the acquired catalog is generating, it doesn’t necessarily have to compete with the private commingled fund run by Round Hill for investments. Another option available to the publicly-traded fund would be buying the catalogs from Round Hill Music Royalty Fund II, which is believed to include the $245 million Carlin Music acquisition Round Hill made in 2018.
On Nov. 3, Round Hill filed that M&G Investment Management, the huge U.K. financial firm, would fulfill the cornerstone investor role and had committed to buying a certain amount — about 15% — of the IPO. M&G further requested minor changes to the prospectus, including naming Round Hill Music’s CEO and founder Josh Gruss as a key person. That key man clause means that if Gruss leaves the company or isn’t able to devote himself to running it full time, M&G could prevent Round Hill from making additional investment acquisitions until a key man replacement is named by Round Hill’s board of directors.
The company’s board consists of three independent, non-executive directors: chairman Trever Bowen, a chartered accountant who spent 11 years as a partner at KPMG and also helped to manage U2 and other artists; Caroline Chan, a retired corporate lawyer who worked on financial industry transactions; and Francis Keeling, who is currently senior vp international digital at Discovery and previously served as Spotify’s global head of licensing and, before that, Universal Music Group’s global head of digital business.
On the first day of trading, Round Hill Music Royalty Fund’s share price closed at $1.015 per share, according to Yahoo Finance — up 1.5% from the IPO investor price.