Things are indeed going from bad to worse for embattled music rights holder Hipgnosis Songs Fund [HSF]. In March, we reported on a revaluation of his song catalog that suggested his wallets were worth 26.3% less than they were valued last September.
The full due diligence report of the company behind this new valuation, Shot Tower Capital, has now been released. It echoes the new estimate for HSF’s catalogs – about $1.95 billion – but contains some harsh criticism of the company’s investment adviser Hipgnosis Song Management [HSM].
It is the enterprise run by HSF founder Merck Mercuriadis. According to Shot Tower Capital’s opinion, HSM “implemented revenue recognition policies and accrual projections that resulted in significantly overstated revenue and EBITDA” for HSF during its time as its investment advisor.
“The fund’s disclosures represent greater ownership and management of musical assets than the fund actually owns,” the report continued. “The investment consultant’s financial analysis when signing acquisitions was below music industry standards. In numerous cases, the investment adviser failed to put in place adequate safeguards to ensure the collection of royalties when letters of reference could not be obtained.’
It’s dry language, as it should be, but the claims are explosive and detailed later in the report.
“Our valuation analysis suggests a current value lower than the purchase price of 67 of the 105 acquisitions,” it claimed. “Forecasts were aggressive, with 75% of fund catalogs missing growth forecasts by an average of 23%
annually.”
There are more criticisms of HSM in the report: for example, the claim that “passive catalogs have scaled significantly better than investment adviser-managed catalogs.” It also accuses HSM of not investing in the systems and services needed to manage its active catalog.
“Although all royalty data flows to the investment adviser, six years into the fund’s creation, it still does not track or manage the Hipgnosis catalog at the track level, which is standard in the music publishing industry,” the report claimed.
“The data provided during the verification process included multiple, inconsistent versions of the same financial information
and in other cases the data in the financial systems was completely different from the information in the public disclosure.’
It also forecasts a compound annual growth rate (CAGR) of 4.4% for Hipgnosis’ catalog over the next five years, reflecting “decline in early vintage catalogs, lack of growth from new releases (as this is a static rights catalog ) and limited revenue from non-English speaking markets (which represent the highest growth streaming markets)’.
Citywire has HSM’s statement in response to the report, though the company said it has not yet had time to review it in detail.
“However, there are aspects of the report that HSM strongly disagrees with and considers to be factually inaccurate and misleading,” it said. “HSM will respond to the company’s board in a timely manner.”
As for Hipgnosis Songs Fund, he said his board and advisers “continue to evaluate all options for the future of the company” and that he will announce the conclusions of that strategic review by April 26.
