Round Hill Music Royalty Fund — High-quality catalogue underpins value

Round Hill Music Royalty Fund (LSE: RHM)

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Round Hill Music Royalty Fund — High-quality catalogue underpins value

Round Hill Music Royalty Fund’s (RHMRF’s) Q123 trading update showed a strong revenue performance building on the good FY22 results. Combined net publishers’ share (NPS) and net label share (NLS) was up 91% over Q122, a gain of 20% on a like-for-like basis. RHMRF’s economic end FY22 NAV per share had increased 13% over the prior year to US$1.27, with revenue up 32%, reflecting the high quality of the catalogue and the added value from active management of portfolio assets. This is despite a market over-shadowed by a backdrop of rising interest rates and constrained household budgets. We view the size of the discount to NAV as overstated.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

Investment Companies

Round Hill Music Royalty Fund

High-quality catalogue drives revenues and value

Investment trusts
Special situations – music royalties

6 June 2023

Price

$0.79

Market cap

$322m

NAV*

$519.6m

NAV per share*

$1.27

Discount to NAV

37.8%

*Economic NAV at 31 December 2022, as reported by the company.

Yield (prospective)

5.8%

Ordinary shares in issue

407.6m

Code/ISIN

RHM/GG00BMXNVC81

Primary exchange

LSE

AIC sector

Specialist – royalties

52-week high/low

$1.08

$0.61

NAV high/low

$1.27

$0.98

Gross gearing*

17.7%

*As at 31 December 2022, defined as total reported debt to the latest reported economic NAV.

Fund objective

Round Hill Music Royalty Fund’s investment objective is to provide investors with an attractive level of regular and growing income and capital returns from investment primarily in high-quality music intellectual property. To achieve this objective, it seeks to invest in a songwriter’s copyright interest in a musical composition or song, together with the rights in the recording of these (known as the master recording rights), along with all other rights and assets considered relevant by the manager.

Bull points

Strong mix of professional music and finance experience in core investment team.

Relatively high predictability of returns.

Prospect of more favourable regulation.

Bear points

Higher interest rates could undermine value.

Risk of overpaying for assets.

Competitive market for assets.

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Michal Mordel

+44 (0)20 3077 5700

Milo Bussell

+44 (0)20 3077 5700

Round Hill Music Royalty Fund is a research client of Edison Investment Research Limited

Round Hill Music Royalty Fund’s (RHMRF’s) Q123 trading update showed a strong revenue performance building on the good FY22 results. Combined net publishers’ share (NPS) and net label share (NLS) was up 91% over Q122, a gain of 20% on a like-for-like basis. RHMRF’s economic end FY22 NAV per share had increased 13% over the prior year to US$1.27, with revenue up 32%, reflecting the high quality of the catalogue and the added value from active management of portfolio assets. This is despite a market over-shadowed by a backdrop of rising interest rates and constrained household budgets. We view the size of the discount to NAV as overstated.

RHMRF’s total return since launch to 31 March 2023 (%)

Source: Refinitiv, RHMRF. Note: SI (since inception) annualised in US dollars.

Why invest in RHMRF now

A background of rising interest rates in H222 took some of the heat out of the music rights market, but a calmer appraisal now shows that the value in these long-term, revenue-generating assets remains clear. There is still plenty of private equity cash looking for a home and significant deals being struck, highlighting the inherent value in RHMRF’s existing portfolio and pipeline. Manager Round Hill is proving adept at adding incremental value through active management of portfolio assets, driving synchronisation revenues from advertising, TV and game trailers, television, film, and stage shows. The Q123 update shows good revenue momentum, while efficiency gains on the scaled business should drive margins. In our view, RHMRF’s revenues are supported by a resilient streaming market and formats such as social media (particularly the growing usage of short-form video), gaming and fitness.

The analyst’s view

RHMRF showed an 18% NAV uplift in 2022 in total return terms, ahead of broad equity markets and its direct peer. The portfolio is valued using an 8.5% discount rate, still reasonably conservative despite rising interest rates and in line with its direct peer. The portfolio valuation has been recently corroborated by a second independent valuation (from FTI Consulting), giving additional confidence. Despite this, the discount to last reported NAV has widened significantly to 37.8% (from 5% at end-2021), broadly in line with its peer. The ‘C’ share conversion in May 2022 reduced dividend cover, which nevertheless improved to 0.98x in FY22 from 0.8x in H122. RHMRF anticipates the dividend to be fully covered in FY24, while in FY23 cover may be below 1.0x due to higher interest expenses amid rising interest rates.

Fund profile: High-quality music royalties specialist

RHMRF listed on the Specialist Fund Segment of the London Stock Exchange (LSE) on 13 November 2020, with the initial public offering (IPO) raising US$276.4m. It was the second UK-listed closed-end fund investing in music royalties (following Hipgnosis Songs (SONG), listed in July 2018). On 19 July 2022, the company’s ordinary shares were admitted to trading on the Premium Segment of the Main Market of the LSE. The company also introduced an additional market quote for the ordinary shares on the LSE denominated in sterling, satisfying one of the criteria for inclusion in the major UK indices.

RHMRF’s IFRS NAV is US$378.7m (as reported in the accounts on 31 December 2022) and the current market capitalisation is US$322.0m (5 June 2023). The economic NAV (see the NAV reporting section below) was US$519.6m or US$1.27 per share at 31 December 2022.

The company seeks to invest in music royalties with a proven track record and wide audience appeal. Further details of the investments are given below. It is worth noting that scale is of value in this industry. The more substantial the catalogue, the greater the bargaining power when it comes to negotiating licensing deals.

RHMRF targets an annualised total return to investors of 9–11% over the medium term, after fees and expenses. It also targets an annualised dividend payment of 4.5 cents per share, payable quarterly. For FY22, the company paid 4.875 cents, with the additional payment compensating for the lack of a Q1 payment in the prior year.

NAV reporting

RHMRF publishes NAV twice a year as part of its reporting. Under IFRS, the songs in the company’s portfolio are classified as intangible assets under IAS 38. The catalogues are held at cost and amortised over their useful life (which is determined at acquisition), less any impairment.

As the IFRS approach does not reflect RHMRF’s portfolio value in full, the investment manager also publishes an ‘economic NAV’, which takes into account third-party valuation of its portfolio. The company relies on third-party valuation specialist Citrin Cooperman, and the end-2022 valuation was also confirmed by a second third-party valuation specialist, FTI Consulting, to provide an additional data point for the market on the fair value of RHMRF’s investments. In our analysis we rely on economic NAV as determined by Citrin Cooperman unless stated otherwise.

On 31 December 2022, RHMRF’s economic NAV per share stood at US$1.27 (based on Citrin Cooperman’s valuation, or US$1.28 according to FTI Consulting’s valuation) representing an 18.0% uplift in FY22 in total return terms. The portfolio value is determined using a discounted cash flow approach and the end-2022 valuation reflects:

the combination of Round Hill’s active rights management approach, underlying growth and continued recovery following the disruption to the industry caused by the pandemic, translating into 15% y-o-y like-for-like revenue growth;

improved licence fee agreements with digital platforms such as TikTok and Meta as well as successful synchronisation placements of 560 unique songs throughout the year;

Citrin Cooperman’s consideration of macroeconomic factors, including the growth of streaming revenue, and the global growth of the recorded music industry; and

a discount rate of 8.5% (unchanged).

NAV benchmarked by alternative approach

Management commissioned an additional independent valuation from FTI Consulting as at the FY22 year-end, which was published in April 2023, ahead of the publication of the results. FTI Consulting’s methodology differs from that offered by Citrin Cooperman, and is based on:

analysis of by-track, by-source of income historical performance data;

identification of non-recurring historical royalty collections;

analysis of forecasted revenue for new song releases and sync placements;

analysis of trends among vintage, genre and territory cohorts;

analysis of administrative contract attrition trends, statutory reversions or other potential loss of income events, as necessary; and

FTI's knowledge of ongoing industry trends, including the impact of recent legislative and/or regulatory developments.

This degree of detail (and hence time and expense investment) makes the approach unsuitable for regular usage but serves a valuable benchmark to the standard approach.

The FTI valuation was done on two bases: traditional bank debt financing and asset-based financing, using WACCs of 9.25% and 8.25%, respectively. The outcome is shown below, with the bank financing-based modelling resulting in a valuation 9% higher than that determined by Citrin Cooperman and the asset-based financing coming in 3% below, and therefore giving additional credence to the original valuation methodology.

Exhibit 1: Independent valuation

US$m

Citrin Cooperman valuation

Implied multiple

FTI valuation/ bank financing basis

Implied multiple

Difference from CC

FTI valuation/ asset-based financing basis

Implied multiple

Difference from CC

RHMRF portfolio (excluding Carlin interest)

534.9

19.4x

523.5

19.0x

-2%

605.6

22.0x

13%

Carlin interest

67.9

20.1x

63.3

18.8x

-7%

72.7

21.6x

7%

Total

602.8

586.8

-3%

678.4

13%

Discount rate applied

8.5%

9.25%

9%

8.25%

-3%

Growth rate assumed

5%

FY23: 7%; FY24: 6%; FY25: 5%

Source: Round Hill Music Royalty Fund

Operating performance update

Continuing strong revenue performance

The Q123 trading update shows that the momentum from FY22 has continued into the new financial year. Combined NPS/NLS was US$10.1m, 91% ahead of that recorded in Q122. Much of this gain is down to the prior year acquisitions of the catalogues of Alice in Chains and David Coverdale. Revenue from the initial investments was ahead 20%, with adjusted income from publishing rights up 22% and from masters’ rights up 14%. Income from the Carlin interest trebled to US$1.0m, with an element of catch-up as revenues were collected from a sub-publisher handling territories beyond the US, UK and Nordics.

The statement also highlights the positive benefits of putting more effort into driving synchronisation (sync) revenue, which was up by 74% on the initial investments, with a number of notable deals mentioned, including the use of Louis Armstrong’s What a Wonderful World on film, TV and advertising projects.

Group revenue for the year to end December 2022 was US$32.4m, a 32% increase over the prior year. On a like-for-like basis (excluding acquisitions made in FY21 and FY22) the growth was still a very respectable 15%. This comprises 16% year-on-year NPS/NLS growth from First Investment Catalogues and 10% year-on-year NPS/NLS growth from the Carlin Investment (all definitions are as per our initiation note). This growth is not solely attributable to streaming, although an improved licensing fee structure with Meta and TikTok has certainly helped. Synchronisation NPS/NLS generated on the initial investments were ahead by 33%, with masters ahead by 13%. Overall masters’ income was up by 70% over the prior year. This is particularly noteworthy as it represents significant outperformance of the industry, which management cites at 9% growth. The breakdown of revenues was as shown below.

Exhibit 2: RMHRF FY22 revenue split

Source: Round Hill Music Royalty Fund

Accruals represent a meaningful proportion of revenues because of the systemic delays in payments within the industry, which are typically of one to six months in the US and three to 12 months elsewhere, with some taking up to 24 months. The investment being made by Round Hill in data collation and management should help speed up this process, although inefficiencies outside of the group will doubtless persist. We would expect the proportion of revenue from accruals to decrease over time.

Costs contained

Excluding the amortisation of Catalogues, operating costs were US$12.0m for the year (FY21: US$10.6m). Costs mainly comprised investment management, portfolio administration, legal and professional, audit and administration fees, in addition to deal expenses incurred to enhance the income streams of existing Catalogues. The increase is largely due to higher Portfolio administration fees of US$0.9m year-on-year, which is due to an increase in NPS, US$0.5m of audit fees for the 2021 audit booked in 2022 and the one-off cost of US$0.5m for the move to the Premium Segment listing on the Main Market of the LSE.

Exhibit 3: Income record and consensus forecasts

Source: Round Hill Music Royalty Fund accounts, Refinitiv

Market forecasts show a slight pause in growth for the current year, but this may not be the case at the organic progress level, as FY22 will have benefited from the shift in the timeline for accruals coming through.

Finance costs

As at 31 December 2022, the ratio of debt to economic NAV was 17.7%, well below the borrowing cap of 25%.

The FY22 accounts show finance costs of US$4.2m, up from US$1.1m in FY21. The largest elements of this cost are the interest expense on the debt drawn down of US$2.2m, US$0.4m of amortisation of the loan arrangement fee and a US$0.1m of non-utilisation charges. The balance of US$1.5m was unpaid at the year-end. Each additional 100bps of interest rate movement up or down would generate a cost (or benefit) of US$0.9m.

Industry developments

We last wrote on the background to the music industry in our January report and there has been limited development since, with a slower pace of deals being agreed. Heavyweight private equity funds remain committed to the asset class, including Blackstone through its backing of SONG, Brookfield Asset Management’s US$2bn investment in Primary Wave, Apollo Global Management, with its US$1bn investment in HarbourView Equity Partners, KKR & Co, Pimco, Northleaf Capital/Spirit Music Group and Lyric Capital Group. Seoul-based Beyond Music has been building a meaningful portfolio, particularly in K-pop, and has made its first forays into the North American market. Weight of capital is important as it facilitates scale, with larger, diversified portfolios earning smoother revenue streams.

Rising interest rates have naturally undermined the relative attractiveness of music royalty revenues compared with other asset classes, but this does not detract from the underlying attractions, particularly regarding perennial music content. The economic backdrop should, at least in theory, have changed the framework for transaction pricing. However, given the levels of interest in assets – especially the headline-grabbing rights portfolios – the adjustment in transaction values may not be as marked as might be expected in more liquid, shorter-term assets.

The resumption of live music events and tours is a clear positive, reinvigorating sales of legacy content as well as newly released material and allowing the industry to return to generating income from merchandise.

Streaming market update: Reports of demise exaggerated…

In its annual report, RHMRF note the continuing supportive backdrop for demand for recorded music and, by extension, demand for the content within the group’s portfolio. This is particularly the case for digital revenues, where streaming continues to build. The largest streaming service, Spotify, grew its premium subscriber base by an extra five million in Q123, up 15% year-on-year, to 515 million globally. The longer-term record is shown below. This total was 15m above earlier guidance, with the growth across all geographic reporting regions and demographics, which shows a constructive background for demand for content.

Exhibit 4: Spotify subscriber numbers

Source: Spotify accounts. Note: MAU, monthly active users.

In October, Apple Music increased its monthly subscription price for its streaming platform in the UK and the US by £1 and US$1, respectively. As the number of subscribers, songs and subscription prices on the streaming platforms increase, it is anticipated there will be a net positive impact on RHMRF's revenues.

These updates follow the positive news announced on 1 July 2022 that the US Copyright Royalty Board had upheld the 44% staggered increase in streaming mechanical royalty fees dating back to January 2018, which is expected to result in increased fees payable to RHMRF. The renegotiated rate settlement for the next period is for a headline rate of 15.35%, with the increase staggered over 2023–27.

In the UK, the PRS for Music collected a record £964m in 2022, up 23% on the prior year.

… but the pace of growth may slow

Given the pressure on household budgets with high inflation and increasing cost of living pressures, the place of music subscriptions in spending will inevitably come under scrutiny. However, music has become akin to a utility as it is a common accompaniment to daily activities. In more economically challenged households, there may be a return to advertising-supported listening, rather than a full ad-free subscription. However, we anticipate that the overall streaming market will continue to progress as older age groups become more accustomed to passive music consumption, with household penetration growth slowing in the more mature markets such as the US and UK.

There are other structural concerns, for example, industry commentators have highlighted the large number of music tracks being uploaded onto digital platforms and the advent of swathes of AI-generated content is likely to swell these numbers further. Having a high-quality portfolio weighted to classic tracks, such as that of RHMRF, is therefore a clear advantage in holding and growing share of listening.

Another potential challenge is the proliferation of short-form content, such as that on TikTok where short sections, rather than whole tracks, are used, although fee agreements are, at least, improving.

Given the swathes of lower-quality content proliferating on the platforms, there are increasingly voluble conversations between major industry players about how the music industry business model should evolve, and better reflect the value of those creating the content. Lucien Grange, CEO of Universal Music, has put his name to an initiative of a more ‘artist-centric’ model, albeit that this is very short on tangible proposals in the public domain. Negotiations behind closed doors are presumably carrying on with the platforms and other interested parties. A positive resolution here would also be financially beneficial to RHMRF.

The growing use of AI presents opportunities and challenges

The use of AI within the music industry is already well-established, but the framework within which it is being used is not yet fit for purpose. The biggest issue is that the AI models must be trained in order for them to generate output and the likelihood is that they will have been trained on material that is subject to copyright. This copyright may not simply cover the recorded material and may extend to encompass the name and likeness of the artist.

The CEO of Open AI, Sam Altman, recently appeared before the US Senate’s Judiciary Committee’s subcommittee on privacy, technology and the law and in his evidence commented:

‘We are absolutely engaged in that… We think that content creators, content owners, need to benefit from this technology. Exactly what the economic model is, we’re still talking to artists and content owners about what they want… I think there’s a lot of ways this can happen, but very clearly, no matter what the law is, the right thing to do is to make sure people get significant upside benefit from this new technology. And we believe that it’s really going to deliver that, but that content owners, likenesses, people totally deserve control over how that’s used, and to benefit from it.’

Seemingly, the law has yet to catch up with day-to-day activity and RHMRF’s management view is that it may take a couple of years to catch up.

AI is far from an unadulterated negative, though. Machine learning is already an everyday element of the monitoring of content usage and has been instrumental in driving efficiency in collections.

Portfolio

There have been no changes to the portfolio since our last report in January 2023, so the following section mostly replicates and updates our earlier document.

Acquisitions

Since 29 December 2021, the group has announced six acquisitions of music publishing catalogues, master royalty income, recorded music income, neighbouring rights and publishing rights (for definitions, please see our initiation report). The investment manager mentions in its 2021 annual report that its strategy is to acquire vintage catalogues across publishing, recorded music and neighbouring rights. Financial consideration remains key, but Round Hill avoids pure asset gathering without fiscal prudency.

The manager’s non-quoted Funds Three and Three Plus have also continued to actively invest over the period and, along with the deals outlined above, a total of over US$200m has been spent on 40 assets. Notable transactions for the private funds have included the catalogue of Nancy Wilson of Heart and the music royalty interests, including producer royalties and neighbouring rights, of the Canadian producer Bruce Fairbairn.

During 2022 Round Hill saw over 100 potential investments with NPS multiples in the range of 15-22x. The management highlights that multiples remain elevated, but pressure on sellers currently translates into fewer deals as sellers pull deals when pricing expectations are not met.

Exhibit 5: RHMRF’s acquisitions since launch

Date of announcement

RHM's name for the catalogue

Number of catalogues

Number of songs

Value*
$m

NPS multiple

Generated revenues US$m

Funding source

Feb-21

Assets of Round Hill Fund One

38

>18,000

282

16.3x

>38m

Pipeline acquisitions

May-21

29.14% minority investment in the RH Carlin portfolio

1

>100,000

c 40

16.2x

Undisclosed

Dec-21

Niko Moon

1

29

Undisclosed*

Undisclosed*

Undisclosed*

C share proceeds

Dec-21

Rebelution

1

N/A

Undisclosed*

Undisclosed*

Undisclosed*

Dec-21

The Richardsons

1

308

Undisclosed*

Undisclosed*

Undisclosed*

Jan-22

Nancy Wilson

1

N/A

Undisclosed*

Undisclosed*

Undisclosed*

End-Dec-21

Portfolio

49

>122,000

372**

16.3x

c 27.2

Jan-22

David Coverdale

1

N/A

Undisclosed*

Undisclosed*

Undisclosed*

C share proceeds

Feb-22

Alice In Chains

1

253

Undisclosed*

Undisclosed*

Undisclosed*

All acquisitions following the pipeline assets’ acquisition up to February 2022

N/A

>5,600

178

17.9x

Undisclosed*

End-Dec-22

Portfolio

51

>123,600

531***

Undisclosed*

34.9

Source: Round Hill Music Royalty Fund. Note: *Due to commercial sensitivities, the company is unable to disclose financial details for each acquisition as it occurs. However, post completion of the investment of proceeds from the C share fund-raise of US$86.5m, together with the remaining undrawn balance of its existing revolving credit facility, the company will make further financial disclosure on the acquisitions. **Fair value as in the annual report to 31 December 2021 and interim report to 30 June 2022. *** Fair value as in the annual report to 31 December 2022.

Valuations

We note that the NPS multiples, at which RHMRF acquires catalogues, have increased over the life of the fund. While the seed portfolio multiples for two catalogues were 16.3x and 16.2x, the average acquisition multiple has grown to 17.9x (see Exhibit 5).

According to the investment manager Round Hill, active management is often not reflected in underlying multiples. It regards valuations of 16–20x NPS for high-quality, iconic, blue-chip, stabilised catalogues as attractive. Management cites a third-party report putting the average multiple paid in 2022 for this type of high-quality, iconic copyrights at 19.4x.

Current pipeline assets

Round Hill has seen significant deal flow emerge from within its existing catalogues (including the pipeline investments) and has a proprietary position on those deals.

Current portfolio positioning

RHMRF’s portfolio has 51 catalogues with over 123,600 songs (at end-December 2022). Exhibits 6 and 7 illustrate how the portfolio is diversified by genre and revenue type, with the catalogues representing a rich mixture across artists, genres, vintages and income composition.

Older genre rock (56%, level with June 2022) makes up the largest share of the portfolio, followed by pop (18%) and country (11%). Following the investment manager’s ‘high quality compositions’ approach to primarily acquire songs over 10 years old, more than 94% of revenues generated from the portfolio are ‘vintage’, from songs written before 2010 (71%: pre-2000). The bias to rock is deliberate, as it appeals to a wider range of age groups and geographies, with hits having a longer ‘shelf life’. The portfolio is also diversified by revenue type, as shown in Exhibit 7 below.

Exhibit 6: Portfolio breakdown by genre*

Exhibit 7: Portfolio breakdown by revenue type*

Source: Round Hill. Note: *As at 31 December 2022.

Source: Round Hill. Note: *As at 31 December 2022.

Exhibit 6: Portfolio breakdown by genre*

Source: Round Hill. Note: *As at 31 December 2022.

Exhibit 7: Portfolio breakdown by revenue type*

Source: Round Hill. Note: *As at 31 December 2022.

Performance: Trading since 13 November 2020

RHMRF delivered an 18.0% economic NAV return in 2022 in total return terms, slightly outperforming the MSCI UK High Dividend Yield Index, which posted 17.4%. Since its inception in November 2020, the NAV total return is 35%, or 10.5% pa (compared to 34.5% and 10.4% delivered by the index, respectively). We note that RHMRF’s performance is significantly ahead of broader equity markets, with the MSCI World Index deteriorating by 17.7% in total return terms in 2022.

Exhibit 8: Investment trust performance to 25 May 2023

Share price total return performance since inception

Price, NAV and index total return performance (%)

Source: Refinitiv, Round Hill. Note: Three-, five- and SI (since inception date: 12 November 2020) performance figures are annualised.

Meanwhile, RHMRF’s shares declined by 22.8% during 2022, which resulted in the discount to NAV widening to 38% at end-2022 (at the same level on 5 June 2023), compared to just 5.4% at end-2021 (see Exhibit 9).

Exhibit 9: Premium/(discount) to last available NAV since inception (%)

Source: Refinitiv

We compare RHMRF to Hipgnosis Songs (SONG) as a direct comparator company, also generating royalty streams from music rights (for a detailed comparison see our initiation note). While the companies are similar in nature, we note that RHMRF’s track record is still relatively short and may be affected by ramp-up effects (SONG launched in 2018). Both funds report their NAVs twice a year, but due to the timing (RHMRF being June and December; and SONG March and September) a direct comparison of NAV performance may be inaccurate.

Having said that, both portfolios (RHMRF and SONG) are valued by the same independent advisor (Citrin Cooperman), which further strengthens the comparability of the companies. Despite significant widening of the discount (as described above) RHMRF’s discount is slightly lower than SONG’s discount to latest available NAV as at end-September 2022 (47.3%). Over the year to end-December 2022 RHMRF reported 18.0% NAV increase in total return terms, whereas SONG showed 9.2% NAV accretion over the year ended September 2022.

Exhibit 10: RHMRF’s comparison to SONG

% unless stated

Market cap US$m

Economic NAV US$m

Songs in portfolio

NAV TR
1 year*

Prem/(disc)

Ongoing charge

Perf.
fee

Gross
gearing

Dividend
yield

Round Hill Music Royalty

307

520

>120k

18.0

(40.9)

1.67

Yes

18

6.0

Hipgnosis Songs

1,273

2,218

65k

9.2

(47.3)

2.46**

Yes

25

6.1

RHM rank

2

2

1

1

1

1

N/A

2

2

Source: Round Hill Music Royalty Fund accounts, Hipgnosis, Edison Investment Research. Note: Market cap as at 24 May 2023. *Performance to latest available NAV: December 2022 for RHMRF and September 2022 for SONG. **Annualised H123. TR = total return in US dollars. Gross gearing is defined as total reported debt to the latest reported economic NAV.

Gearing and RCF

RHMRF is allowed to gear up to 25% of economic NAV, calculated at the point of drawdown. As at end-December 2022 RHMRF had US$91.7m drawn down from its revolving credit facility (including accrued expenses), translating into 17.7% of economic NAV.

In February 2023 RHMRF entered into a new revolving credit facility with City National Bank, replacing the previous agreement with Truist Securities. The new facility has a US$120m capacity (compared to US$110m with the previous one) and bears interest of SOFR + 2.25% (Libor + 2.25% previously). While the interest specification is unchanged, the new facility has an improved non-utilisation fee agreement, which stands at 0.375% and 0.25% if more than half of the facility is drawn (0.375% flat in the previous facility). The facility matures in February 2026.

Assuming RHMRF has drawn from the new credit facility the exact amount it had outstanding as at end-2022 (US$92m), it would currently have US$28.3m available. We calculate that even full drawdown of the RCF would translate to 23% of NAV – below the 25% threshold. Considering it had US$10.9m in cash as at end-2022, we calculate RHMRF has US$39.2m available for investment, which is 7.5% of end-2022 economic NAV.

Dividends and dividend policy

RHMRF targets a dividend payout to produce a 4.5% yield on its IPO price of US$1.00, which translates to a 5.8% yield based on the current share price. It pays dividends quarterly (in March, June, September and December), with the latest payment of US$0.01125 (in line with the target) paid in March 2023. The dividend policy aims to pay dividends out of royalty income but allows for payments out of capital if necessary to reach the target.

Dividend almost covered in 2022, full cover anticipated for FY24

In 2022 RHMRF reported dividend cover of 0.98x, which is calculated as net profit for the period and amortisation of catalogues compared with dividends paid. While the company expects the revenues to show strong growth (FTI and Citrin Cooperman assume 5–7% annual growth of portfolio cash flow generation) it highlights that the impact of recent successive interest rate rises puts downward pressure on 2023 dividend cover. However, the company anticipates dividends to revert to being fully covered by the end of 2024.

The board

Exhibit 11: RHMRF’s board of directors

Board member

Date of appointment

Remuneration in FY22

Shareholdings at end-FY22

Robert Naylor (chairman)

November 2022

£12,500

50,000

Audrey McNair

July 2022

£29,084

28,697

Caroline Chan

August 2020

£70,000

50,000

Francis Keeling

October 2020

£70,000

75,000

Source: Round Hill Music Royalty Fund

RHMRF’s board currently consists of four non-executive directors.

In November 2022, Trevor Bowen announced his intention to step down from the chair and as a non-executive director, having steered the group through a successful listing process on the Premium Segment of the Main Market of the LSE. His remuneration in FY22 was £66,667. His successor is Robert Naylor, who has over 25 years' experience in capital markets and investment trusts. A qualified chartered accountant, having started his career with Ernst & Young in 1996, Robert has held various positions within JP Morgan Asset Management, Panmure Gordon (UK) and Cenkos Securities. He is currently CEO of Intuitive Investments Group, an AIM-listed investment company, providing investors with exposure to a portfolio concentrating on fast-growing life sciences businesses. Additionally, he is a non-executive director of Light Science Technologies, an AIM-listed controlled environment agriculture company.

Ownership

RHMRF has a strong institutional shareholder base, with generally relatively little trading activity. In recent weeks, Josh Gruss, the CEO, has built his position in the stock to 6.34%.

Exhibit 12: Share ownership as at 23 May 2023

Source: Refinitiv


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This report has been commissioned by Round Hill Music Royalty Fund and prepared and issued by Edison, in consideration of a fee payable by Round Hill Music Royalty Fund. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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