The robust growth of digital streaming subscriptions has led to strong music royalty payments, creating an attractive investment opportunity for private equity firms. Music streaming, which grew in popularity during the COVID-19 pandemic, can provide stable royalty revenue and a recurring cash flow potential that makes it a comparatively lower-risk investment for private equity shops.

Year-to-date, private equity and venture capital firms have deployed approximately $1.51 billion in digital music rights, according to S&P Global Market Intelligence data for global disclosed deals.

Highlights include the acquisition of the KMR Music Royalties II portfolio, which is made up of more than 62,000 music publishing copyrights, by KKR & Co. Inc. and Dundee Partners LLP for $1.10 billion; the sale of Entertainment One's music business in Canada by Hasbro Inc. to Blackstone Inc. for $385.0 million; and the divestment of DEAG Deutsche Entertainment AG by Apeiron Investment Group and Galaxy Group Investments LLC for $101.0 million.

Blackstone has been moving into the space through a recent partnership with Hipgnosis Song Management Ltd. to buy approximately $1 billion of music rights and manage catalogs. The firm will also hold an ownership stake in Hipgnosis, which advises the U.K.-listed music-focused investment vehicle Hipgnosis Songs Fund Ltd.

The private equity giant, together with EQT AB (publ), also dispensed $450 million into restriction-free music platform Epidemic Sound AB. The transaction marks the partial exit of EQT from the business, which also sold a minority stake to Swedish pension funds Alecta pensionsförsäkring ömsesidigt and AMF Pensionsförsäkring AB and fund manager Teknik Innovation Norden Fonder AB.

KKR has also been on a music shopping spree as it teamed up with global music company BMG in March to buy music catalogs and purchased a majority stake in the music catalog of band OneRepublic and its lead vocalist Ryan Tedder in January.

Another notable deal was middle-market investor Northleaf Capital Partners Ltd.'s $500 million strategic investment in Spirit Music Group Inc.'s portfolio, consisting of mature music royalty assets managed by music rights investor Lyric Capital Management Group LP. Caisse de dépôt et placement du Québec was a significant coinvestor in the deal.

Full stream ahead

The COVID-19 pandemic slowed traditional revenue formats, such as performance rights; physical formats, such as CDs and vinyl sales; and synchronization, which relates to the use of music in advertising, film, television and games.

In 2020, global recorded music revenues jumped 7.4% to $21.6 billion, driven by streaming revenue, according to the International Federation of the Phonographic Industry's Global Music Report 2021. Streaming accounted for 62.1% of the total global revenue, and growth was mainly spurred by paid subscription streams.

In addition to digital streaming, private equity is now looking into revenue-generating opportunities from new formats that use copyrighted music, such as social media apps like TikTok Inc., Instagram LLC and YouTube LLC.

However, one risk factor is overpaying for catalogs because royalties tend to depreciate the first few years after a song release before leveling off.