Investing in Music Royalties

I recently learned about investing in music royalties as an alternative investing strategy.   These investments can be purchased on an exchange (the best one I have found is Royalty Exchange) and will pay out for a set term like ten years or the life of the royalty, which is typically the life of the author plus 70 years.  Music royalties are administered by one of a few major entities (ASCAP, BMI) and are paid to songwriters and performers, unless sold to someone else.  The older the song, the more history of royalties there is, which helps to determine the value of the royalty payment stream.  Royalty Exhange has a model that calculates the internal rate of return on a royalty investment using historical payments and a future earnings trend rate.  So when you bid for the royalty, the IRR is automatically calculated.  The internal rate of return is like a yield on a bond and assumes you get paid back your investment plus the stated interest rate.  It’s important to note that future royalty payments could be higher or lower than historical payments, so you really have to think about the outlook for the artist.  Are they actively touring, writing new music, promoting their songs through videos, movie/tv placements and other means (which should help their “back catalog”)?  What’s interesting about royalties is that they are not correlated to stock or bond markets.  They are more dependent on demand for music on radio, streaming, movies and television, etc.   The popularity of streaming music has helped drive up overall royalty payments in recent years and the popularity of hip hop music has made these types of royalties very popular investments.   Also if you happen to be a fan of the artist it’s kind of a cool investment as long as you are happy with the return.

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