Money is "Music to My Ears": An Analysis of Royalty-Backed Securities and Their Value as an Alternative Investment Class
Open Access
- Author:
- Nybro, Nicolette
- Area of Honors:
- Actuarial Science
- Degree:
- Bachelor of Science
- Document Type:
- Thesis
- Thesis Supervisors:
- Steven L Putterman, Thesis Supervisor
Steven L Putterman, Thesis Honors Advisor
Lisa Lipowski Posey, Faculty Reader - Keywords:
- cash flows
alternative investment
portfolio diversification
music royalties
asset-backed security
royalty-backed security
securitization - Abstract:
- In 1997, David Bowie, a famous singer and songwriter, took part in an innovation unheard of in the music industry: he earned $55 million from selling future earnings of his songs in the form of bonds. These bonds, which were dubbed “Bowie Bonds” at the time, are now known as royalty-backed securities which are a type of asset-backed security. In music royalty securitization, the underlying collateral of the bond is comprised of the future royalty streams or intellectual property rights of a certain catalog or bundle of songs. Musicians, recording artists, and other holders of royalty rights could get money upfront by securitizing their existing work to capitalize on their future earnings from songs. Investors in these securities would earn steady income for the term of the bond based on the current and future royalties of the song or catalog. After Bowie’s initial bonds matured, the technique of securitizing royalties flew under the radar for a while. However, recently, music royalty securitizations are becoming even more lucrative than ever before. In the past few years, the market for music royalties has been rapidly expanding as streaming and new sources for royalty rights have driven the growth of music revenues across the globe. Furthermore, the effects of the COVID-19 pandemic are making these securities an even more attractive asset class for investors and musicians alike. Despite the emerging market, participating in these deals as an individual investor is limited due to high prices and elevated risks. This paper discusses the current benefits, risks, and various factors making up a deal. It then proposes a method that would make these deals more accessible and less concentrated for a retail investor, based on projected royalty securitization data. In a world with a growing royalty market, the music industry and investment community need to understand and take advantage of the increasing value of this relatively new asset class.