The year may almost be over but there’s another twist in the Hipgnosis story in 2023.
Following the report that the songs fund’s six-month financial results would be delayed amid uncertainty over the valuation, those figures have now been published.
According to the portfolio independent valuer, Citrin Cooperman, the fair value of the portfolio decreased by 6.4% to $2.62 billion at September 30, 2023, compared to the valuation of $2.8bn six months earlier. The portfolio valuer applied an 8.5% discount rate.
But the board recommended that investors use the latest results including operative NAV with a “higher degree of caution and less certainty than might otherwise be attached to it as an accurate reflection of the fair value of the company's assets”. Dividends have been suspended for at least the remainder of the financial year.
In the interim six-month results up to September 30, operative NAV per share decreased by 9.2% to $1.7392, as a result of the reduction in the fair value of the portfolio.
Gross revenue from continuing operations for the period was $63.2 million, compared to $86.4m a year earlier. Net revenue from continuing operations fell to $54.0m (from $76.8m a year ago) primarily driven by lower anticipated future retroactive payments amounting to $11.9m from CRB III royalties ruling.
The 9.2% decline in operative NAV was in spite of the positive music market and like-for-like income growth of the company's assets, according to the statement. The fair value of Hipgnosis Songs Fund decreased overall even though there was a positive impact of $24.3m including the result of changes in subscription pricing of streaming services.
However, it is the accompanying comments from new chairman of Hipgnosis Songs Fund, Robert Naylor, that will draw the attention of music industry watchers today and intensify the pressure on Hipgnosis Song Management, the investment adviser led by Merck Mercuriadis.
Following his appointment last month, Robert Naylor is tasked with overseeing the strategic review following the shareholder vote against the Hipgnosis fund’s continuation, at least under its current plans. A proposal to sell off song catalogues to Hipgnosis Songs Capital – majority-owed by funds managed by Blackstone – in a deal worth $417.5 million was also rejected.
Hipgnosis Song Management (itself majority-owned by Blackstone) has been asked to propose alternative terms for their future investment advisory arrangements for the company. If the board believes these are not in the best interests of the future of the company and its shareholders, it will explore bringing forward alternative proposals.
"I am pleased with the progress made on the ongoing strategic review,” said Naylor in today’s update. “The board, through its advisers, has begun due diligence on the company's assets with Shot Tower LLC, a specialist music rights practice, acting as lead adviser. This process will help the new board bring forward proposals for delivering value to shareholders.”
However, Naylor went on to voice concerns about the role of the investment adviser, Hipgnosis Song Management, including drawing attention to a contract error which could cost the company up to $4.5m.
“Notwithstanding this progress, since I joined the board there has been a regular occurrence of issues raised as a result of ongoing failures in the financial reporting and control process,” said Naylor. “Whilst we consider substantial progress has been made in identifying and rectifying these issues, we have had to suspend the dividend for at least the remainder of the year in order to ensure compliance with our banking covenants.”
Hipgnosis will “only start paying dividends to shareholders when it believes that we can sustainably meet our banking covenants and working capital requirements”, said a statement from the chair.
Based on forecasts provided by the investment adviser, the board believes that Hipgnosis should have sufficient headroom to operate within its banking covenants for at least the next 12 months.
“However, this is qualified by the continuation of issues around financial reporting and controls,” added the statement from the chair. “For example, the board were made aware on Friday, 15 December 2023 of a drafting error in a contract, whereby the company received notice of the exercise of a put option contained within an acquisition contract, which increased the estimated liability from $4 million to $25 million. The investment adviser sought to remedy this over the subsequent weekend by way of an amendment to the contract and the board now understands, from the investment adviser, the potential liability to be in the region of $7.5 million to $8.5 million.”
I urge the investment adviser to provide the board with their opinion as to the fair value of the company assets
The board has also sought a response from the investment adviser on the fair value of the company’s assets.
"The board are aware of multiple data points and transactions within the market which are at material discounts to the implied fair value of the company’s assets," said the board in its update. "Given these multiple valuation data points and the continued uncertainty in the wider macro-economic environment, the board sought advice from Hipgnosis Song Management Limited, its investment adviser, which is majority-owned by funds managed and/or advised by Blackstone on this matter. Hipgnosis Song Management is the company’s appointed expert on the marketplace for songs and de facto executive function, and the board expects them to provide an opinion as to whether the fair value is reasonable."
"Regrettably, the investment adviser initially refused to provide an opinion,” said chair Robert Naylor. “While the investment adviser did eventually provide an opinion to the board, it was heavily caveated. Whilst the board sought for correspondence with the investment adviser on the matter to be published on the company's website in order to provide transparency for shareholders, the investment adviser has refused to consent under the confidentiality clauses of the investment advisory agreement.
"We note the announcement from Hipgnosis Song Management stating that they will 'continue to work in a constructive manner to support the interests of the company and its shareholders'. On behalf of the board, I therefore urge the investment adviser to provide the board with their opinion as to the fair value of the company assets, without caveats, such that we can provide greater certainty and transparency to our shareholders."
The chair’s statement also reflected on the concerns of shareholders on key issues, including the “failure of the financial reporting and controls at the investment adviser”.
It noted an improvement in financial reporting and disclosure since the appointment of CFO Dan Pounder in September 2023, although this has led to short-term negative impacts in reporting. This includes additional catalogue bonus payments to songwriters totaling £23m, the reduction of prior year income of in expected CRB III receipts and a proposed change to the revenue accrual methodology which may result in an adjustment reducing annual revenue by up to 10%.
In another extraordinary part of the statement, the chair noted shareholders’ concerns about the “perceived mismanagement of the conflicts of interest, both in the recently failed sale of assets to Hipgnosis Songs Capital, a fund that is majority owned by Blackstone, at a material discount to fair value of those assets, and in the terms of the investment advisory agreement with Hipgnosis Song Management”.
“This is harder to address, but we will seek to do so in the coming months,” added the statement.
Despite these concerns, there was some positive performance in the underlying assets which shows like-for-like revenue statement growth of around 10%. Pro-forma Annual Revenue (PFAR), which shows the gross royalty statements received or receivable within the reporting period and does not include any revenue accruals under IFRS, grew 10.4% to $64.9m for the six months to September 30.
As of September 30, 2023, the portfolio consisted of 146 catalogues containing 65,413 song rights acquired.
Hipgnosis Songs Group, the operating company within the fund which carries out both administration and frontline publishing business activities, reported a loss of $63.2 million for the six months compared to $20.1m a year earlier.
Hipgnosis Songs Fund has also announced the appointment of KPMG as its auditor. PwC was the previous auditor but did not tender for the contract renewal.