There are two basic approaches to figuring out what an investment is worth to you. The first is fairly straightforward. Say you're thinking of buying an apartment building, and you're pretty confident it'll bring in $500k per year in rent. Would you pay $5 million for it? If someone else bids $6 million, would you try to go higher? It's not an easy question per se, but you can get your head around it — you're trading a big lump of cash today for a stream of cash in the future. People have put a lot of thought into how to make this trade, and there are Excel models that will tell you, in theory, what you should pay. This is the traditional, quaint way to invest, and it nudges you towards low-volatility investments with predictable cash flows. Think Warren Buffet.
The second approach is, for lack of a better word, more postmodern. Something is worth what someone else will pay for it, full stop. Why is one Bitcoin worth $62,890 as of the time of writing? Why not $31,276 or $11? There are no cash flows to plug into Excel, nor is there much you can do with a Bitcoin besides gamble on its price. (You can't even buy heroin with Bitcoin anymore.) But it turns out you don't cash flows or a use case to have a financial product. The buyer just needs to believe that someone else will buy it off of them at a higher price. But the second buyer only exists because there is some hypothetical third buyer that they can turn around and sell to. The price is supported by hype and collective belief alone. It's still possible to bet intelligently in a market like this — but you're mainly betting on human psychology
To grossly generalize, boring investments like bonds and blue-chip stocks tend to invite the first approach, while fun investments like art and Manhattan penthouses invite the second.[1] But there’s plenty of gray area. For example, Tesla is a real company with real cash flows that you can plug into Excel. But back in 2021 when Tesla was worth over a trillion dollars, a hefty chunk of that valuation was based on the cult of Elon Musk. The pandemic-era meme stock craze took real companies' stock and turned them into a pure-play bet on the Reddit hivemind. They became fun investments.
As an investment, where does Justin Bieber's back catalogue fall on the boring-to-fun spectrum? I'd be tempted to say it's a fun investment, like a Picasso. Think about it from a mega-rich person's perspective. You'd be invited to the coolest parties on Earth, especially once word gets out that you provide A-list musicians with liquidity events. Every time "Sorry" comes on the radio, you could sit back with satisfaction and say, "Nice, I own this." I know if I had a few hundred million lying around, I'd be very tempted to blow it on Radiohead.
You can also imagine the meme stock angle. What if Taylor Swift (or Shamrock Capital, the firm that owns her older masters) transferred her copyrights into a fund, chopped the fund into shares, and sold them to fans on the New York Stock Exchange, maybe under the ticker $SWFT? And what if she attached exclusive fan perks to these shares, the way AMC courted Redditors with free popcorn? They'd probably sell for multiples of net asset value. It's the same idea (except a bit less grifty) as what Donald Trump is doing with $DJT. And as A few weeks ago, GameStop and AMC soared because of this tweet. With hype, anything is possible. Dream big.[1]
But as we'll see, Hipgnosis Song Fund did not take this approach — its CEO talked up the "utility-like revenues" to large institutional investors. In other words, it advertised songs, especially by legendary-status artists, as fairly boring investments whose cash flows won't fluctuate too much. Objectively, this is a much smarter approach than trying to manufacture a meme stock. But Hipgnosis just wasn't very good at the traditional investment approach.[2] It makes you wonder what they left on the table.
The Tale of Hipgnosis
Hipgnosis is (as of writing) an investment fund founded by Merck Mercuriadis, a Canadian-British superstar manager for artists like Beyoncé, Elton John, and Guns N' Roses. It pioneered the business model of spewing a geyser of money to acquire the rights to artists' back catalogues, throwing them all together into a fund, slicing the fund into shares, and selling them on a stock exchange (in this case, London's). Over a few years, they spent $2.2 billion on Justin Bieber[2], The Red Hot Chili Peppers, Shakira, and Justin Timberlake, among others. They amassed rights to over 40,000 songs in all, most of them quite expensive. Hipgnosis even has a fun stock ticker: SONG.
And it promised something genuinely tantalizing to big investors like pension funds, insurance companies, and endowments: uncorrelated returns. Portfolio managers are constantly on the hunt for diversification, and here comes a new asset class that won't necessarily drop in value when the stock market does. Hipgnosis's business model didn't depend on Bieber or Timberlake exploding in popularity — the model is that large investors will pay hefty fees for the diversification that Hipgnosis provides. It's a pretty brilliant model, frankly.
Brilliant, except Hipgnosis wasn't good at investing. According this presentation to Hipgnosis's board, Mercuriadis's company was a mess. They often overstated how much of a given song's copyright they owned — in fact, it seems like they didn't know themselves much of the time, and didn't have the administrative prowess to figure it out. And they routinely overpaid for song rights, building up an impressive catalogue of music that was worth a lot of money, just not quite what they paid for it. (It's not often that artists are on the winning side of a bad financial trade, so there's a silver lining.)
Now Blackstone, the private equity giant, is buying the fund for $1.6 billion, or $600 million less than what Mercuriadis originally paid. It's almost poetic that Blackstone is buying it now. It turns out that running a song fund is boring, tedious, esoteric, and full of spreadsheets — i.e. the kind of work that is Blackstone's bread and butter. The skillset you need to be Elton John's manager is just not very helpful.
Unless you're trying to market a meme stock! This would be much more Mercuriadis's wheelhouse, and I would love to see that counterfactual. It certainly wouldn't be a sustainable investment vehicle, but if you can sell shares of a fund at 10x net asset value, you don't need to be in the game for long to get rich. Mercuriadis, if you're reading this, call me — I have some ideas I'd like to discuss.
Footnotes
[1] Maybe it's overall not value-accretive for TS to tank her reputation by running a pump and dump scheme on her fans. Still, it'd be hard to resist...
[2] Bieber's catalogue was technically bought by Hipgnosis Song Capital, a separate Blackstone-backed fund also managed by Mercuriadis and Hipgnosis Song Management, which is the investment company set up to collect fees from both funds. Needless to say, not all shareholders were thrilled by this conflict of interest.