Deals that dance to a different beat

A GP-led deal in the music royalties space shows how adventurous secondaries investors are getting and how readily existing deal types can be applied to new asset classes.

Secondaries Investor has a document called the Leads List, containing all the deal-related tips that we accrue in our daily conversations. The list is looking rather different now to how it did a year ago. Credit, energy and real estate, minority pursuits then, now make up a sizeable proportion of stories to be chased. These aren’t all small and esoteric, either, but large deals involving household names. 

This spirit of asset-class adventure continued this week with the announcement of what is probably the first GP-led process in the music royalties space. 

Spirit Music Group, an asset held since 2009 by US buyout firm Pegasus Capital Advisors, had a portfolio of 75,000 owned and managed copyrights and master recordings of artists such as Madonna and The Who. The company wanted to raise third-party capital to expand its collection, but didn’t have a track record of managing money. 

In a secondaries process run by Eaton Partners, Spirit was bought out of its  fund and reshaped into a GP/LP partnership vehicle named Lyric Capital I. Two unidentified secondaries firms – believed to be recognisable names –  and a Chicago-based insurance company backed the buyout and invested an extra $150 million for follow-on acquisitions in a deal worth $350 million. If the fund performs well, it will give Lyric a shop window  in which to attract investors for its first independent fund.

The deal is another example of how far secondaries buyers have moved from the bread and butter portfolios on which the strategy was built. Such was the interest from secondaries firms that Eaton had to cut investors from the final syndicate. As well as matching the return profile of many firms, the steady stream of income from sales, music streaming and radio plays offers a degree of counter-cyclical protection, according to Peter Martenson, a California-based partner with Eaton.

“We were surprised by how much interest came from secondaries funds when you still had to explain to people how the industry works, how the revenue stream works and why new laws and regulations have created a better environment for it,” he said.

It also highlights the applicability of this deal type to a variety of situations and asset classes. A similar structure was used in private equity, in the case of Orix Capital Partners, infrastructure, in the case of John Hancock, and now music royalties.

Have decent assets, want to raise third-party capital but aren’t yet ready to fundraise in the open market? This could be the thing for you.  

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