Hipgnosis: debt pressure and asset sales will proceed along parallel lines

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“It seemed like the real thing, but I was so blind.” Blondie’s “Heart of Glass” captures the sentiments that many investors in music rights investor Hipgnosis must now be feeling.

The UK investment trust once bought rights with all the abandon of a rock band spending its advance on high living. The resulting calamities now include the board postponing results because it lacks confidence in a valuation of company assets.

Hipgnosis’s core claim was that music rights of the kind it purchased from artists such as Debbie Harry were critically undervalued. In a business lacking transparent market pricing, shareholders had to make do with valuations from Citrin Cooperman, a small specialist consultancy.

The dangers of this were signalled years ago by this column and FT Alphaville.

A revamped board led by Robert Naylor, the former chair of rival Round Hill Music, is leading a review of the company’s options. It says that Citrin’s valuation of Hipgnosis’s assets was “materially higher” than implied by recent music industry transactions

The board also took a shot at the fund’s investment adviser, Hipgnosis Song Management, which is 51 per cent owned by Blackstone.

Song values have been falling as discount rates have been pulled higher by rising interest rates. Hipgnosis’s share price reflects this, down 45 per cent since the start of 2022. Its net asset value, meanwhile, has gone up about 23 per cent. The discount to NAV of 55 per cent is at a record.

Rights investor Alchemy bought Roundhill in September at an 11 per cent discount. Hipgnosis offloaded a non-core portfolio at a 14 per cent discount to its September valuation. HSM tried to sell a larger portfolio to a separate fund owned by Blackstone at a steep 24 per cent discount, but the deal was blocked by shareholders. 

Hipgnosis has too much debt. Covenants stipulate its borrowings have to be less than 30 per cent of the NAV. To meet that requirement, Hipgnosis may have little option but to begin selling its catalogue. Once it starts, it may have to keep going. The complete windup of the fund appears increasingly inevitable.