Royalty Exchange (RE), an American company operating an online platform that enables investors to buy and sell royalty dividends, is part of a new approach to investing, writes Shannon Berkley.
Royalty assets of all types (but predominantly music) are offered to investors via the platform, where performing and recording artists can seek funding by selling off future royalties. It is mostly songwriters, film producers and the creatives behind the arts that offer royalties for sale through the company.
Chic and extremely viable as alternative assets, the trades hosted by the company are enabled by auctions in a sleek online marketplace. Currently, more than 22,500 investors of all kinds have made or regularly seek deals with the owners of royalties or royalty-based assets on the platform.
The Denver-based Royalty Exchange was founded nine years ago, and initially operated from North Carolina. Three entrepreneurs in the form of Sean Peace, Reggie Calloway and Wilson Owens built the platform and populated its startup warehouse with a variety of royalties. Spence brought the exchange to digital life, while Calloway brought industry acumen, being a multiple Grammy-nominated songwriter and artist. Owens had been managing bands and marrying pop music into the digital marketplace for years prior to Royalty Exchange’s formation. The company was then acquired in 2015 by a consortium of private investors, and in 2017 became a member of the Techstars Music Accelerator initiative.
Although focused on creative royalties, many other asset types can be traded on the platform, such as intellectual property and patent royalties, and those derived of trade secrets and technology licensing. There are renewable energy land leases, tax credits and franchise royalties on offer too, even agricultural royalties. Although music, book publishing and straight up copyright royalties form the bulk of trading, the company has managed to present a mixed basket of extremely viable alternative investments to traders — and has eliminated the historical barriers between creative income ownership and outside investment.
The RE founders brought these innovative asset types to market, providing huge potential liquidity to the creative process, while also offering investors an exciting alternative investment structure with measurable viability and likely outcomes. Although the creative process has typically been seen as not amenable to legacy investment analysis, nor giving in terms of consistent returns, the assumptions are unfounded and perceptions are changing.
ROYALTY EXCHANGE IS SINGING A NEW SONG
Long a niche construct closed to outside investment, creative royalties are those dividends derived of both the initial popularity and longer term use of recorded music, movies, or written works. As a novel and profitable investment option, royalties are simple to understand, yet demand the same due diligence of investors in order to gauge likely future profitability. Just like stocks, fair purchase value and future prospects are the prime considerations for investors looking at these alternative investments.
Royalty Exchange foreshadowed a growing number of heavyweight financial concerns that have made alternative investment funds attractive to investors, such as AGI Partners’ Unison Fund and big hitter BlackRock’s Alignment Artist Capital. RE gleans a modest percentage of each sale made on the platform, presenting very much as a traditional brokerage.
That said, RE also presents investors with unusual and potentially exciting alternatives to stocks and bonds. The drive behind the company’s presentation to potential investors is to illuminate and demystify these particular alternative investment options, while also facilitating their trading on a platform with a known format and all available intel that accompanies the typical investment process. All manner of assets are monetised and offered for investment on RE, and monthly trading figures are now reaching impressive volumes. As the yield is often different to the more staid and well known accumulation associated with the annual cycles of legacy investment classes, investors heading into the auction will need to determine their appetite for the unusual.
Although returns from RE investments do usually follow the traditional path, the assets traded present the opportunity for far more initial dynamism, as well as longer term accumulation. In effect a perfect passive income, assuming one backs the right horse, the asset class holds appeal for many who want to marry their pop culture savvy with financial investment. Passive or long-term income from RE assets can be erratic — anathema in legacy investment circles — but investors who understand the sometimes slow accumulation of royalties and their long term payback potential have found a home with RE.
ALTERNATIVE PLATFORMS LIKE ROYALTY EXCHANGE ARE RISING
Whether it’s the Black Eyed Peas, Robbie Williams, Britney Spears, Jay-Z, Usher, TLC, Boyz II Men, Luniz, Coolio, or Barry White, there is now a new trend of recording artists willing to sell the performance royalties of their world renowned hits to private investors seeking the residual cash flow that royalty income provides. Via the online crowdfunding platform provided by RE, investors can appraise royalty purchases along the same lines as any other asset class, while enjoying the unique dynamics of income derived of creative work.
In appraising RE’s offered assets, correctly valuing such royalties is a more critical point than when dealing with the valuation of stocks, ETFs, bonds or mutual funds. Broadly illiquid assets, royalties bought via RE are not subject to daily trading, but rather present as buy-and-hold assets. This means that investors won’t be buying and selling such intellectual property on a daily basis as with traditional investments. Indeed, when buying into IP, investors would do best holding them over the longer term, as its gradual accumulation of dividends is what will outstrip the value of more traditional investments.
Any investment involves buying into the future value of its income. In the case of creative assets, the price-to-earnings (P/E) ratio needs to be gauged, notwithstanding that there is an understanding that these are illiquid, longer term assets that will provide a slow accumulation of dividends. The current valuation level of creative assets will determine the timing and nature of returns, and although there are many variables in pegging such a level with alternative assets, there are also broad market norms that can steer investors.
For many, the time value of money might make such calculations unpalatable, although the formulaic route is the same as for stocks and bonds. RE provides the tools and intel to plot the likely return on what for those new to the arena might experience as unknown assets, and to date has managed to fill the ‘diversity’ niche of many traditional portfolios.
ALTHOUGH SLOW AT TIMES, ROYALTIES NEVER END
As long as the price is fair for the asset involved, returns from royalties can be pleasantly consistent when seen over the longer term. Again coming back to the appetite of individual investors, many find the smaller but gradually accumulating dividends from royalty purchases to be a welcome alternative to the dynamics of commercial and industrial stocks, and just what they hoped for. Other investors might feel that bigger money is better spent investing in assets with a faster rate of return, but in both cases the same gauge is applicable.
When looking at how much of a return over how long a time can be anticipated from any asset, creative or otherwise, Royalty Exchange’s offered buy-ins perform comparably with other options. They come with the added value of participation in a creative society, though, and that holds its own unique value for many of the company’s traders.
Like traditional investment incentives, royalty purchases provide the working capital to expand the sphere by enabling creatives, thus expanding the potential for a growing IP investment market. While the P/E ratio might look better on commercial stocks for those who know the business space far better than the profitability of the creative industry as a whole, the fundamentals remain the same. Buy at a fair price and with a strong likelihood of solid returns over time.
Royalty prices can be hyped — just like tech and other stocks experience cycles of over-enthusiasm from markets from time to time — and streams can be variable. The same can be said of any other investment, however, and buying into creative IP holds the promise of both sharp initial climbing (in the case of new releases) or perpetual, reassuring earnings (where royalties stem from work that is already embedded in human culture, and can be evaluated in an historical context).
That big names in investing have added this asset class to the books, also goes some way towards assuring aspiring investors of the viability of the sector, and RE along with other alternative investment companies, can expect good growth going forward. When retail investors are often faced with great yet prohibitively expensive stocks on legacy exchanges, RE’s pitch allows for a lower barrier to entry and far greater diversity in investing, with at least as much confidence that returns will be worth waiting for. EG