On October 25th, 2017, Royalty Flow Inc., Denver-based company specializing in the acquiring, holding, and managing of artists’ royalty interests, announced its bid for an IPO release on the New York Stock Exchange under the ticker symbol RLTY.
A music industry player breaking into the dynamics of Wall street is nothing new – albeit still uncommon. Most famously, David Bowie was the first musician to market his own potential future royalty earnings in the release of Bowie Bonds. Royalty Flow seeks to do something similar by using investor purchase power to secure the royalty holdings of popular artists and add them to their royalty catalogue. The royalty catalogue in turn will generate a steady stream of cash flows for the company, a portion of which will be paid out to investors in dividends (suggesting a high dividend yield).
Royalty Flow’s first acquisition will be of Marshall Mathers’s (Eminem) 1999 – 2013 recording catalogue owned by Mark and Jeff Bass – who both produced many of the artist’s greatest hits. Eminem is hip-hops best-selling hip-hop artist, and music’s 2nd best-selling male artists – two factors that greatly support the generous earnings forecast of the royalty catalogue. The IPO opens up an opportunity for the average investor, fan, or speculator to buy into the music industry’s profits. Additionally, it presents a new type of investment class for those looking to add more diversification to their portfolios; potentially with low downside variance and high returns. However, speculators have already noted a potential problem with bringing music to Wall street; the irrationality and unpredictability of the performers who may influence investor skepticism for future royalty-based earnings.
Consider this farfetched example: Royalty Flow invests 20% of available cash into the royalties of a very popular artist who will probably continue to sell records. Then, a month following the acquisition the artist is brought to trial and found guilty of domestic abuse and murder. Suddenly, people are less reluctant to use the artist’s music for commercial gain, and record sales also slump. What happens to the expect cash flows for Royalty Flow? They drop. Royalty Flow needs to diversify their royalty assets very quickly within the next few years. This week Eminem released a very controversial performance at the BET Hip-Hop awards that may or may not influence the potential proceeds from his music – and therefore Royalty Flow who are not affiliated with the artist directly.
Royalty Flow Inc. has already marketed many peer advance investments through their website http://auctions.royaltyexchange.com, with royalties from musicians such as The Grateful Dead. One of their royalty packages included the purchase of $135,300 of royalties from the band with the right to collect $45,000 in royalties – a 32% total return.
Royalty Flow’s business model is an echo of commodity royalty company Royal Gold ($RGLD) – headquarted just around the block from Royalty Flow in Denver, Colorado. Royal Gold Inc. acquires precious metal royalties and streams from mines and manufacturers in the U.S., Canada, Mexico, Chile, Dominican Republic, and Africa.
However, in recent years this form of novel investment has not been very profitable for Royal Gold. Their revenue and income dropped significantly in 2016, and has only recently started making a comeback. However, when their share price is compared to other market instruments it’s done very well. This suggests that if Royalty Flow is based on the same business model as Royal Gold investors should consider this solid model as being capable of outperforming the market leaders such as Sony Entertainment ($SNE).
When compared against the iShares Gold ETF and Dow’s Gold Mining Index Royal Gold has actually outperformed the market by a significant margin over the last 5 years.
The IPO process may last up to 3 months, and we are yet to see any indication of share volume or pricing of Royalty Flow, but what is on everyone’s mind is what other artists will make up the Royalty Flow portfolio.