Round Hill was one of the first in the industry to raise capital through a classic private equity fund – a popular Wall Street investment vehicle for institutional investors like pension funds and foundations, although in 2010, these funds typically invest in blue chip companies, not alternative assets like music copyrights. A decade later, money management giants like Apollo Global Management, Blackstone and KKR seem poised to spend $ 1 billion each on musical assets. “If these rumors are true, it’s very hard to think of too many big contracts they can get,” said Gruss. “So we are in a great position.”
Gruss compares the growing interest in music publishing to the proliferation of private equity funds. “When my dad started his cover strategies in the 1970s, there were seven or eight players,” he says. “Twenty years later, there were hundreds. The same thing happened in music.”
Gruss didn’t follow a straight path to get to where he is today. After college he went to Berklee School of Music, played guitar in a few bands, and worked for a year at Atlantic Records. In 1999, he changed careers to join Bear Sterns. “I was in the investment banking analyst program,” he says. “I did everything to sleep under your desk, work 100 hours a week.” He earned MBAs from Columbia Business School and London Business School, then – after six years in the Coast Guard – joined his father’s business.
His dual musical and financial background serves him well at Round Hill. His conversations with artists and songwriters are informed by his own musical background, and he is also fluent in the language of finance. “When you’re trying to raise $ 100 million for a fund, investors have very sophisticated questions,” he says. “If you don’t have the language skills, it’s very obvious, which can deter investors.”
Did you use your family’s money to start Round Hill?
We had to test the engine of the first fund concept and show investors that we could close deals. So we used family capital to buy five or six catalogs, including the one with the six Beatles songs and the catalog by Andreas Carlsson, the Swedish songwriter who co-wrote “I Want It That Way” for the Backstreet Boys. These initial transactions were sold to the first royalty fund at cost, so it was like bridge financing. And that’s how it turned out.
Did the rich kid, rock star-wannabe etiquette bother you?
Not at all. Since then, I have raised almost $ 1 billion on my own, and with debt the total is $ 1.5 billion. It is among the best funded groups in the industry today. As for being an aspiring rock ‘n’ roll, that’s right: I’d trade it all out to be a rock star. It has always been my dream. But it wasn’t meant to be.
You took a contrarian stance when Round Hill started – 10 years ago the industry was still in decline.
There was a lot more uncertainty in the business, but it was almost pleasant because I used to invest when there was fear in the market.
You bought a lot of catalogs when a multiple of 12 times the publisher’s net share was considered expensive. These investments look good now. With multiples now of 18 times or more, are the same returns possible?
Ten years ago, the growth of the company was very weak. The mechanics of the master recordings were decreasing by 10% per year; the timing was flat; performance royalties were increasing by 2% per year. Today, the mechanics are developing in parallel with the growth of streaming, in the order of 19%. Synchronization is growing, thanks to Hulu and Netflix. Performance increases by 8%. And the interest rates are even lower. If you pay a high multiple today, you can still get the same overall return.
You have introduced one of your funds to the stock market and promise investors a dividend of 4.5%. How will this fund grow?
We are aiming for a dividend of 4.5% but an overall return of 8% to 11%, which would come from the growth in cash flow and the increase in the appraised net asset value.
Will you use that extra cash flow to buy more assets?
No. We will raise funds by issuing more shares. We recently raised $ 87 million by selling C shares and using debt to buy master recording royalties from The O’Jays catalogs and [producer] Tim Palmer.
Why go public? There is no shortage of American institutional investors ready to buy musical assets.
True, but we needed a way to sell our first fund and create liquidity for our first investors. And by the way, we are currently raising our fourth private fund. Our private fund is aimed at American institutional investors, who are much more used to private funds, and our public fund is aimed at British institutional investors. For tax reasons, it is very difficult for European institutional investors to invest in our American private funds and very difficult for American investors to take care of the London side. So now we can fundraise effectively in two different capacities on both sides of the pond.
So what’s next for the London Round Hill Music Royalty Fund?
Right now, our stocks are listed in dollars. The next phase would be to have a pound sterling quote so that we can exit what is called the specialized segment of the exchange – where only institutional investors can own shares – and move to the larger exchange, which allows individual investors to own shares. This will allow us to be on the stock indexes, which could really boost the stock’s growth.
Your portfolio is focused on rock and country rather than pop and hip-hop, which are trading at lower multiples today because it’s hard to discern which songs will ultimately go out of style. But in 10 years, won’t film and television producers instead be looking to synchronize hip-hop and pop songs?
We want the portfolio to be diverse, but we find it difficult to invest in pop and hip-hop today. If you invest in a songwriter today, there’s a good chance that even if they are successful, they are in the 10 different writers on a song, so you only get a small portion of the royalties. . We prefer to have the old R&B stuff – we now have James Brown – that tends to be sampled in pop and hip-hop. We like to have music from Drake or Kanye, as a sample, rather than trying to find the guy who is going to write Drake’s next big hit.
But are you overweighted in rock?
People thought rock was dead. If rock is anything, it’s extremely consistent, and we’re always looking for the safest, most consistent game. We are not going to sacrifice the reliability of those cash flows for the sake of diversification. People play rock from the 70s, 80s, 90s and 2000s almost as much as any music.
This is not exactly true. A few classic rock bands, like Foreigner, reach just over 1 billion streams per year. But today’s successful pop and hip-hop artists surpass one billion streams per year.
I’m not talking about the size of the streaming numbers. I’m saying within pop and hip-hop there are very few people streaming from the ’80s and’ 90s. Eighty-five percent of the pop streams are from the past 10 years. But the rock acts of the 1970s are still on the air. The shelf life of rock seems to be longer than that of modern hip-hop or pop. Even the pop songs of 10 years ago are gone.
Do you have modern songwriters sign contracts?
We do. If you look at our market share, Round Hill has ranked # 6 to # 10 every quarter for almost 2014. So how the hell did we get there?
Yes. We don’t want to compete with the majors to find Justin Bieber’s next co-writer. But each year the country becomes a more dominant part of the radio landscape. So if you have a # 1 country song that’s pretty meaningful for those Billboard ranking of publishers.
What do you think of all the competition entering the music market to buy publishing assets?
I had expected a lot more competition for a long time. For many years I wondered if there was something wrong with me – others should have come by now, and they didn’t. Then Hipgnosis really started to stir the pot. It was only natural that an attractive field like music would be discovered by more investors over time, especially when Round Hill and others were waving the flag for so many years. To increase the amount of private funding that we did, Round Hill probably took 500 meetings and really lifted our skirts to show what we’re doing, with a lot of information and data. I’m sure Primary Wave, Shamrock, and Spirit were doing the same. This activity shone. Five years ago the investor market was uneducated, but now they are, which has boosted Universal Music Group’s public listing. Investors realized what an incredible asset Universal is, sitting within Vivendi. My point is this: Attractive businesses don’t stay hidden forever.
A version of this story originally appeared in the October 23, 2021 issue of Billboard.