How to Invest in Royalties
This year Ed Sheeran has the top two hits of 2017.
His song, “Shape Of You” has earned $2.6 million in sales, and has set the record for the most streamed song of all time.
Dolly Parton is still collecting royalties from her song, “I Will Always Love You.”
It was originally recorded in 1973 and was #1 Billboard country song in 1974 and 1982. Then Whitney Houston covered it for the movie The Bodyguard in 1992 and it reached the #1 spot again and became one of the best-selling singles of all time.
Wouldn’t it be amazing to be able to collect royalties on songs like these, forever?
Even if you’ve never written a song, you can still collect on royalties. If you’re looking for an alternative investment opportunity, royalties are worth looking at.
While stock prices constantly fluctuate, royalty revenues have continued to grow.
According to the International Confederation of Societies of Authors and Composers, in 2008 the 2.5 million artists represented by the group collected over seven billion Euros in royalties.
Now You Can Collect Royalties for Songs You Didn’t Even Write
How is it possible?
There are times when an artist who owns the royalties for a song, and they would rather have some of the money right now. Maybe they want to buy a house, or build their business, or cover immediate living expenses.
Investors who want to have a stable income stream can buy a percentage of those royalties on The Royalty Exchange.
The Royalty Exchange is the #1 marketplace for buying and selling royalties. The company was founded in 2011, and they have auctions and even IPO's on music catalogs like pre-2013 Eminem.
The owner of the royalties puts their work up for auction, with a minimum bid that they will accept. Once the royalties are purchased, the organizations that pay the royalties put the money into an escrow account and the royalties are then paid every quarter or every six months. Buyers get a dashboard where they can keep track of their purchases and earnings.
For example, someone bought 25% of the royalties for the 1984 Alabama song, “If You’re Gonna Play in Texas,” for $56,000. The website shows that that song earned $4,992 in royalties over the past 12 months.
The royalties for an album of worship music was sold for $122,000. That album earned $20,190 in royalties over the past 12 months.
Sometimes the royalties are auctioned off by a collaborator of the song, or by someone who has inherited the royalty rights.
According to an article called, “Are Music Royalties a New Alternative Investment?” by John Waggoner in Investment News, Tony Geiss, the songwriter for a collection of Sesame Street songs including “Elmo's World” gave his share of the royalties to charity. His estate auctioned them off for $580,000 so that the charities could benefit from the gift immediately.
Royalties can go up because a song was used in a soundtrack or because one of the artists died. Royalties for songs are not correlated to the stock market, which is a big draw for investors.
Get Started on These Platforms
The Royalty Exchange is an online royalty marketplace where you can bid on royalties in many industries such as music, film, TV, books, solar energy, pharmaceutical, intellectual property, oil, gas and more. You pay a 2.5% buyer premium and another 2.5% for the management and payout of your royalty stream.
Lyric Financial is another royalty platform to try. Lyric Financial is a company created to help musicians have the money they need to finance their careers and pay the bills. They give musicians short-term advances on their all or a portion of their royalties. They also offer lines of credit to musicians who earn $100,000 or more a year in royalties.
SongVest describes themselves as the stock market of music. Through their website, you can buy or sell royalties. Fans can finance albums that are being made now through a crowdfunding model, and in return get a percentage of the royalties. The money raised allows the musicians to create and market the albums.
How Can You Tell if a Song Will Earn a Lot of Money?
According to an article on The Royalty Exchange, the most important factor in how much money a song makes is how often it is used. The more popular the song is, the more it is played, and the more money it will make.
In addition to popularity, holiday songs make a lot of money over a long period of time because they are played over and over every year.
If a song is used in a soundtrack to a movie, it will earn more royalties.
And when a song is covered and reinterpreted by a new artist, both the original artist and the new artist will earn royalties.
The top ten highest earning songs are “Candle in the Wind,” by Elton John and Bernie Taupin; “The Christmas Song,” by Mel Torme and Bob Wells; “Pretty Woman” by Roy Orbison and Bill Dees; “Every Breath You Take,” by Sting; “Santa Claus is Coming to Town” by Haven Gillespie and Fred J. Coots; “Stand By Me,” by Ben E. King, Jerry Leiber and Mike Stoller; “Unchained Melody,” by Alex North and Hy Zaret; “Yesterday” by John Lennon and Paul McCartney; “You’ve Lost That Feeling,” by Barry Mann, Cynthia Weil and Phil Spector; and “White Christmas,” by Irving Berlin.
Pension Funds are Increasing their Returns by Investing in Royalties
In his article, “Warren Buffett’s Tollbooth Investment Strategy,” Simon Black writes that most pension funds are seriously underfunded simply because they get a low return.
When pension managers invest, they are looking for ways to get a safe return. Unfortunately, it’s nearly impossible to get a safe return of more than 7-8%.
But royalties are different. Royalties can often bring in as much as 10-25% per year.
You are getting paid for other people to use an asset that you own. Warren Buffett compares owning royalties to owning a toll road. Once you build the road you can collect cash forever just for letting people use the road.
For this reason, many pension fund managers have been adding royalties to their mix of assets as a way to safely boost their returns.
The Canada Pension Plan Investment Board allocated $325 million for a percentage of the royalties in Venetoclax, a cancer drug.
Round Hill Music Royalty Fund owns rights to more than 4,000 songs, including Chris Kenner’s Land of a Thousand Dances, which appears in the movie Forrest Gump. According to the CEO of Round Hill Music Royalty Fund, the song generates between $300,000-$400,000 a year.
The benefits of investing in royalties are that you can have a steady income that lasts for the lifetime of the copyright or patent, royalties are not influenced by the stock market and so they are a good way to diversify your portfolio, and there is always the possibility that your royalty will have a revenue spike.
You Can Invest in Royalties in Other Industries
What is a royalty? Whenever the owner of an asset is paid so that other people can use that asset, they are receiving a royalty.
Aside from the entertainment industry, people can invest in royalties in oil, natural gas, and other minerals.
In her article, “Royalties as an Alternative Investment,” Enelda Butler explained it this way: “The owner may license the asset to be used by another party, and will be paid a percentage of the net revenues of the asset based on its usage. Royalties can also be used to allow investors in a company to have a percentage ownership of future production or revenues that will be paid at specified intervals like annually, quarterly or monthly.”
It’s like owning an oil well without all the drilling.
Owning and operating an oil well is out of reach for most people.
But you can get a percentage of all the revenue that comes from all that by investing in an oil and gas royalty trust.
In “Energy Investing 101: Tackling Oil & Gas Royalty Trusts,” Motley Fool writer Tyler Crowe provides a good primer for people who want to take advantage of these high-yield investments.
Investing in a royalty trust is similar to buying the royalties to a song. The oil company will issue units of a royalty trust so that they can raise capital.
There are several reasons why these investments are worth including in your portfolio.
They are corporate tax-exempt.
The distributions count as capital gains, which have a lower tax rate.
You will become a part owner, which means that you can lower your cost basis by depreciating the asset, delay your taxes and take advantage of tax credits.
The ten largest oil and gas royalty trusts get returns that range from 8.4% to 28.5%. Royalty trusts are required to distribute all of their cash flow, which is why the yields are so high.
Oil and gas royalty trusts are more like bonds than trusts. They have a finite lifespan. Crowe said, “It’s value slowly declines over time until it’s no longer economically feasible to pull oil and gas from the well.”
The amount of the distributions vary depending on oil and gas prices, how much the wells are producing and other factors. Although the yields may be high, there is no guarantee that you will earn back the principal. That said, some of the well-established trusts have beaten the S&P 500 for the past 15 years.
Before deciding to invest, the Motley Fool recommends looking at three things. 1) The production mix of the well; what percentage is oil, natural gas, etc. 2) The Payback period; the amount of time it will take to break even. 3) The shelf life of the trust; the total amount of time the trust will be in production.
Royalty Companies in the Mining Industry
In a Stansberry Research article called, “How to Make the Biggest Safest Returns Possible with Royalty Companies,” John Doody, the editor of Gold Stock Analyst, explains the benefits of investing in royalty companies.
One of the biggest benefits is that investing in royalty companies lets you enjoy the high returns from the precious metals mines without the risk that can come with mines.
“There's a lot of risk associated with a one- or two-mine company. It's common to see mines encounter difficulties for various reasons, and the related mining stocks might lose 25%, 50%, or more of their value in one day,” said Doody. “On the other hand, if a big royalty company had a royalty on that mine, it wouldn't be a big deal, because there would be royalties from other mines that could take up the slack.”
Royalties as a Form of Venture Capital Financing
epaCUBE was founded in Dallas, TX, in 2001. It is a SaaS company that provides profit optimization solutions.
They needed funding so that they could adjust their business model and fund new sales and marketing effort. To make this happen, they went to Cypress Growth Capital, who gave them $2 million in 2013.
Cypress offers royalty-based growth capital. The Cypress Growth Capital website said, “Unlike a traditional equity investment, extraordinary growth projections and market opportunity are not prerequisites for royalty-based growth capital. As a royalty investor, our investment success is not dependent on an exit event, like a sale of the company or a public stock offering.”
Entrepreneurs and start-ups are turning to a royalty based model of capital funding, like the ones offered at Cypress.
Normally, companies have to give up the control of their company and a chunk of equity whenever they receive funding from investors. But with royalty-based financing, investors get a monthly payout based on the revenue of the company. Rather than get an ownership stake, investors get a guaranteed percentage of the sales.
Royalty Capital Management, BDC Capital and Rockwater Capital are three investment firms that specialize in the royalty-based model.
Diversify Your Portfolio with Royalties
Investing in royalties is a good way to diversify your portfolio because it is possible to get a high return on your investment with relatively low risk.
Musicians occasionally sell all or part of the royalties for their songs and albums, and investors can bid on them on several online marketplaces. Once you win a bid on a royalty, you will receive the royalty checks whenever that song is played. Many pension funds are turning to royalties as a way to increase their yields.
Other industries have opportunities to buy royalties. The oil and gas industry sells royalty rights through oil and gas royalty trusts. Many startups and small businesses are funded through royalty deals where the investor gets a percentage of the revenues that are coming in.
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