Hipgnosis Songs Fund (HSF) chair Robert Naylor has formally addressed investor issues about attainable conflicts of curiosity relating to the phrases of the corporate’s settlement with its Blackstone-powered funding adviser, Hipgnosis Music Administration (HSM).
Naylor, previously the chair of Spherical Hill Music’s since-sold songs fund, commented on the funding advisory settlement and several other different noteworthy subjects as a part of HSF’s newly revealed H1 2023 earnings report.
Dated December twentieth, the firmly worded feedback from the Intuitive Investments Group CEO Naylor have come simply days after HSF’s board, upon delaying the earnings report’s publication, expressed “issues” in regards to the appraised price of the fund’s catalogs.
The underlying valuation methodology has lengthy been a topic of debate, and HSF’s market cap has for a while represented a steep low cost to the marketed price of its music IP. Making an allowance for the factors, Naylor reiterated that the HSF board had approached HSM in search of readability in regards to the valuation.
As we beforehand reported, Merck Mercuriadis-led HSM issued a public response to the request. Nevertheless, behind the scenes (not less than as described by Naylor), the funding adviser “at first declined to provide an opinion however, after repeated requests…finally supplied an opinion which was closely caveated.”
“Within the absence of additional proof or perception from the Funding Adviser,” proceeded Robert Naylor, “on which to base a judgement on the valuation of the Firm’s property, the Board has issues as as to if the Honest Worth is cheap.
“Consequently, the Board recommends that buyers use the Honest Worth and the Operative NAV with a better diploma of warning and fewer certainty than would possibly in any other case be hooked up to it as an correct reflection of the honest worth of the Firm’s property,” he drove residence.
The Standing of HSF’s Strategic Evaluate – and the Way forward for the Funding Advisory Settlement
In October, quickly earlier than buyers voted in opposition to its continuation, HSF formally launched a strategic evaluate. And in reference to the analysis, Naylor has confirmed that the corporate “requested Hipgnosis Music Administration suggest different phrases for his or her future funding advisory preparations.”
Briefly, HSM collected a not-insignificant $5.4 million in advisory charges from HSF between April and September of 2023 regardless of a whole lack of latest acquisitions for the fund, the suitable earnings report reveals.
Moreover, HSF had proposed to promote 29 catalogs to Hipgnosis Songs Capital (an HSM-Blackstone partnership) for a worth that buyers, who overwhelmingly rejected the deliberate deal, believed too low. Some buyers additional claimed that the phrases of the bidding course of and the transaction’s construction had dissuaded third events from submitting provides.
Extra urgent but, HSF relayed in November that it had opted in opposition to slicing free HSM (a chunk of which belongs to Mercuriadis) as funding adviser – a transfer that it stated would require trigger or not less than “12 months’ discover, with an extra one-time termination payment equal to at least one 12 months’s advisory payment calculated on NAV as on the termination date.”
Explaining the choice, the board famous that parting methods on this method would, amongst different issues, set off a “name possibility” by means of which HSM would (considerably astonishingly) have the ability to “purchase the Firm’s [HSF’s] portfolio on termination of its contract.”
As summarized by Naylor in right this moment’s report, private conferences with “various shareholders,” possessing a cumulative 60 or so p.c of HSF’s complete shares, have had “two key themes,” one being “the failure of the monetary reporting and controls at” HSM, the opposite being the attainable mishandling of alleged conflicts of curiosity.
“Secondly, the perceived mismanagement of the conflicts of curiosity,” penned Robert Naylor of buyers’ chief worries, “each within the not too long ago failed sale of property to Hipgnosis Songs Capital, a fund that’s majority owned by Blackstone, at a cloth low cost to honest worth of these property and within the phrases of the Funding Advisory Settlement with Hipgnosis Music Administration. That is tougher to deal with, however we’ll search to take action within the coming months.”
Elsewhere within the prolonged textual content, Naylor made clear that if HSM fails to suggest phrases “in the very best pursuits of the way forward for” HSF and buyers, the board “will discover bringing ahead different proposals to shareholders.” After all, it’ll be attention-grabbing to see within the new 12 months precisely what these attainable different proposals contain.
HSF’s Operational Future With Regard to Banking Covenants
Trying ahead to the following 12 months, Naylor signaled that the board, factoring primarily based on info from HSM – the identical funding adviser with which all method of HSF buyers have taken challenge, that’s – believes HSF “ought to have enough headroom to function inside its banking covenants.”
Even so, the chair additionally emphasised inherent operational uncertainty stemming from “the continuation of points round monetary reporting and controls,” citing for example an surprising multimillion-dollar contractual obligation that the board realized about on December fifteenth.