It’s not just corporate ventures that generate huge profits. Music is big business. Songs recorded in the 60s and 70s are still making money today. Every time Ed Sheeran or Adele releases an album, millions of dollars are made, and those with royalty investments receive regular cash injections.
Arts and music royalties are a lesser-known asset class. But they can be a profitable string to your bow in terms of building a diverse and balanced portfolio.
Previously only available to artists and their representatives, now anyone can get a piece of the action.
What is royalty investing?
In the music industry, royalties are the payments made when a song is played on the radio, in a club, or on a streaming service like Spotify.
Creative royalties - sometimes referred to as entertainment royalties - become available to investors when an artist decides to liquidate the asset.
Royalty Exchange is an online auction platform for buying and selling royalty assets of any type (mostly related to music). The US-based platform offers two types of assets on their market place:
Life of Rights – a fiercely competitive asset that gives the investor the right to collect royalties for, well, a lifetime. Lifetime copyrights in the music industry, however, have an expiration date which means an investor will own the rights for the lifetime of the last living creator plus 70 years.
The Term – allows investors to collect royalty income for a fixed period of time - usually 10 years. At the end of the term, the royalty payments are reverted back to the original owner.
There are a range of royalty opportunities on the platform averaging an annual ROI of 10%, but you can also find higher yield opportunities if you’re willing to invest a greater sum.
For example, if you’d invested USD $203,000 in Grammy-nominated ‘Don’t Stop the Music’ by Rihanna last year, you’d have made $38,879.98 in royalties in a year. At the end of the 10-year term, the expected return on this investment is anticipated to be 140%.
Jay-Z’s multi-platinum ‘Empire State of Mind’ was fiercely contested during its 2018 auction with the rights eventually selling for USD $190,500. So far, the new owner has earned USD $95,232, indicating a total expected ROI of ~60% by the end of the 10-year ownership term.
Advantages of investing in creative royalties
- Payouts are made either quarterly or biannually. This makes them a regular and reliable source of passive income.
- The average yield is competitive. Royalty returns often sit around the 8-10% mark.
- Lower volatility. Royalties perform completely independently of public markets. Although every asset is subject to fluctuations and macro events, those relating to royalties are arguably on a lower scale to highly volatile stock market picks.
- Royalties can increase in the event of a song featuring in a major soundtrack, the band breaking up, or the artists’ death. Christmas songs are popular choices as they’re guaranteed to be played every year.
- Platform-based investing. It’s simple and user-friendly to invest in creative royalties via platforms like The Royalty Exchange, Lyric Financial, and SongVest (remember that investing is always risky despite how straightforward these asset types can be).
- 100% passive. Royalty investing is an ‘earn while you sleep’ method of investing.
- A route to diversification. The set terms of royalties make them an ideal candidate for balancing your shorter-term investments.
Other types of royalties for investment
Other creative arts
In publishing, royalties are paid when a book sells. As the owner of the intellectual property, these go to the author as standard. But you can purchase a share of this IP from the author in order to collect the royalties yourself. Different niches - for example, textbook publishing, genre fiction, and religious texts - operate on different business models, and so command different returns.
Royalties are also paid for art, online use of images (stock photos), TV shows, and films (know as ‘film residuals’).
Royalties can also function in a venture financing environment as an alternative to traditional VC, angel, and crowdfunding investment.
The benefit to companies is that they can raise capital without an investor taking a controlling stake. Investors will receive payments reflecting company revenue, often on a monthly basis.
This mode of financing is not so bound by legal restrictions and checks, so in some senses, it more closely resembles a loan.
If you're interested in diversifying your portfolio with different asset classes, you might want to consider equity crowdfunding. See our live offers here.