The Hipgnosis vs Hipgnosis war of words continues with Hipgnosis Songs Fund and Hipgnosis Song Management firing out briefing memos and counter-briefing memos at an increasingly frantic rate.

In the latest development, Hipgnosis Songs Fund - or ‘SONG’ - has issued a memo alleging that Hipgnosis Song Management “cherry picked” assets from the SONG catalogue for a proposed sale to another investment fund, Hipgnosis Songs Capital.

The machinations between the various Hipgnosis entities are somewhat complex, not least because there are so many Hipgnosis-named companies involved. That said, it doesn’t become much easier to understand, even once you have a handle on that. But let’s try. 

Hipgnosis Songs Fund is the publicly traded investment fund listed on the London Stock Exchange as ‘SONG’, while Hipgnosis Song Management is the Merck Mercuriadis led firm that acts as ‘investment adviser’ to SONG. 

Hipgnosis Song Management is majority owned by private equity giant Blackstone, which runs another investment fund which is private not public. That fund is called Hipgnosis Songs Capital and Mercuridias holds a minority stake in Hipgnosis Songs Capital, as well as his minority stake in Hipgnosis Song Management. Hipgnosis Song Management also acts as investment adviser to Hipgnosis Songs Capital. Phew. 

The proposed sale for which this “cherry picking” is alleged to have happened - known as the ‘First Disposal’ - was ultimately knocked back by SONG shareholders at an AGM in October. 

That AGM served as a coalescence of a number of relatively dramatic events - at least by the standards of otherwise relatively staid City of London fund management conventions. One of those events was SONG launching a ‘strategic review’ of HSM’s investment adviser role, and the other was the replacement of SONG’s board.

The bold statement comes from that new board and is backed, says the memo, by two “independent research reports” from City analysts. 

Those analysts, it says, “assert that the 29 catalogues proposed to be sold to Hipgnosis Songs Capital, a fund also managed by the investment adviser, which is majority owned by funds managed and/or advised by Blackstone, were growing at materially higher rates to the overall portfolio and were therefore ‘cherry picked’ for sale to Hipgnosis Songs Capital”. 

CMU has obtained a copy of the analyst notes in question, one written by Stifel’s Sachin Saggar, and the other by Investec

In his note Saggar says, “We were surprised to see that a subset of the First Disposal catalogues that were proposed for sale [to HSC] grew at +21% in the twelve months to 39 Sep 2023 versus a portfolio average of +10% over the same period. The difference is extreme and supports suspicions that the First Disposal catalogues were cherry-picked”. 

Investec’s note provides various data, pulled from SONG’s recent filings. It breaks out numbers for SONGs catalogues at an individual level, and comments and notes the performance disparity between catalogues selected for the first disposal sale to HSC and says, “Despite the significant conflict of interest involved in structuring the failed transaction, it was never made clear who was ultimately responsible for asset selection”. 

However, they also go on to fairly strongly endorse the underlying catalogues owned by SONG saying, “We like the quality of the underlying portfolio and believe [it] continues to be undervalued by the market, and that there remains considerable upside to the current share price. That said, there are meaningful challenges for the company to work through and we would welcome further transparency at the individual song level and with respect to administration rights”.

One question that has been asked by several people CMU has spoken to - and, indeed, is one that we’re beginning to ask ourselves - is why are two grown up companies airing their dirty laundry in public in such a dramatic way?

Using slightly more restrained language, JP Morgan’s Christopher Brown and Adam Kelly hint at the same thing. “We are surprised,” they say, “that the new board has chosen to disclose this information as, based on several factors, it looks hard to substantiate,” before going on to note that “without further information, it is impossible to determine if ‘cherry picking’ has occurred”.

It’s worth noting at this point that Blackstone, alongside its control and influence over HSC, has majority ownership and control of HSM. The implication of SONG’s statement - and the analyst assertions - is that something not quite right was going on. 

Once source familiar with the matter speaking to CMU said that it was “startling” for a publicly listed company like SONG “to imply that there might have been some sort of double dipping going on”.

At the heart of the allegation is the implication that HSM is not - or did not - act in the best interests of its client SONG because of a conflict of interest, and that Blackstone was, in essence, using its influence and HSM’s inside information to select the best music rights from SONG to acquire through its own fund.

However, a source who spoke to CMU said that this was highly unlikely. That source highlighted the role that “Chinese walls” play in many investment transactions. These are - according to a definition provided by the American Criminal Law Review - “policies and procedures intended to prevent the misuse of inside information in securities trading by limiting the availability of material, nonpublic information to departments of the firm that might misuse such information”.

A source familiar with the First Disposal process pointed CMU to a regulatory document filed by SONG when the transaction was first proposed that makes it clear that, in fact, a Chinese wall was put in place. 

That document says, “Given that Hipgnosis Songs Capital and the investment adviser are under common control and, additionally, the investment adviser acts as investment adviser to Hipgnosis Songs Capital, the board put in place appropriate governance arrangements and information barriers to ensure the continued availability to it of a segregated team of the investment adviser to consider and advise on the First Disposal, none of whom were available to or have any financial interest in Hipgnosis Songs Capital”.

Another source tells CMU that HSM “did everything by the book”.

“The firm was split into four different teams, North, South, East and West, and each team was very separate - they weren’t even allowed to share printers, in case someone saw something that they shouldn’t”, the source says. “The East and West teams were each tasked with a different client - HSC or SONG - and another team reported into the SONG board”. 

Indeed, the regulatory filing also makes it clear that the actual sales process was managed by JP Morgan which acted as “sponsor and financial adviser to Hipgnosis Songs Fund in respect of the First Disposal”.

The same source also noted “what some people perhaps don’t understand is that HSM’s income will be entirely dependent on the share price of HSF - that’s the way investment advisers work pretty much across the board. For people to imply that HSM and Blackstone somehow colluded to undercut SONG is daft, because if SONG wins HSM also wins - and vice versa”.

The latest memo comes after last week’s announcement by SONG that it was offering a £20 million “bung” to potential bidders interested in acquiring some or all of the catalogue of music rights it owns. This move has been described by JP Morgan analysts Christopher Brown and Adam Kelly, in a note seen by CMU, as “putting up the ‘for sale’ sign without entering a formal sale process”. 

Investec’s analyst note also picked this process out for comment saying, “We find the timing curious, and would have expected an announcement of this nature to be made at the culmination of the strategic review and form part of wider reaching alternative proposals”.

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