The publicly-listed Hipgnosis Songs Fund has cut the valuation of the music catalogues it owns by 9.2% and also warned investors to be cautious of that valuation. This was all set out in HSF's delayed financial results for the first half of the current financial year, which also reference the ongoing tensions between HSF and its investment advisor, Hipgnosis Song Management.
A statement from HSF's new Chair, Robert Naylor, says: "In spite of the positive music market and like-for-like income growth of the company’s assets, the company’s operative net asset value, which reflects the fair value of its assets as determined by the independent portfolio valuer, has fallen 9.2%".
The new lower valuation, Naylor confirms, "primarily reflects the material reduction in expectations" in relation to the royalty rate changes introduced by the US Copyright Royalty Board. It emerged in October that HSF was cancelling a proposed dividend payment to shareholders because the windfall due from changes made by the CRB to the song royalties paid by streaming services was less than half than originally expected.
Even with the revision downwards, Naylor continues, the board of HSF remains concerned about the reliability of the current valuation of its catalogues. "The board are aware of multiple data points and transactions within the market which are at material discounts to the implied fair value of the company’s assets", he explains.
With that in mind, the board sought guidance from HSM. It, however, initially declined to give an opinion. "After repeated requests from the board", Naylor goes on, "eventually [HSM] provided an opinion which was heavily caveated. In the absence of further evidence or insight from the investment adviser, on which to base a judgement on the valuation of the company’s assets, the board has concerns as to whether the fair value is reasonable".
"Consequently", he adds, "the board recommends that investors use the fair value and the operative NAV with a higher degree of caution and less certainty than might otherwise be attached to it as an accurate reflection of the fair value of the company’s assets".
Naylor's statement also provides an update for shareholders on the strategic review of HSF's operations, which was launched amid growing criticism among investors of the fund's previous board and its relationship with HSM.
Specific issues raised by investors, he says, include concerns around financial reporting and disclosure at HSM, and the fact Hipgnosis Songs Management is majority owned by funds advised by Blackstone, as is Hipgnosis Songs Capital, another music rights owning fund also advised by HSM.
Earlier this year HSM proposed a sale of some of HSF's catalogues to Hipgnosis Songs Capital at a discount as part of a plan to boost the HSF share price. The proposal was rejected by HSF shareholders.
Regarding financial reporting, Naylor says he believes that HSM's newish Chief Financial Officer Dan Pounder - who was appointed in September - is effectively dealing with past problems. However, the perceived "mismanagement of conflicts of interest is harder to address, but we will seek to do so in the coming months".
It remains to be seen what proposals are made as the HSF strategic review progresses.