This week, Round Hill Music co-founder/CEO Josh Gruss will take two weeks off from running one of the more important new competitors in the music publishing business, but not for the beaches of St. Barts or the ski trails of Sun Valley, Idaho. He’ll be on the road opening for Buckcherry with Rubikon, the hard rock band he has played guitar with for the last 20 years.
A few years ago, when Round Hill was still operating as a purely private company, some of Gruss’ industry peers disparaged him behind closed doors as a wannabe rock ‘n’ roller playing with his family’s wealth. His father, Martin, ran a hedge fund, Gruss Asset Management, and Gruss, 43, worked there after a six-year stint in the U.S. Coast Guard. (“I lived in [New York] close to the Twin Towers,” he says, “and I really got caught up in all the emotions and patriotism that came with 9/11.”)
But since its 2010 launch, Round Hill has raised over $1.2 billion from institutional investors to fuel its acquisition of over 120,000 songs (among them six Beatles titles, including “She Loves You”), and a year ago took one of the three private equity funds that manage those assets public on the London Stock Exchange. As of Oct. 14, that fund was valued at $440.6 million.
Round Hill was one of the first in the industry to raise capital through a classic private equity fund — a popular Wall Street investment vehicle for institutional investors like pension funds and foundations, although in 2010, those funds typically invested in blue-chip businesses, not alternative assets like music copyrights. A decade later, money management behemoths such as Apollo Global Management, Blackstone and KKR appear ready to spend $1 billion each on music assets. “If these rumors are true, it’s very hard to think of too many large deals that they can get,” says Gruss. “So, we are in a great position.”
Gruss compares the swelling interest in music publishing to the proliferation of private equity funds. “When my dad started his hedging strategies in the 1970s, there were seven or eight players,” he says. “Twenty years later, there were hundreds. The same thing has happened in music.”
Gruss didn’t walk a straight path to get where he is today. After college he went to the Berklee School of Music, played guitar in a few bands, and worked a year at Atlantic Records. In 1999 he switched career paths to join Bear Sterns. “I was in the analyst program in investment banking,” he says. “I did the whole sleep-under-your-desk, work 100-hours-a-week thing.” He earned M.B.A.s from both Columbia Business School and the London Business School, and then — after a six-year hitch in the Coast Guard — joined his father’s firm.
His dual background in music and finance serves him well at Round Hill. His conversations with artists and songwriters are informed by his own experience playing music, and he’s fluent in the language of finance as well. “When you are trying to raise $100 million for a fund, investors have very sophisticated questions,” he says. “If you don’t have the language skills, it’s very obvious, which can deter investors.”
Did you use any family money to start Round Hill?
We needed to test the engine for the first fund concept, and we needed to show investors that we could do some deals. So, we used some family capital to buy five or six catalogs, including the one with the six Beatles songs and the catalog of Andreas Carlsson, the Swedish songwriter who co-wrote “I Want It That Way” for the Backstreet Boys. Those initial deals got sold into the first royalty fund at cost, so it was like bridge financing. And that’s how things got going.
Did the rich-kid, rock-star-wannabe tag bother you?
Not at all. Since then, I have raised almost $1 billion on my own, and with debt, the total is $1.5 billion. That’s up there with the most well-funded groups in the business today. As for being a rock’n’roll wannabe, that’s accurate: I would trade all of this to be a rock star. It has always been my dream. But it wasn’t meant to be.
You took a contrarian stance when Round Hill started — 10 years ago, the industry was still in decline.
There was much more uncertainty in the business, but it almost felt good because I was accustomed to investing when there is fear in the marketplace.
You bought a lot of catalogs when a 12-times multiple of net publisher’s share was considered expensive. Those investments look good now. With multiples now 18-times or higher, are the same returns possible?
Ten years ago, there was very little growth in the business. Mechanicals from master recordings were declining 10% a year; synch was flat; performance royalties were growing at 2% a year. Today, mechanicals are growing in line with streaming growth, something like 19%. Synch is growing, thanks to Hulu and Netflix. Performance is growing at 8%. And interest rates are even lower. If you pay a high multiple today, you can still come out with the same overall return.
You’ve gone public with one of your funds and are promising investors a 4.5% dividend. How will that fund grow?
We are targeting a 4.5% dividend but an overall 8% to 11% return, which would come from the growth in the cash flow and the rise in the appraised net asset value.
Will you use that extra cash flow to buy more assets?
No. We’ll raise cash by issuing more equity. We most recently raised $87 million by selling C shares and using some debt to buy master recording royalties from the catalogs of The O’Jays and [producer] Tim Palmer.
Why go public at all? There’s no shortage of U.S. institutional investors willing to buy music assets.
That’s true, but we needed a way to sell our first fund and create liquidity for our first investors. And by the way, we are raising our fourth private fund right now. Our private fund is for U.S. institutional investors, who are much more used to private funds, and our public fund is for U.K. institutional investors. For tax reasons, it’s very hard for European institutional investors to invest in our American private funds and very difficult for U.S. investors to load up on the London side. So now we can raise money efficiently in two different capacities on both sides of the pond.
So what’s next for the London Round Hill Music Royalty Fund?
Right now, our shares are dollar quoted. The next phase would be to have a British pound quote so that we can move off what’s called the specialist segment of the exchange — where only institutional investors can own shares — and move into the broader exchange, which allows retail investors to own shares. That will allow us to be on stock indexes, which could really cue further growth of the stock.
Your portfolio is weighted toward rock and country rather than pop and hip-hop, which today trade at lower multiples because it’s hard to discern which songs will eventually be evergreen. But 10 years from now, won’t film and TV producers be looking to synch hip-hop and pop songs instead?
We want the portfolio to be diversified, but we find that it’s hard to invest in today’s pop and hip-hop. If you invest in a songwriter today, chances are that even if they are successful, they are one of 10 different writers on a song, so you only get a small piece of the royalties. We prefer to have the older R&B stuff — we now have some James Brown — that tends to get sampled in pop and hip-hop. We like having Drake or Kanye music, by way of the sample, as opposed to trying to find the guy who is going to write the next big Drake hit.
But are you overweighted in rock?
People thought rock was dead. If rock is anything, it is extremely consistent, and we are always looking for the safest, most consistent play. We are not going to sacrifice the reliability of that cash flow for the sake of diversification. People are streaming rock from the ’70s, ’80s, ’90s and 2000s almost as much as any music.
That is not exactly true. A few classic rock bands, like Foreigner, are just now reaching 1 billion streams a year. But current pop and hip-hop hit artists are exceeding 1 billion streams a year.
I am not talking about how large the streaming numbers are. I’m saying that within pop and hip-hop, there are very few people streaming from the ’80s and ’90s. Eighty-five percent of pop streams are from the last 10 years. But rock acts from the 1970s are still being streamed. The shelf life of rock seems to be longer than the shelf life of hip-hop or modern pop. Even pop songs from 10 years ago are gone.
Do you sign modern songwriters to contracts?
We do. If you look at our market share, Round Hill has been ranked anywhere from No. 6 to No. 10 every quarter since almost 2014. So how the hell did we get there?
Yes. We don’t want to compete with majors to find the next Justin Bieber co-writer. But every year, country becomes a more dominant part of the radio landscape. So, if you have a No. 1 country song, it’s pretty meaningful to those Billboard publisher rankings.
What do you think of all the competition coming into the music marketplace to buy publishing assets?
I was expecting a lot more competition for a long time. For many years, I was wondering if there was something wrong with me — others should have come in by now, and they hadn’t. Then Hipgnosis really started stirring the pot. It was only natural for an attractive area like music to get discovered by more investors over time, especially when Round Hill and others were waving the flag for so many years. To raise the amount of the private funds that we did, Round Hill probably took 500 meetings and really lifted our skirts to show what we are up to, with lots of information and data. I am sure Primary Wave, Shamrock and Spirit were doing the same thing. That activity shined a light. Five years ago, the investor marketplace wasn’t educated, but now they are, which spurred the Universal Music Group public listing. Investors realized what an amazing asset Universal was, sitting inside Vivendi. My point is: Attractive businesses don’t remain hidden forever.