Specialty Finance - Post 5

Categorizing Specialty Finance with a slice of Music Royalties

In this post I will go macro and top-down to make a case for why specialty finance is likely to continue growing. It boils down to a host of factors and several include: banks are retrenching creating opportunities for private credit to step up, regulations and accounting rule changes on traditional lenders offer further greenfield for more nimble and agile capital providers to expand their platforms, investors are increasingly hunting for alternative sources of yield - and part of this comes by getting exposure to niche and specialized areas of private credit (PC).

Recently I was reviewing meeting minutes from a public pension plan regarding the strategic plan for their PC program. What immediately grabbed my attention were three things:

1. The sheer size of the PC space as measured by the amount of capital being raised and the number of funds. This has been happening for some time and bigger managers are winning and expanding horizontally to new areas and geographies.

   1. My take: The growth in PC is well documented but what is less discussed is who comprises the increase in specialty finance managers and platforms. This is one of the main reasons I started this blog.

2. How dynamic the market is when you look at the areas growing and shrinking and how unfamiliar institutional investors acknowledge being about PC relative to private equity (PE).

   1. My take: PE gets the majority of the headlines but those investors and LPs with the best relationships, knowledgeable staff, and willingness to explore specialized areas of PC, stand to benefit relative to peers.

3. How many sub strategies now exist (and are expected to increase) within the six main food groups of PC:

   1. Direct Lending

   2. Distressed Debt & Special Situations

   3. Specialty Finance - The focus of this blog

      1. My take: This isn’t even a complete list and includes

         1. Venture Lending aka Venture Debt

         2. Technology Lending/Fintech Lending

         3. Litigation Finance

         4. NAV Lending aka Fund Finance

         5. Royalties

            1. Media such as Film, Media, Etc.

            2. Oil & Gas Minerals

            3. Healthcare (including Lending)

         6. Regulatory Relief Strategies

         7. Factoring, Accounts Receivable

         8. Inventory Finance and Accounts Receivable Finance

         9. Rediscount Lending

         10. Consumer Lending

         11. SMB or SME Lending

         12. Insurance Credit

   4. Real Estate Credit

   5. Real Asset Credit

   6. Mezzanine

One area that continues to capture my attention are music royalties and music assets. I recently picked up a copy of Donald S. Passman’s classic book “All You Need to Know About the Music Business” - which is in its 11th Edition! The royalties discussion in Part II is packed with nuggets and there are so many concepts and legal points to a deal (as Mr. Passman clearly outlines) that specialization is an understatement. On the heels of finding this book, Billboard reported on February 9th that Sony Music was buying a stake in Michael Jackson’s catalog, valuing the rights at over $1.2B. In future posts and ATLalts podcasts I will interview experts in the music and media royalties space. CJ Wei, Director of Private Credit at Northleaf Capital Partners penned an article on Music Royalties for the abf journal which you can find here. Digging around I found this old SEC file from Royalty Flow regarding artist Eminem. It is dated but interesting to see how the space has evolved since 2017.

As streaming of music, video, gaming, and other forms of digital content continues to increase, the potential value of owning the rights and/or royalty income to this content arguably could increase. Capital is flowing into these areas of PC at the highest levels of Wall Street as evidenced by the 2021 deal by Blackstone and Hipgnosis Song Management Ltd. Additional competitors include Round Hill Music Royalty Partners, HarbourView Equity Partners and Litmus Music, backed by Carlyle’s Global Credit Platform. Pitchbook wrote an article last year discussing additional drivers of demand for these strategies which largely boils down to a theme worth repeating anytime we talk about specialty finance - yield hungry investors.