In This Issue

Welcome to a Tuesday morning, post Tax Day edition. We have another busy couple of weeks’ worth of news summarized for you:

1. How the US economy is holding up and what’s happening with interest rates

2. Real estate news (residential and commercial)

3. Music royalty news

4. Startup investing news

5. News about other assets

6. An intro to our latest article (comprehensive intro to music royalties)

💸 ECONOMY
Uncertain Outlook

• 2024 continued its hotter-than-expected inflation numbers in March, with yearly CPI climbing to 3.5%.

  • After the inflation data, the market has once again pushed back expectations for the first rate cut from the Federal reserve. It’s now anticipated to happen in September.

• Jaime Dimond, the CEO of JPMorgan Chase, noted in a shareholder letter that the bank is prepared for a range of different situations. That includes higher inflation and interest rates - up to 8%.

• The change in expectations for interest rates comes at a complex time for the US economy.

  • The Economic Cycle Research Institute’s (ECRI) Leading Economic Index (say that 5 times fast) has been in decline for the past year. The index has historically been successful at detecting recessions.

  • The ECRI’s measure of labor strength has also waned, with notes that positive job growth has existed in more essential areas like education.

  • ECRI’s take also aligns with a Business Insider story about some weaker labor force metrics. That includes an increase in layoff announcements as well as job growth being concentrated in part-time positions.

  • This also aligns with some data in an article about job searching from Fortune. In a Q1 survey, fewer people said they were able to find a new job within a month (60% → 46%) and 58% said their job search experience was positive (68% → 58%). That suggests that job seekers are “feeling” a slowdown in hiring from Q4 of last year.

  • An opinion piece in The Wall Street Journal suggests that Gross Output (GO) is a better indicator of economic strength than Gross Domestic Product (GDP). And while GDP figures are holding up well, GO has declined significantly since mid-2022 and has mostly stagnated over the past year. This suggests the economy may be weaker than the GDP figures suggest.

ALTERNATIVE INVESTMENT NEWS ROUNDUP
🏠 Real Estate

Residential Real Estate

According to Redfin, February saw just over 1/3rd of all home purchases done in all-cash. The level of all-cash purchases continues to be very high as high mortgage rates make it a compelling financial option for those with the means to do so.

According to an analysis from Moody’s, housing generally remains overvalued, but prices are slowly coming into line with fair valuation.

• Overvalued Markets: 395 (Q2 ‘22) → 381 (Q4 ‘23)

• Significant Overvalued Markets: 205 (Q2 ‘22) → 155 (Q4 ‘23)

Commercial Real Estate

The long-predicated commercial real estate (especially office) apocalypse hasn’t materialized. One reason may be due to loan extensions given in 2023.

Basically, banks didn’t seize property or refinance loans - they just added another year hoping that conditions would improve and give everyone better options.

That has increased the amount of loans maturing in 2024 however. With rate cuts sliding further and further back (in some cases being questioned entirely), this strategy may not pay off for banks. Sooner or later either interest rates need to drop, or banks need to start working through these loans coming due.

Unfortunately, there doesn’t seem to be much hope for offices. Vacancy rates just hit a new all-time high at 19.8%. In a related note, Capital Economics expects downtown offices in major West Coast cities to plunge another 25% in 2024.

Higher vacancies means lower demand for office space, which reduces revenue by itself, but also puts downward pressure on rents for space that is occupied as there is a supply-demand imbalance. As office buildings can produce less rent/revenue, their values decline.

Other Stories

• Equity Multiple announced that they will be acquiring HoneyBricks. The joining of these two commercial real estate investing platforms continues a trend of consolidation we’ve seen in the industry.

🎵 Music Royalties

I Knew You Were Money When You Walked In

According to Forbes, Taylor Swift crossed an amazing milestone last October, driven by her Eras tour. She became a billionaire and is now estimated to be worth $1.1B.

Making the achievement even more notable is that she is the first musician ever to reach the $1B threshold based on their music alone.

Billboard estimated that the concert ticket sales alone for the Eras tour produced $900M in sales. They further estimated nearly $2B in total gross revenue in 2023 including things like royalties and merchandise.

Other Stories

• A new report suggests that Spotify is planning to start increasing prices again this year across multiple regions. As the price for streaming services increases, the revenue being split with music rights holders also increases.

• A new report suggests that Spotify is also looking to add support for music editing to the platform. This would allow fans to do things like make mashups of their favorite songs. While this happens today elsewhere, having this available on Spotify might improve the ability for the original artists to receive payments for them.

• Billboard has released a mobile game where users try to predict how high on the Billboard 100 a song will reach after listening to the song. It seems to be marketed as a fun contest for music fans, but I cannot help but wonder if its real purpose is to gather data.

Recurring Topics

New developments about topics and stories that we continue to keep an eye on.

UMG & TikTok News

The Independent Music Companies Association (IMPALA), which represents many small European music companies, released a statement in support of Universal Music Group’s position against TikTok.

Music X AI News

The Artists Rights Alliance published an open letter against AI and the companies that are developing tools that can devalue the work of human artists. The letter was signed by more than 200 artists, including Billie Eilish, Imagine Dragons, and Katy Perry.

Unfortunately for them, Suno AI has different ambitions. Rolling Stone has a story detailing the startup’s efforts to build an accessible generative AI tool for music. The piece begins with the introduction of a song generated by their technology, which the author describes as:

And they’re not alone. A newer company called Udio is also working on generative AI technology for music. However, while Suno is trying to build a music creation tool for the masses, Udio is aiming to be a tool for artists. Rolling Stone also covers this new AI company and how their product compares to Suno’s.

Notable Sales

Kiss, for all intents and purposes, is now owned by Pophouse Entertainment Group. The Associated Press reports that the transaction is estimated to be in excess of $300M.

💡 Equity Crowdfunding & Startups

Bubble Watch

An AI startup called Cognition Labs is trying to raise funds with a $2B valuation after its creation… in November. Naturally this has some warning of an investment bubble in AI where hype and future promises outpace revenue and real-world applications.

As the article from Fortune documents, it’s far from the only one seeing crypto-currency like spikes in valuations. Perplexity, which is looking to take on Google’s Search product, effectively doubled their valuation to $1B in a few months.

While many have tried to differentiate the boom in AI from the speculation of the dot com era, it seems like there are places where parallels are emerging.

IPOs

It looks like Rubrik, a cybersecurity startup focused on data protection, is reportedly preparing for an IPO. The company last had a $4B valuation three years ago.

While it’s unclear what valuation they would seek in a public offering, it is further evidence that the IPO market may be opening up.

Other Stories

• Crunchbase News reported that North America saw a 14% increase in startup funding in Q1 when compared with Q4. While that’s still down 27% from last year, it’s a sign that activity is improving. I’m willing to bet the recovery is being heavily driven by AI-related investments.

• Wefunder used a Times Square billboard in an effort to court newsletter company Beehiiv to raise a community round on their platform. Based on their response, they’re at least humoring the idea. If you’ve wanted to invest, let them!

  • Also, before anyone asks, yes, Beehiiv is what is running this newsletter.

🎨 Other Assets

• There was a really interesting transaction in the trading card space. In what reads a little bit like a sports trade:

  • eBay is acquiring Goldin (a collectibles marketplace)

  • PSA (card grading company) is acquiring eBay’s “Vault”

  • PSA and eBay will launch a new partnership allowing graded cards to be immediately/directly listed on eBay

• Vinovest has posted their Q1 report. There are some interesting tidbits, but the standout numbers are the -3.5% decline in the Liv-ex 1000 (the main wine “index”) and the reported -1.8% decline of wines held in Vinovest portfolios.

• While the art market saw a slowdown of deals in 2023, a pickup in activity in early 2024 has some optimistic for growth this year.

• Lofty recently had their first land offering. The offering was for 30 acres of New York farmland. There are limited players in the fractional farmland space (all of which require accreditation), so this is an interesting development.

📚 NEW RESOURCES
An Introduction To Music Royalties

Music royalties are an interesting and (sometimes) complex asset class we talk about a lot. To help you get more comfortable with this alternative investment, we have a comprehensive new guide.

Take a look at the full guide here

The full guide is worth a read, but we’ve got a few key points from some of the major sections for you below:

Introduction To Music Royalties

• Royalties are small payments for the use of copyrighted music. They’re generated from things like streaming songs on Spotify.

Understanding The Asset Class

• There are 4 main different types of royalties (mechanical, public performance, synchronization, print) that govern the rules and rates at which rights holders make money.

• These different types of royalties produce income from a wide range of different formats. Those formats have changed over time with about two dozen showing up in data the RIAA tracks.

• Different parties (e.g. songwriters) earn in different contexts and there are several different organizations involved in actually collecting and distributing royalty payments to artists.

Investing In Music Royalties

• While terms can vary, the most interesting is the life of copyright. That generally lasts for the life of the author plus 70 years.

• Music royalties are an interesting investment for their potential to produce higher yields, non-correlated returns, and passive income for (potentially) decades.

• On the other hand, they’re difficult to value, liquidity is a challenge, and there are plenty of external factors that can affect earnings over time.

• How to invest largely depends on how much you are able to invest. For smaller sums, you’ll basically have to look at a fractional investment platform. Larger sums provide more options to participate in auctions for “full” assets.

Digital Platforms and Music Royalties

• Streaming now dominates streaming earnings, making up over 75% of earnings in 2022. This is dominated by Spotify.

• Streaming royalties are generally driven by “streamshare” payouts.

  • A portion of (say Spotify’s) subscription earnings are allocated to rights holders generally. Then, individuals earn payments in accordance with their “slice” of the overall streams.

  • For example, if there’s $100 going to rights holders and 100 total streams of all songs eligible for payments, then ten streams would be a $10 payment.

• Social media follows a different model. The major platforms negotiate agreements for use of copyrighted music. In general, social media platforms pay significantly lower royalty rates than streaming platforms.

Risks And Challenges In Music Royalties Investment

Some of the major challenges include:

• How to value assets

• Higher fees for buying and selling assets

• Limited liquidity and high investment minimums

• Changes in the landscape of artists and payments