RoyaltyExchange is a royalty rights auction platform which primarily lists offerings in the music and entertainment space – though the site also explicitly states that it can handle transactions in other spaces where royalties are commonly found such as energy, pharmaceuticals, and book publishing, among others. Examples of historical listings on RoyaltyExchange include: rights to a portion of future sales of Listerine mouthwash, income sharing rights to a portfolio of iconic celebrity photographs (think Albert Einstein, Marilyn Monroe, and James Dean), and a wide range of music offerings from well-known classic and contemporary artists spanning numerous genres (a few examples: The Doobie Brothers, Jay-Z, Coldplay, Whitney Houston, and REO Speedwagon).
The Asset
At a high level, a royalty can be generally thought of as the future right to income produced by an asset, such as a song, mineral production tied to a specific land parcel or project, a drug, or virtually any type of intellectual property. By nature of the broad range of industries in which royalties are employed, they can vary significantly on a deal-by-deal basis in their structure, scope, time period, and many other terms.
The Industry
While RoyaltyExchange does list royalties from other industries, the vast majority of those on the platform to-date have been in the music and entertainment space. As anyone who has actively listened to music in the past two decades knows, the nature of the industry and how it monetizes its content has experienced a paradigm shift. In 2001, the majority (~97%) of industry revenues were derived from the sale of physical CDs bought in stores. In 2018, physical sales produced approximately one quarter of the industry’s aggregate revenue, with the largest single revenue source being derived from digital streaming services (46.8%). Other significant revenue sources include live performances and use of the asset in advertising campaigns.
Pros
- RoyaltyExchange helps provide retail investors with access to a highly unique asset which will often be uncorrelated with the market (the degree of correlation will vary on a case-by-case basis depending upon the specific royalty)
- As an investment whose value is realized based upon the earning performance of an underlying asset, royalties have the potential to provide investors with significant, consistent cash flow, which are typically paid either quarterly or biannually. Some of the assets include exposure to income streams from numerous sources (i.e. live performances, streaming, advertising).
- Despite the inherently high investment minimum entry levels (the price of each auction), RoyaltyExchange is open to non-accredited investors
Cons
- RoyaltyExchange does not offer syndication of individual royalties to large groups of retail investors--it’s an auction site. As a result, investors must buy the entire royalty being offered, which will be cost-prohibitive for most. Even the least expensive auction listings are typically won for several thousand dollars.
- The “theoretical IRRs” calculated by RoyaltyExchange for each individual asset vary widely, some of which are highly underwhelming. Just like one would when investing in an individual stock, investors should gain conviction in the future expected performance of each specific royalty and ensure the investment is aligned with the objectives of their portfolio.
- The high relative cost of each individual listing makes it difficult for most to achieve a diversified royalty portfolio, adding a significant degree of portfolio concentration for the asset
- The terms for specific auctions and assets can be extremely complicated. Investors should complete their own due diligence and ensure they fully understand the asset on which they’re bidding. Holistically, this is not a site for novice investors that simply wish to gain frictionless, efficient exposure to highly uncorrelated assets. For those with this goal in mind, there are better options
