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Hipgnosis Song Fund’s Accounting Practices And Its Overstated Valuation

Updated: May 6

As reported by Billboard, it is not uncommon for accounting scandals to go unnoticed by the public, but the recent internal report by Hipgnosis Songs Fund has brought to light some serious questions about the quality of publicly traded companies' books. Hipgnosis Songs Fund is a London-listed company that has played a crucial role in turning music rights into an attractive and stable asset class. The 26-page report by Shot Tower Capital, the firm hired by the company's board of directors, confirms long-held suspicions by some analysts and shareholders regarding the investment advisor, Hipgnosis Song Management (HSM). 

Shot Tower's report details how HSM made numerous missteps in accounting and financial projections of its vast music rights portfolio that includes music by Red Hot Chili Peppers, Shakira, and Journey. At worst, the report suggests that HSM chose accounting standards that overstated revenue, inflated the portfolio's valuation, and resulted in larger fees paid for managing the portfolio. This presents an unflattering portrait of HSM and its internal operations.

In response, HSM considers “some aspects of the report to be factually inaccurate and misleading”. The company received the report the evening before its release and will respond to the board “in due course”. Shot Tower did not explicitly comment on the investment advisor's intent in using certain accounting practices, but the data-heavy report offers analysis, not speculation. The report made clear that annual revenue was "materially" overstated and laid out numerous examples where the fund's numbers didn't reflect the reality behind its assets.

Shot Tower's report found that Hipgnosis acquisitions counted some right to income (RTI) revenue as annual revenues, rather than an adjustment in the purchase price. Misclassifying RTI "significantly" increased the fund's income in 2021 and 2022.

The report also found that the proposed sale of a portion of the portfolio to Hipgnosis Songs Capital presented to shareholders had a net purchase price of $424.7 million (including RTI revenue of $15.3 million). Still, Shot Tower believed the catalog's multiple should have been 14.9x based on higher annual revenue of $28 million, and the net sale price should have been $416.7 million. Shareholders voted against the proposed sale in October.

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The investment advisor changed how it accounted for accrued revenues in fiscal 2022, estimating revenue earned in the period, rather than recognizing revenue when royalties are collected. The new approach, called "usage accruals," calculated accruals "based on expected usage" and occurred "at a time when RTI revenue was declining, and the Fund could no longer raise capital for continued acquisitions." The change reduced the amount of RTI revenue added to annual revenue. Without the change, Shot Tower believes the fund "would have breached its lender covenants," and fiscal 2022 revenue would have been $36 million lower.

Shot Tower also found problems with PFAR, a non-IFRS metric meant to show investors organic growth excluding accruals and RTI. The report stated that PFAR included accrual estimates of income expected to be included in the period, which "presents a picture of organic growth that is higher than growth suggested by the statement data." As such, Shot Tower warned investors not to rely on PFAR as a metric.

Finally, Shot Tower's due diligence investigations into how individual catalogs were valued found that the entire portfolio, which stood at $2.8 billion on Mar. 31, 2023, is instead worth $1.95 billion, a difference of some $850 million.

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