Don’t Stop Believin’ • Something Just Like This • Shape Of You • Girls Like You • Don’t Let Me Down
• Castle On The Hill • Sweet Dreams (Are Made Of This) • What About Us • Love Yourself •
In My Blood • Closer • No Tears Left To Cry • High Hopes • Look What You Made Me Do
• There’s Nothing Holdin’ Me Back • Beautiful Trauma • What Lovers Do • Treat You Better •
Uptown Funk • Photograph • Havana • Happier • Separate Ways/Worlds Apart • Faithfully
• Breathin • Livin’ On A Prayer • Wanted Dead Or Alive • Single Ladies (Put A Ring On It) •
Anyway You Want It • God Is A Woman • River • Locked Out Of Heaven • Roses • Shallow • Sick Boy
• Love Me Again • Supermarket Flowers • Paris • Break Up With Your Girlfriend, I’m Bored •
Smooth • Set Fire To The Rain • Skin• Umbrella • Close To Me • Green Light • Galway Girl • Feels
• Rockabye • I Don’t Wanna Live Forever • #Selfie • We Are Young • Stone In Love •
All Time Low • These Days • Best Of Me • It’s My Life • You Give Love A Bad Name • Baby
• Just The Way You Are • Handclap • Great Are You Lord When • I Was Your Man • Eraser • Dive •
Cold Water • 2002 • Symphony • Moves Like Jagger • Issues • Open Arms • New Man • Trumpets
• Back To Black • Know No Better • Rise • 2U • What Do You Mean? • Mama • Marry You •
Nothing Breaks Like A Heart • So Far Away • Don’t Wanna Know • Lost In Japan • Hey Look Ma,
I Made It • All We Know • Wait • Live In The Moment • Here Comes The Rain Again •Let’s Stay
Together • Treasure • Wheel In The Sky • Heart’s Don’t Break Around Here • Despacito (Remix)
• Stitches • We Are Family • Hurt Somebody • Naked • Needed Me • Blame • Love My Life•
Brave • Believe • Titanium • Story Of My Life • Now Or Never • Call It What You Want
Bed • Grenade • All Of
• Who’s Crying Now •
The Stars • Payphone
There Must Be An Angel
• Yeah • The Lazy Song •
(Playing With My Heart) •
I’m The One • Nancy
D o n’ t L e t G o ( L ove )
• Barcelona • Honest •
Mulligan • Some Nights
Me, Myself & I • It Will
• Everybody Hates Me •
Rain • Blue Jeans • Maps •
Tenerife Sea • What Do
T h e y D o n ’ t K n o w
I Know? • Too Much To Ask
• Would I Lie To You? •
• Bloodstream • Drag Me
Flatliner • New Year’s Day
Down • Only The Young •
• P e r f e c t • P l a c e s
1-800-273-8255 • Lights
• Stand By You •
Sisters Are Doin’ It For
T h e m s e l v e s • X O •
Rearview Town • Runaway
With You • Good Times
Baby • Scared To Be Lonely
• Lonely Together • Freaky
• All The Small Things •
Friday • Dress • Runnin’
Electricity • Come And Get It
(Lose It All) • Changing •
• I Predict A Riot •
Diva • Somebody • One
Disturbia • Not Giving In
• Mercy • Getaway Car
Last Time • Waterfalls •
Liability • I’ll Be There For You • This Is Why We Can’t Have Nice Things •Out Of The Woods
• Somewhere On A Beach • Count On Me • Just Give Me A Reason • Don’t Be So Hard On Yourself •
Nervous • Someone To You • Sign Of The Times • Supercut • Even So Come • Soundtrack 2 My Life
• Unknown (To You) • I Miss You • Run The World (Girls) • All Of The Lights • You Make It Easy •
Bad Medicine • Love On Top • Cheating • Fallin’ All In You • As You Are • Don’t Come Around Here
No More • Young • Dance For You • Thorn In My Side • Lay Your Hands On Me • It Won’t Kill Ya •
Fake Love • Something Big • Hunger • Where Are Ü Now • Love • The Same Power • Open Up
The Heavens • Birthday Cake • Stereo Hearts • Setting Fires • How Can It Be • Black Magic •
Swish Swish • Here’s My Heart • Green Onions • Life Of The Party • Everytime • Feel The Love
• Holy Grail • Arrow • Head Held High • Born To Be My Baby • Company • Obsessed •
We Weren’t Born To Follow • A Different Way • You Owe Me • How Do You Sleep? • Break Your
Heart • Hard • What’s My Age Again? • The One • This Town • Give Me Your Love • Motivation
• Runaway • Girl On Fire • Le Freak • Underneath It All • Parallel Line • King Is Born • Keep The Faith •
Inside Out • The Rest Of Our Life • Monster • Wild Horses • Mr. Rager • Glad You Came • Fuck You
• Say Amen (Saturday Night) • Young Girls • Polaroid • History • Touch My Body • Been You •
Bloodline • Miracle Of Love • Would You Ever • Yo (Excuse Me Miss) • Mariners Apartment Complex
• I’m Coming Out • You And I • We Can Do Better • Is That For Me • Because He Lives (Amen) •
Me And My Broken Heart • Wasted Times • Be Without You • Chains • The Lord Our God
Hipgnosis Songs Fund Limited
Annual Report 2020
Hipgnosis Songs Fund is the first and only UK investment company
offering investors a pure-play exposure to Songs and associated
musical intellectual property rights. Our focus is building a diversified
Portfolio acquiring Catalogues that are built around proven hit Songs
of cultural importance by some of the most talented and important
songwriters globally.
Our shares listed on the Main Market of the London Stock Exchange
in July 2018 and transferred to the Premium Segment of the Main
Market in November 2019. Since March 2020, Hipgnosis Songs Fund
has been a constituent of the FTSE 250 Index.
2
Annual Report 2020
Hipgnosis Songs Fund Limited
Contents
Strategic Report
Governance
4 Introduction from Merck Mercuriadis
8 Financial and Operational Highlights
10 The Chair’s Statement
12 Investment Adviser’s report
12 Introduction
14 The Life of a Song
16 Hitting the Key Notes in Our Musical World
20 Our Purpose and Business Model
22 Our Investment Objective and Policy
23 Our Song Acquisition Strategy
24 Market Conditions
24 Portfolio
27 Recent Portfolio Highlights
27 Financial Review
30 Market Outlook
32 Our Advisory Board
34 Our Resources and Relationships
36 Principal Risks and Uncertainties
40 Going Concern and Viability Statements
42 Section 172(1) Statement
44 Corporate Governance Report
44 Compliance Statement
44 Application of AIC Code Principles
47 Other Key Governance Statements
48 Board Leadership and Company Purpose
50 Division of Responsibilities
53 Composition Succession and Evaluation
54 Board of Directors
56 Report of the Nomination Committee
58 Audit, Risk and Internal Control
60 Report of the Audit and
Risk Management Committee
64 Report of the Management Engagement
Committee
65 Report on Remuneration
67 Report of the Directors
71 Directors’ Responsibilities Statement
73 Independent Auditor’s report
Financial Statements
84 Consolidated Statement of
Comprehensive Income
85 Consolidated Statement of Financial Position
86 Consolidated Statement of Changes in Equity
87 Consolidated Statement of Cash Flows
88 Notes to the Consolidated Financial
Statements
Additional Information
115 Alternative Performance Measures
116 Glossary of Capitalised Defined Terms
119 Directors and General Information
120 Corporate Summary
120 Advice to Shareholders
Hipgnosis Songs Fund Limited
Annual Report 2020
3
Strategic Report
Introduction from Merck Mercuriadis
With over £1 billion of acquisitions in the pipeline
covering some of the most important Songs and
artists of all time, much of it in exclusivity already, we
have just launched a placing targeting £200 million
of new equity financing to help capture this pipeline
and deliver further returns for our shareholders. With
all of this in mind we are very much looking forward to
the year ahead where we will work extremely hard to
offset any adverse effects of the COVID-19 pandemic
and deliver added value to our shareholders.
It remains only for me to thank our incredible
shareholders for their support and the Songwriter,
Artist and Producer community for entrusting us with
their incomparable work that is the energy that makes
the world go around whether times are good or bad,
happy or sad.
Thank you all for joining us in our mission: To champion
the power of Songs and songwriters of the greatest
cultural importance.
Merck Mercuriadis
Founder of Hipgnosis Songs Fund Limited and Founder/
CEO of The Family (Music) Limited (Investment Adviser to
Hipgnosis Songs Fund Limited)
3 July 2020
I founded Hipgnosis to give the investment community
access to extraordinarily successful hit Songs by
culturally important artists and to establish Songs as an
uncorrelated asset class with attractive risk-adjusted
returns. Our ulterior motive is to use the importance
of our unparalleled Catalogue and financial clout
as influence to improve the songwriter’s position in
the economic equation.
We have become a FTSE 250 company in only
20 months and as of the date of this report we are
now the 58th biggest yielder on the FTSE 250.
All of our Songs have a proven track record and
we do not speculate on new Songs regardless of
the past performance of the songwriter, producer
or artist. These proven hit Songs produce reliable,
predictable and uncorrelated cash flows which are
highly investible. Furthermore, 15 years of technological
disruption in the form of illegal downloading has
left these assets available at attractive prices at a
time when the rapid adoption of streaming and its
paid music subscription services is growing industry
revenues significantly. The convenience and access
afforded by streaming combined with a price point of
c.£10/$10 per month has moved music from a luxury/
discretionary purchase to very much an indispensable
utility alongside the electricity and gas bill. It’s at the
centerpoint of the technology that has penetrated
everyone’s life and the Company’s revenues/net asset
value are being impacted positively as a result. This has
been demonstrated more profoundly than ever during
the course of the pandemic when the comfort and
escape of music has played a critical role in seeing
everyone through these challenging times.
We are very excited about these results and we are
particularly proud that everything we have promised
our investors over the last two years has either come to
fruition or been exceeded. We have bought amongst
the finest Songs of all time against a backdrop of
dramatic streaming growth and we are adding
significant value by actively managing these great
Songs and bringing efficiencies to collection.
When compared with the 3 major song companies
we have achieved between 7% and 12.5% of their
revenue on between 0.5% and 0.9% of their number
of Songs. Our small Catalogue of 13,291 Songs, albeit
with an extraordinarily high ratio of success within it,
is earning £4,868 per song vs something less than
£150 per song for our competitors.
4
Annual Report 2020
Hipgnosis Songs Fund Limited
Hipgnosis has 4 out of the top 5
Billboard Songs Of The Decade...
DECADE-END CHARTS
HOT 100 SONGS
2010-2019
Uptown Funk!
Mark Ronson Featuring Bruno Mars • Mark Ronson
and Jeff Bhasker Catalogues
1 Peak Position
2015-01-17 Peak Date
Party Rock Anthem
LMFAO Featuring Lauren Bennett & GoonRock
2 Peak Position
2011-07-16 Peak Date
Shape Of You
Ed Sheeran • Johnny McDaid Catalogue
1 Peak Position
2017-01-28 Peak Date
Closer
The Chainsmokers Featuring Halsey • Chainsmokers
Catalogue
1 Peak Position
2016-09-03 Peak Date
Girls Like You
Maroon 5 Featuring Cardi B • Starrah Catalogue
1 Peak Position
2018-09-29 Peak Date
...and 18 of the Top 100!
1
2
3
4
5
9 Despacito (Remix)
20 Moves Like Jagger
Luis Fonsi & Daddy Yankee
Featuring Justin Bieber • Poo
Bear Catalogue
Maroon 5 Featuring Christina
Aguilera • Ammar Malik
Catalogue
58 Don't Let Me Down
59 Havana
The Chainsmokers Featuring
Daya • Chainsmokers and Scott
Harris Catalogues
Camila Cabello Featuring
Young Thug • Starrah Catalogue
22
Just The Way
You Are
Bruno Mars • Ari Levine
Catalogue
67 Some Nights
fun. • Jack Antonoff and Jeff
Bhasker Catalogues
29 We Are Young
fun. Featuring Janelle Monae
•Jack Antonoff and Jeff Bhasker
Catalogues
77 Payphone
Maroon 5 Featuring Wiz Khalifa
• Ammar Malik Catalogue
42 Love Yourself
Justin Bieber • Benny Blanco
Catalogue
86 What Do You Mean?
Justin Bieber • Poo Bear
Catalogue
45
Locked Out
Of Heaven
Bruno Mars • Ari Levine, Mark
Ronson, Emile Haynie and Jeff
Bhasker Catalogues
95
F**k You!
(Forget You)
CeeLo Green • Ari Levine
Catalogue
54 Grenade
Bruno Mars • Ari Levine
Catalogue
97 Break Your Heart
Taio Cruz Featuring Ludacris
• Fraser T Smith Catalogue
Chart data at 26 June 2020. Courtesy of Billboard
5
Strategic Report
Hipgnosis has 8 out of Spotify’s
Top 25 Most Played Songs Of All Time
1 Shape of You
Ed Sheeran • ÷ (Deluxe) • Johnny McDaid Catalogue
2 Rockstar
Post Malone, 21 Savage • Beerbongs & Bentleys
3 One Dance
Drake featuring Wizkid and Kyla • Views
4 Closer
The Chainsmokers featuring Halsey • Collage • Chainsmokers Catalogue
5 Dance Monkey
Tones and I • The Kids Are Coming
6 God's Plan
Drake • Scorpion
7 Thinking Out Loud
Ed Sheeran • × (Deluxe Edition)
8 Sunflower
Post Malone, Swae Lee • Spider-Man: Into the Spider-Verse & Hollywood's Bleeding
9 Señorita
Shawn Mendes, Camila Cabello • Shawn Mendes (Delux)
10 Havana (feat. Young Thug)
Camila Cabello, Young Thug • Camila • Starrah Catalogue
11 Perfect
Ed Sheeran • ÷ (Deluxe)
12 Say You Won't Let Go
James Arthur • Back from the Edge
13 Bad Guy
Billie Eilish • When We All Fall Asleep, Where Do We Go?
14 Love Yourself
Justin Bieber • Purpose (Deluxe) • Benny Blanco Catalogue
15 Believer
Imagine Dragons • Evolve
16 Photograph
Ed Sheeran • × (Deluxe Edition) • Johnny McDaid, Jeff Bhasker and
Emile Haynie Catalogues
17 Starboy
The Weeknd featuring Daft Punk • Starboy
18 Lean On (feat. MØ & DJ Snake)
Major Lazer, MØ, DJ Snake • Peace Is the Mission : Extended
19 New Rules
Dua Lipa • Dua Lipa (Deluxe)
20 Despacito – Remix
Luis Fonsi, Daddy Yankee, Justin Bieber • Vida • Poo Bear Catalogue
21 Sorry
Justin Bieber • Purpose (Deluxe)
22 Something Just Like This
The Chainsmokers, Coldplay • Memories...Do Not Open • Chainsmokers Catalogue
23 Sad!
XXXTentacion • ?
24 Don't Let Me Down (feat. Daya)
The Chainsmokers, Daya • Collage EP • Chainsmokers and Scott Harris Catalogues
25 Thunder
Imagine Dragons • Evolve
3:53
3:38
2:53
4:05
3:29
3:18
4:41
2:38
3:10
3:37
4:23
3:31
3:14
3:53
3:24
4:18
3:50
2:56
3:32
3:48
3:20
4:07
2:46
3:28
3:07
6
Chart data at 26 June 2020. Courtesy of Spotify
Apple Music for Artists
Global Weekly Recap June 19-25
J O U R N E Y
Journey
Weekly Recap
Jun 19-25
PLAYS
2.7M
SHAZAMS
65.6K
Insights
Jun 21, 2020
Wheel in the Sky hit 20,000,000 all-time plays.
Jun 21, 2020
It Could Have Been You hit 1,000 all-time Shazams.
Jun 20, 2020
Who’s Crying Now hit a new high of 1,000 daily plays in Canada.
Most Played Songs
Most Shazamed Songs
1. Don’t Stop Believin’
901,348
0%
1. Don’t Stop Believin’
24,346
0%
2. Faithfully
232,037
-2%
2. Separate Ways (Worlds Apart)
9,315
-2%
3. Separate Ways (Worlds Apart)
185,111
0%
3. Faithfully
5,227
-3%
Top Cities
Top Shazam Cities
1.
Los Angeles
73,215
1.
New York City
2.
Chicago
64,554
2.
Mexico City
3.
New York City
63,894
3.
Los Angeles
1,178
1,078
714
7
Strategic Report
Financial and Operational Highlights
As at 31 March 2020, the Company had raised a total of over £625 million (gross
equity capital) through its Initial Public Offering on 11 July 2018, and subsequent
placings in April 2019, August 2019 and the C Share raise in October 2019, with the
subsequent conversion in January 2020.
Catalogue Acquisitions during the period
As at 31 March 2020, the Company had deployed approximately £679 million in total since IPO on
54 Catalogues and 13,291 Songs.
The Portfolio as at 31 March 2020 is below:
Catalogue
Acquisition Date
Ownership
Songs
Catalogue
Acquisition Date
Ownership
Interest
Total
Interest
Terius Nash (The-Dream) 11 July 2018
Jason Boyd (Poo Bear)
16 November 2018
Bernard Edwards
28 November 2018
TMS
7 December 2018
Tricky Stewart
17 December 2018
Giorgio Tuinfort
3 January 2019
Itaal Shur
Rico Love
Sean Garrett
Johnta Austin
Ari Levine
Sam Hollander
Teddy Geiger
Starrah
David A Stewart
Jamie Scott
Al Jackson Jr.
Michael Knox
Lyric Catalogue
Brian Kennedy
Jon Bellion
Neal Schon
Eric Bellinger
Jason Ingram
Andy Marvel
Benny Blanco
30 January 2019
21 March 2019
21 March 2019
21 March 2019
31 March 2019
31 March 2019
9 April 2019
23 April 2019
10 May 2019
21 May 2019
30 May 2019
10 June 2019
12 June 2019
12 June 2019
12 June 2019
21 June 2019
1 July 2019
1 July 2019
26 July 2019
7 August 2019
The Chainsmokers
20 August 2019
75%
100%
37.5%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Total
Songs
108
29
103
109
47
44
298
90
109
48
436
188
122
302
214
290
121
121
182
209
245
588
249
Timbaland
10CC
9 October 2019
17 October 2019
Journey (Publishing) 17 October 2019
Jaron Boyer
5 November 2019
John Newman
7 November 2019
Arthouse
Fraser T Smith
Ammar Malik
Ed Drewett
Kaiser Chefs
15 November 2019
25 November 2019
5 December 2019
9 December 2019
9 December 2019
76
Jeff Bhasker
10 December 2019
499
Jack Antonoff
10 December 2019
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
99%
Emile Haynie
10 December 2019
100%
6
73
Brendan O’Brien
10 December 2019
100%
1,855
1,068
Savan Kotecha
18 December 2019
144
185
110
571
101
180
Johnny McDaid
11 December 2019
Tom DeLonge
23 December 2019
Journey (Masters)
10 January 2020
Rebel One
Scott Harris
10 January 2019
10 January 2019
Brian Higgins
23 January 2020
357 Gregg Wells
10 February 2020
242
462
740
Jonathan Cain
28 February 2020
Johnny Coffer
28 February 2020
Richie Sambora
4 March 2020
93 Mark Ronson
31 March 2020
100%
100%
100%
65%
100%
100%
100%
100%
100%
100%
100%
70%
49
164
157
389
157
129
361
11
216
85
186
315
42
Total Songs
13,291
8
Annual Report 2020
Hipgnosis Songs Fund Limited
Financial highlights1
Year ended 31 March 2020
IFRS NAV 2
Operative NAV 3
£621,479,961
(31 March 2019: £198,558,826)
£718,863,294
(31 March 2019: £208,794,543)
IFRS NAV per share
100.91p
(31 March 2019: 98.21p)
(Discount)/Premium
to Operative NAV
(11.76%)
(31 March 2019: 4.10%)
Middle market share price
Ongoing charges figure (%)
103.00p
(31 March 2019: 107.50p)
Operative NAV per share
116.73p per Share
(31 March 2019: 103.27p)
1.52%
(31 March 2019: 1.70%)
Total dividends declared
in respect of the period
5.00p
(31 March 2019: 2.25p)
The footnotes are shown on page 31
Hipgnosis Songs Fund Limited
Annual Report 2020
9
Strategic Report
The Chair’s Statement
This is the Company's first full 12 months’ fiscal year report since its launch, covering
the 12 months ended 31 March 2020. I am delighted to issue a report which
summarises the significant continued progress that has been made in building
a Portfolio of proven Songs which are generating strong investment returns, and
in raising new equity capital to fund further investments with a view to delivering
increased value for our shareholders.
During the period, the Company invested a further
£560 million across 42 Catalogues utilising proceeds
from the £141.5 million placing in April 2019, the
£51.1 million placing in August 2019, £231 million C Share
issue in October 2019 and subsequent conversion to
Ordinary Shares in January 2020 and from the £60 million
drawn down from the £100 million revolving credit
facility (subsequently upsized post year-end). Total
equity raised since IPO is now over £625 million.
The Portfolio has been independently valued at
£757 million, representing a net increase of 11.4% on
the aggregate purchase price of £679 million (of
which approximately 89% has been acquired in USD),
and an increase of 8.6% excluding the impact of
foreign exchange gains and losses.
In September 2019, the Company moved the listing
of its shares from the Specialist Fund Segment of the
London Stock Exchange, to a Premium Listing on the
Main Market. This move has benefitted the Company
from wider research coverage and has also made its
shares accessible to a wider range of shareholders,
including retail investors. I am pleased to report
that towards the end of March 2020 the Company
became a constituent of the FTSE 250 Index.
Investments
During the period to 31 March 2020, the Company
acquired 42 Catalogues comprising 10,180 Songs for
a total consideration of £560 million. The acquisitions
have significantly diversified the Portfolio which
now includes Songs performed by hundreds of
artists across multiple genres and vintages. All of the
acquisitions were sourced by our Investment Adviser,
The Family (Music) Limited, who together with its
Advisory Board provide access to some of the most
successful artists, songwriters and producers globally.
EPS, excluding total amortisation of Catalogues,
was 10.7p, representing over 2x cover on the full year
dividend target4 of 5p per Ordinary Share.
The Board considers that the most relevant NAV for
Shareholders is the 'Operative NAV', which reflects the
fair value of the Company's Portfolio as valued by an
Independent Valuer.
As at 31 March 2020, the Operative NAV per Ordinary
Share was 116.7p, reflecting an increase of 13.0% since
31 March 2019 and 14.3% since the last published
Operative NAV per Ordinary Share of 102.2p as at
10 January 2020, which was the post C Share
conversion NAV.
Including dividends paid, at 31 March 2020 Hipgnosis
has produced a Total Operative NAV Return of 17.7%
since 31 March 2019, and 22.7% in less than two years
since the IPO on 11 July 2018.
As at 31 March 2020 the Ordinary Share price was
103p, a 0.8% premium to the then last published
Operative NAV per Ordinary Share of 102.2p as at
10 January 2020. As at 30 June 2020 the Ordinary
Share price had risen to 116p, a 0.6% discount to the
latest published NAV per share of 116.7p.
Dividend
In the financial year the Company paid total
dividends of 5p per Ordinary Share, paid in four
quarterly instalments of 1.25p each at the end of May,
August and November 2019 and February 2020.
As previously reported, the Company continues to
target a total dividend of 5.0p4 per Ordinary Share for
the current financial year ending 31 March 2021 and
has today declared its first interim dividend for the year
ending 31 March 2021 of 1.25p per Ordinary Share.
Performance
I am pleased to report an increase in revenue to
£64.7 million for the period (financial period ended
31 March 2019: £7.2 million), which was ahead of
management’s expectations for the period by 2%.
During the period adjusted Operating Costs were
£10.0 million. Accordingly, the Ongoing charges ratio
decreased from 1.70% to 1.52%, reflecting the increased
scale of the Company. The Board believes that the
Ongoing charges ratio will continue to fall, particularly
once the current level of Catalogue investment
stabilises and the Company reaches steady state.
Profit before tax, excluding amortisation of
Catalogues of Songs under IFRS, was £51.6 million.
Working Capital Facility
In its first Annual Report, the Company stated that the
Directors considered it a priority that the Company’s
level of gearing should be established at appropriate
levels with sufficient flexibility to enable the Board to
adapt at short notice to take advantage of changing
conditions in the market for purchasing Songs.
On 29 August 2019, the Company signed a Revolving
Credit Facility (RCF) of £100 million with JPMorgan
Chase Bank, the facility being available for 3 years.
As at 31 March 2020, net debt (Total amount drawn
down less cash in bank) was £45.9 million, with facility
headroom of £39.5 million. Post year end the Company
10
Annual Report 2020
Hipgnosis Songs Fund Limited
The footnotes are shown on page 31
entered into an agreement to increase its RCF to
£150 million (and may request a further increase of
£50 million subject to certain conditions). The term
of the facility was also extended to 5 years.
In addition, on 29 May 2020, the Company announced
that it was seeking shareholder support to increase
the Company's current borrowing limit of 20% of its
Operative NAV to a maximum of 30% of its Operative
NAV, given that the Company’s assets and their
associated income streams are well suited to supporting
leverage. This approval was given by shareholders at an
Extraordinary General Meeting on 11 June 2020.
The Board
Preparations for the Company’s migration to a Premium
Listing on the Main Market of the London Stock Exchange
resulted in planned changes to the Board and its
Committees throughout the year ended 31 March 2020:
• Mr Burger, an existing independent Non-Executive
Director, was appointed as Senior Independent
Director on 9 September 2019;
• Ms Coleman was appointed as an independent
Non-Executive Director with effect from
27 November 2019; and
• On 9 September 2019, the Board established
a Nomination committee and a Remuneration
committee which will be responsible for
appointment and remuneration of Directors:
– Nomination Committee
Mr Burger has been appointed as the Chair
of the Nomination Committee. As the Board is
comprised wholly of independent Non-Executive
Directors, all members of the Board are members
of the Nomination Committee.
– Remuneration Committee
Mr Holden has been appointed as the Chair of
the Remuneration Committee. As the Board is
comprised wholly of independent Non-Executive
Directors, all members of the Board are members
of the Remuneration Committee.
Annual General Meeting
Due to the ongoing situation surrounding COVID-19
and the restrictions on public meetings, it is intended
that this year’s Annual General Meeting (‘AGM’) will
be held later in the year, probably in September or
October. The Company will announce details of the
AGM later in the summer and will send the Notice
of AGM to Shareholders at that time.
It is hoped that Shareholders will be able to attend
the AGM in person should they wish to do so, although
this will be subject to Government restrictions and
advice in force at the time. In any event, in these
exceptional circumstances, even if restrictions on
public meetings have been relaxed by the time of
the AGM, Shareholders are strongly encouraged to
consider whether it will be appropriate for them to
attend the AGM.
In the event that the situation changes and the
arrangements for the AGM have to be amended
after the Notice of the AGM has been issued, the
Company will update Shareholders through an
announcement to the London Stock Exchange and
on the Company’s website.
Outlook
The first half of 2020 has seen enormous shocks to the
global economy as a result of the COVID-19 pandemic.
The pandemic will have significant effects on lives,
livelihoods, and businesses, for some time to come.
The music industry is not immune to the impact of the
pandemic, with performance and live entertainment
in particular having been materially disrupted
during the immediate period of lockdown. However,
people listen to music in good times and bad and
the streaming of music has increased noticeably
during the lockdown period, demonstrating the
resilience and longevity of quality music and Songs.
The Company benefits from investing in an asset class
which can thrive when other sectors and markets are
suffering and I am confident that this can continue to
be the case over the coming year.
On behalf of the Board I would like to express my
thanks to all of our Shareholders for their continuing
support. The Company has assembled a diversified
Portfolio of proven Songs, across vintage and genres,
sourced by our Investment Adviser. Our pipeline of
Catalogues remains very strong with a potential total
investment fair value in excess of £1 billion and it is
the Board’s view that the investment thesis remains as
solid now as at the time of our IPO. Accordingly on
2 July 2020, the Company announced a placing
and retail offer to raise a target of £200 million of new
equity capital. I look forward to the next exciting
12 months of activity for Hipgnosis.
Andrew Sutch
Chair
3 July 2020
Hipgnosis Songs Fund Limited
Annual Report 2020
11
Strategic Report
Investment Adviser’s Report
Introduction
I started Hipgnosis to give the investment community
access to extraordinarily successful hit Songs by
culturally important artists and to establish Songs
as an uncorrelated asset class with attractive risk-
adjusted returns. All of our Songs have a proven
track record and we do not speculate on new Songs
regardless of the past performance of the songwriter,
producer or artist. These proven hit Songs produce
reliable, predictable and uncorrelated cash flows
which are highly investible. Furthermore, 15 years
of technological disruption in the form of piracy
has left these highly investible assets available at
attractive prices at a time when the rapid adoption
of paid music subscription services is growing industry
revenues significantly. The convenience of streaming
and the access afforded by it combined with a price
point of £10/$10 per month has moved music from
a luxury/discretionary purchase to very much an
indispensable utility alongside the electricity and
gas bill. It’s the centerpoint of the technology that has
penetrated everyone’s life and the revenues/net asset
value are being impacted positively as a result. This
has been demonstrated more profoundly than ever
during the course of the pandemic when the comfort
and escape of music has played a critical role in
seeing everyone through these challenging times.
We are very excited about these results and we are
particularly proud that everything we have promised
our investors over the last two years has either come
to fruition or been exceeded. We have bought what
we consider to be amongst the finest Songs of all time
against a backdrop of dramatic streaming growth
and we are adding significant value by actively
managing these great Songs and bringing efficiencies
to collection.
A core part of our thesis is that Song revenues are
uncorrelated as whether in good times or when
facing challenges, music is always being consumed.
While we would not have wished for a pandemic to
demonstrate this it has indeed done exactly that and
that has been reflected in our strong performance.
We have become a FTSE 250 company in only
20 months and as of the date of this report we
are now the 58th biggest yielder on the FTSE 250
meaning there are only 57 companies paying a
higher dividend (relative to share price) and at a
time when many have had to cancel their dividends
altogether. The lockdown due to COVID-19 has had a
devastating impact on the economy. Despite music
being uncorrelated there are still certain income
streams that have been impacted. Live events are not
possible and it may be 2021 before mass gatherings
12
Annual Report 2020
Hipgnosis Songs Fund Limited
Merck Mercuriadis, Founder of Hipgnosis
Songs Fund Limited and CEO of The Family
(Music) Limited (Investment Adviser to
Hipgnosis Songs Fund Limited)
are widely permitted. Revenue from licenses
issued to shops, gyms, bars and restaurants that
were temporarily closed will feel adverse effect
despite most of them being annual licences paid
in advance. TV/Radio advertising have also been
affected as the advertising market has also been
negatively impacted, but it has been temporary
and it is expected this will be offset with increased
programming for television and streaming services
where our synchronisation activity remains strong.
Netflix alone have 52 new shows in production as
announced on 20 June. It is important in this context
to highlight that the majority of our Songs have a
proven track record of extraordinary success and
we do not speculate on new Songs regardless of
the success of the songwriter, producer or artist.
Music streaming remains buoyant with now more
than 400 million subscribers globally and there have
been extensive reports throughout the pandemic
that subscriptions are up across the entertainment
sector as people have consumed more music and
entertainment whilst in isolation. This is explored in
more detail within the current market conditions
below and it is expected that this will outpace the
decline in other revenues streams, and this is
reflected in Goldman Sachs’ COVID-19 report* which
projects that song related revenues will grow by 3.5%
overall in 2020.
Since 31 March 2019, we have acquired a further
42 Catalogues which contain some of what we
believe to be the most culturally important and
commercially successful Songs of all time including
Eurythmics’ ‘Sweet Dreams (Are Made of This)’,
Journey’s ‘Don’t Stop Believin’, The Chainsmokers’
‘Closer’, Al Green’s ‘Let’s Stay Together’, Ed Sheeran’s
‘Shape of You’ and ‘Castle On The Hill’, Mark Ronson’s
‘Uptown Funk’, Amy Winehouse’s ‘Back To Black’,
Lady Gaga and Bradley Cooper’s ‘Shallow’, Bon
Jovi’s ‘Livin’ on a Prayer’, P!nk’s ‘What About Us’, Justin
Bieber’s ‘Love Yourself’ and Shawn Mendes’ ‘Stitches’.
We are delighted that we co-own five of the
“Top 10 Songs of the Decade” (including 4 of the
Top 5) as announced last year by Billboard Magazine.
We further cemented our interest in the Top 10
through our recent acquisition of Mark Ronson’s
Catalogue which includes the record-breaking
Number 1 hit of the decade ‘Uptown Funk’.
We are pleased to note that ‘Shallow’ by Lady Gaga
and Bradley Cooper, co-written by Mark Ronson, was
in the global top 10 digital singles of 2019. Furthermore,
Taylor Swift’s album ‘Lover’, of which we own copyright
interest through our Jack Antonoff acquisition, was
ranked second in the IFPI global top albums of 2019
and Camila Cabello’s ‘My Oh My’ has just been #1 on
radio in the US.
Significantly we also own 8 of the 25 most streamed
Songs of all time on Spotify and our interest in that
chart is likely to continue to grow as we acquire other
classic Songs.
I would sincerely like to thank all of our investors for
their belief in helping us to establish proven Songs
as arguably the strongest of new asset classes, which
is not only great news for all of us, but the wider
community of songwriters, artists and producers as
a whole.
* Source: Goldman Sachs (Equity Research), ‘Music in the Air, The show must go on’
Hipgnosis Songs Fund Limited
Annual Report 2020
13
Strategic Report
A Decade of ‘Livin’ on a Prayer’ by Bon Jovi
co-written by Richie Sambora whose publishing Catalogue was acquired by Hipgnosis in March 2020
Publishing Income 2009-19 (US$)
The income generated by ‘Livin’ On A Prayer’ since 2009 provides an illustration of the enduring appeal
and consumption of Songs in our Portfolio and how effective active management adds to the underlying
performance. It encapsulates themes of activity the investment adviser will emulate and prioritise on all its
classic assets.
The 44% increase in total income
over the past decade for ‘Livin’ On
A Prayer’ is reflective of the overall
music publishing business which
has enjoyed fantastic growth
over the past 5 years. This growth
was driven by the global online
subscriptions in Streaming from
c.1 million1 in 2009 to 358 million
in 20192 more than offsetting the
declines seen within Mechanicals
and Downloads.
Performance (2)
Performance income has increased
steadily reflecting better collections
seen globally combined with growth in
tv and radio. Between 2018 and 2019
there was a significant uptick of 66%
driven by Bon Jovi touring income.
Bon Jovi are currently planning a new
World Tour for 2021/2022.
Streaming (3)
Over the past decade there has been a
fundamental shift in streaming. Between
2009 and 2011, only 3% of total royalties
were generated from streaming
services. Since 2009, Streaming has
grown from close to zero revenue to
the second largest revenue source with
the fastest current growth rate.
1 Source: Wired Magazine ‘Spotify Has 1 Million Paid Subscribers…’
2 Source: Counterpoint 3 April 2020 ‘Global Online Music Streaming Grew 32% YoY
to Cross 350 Million Subscriptions in 2019’
Streaming growth rate increased
following Spotify’s US launch in 2012.
The growth in streaming for ‘Livin’ On
A Prayer’ has been impressive, at a
staggering 276% since 2016.
We expect to see this income type
become more dominant in the years
to come with the continued adoption
of DSPs such as Spotify and Apple
Music, as well as new entrants to the
marketplace such as Tik Tok and
Peloton, which are being adopted
by a widening demographic of user
age groups.
2009
Synchronisation royalties for the
iconic video game ‘American
Guitar Hero’ and for music video
game ‘Rock Band 2’.
2011
2012
Marked the highpoint in
Mechanical royalties for the song
over the decade with Mechanical
sales declining for most of the
period thereafter, common
with the general trend in music
consumption.
The launch of Spotify in 2012
marks the start of an upward
trend for Streaming which by 2019
accounted for 25% of total
revenue for this Song. The growth
in streaming has been impressive
at a staggering 276% since 2016.
KEY
1 Total
2 Performance
3 Streaming
4 Synchronisation
5 Mechanicals
6 Downloads
7 Other
< 2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019 >
14
Annual Report 2020
Hipgnosis Songs Fund Limited
1
2
3
4
5
7
6
$150k$300k$450k$600k
Synchronisation (4)
Synchronisation is buoyant over the
period, reflecting that the song is highly
‘syncable’ with strong opportunities for
Active Management. Synchronisation
deals over the period include the
song being placed in the iconic video
games ‘American Guitar Hero’ and
‘Rock Band 2’ both in 2009, in 2014 was
on the trailer for the 2013 animation
film ‘Free Birds’ and in 2016 the football
video series ‘Madden NFL 2017’. These
lucrative licenses across the decade
demonstrate the continued earning
power of the song.
Mechanicals (5) and Downloads (6)
Downloads and Mechanicals account
for a small proportion of total royalties
earned between 2017 and 2019. This
trend is reminiscent of the general
sentiment in music consumption of
accessing music via streaming rather
than ownership through downloads
and the decline in physical sales, which
both trigger a mechanical royalty.
Other (7)
Income was also generated
from Print rights, for the song
to be reproduced as sheet
music, and Grand rights, to
use the song in theatrical
stage productions and
musicals.
1
2018-19
saw a 66% growth in total income
for the song. The growth was driven
by Performance and Streaming,
more than offsetting the declines in
Mechanical and Download.
2016
Synchronisation earnings growth
in 2016 was driven by license for
the football video series ‘Madden
NFL 2017’.
KEY
1 Total
2 Performance
3 Streaming
4 Synchronisation
5 Mechanicals
6 Downloads
7 Other
2
3
4
5
7
6
< 2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019 >
Hipgnosis Songs Fund Limited
Annual Report 2020
15
$150k$300k$450k$600kStrategic Report
Investment Adviser’s Report
Continued
Hitting the Key Notes in Our Musical World
Our Thesis
1. Access
• We are trusted by the artist, songwriter and
4. Active Management
• Our Investment Adviser has an extensive network
producer community as a buyer and custodian
of relationships in the music industry
– Creators are protective over their legacy and
• We are specifically structured to have the
are selective about who they will sell to
– They want to be sure that their Songs will be
used in line with the ethos on which they have
built their careers by a team that understands
them
– We are viewed as custodians who can protect
the meaning and secure the financial future
of the creator’s Songs. We in fact do not view
ourselves as publishers at all but rather SONG
Managers who actively manage the Songs
with great responsibility
– We have the relationships, reputation and
expertise in the industry to advocate on behalf
of creators and look after their legacy
bandwidth that allows us to Song Manage in
order to extract incremental revenue with a focus
on a smaller number of songs per Executive than
the publishing majors
5. Efficiencies In Collection
• We work to bring efficiencies via faster and more
transparent collection of micro-payments using
our preferred administrator
• Different streams of income from the Songs will
go to pay a 5p p.a. target dividend yield with
significant capital upside 2
6. Strategy
• We have made our reputation with songwriters,
• We now have over £700 million invested across
artists and producers not at their expense
54 Catalogues (13,291 Songs)
• Target proven Songs
2. Streaming
• Technology has changed music consumption
• The monetisation of music has improved
• The revenue pie has grown dramatically from
50 million paid subscribers 2 years ago to more
than 400 million today
• Emphasis on the great works of the African
American Community; since the days of Elvis
Presley, The Beatles and The Rolling Stones
covering Arthur ‘Big Boy’ Crudup, Chuck Berry,
Little Richard, Muddy Waters, Smokey Robinson
and Bobby Womack songs, black music has
made the world go round.
• Music is now a utility purchase rather than
• Act as custodians for the songwriter
discretionary or a luxury
3. The US Copyright Royalty Board
• The CRB has passed into law an increase in
streaming songwriter royalty rates from 10.5%
to 15.1% over the five years to 2022 1
• Leverage our assets to address structural
imbalance between payments on recorded
music and payments on Songs in favour of the
songwriter
Sources:
1 https://www.musicbusinessworldwide.com/a-44-streaming-royalty-rise-is-now-locked-in-for-us-songwriters-so-long-as-the-likes-of-spotify-dont-declare-war/
2 The target dividend should not be taken as an indication of the Company’s expected future performance or results over such period. The target dividend is
a target only and there is no guarantee that it can or will be achieved and it should not be seen as an indication of the Company’s expected or actual return
16
Annual Report 2020
Hipgnosis Songs Fund Limited
How Do We Know?
Understanding the income streams for copyright owners of Songs
Copyright
owner(s)
Performance
Royalties
Due when a song
is performed live
or broadcast
Mechanical
Royalties
Due when a copy
of a song is made
Synchronisation
Fees
Due when a song is
used in another form of
media or moving picture
Physical
(CD, DVD, vinyl)
Digital
(downloading,
streaming)
TV adverts
Movies
Video games
Radio
Streaming
Live performance
by an artist
Played in shops,
gyms, clubs &
restaurants
Hipgnosis Songs Fund Limited
Annual Report 2020
17
Strategic Report
Investment Adviser’s Report
Continued
What is Happening?
Streaming
• Technology has changed music consumption
– 2017 $62bn -> 2030E $131bn global revenues
– Music Publishing revenues are projected to
grow +108% over this period
• Legal streaming has replaced illegal downloading 1
– Streaming: 50m paying users in 2016, 400m
music subscribers globally by Q1 2020, up from
341m at the end of 2019.
– By service, Spotify led with 32%, followed by
Apple Music on 18% and Amazon Music on 14% 2.
– Streaming: 2015 $2.3bn -> 2030E $28bn (+1117%)
– Downloading: 2015 $1.5bn -> 2030E $0.2bn (-87%)
• Streaming is driving industry revenue growth 3
– Spotify Premium subscribers grew 31% year-on-
year to 130m at 31 March 2020
– Apple Music amassed 60m paid subscribers in
June 2019, up from 50m in June 2018.
– 65% consumption is classic catalogue, 35%
new hits of the last few years
– 5% growth in premium subscriptions in Q1 20,
ahead of forecasts set before COVID-19
– Total Monthly Active Users (MAU) grew 31%
year-on-year to 286m
– Passed 60m paid subscribers in June 2019,
up from 50m in June 2018 4
– Rival streaming apps launched in December
to challenge Spotify, TencentMusic and
Apple Music in Asia
– We are well positioned in this space with
The Chainsmokers, Ariana Grande, Taylor
Swift, Ed Sheeran, Camila Cabello, Shawn
Mendes and Justin Bieber
– Amazon Music Unlimited subscribers now
over 55m 5
• 51% streaming growth in vintage Catalogues 6
CRB Ruling
• In 2018 the CRB ruled to increase streaming
songwriter royalty rates from 10.5% to 15.1% by 2022 7
• Appeal to ruling by Spotify is expected to fail 8
Warner Music Group IPO11
• IPO on Nasdaq on 3 June 2020
• $2bn raised at $25 per share, implying:
– Market value of $12.5bn
– EV/EBITDA multiple of 20.2x
• Shares rose over 20% on first day of trading to
c$30, implying:
– Market value of over $15bn
– EV/EBITDA multiple of 23.6x
• Key comparisons to Warner Music Group
– Hipgnosis generated ~12.5% of Warner
Chappell revenue on less than 1% of assets
– Hipgnosis’ Net Publisher Share per Song
of c.£5,000 compares to £135
18
Annual Report 2020
Hipgnosis Songs Fund Limited
Global Music Market Breakdown,
2019 vs. 2030E (US$ bn)
2019
2030E
n Recorded:
n Download:
n Physical:
2019
$37
$12
$28
2030E
$81
$22
$39
Source: Goldman Sachs Global Investment Research
China streaming market (US$m) and
% contribution to global streaming growth
2.5
2.0
1.5
1.0
0.5
0.0
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
8
1
0
2
9
1
0
2
0
2
0
2
1
2
0
2
2
2
0
2
3
2
0
2
E
4
2
0
2
E
5
2
0
2
E
6
2
0
2
E
7
2
0
2
E
8
2
0
2
E
9
2
0
2
E
0
3
0
2
■ China contribution to global streaming growth
■ China streaming market ($m)
Source: IFPI Global Music Report 2020, Goldman Sachs Global
Investment Research
5%
4%
3%
2%
1%
0%
Sources:
1 Goldman Sachs (Equity Research) ‘Music In the Air’ update 2019
2 Midia Research 2020
3 Spotify Q1 results: https://s22.q4cdn.com/540910603/files/doc_
financials/2020/q1/Shareholder-Letter-Q1-2020-[Final]-(1).pdf
4 Endgadget Analytics
5 https://www.google.co.uk/amp/s/www.theverge.com/platform/
amp/2020/1/22/21077187/amazon-music-service-55-million-customers-spotify-
apple-music-prime-members
6 Company Data
7 https://www.musicbusinessworldwide.com/a-44-streaming-royalty-rise-is-now-
locked-in-for-us-songwriters-so-long-as-the-likes-of-spotify-dont-declare-war/
8 This ruling has been challenged but is expected to fail
9 Goldman Sachs (Equity Research) 2016
10 For musical works/composition. Not applicable for sound recordings.
Copyright terms vary from jurisdiction to jurisdiction
11 https://www.rollingstone.com/pro/news/warner-music-group-nasdaq-
ipo-1009778/#:%7E:text=WMG%20is%20once%20again%20a,company%20
a%20%2415%20billion%20valuation and https://www.billboard.com/articles/
business/9395845/warner-music-group-shares-up-20-percent-first-day-trading
Giving a Perfect Storm of Opportunities
for Investment Now
1. Disruption from technology has created
a surge in music streaming
• Integration with other products
– Spotify now comes with your Sky box
– BMW, Volvo and Ford cars pre-installed with
Spotify and Apple Music CarPlay
– Easy to play music by voice commands to
Amazon’s Alexa and the Apple Homepod
speakers
– Spotify integrated into Android Wear and
Samsung Gear Fit watches
2. Songs are available to buy
• Until recently, 15 years of declining revenue has
resulted in attractively priced copyrights and
writers who are willing to sell to the right buyer
• Estate and pension planning is a priority for many
creators – a good song’s copyright can produce
predictable and reliable royalty income 9
– ‘Merry Christmas Everybody’ by Slade earns
c.£500,000 every Christmas 9
– ‘Yesterday’ by the Beatles has been covered
over 2,200 times. The songwriters receive
royalties from every version, totalling around
$30m since the song’s inception 9
3. Copyrights remain attractively priced
• Valuation multiples applied to historical royalty
income
• Royalty revenues have declined for 15 years
until 2016 1
• Based on our Investment Adviser’s view, portfolio
acquisition multiples remain attractively priced
4. Longevity of Income
• Song copyrights persist for decades – In the UK,
70 years after the death of the last co-composer
giving, on average, 120 years of rule of law
protected revenue 10
• Income from owning the writer’s and publisher’s
share of a song is protected by law
5. Improvement in royalty income collection
with increased transparency and efficiency
• Music Modernization Act was passed by
US Congress in April
• The Copyright Royalty Board ruled to increase the
revenue paid to songwriters by 44% 8
• $1 of income purchased last year will now be
worth $1.44 by the end of 2022
6. Increasing synch opportunities with
income produced from music being used
in trackable sources
• Movies, video games, TV adverts and programmes
• Virtual reality and social media
• YouTube videos made by bloggers with millions
of followers (“vlogging”)
• Cover versions are stronger than ever (e.g. from
a rise in televised talent shows)
7. Opportunities in emerging markets
• Historic high piracy rates
• Recent payment solutions, business models and
recognition of intellectual property rights have
set the stage for growth
• Increased uptake in legal streaming
• Apple, Spoitfy and local services are delivering
revenues from markets that are not in the data on
which we buy Catalogues
8. Emerging technologies
• Increasing income created from high
smartphone usage
• Creating more sources of music usage and
opportunities to produce synchronisation income
Streaming Subscriber Mix by Geography, 2019 vs. 2030E (%)
2
10 11 1
9
8
7
2019
6
1
2
3 4 5
12
1
1
0
1
9
2030E
8
1
2
3
4
5
6
7
1. USA
2. UK
3. Germany
4. France
5. Japan
6. Other
7. China
8. India
9. Brazil
10. Mexico
11. Russia
S
T
E
K
R
A
M
D
E
P
O
L
E
V
E
D
S
T
E
K
R
A
M
I
G
N
G
R
E
M
E
2019
2030E
24%
13%
5%
4%
2%
2%
3%
2%
2%
2%
22%
10%
12%
20%
4%
4%
3%
3%
10%
4%
2%
2%
Source: IFPI Global Music Report 2020, Goldman Sachs Global Investment Research
12. Oth. ex BRICS
11%
28%
Hipgnosis Songs Fund Limited
Annual Report 2020
19
Strategic Report
Investment Adviser’s Report
Continued
Our Purpose and Business Model
Our Purpose
Hipgnosis was created to give the investment
community access to extraordinarily successful
hit Songs by culturally important artists and to
establish Songs as an uncorrelated asset class with
attractive returns. Our ulterior motive is to use
the importance of our unparalleled Catalogue
and financial clout as influence to improve the
songwriter’s position in the economic equation.
• The benefits of scale on volatility, giving smoother
income the larger the Company gets, and the
opportunity to drive incremental equity yield
over the contracted period through active
management and appropriate outsourcing
of administration.
• Exposure to structural growth themes in relation to:
i) the penetration of technology into everyone’s
everyday life;
Our Business Model
The key characteristics of the Hipgnosis business
model are:
ii) the growing value of entertainment markets; and
iii) the recognition of the real asset value
of intellectual property rights.
• Sustainable earnings, with sources of income
from across the spectrum of consumption
patterns made up of millions of microtransactions
such as streaming, physical purchase, downloading,
synchronisation, performance, licensing and
merchandising. The main revenue streams are:
i) Mechanical royalties – are paid to the owner of
the composition copyright. Mechanical royalties
are also collected by royalty collection agents or
the portfolio administrators whom the copyright
owner appoints;
ii) Performance royalties – these are collected by
various performance rights organisations (“PROs”)
worldwide which represent songwriters and other
copyright owners; and
iii) Synchronisation fees – these are typically paid
directly to the owner of the relevant copyright or its
publisher, on the terms and in the amounts agreed
with the relevant film or television production
company, advertising agency or end customer.
• A durable and diversified portfolio of high-quality
assets founded on the copyright security –
70 years after the death of the last co-composer -
of works across a broad range of genres,
vintages and geographies of consumer markets.
On average our Songs have more than 100 years
of copyright protected revenue.
• Offering uncorrelated returns against all major
asset classes.
• High barriers to entry in relation to the acquisition
and active management of Catalogues. We
believe that the market experience, reputation
and relationships of our Investment Adviser
and our Advisory Board enable us to overcome
those barriers, so as to position Hipgnosis as an
attractive potential purchaser of Catalogues
from songwriters or assorted owners of music
intellectual property rights who are selective
about whom they are willing to sell to.
• The combination of our Investment Adviser’s
expertise and the expertise of our current and
potential portfolio administrators that results in us
being well-positioned to manage the Songs we
own successfully, increasing royalty collection,
improving the speed and accuracy of collection
of royalty income, and improving synch
placement of the Songs.
• Our Investment Adviser’s extensive network
of relationships with broadcasting networks,
TV studios and advertising agencies to create
synchronisation opportunities for the Company
and enable it to increase its income. Having
a diversified Portfolio of Songs enables the
Company to capitalise on multiple synch
opportunities.
• Our Investment Adviser’s strategy of having not only
a “motive” of providing great returns for shareholders
but also an “ulterior motive” of using the influence of
the Company and our great Songs to improve the
songwriter’s position in the economic equation.
20
Annual Report 2020
Hipgnosis Songs Fund Limited
The diagram below sets out an overview of the various revenue streams that the Company can benefit from.
Publishing Rights Flows into Hipgnosis Songs Fund
Performing Rights Income
Mechanical Rights Income via MCPS
Synch Rights Income
Payment of writers’ share
of Performance (50%)
Investment Adviser
generated synch. fees
Direct Revenue
Users of Music
Administrator
Synchronisation
Fees
Publishers share of
Performance (50%)
Mechanical Income direct from mechanical societies (MCPS)
General Licence
Overseas
PRO Licence
Digital Services
Broadcasters
Record
Companies
Source: The Family (Music) Limited, March 2019
We intend that, following the acquisition of each Song, we will step into the songwriter’s position with regard to the collection of their share of the royalties and
payments (which could comprise their writer’s share, their publisher’s share and/or their performance rights) due in respect of each Song.
The Company aims to register the musical works it owns or acquires in order to protect its copyright ownership to the extent legally permissible and where the
Investment Adviser and the Board considers it to be commercially prudent to do so. We seek to acquire both the writer’s share and publisher’s share of the rights to
the synchronisation fee so that, in most cases, the synchronisation fee is not split.
Hipgnosis Songs Fund Limited
Annual Report 2020
21
Strategic Report
Investment Adviser’s Report
Continued
Our Investment Objective and Policy
Investment Objective
The Company’s objective is to provide Shareholders
with an attractive and growing level of income,
together with the potential for capital growth,
from investment in Songs and associated musical
intellectual property rights, in accordance with its
investment policy.
Investment Policy
The Company’s investment policy is to diversify
risk through investment in a Portfolio of Songs and
associated musical intellectual property rights
(including, but not limited to, master recordings and
producer royalties). The Company seeks to acquire
100% of a songwriter’s copyright interest in each
Song, which would comprise their writer’s share,
their publisher’s share and their performance rights.
In appropriate cases, however, the Company may
not acquire all three elements of the songwriter’s
interest. The Company acquires interests in Songs
which are sole authored or co-authored. The
Company may also acquire interests in Songs jointly
with another purchaser. Each Song is considered by
the Company to be a separate asset.
The Company, directly or indirectly via portfolio
administrators, enters into licensing agreements,
under which the Company receives payments
attributable to the copyright interests in the Songs
which it owns. Such payments may take the form of
royalties, licence fees and/or advance payments,
including:
• mechanical royalties – when a copy of a Song
is made, whether physical (e.g. CDs, DVDs) or
digital (e.g. permanent downloads, streaming,
webcast);
• performance royalties – when a Song is
performed live or broadcast on TV or Radio, or
when a song is streamed online; and
• synchronisation fees – when a Song is used in
another form of media (e.g. movie, TV show,
video game, advertisement).
The Company focuses on delivering income growth
and capital growth by pursuing efficiencies in the
collection of payments and active management
of the Songs it owns.
The Company may acquire Songs for consideration
consisting of cash, Shares or a combination of
cash and Shares, and payment of part of the
consideration may be on deferred terms. The
Company may acquire Songs or Catalogues
directly, or indirectly by acquiring the entity through
which such Songs or Catalogues are held.
Whilst the Company does not intend to sell the
Songs it owns, it may make disposals of Songs
where it considers such a disposal to be in the best
interests of Shareholders.
Investment restrictions
The Company invests its assets and manages the
Songs it acquires with the objective of constructing
a high quality and diversified Portfolio of Songs.
The Company acquires Catalogues from a
number of different songwriters, which includes
Songs diversified across music genres and sung by
numerous recording artists. The Company is subject
to the following investment restrictions:
a) the Company holds interests in a minimum
of 300 Songs;
b) the value of any single Song does not, and will
not, represent more than 10% of the Company’s
Gross Assets, calculated at the date of the
acquisition of such Song (and re-calculated
in the aggregate upon the acquisition of any
additional interest in a Song). In the event this
limit is breached at any point after the relevant
investment has been made or added to (for
example due to a change in valuation of any
Song), there is no requirement to sell any Song,
in whole or in part; and
c) the Company does not, and will not, invest in
closed-ended investment companies or other
investment funds.
22
Annual Report 2020
Hipgnosis Songs Fund Limited
Cash management
The Company’s uninvested capital may be
invested in cash, cash equivalents, near cash
instruments and money market instruments.
Hedging and derivatives
The Company may utilise derivatives for efficient
portfolio management. In particular, the
Directors may engage in full or partial foreign
currency hedging and interest rate hedging. The
Company does not, and will not, enter into such
arrangements for investment purposes.
Leverage
The Company may now incur indebtedness of
up to a maximum of 30% of its Net Asset Value,
calculated at the time of drawdown. For these
purposes all bank borrowings and other forms
of indebtedness incurred by any member of the
Group (as defined below), and any nonequity
share capital, will be taken into account.
“Group” means the Company and its subsidiaries
(as defined in section 531 of the Companies
(Guernsey) Law, 2008, as amended).
Amendments to and compliance with the
Investment Objective and Policy
Any material change to the Company’s
Investment Objective and Policy will be made
only with the prior approval of the FCA and the
Shareholders by ordinary resolution.
In the event of a material breach of any of
the investment restrictions applicable to the
Company, Shareholders will be informed of the
actions to be taken by the Company through
an announcement made via a RNS.
Our Song Acquisition
Strategy
Focuses on proven Songs and Artists
of great cultural importance
• High profile
• Artists well known to society
• Culturally influential
– Typically continuously played over time
– Often with enduring appeal that attracts covers
from new recording artists
• With a track record of producing predictable
and reliable income
• Uncorrelated to global capital markets
And acting as custodians for the songwriter…
• Creators are protective over their legacy and are
selective about who they will sell to
• We are Song Managers, compared to the major
publishing houses, we are viewed as a safer
alternative who can protect the meaning and
secure the financial future of the creator’s songs
• We have the relationships, reputation and
expertise in the industry to advocate on behalf
of creators and look after their legacy
To deliver value by leveraging our assets
to address structural imbalance between
payments on recorded music and
payments on Songs
• We are advocates and catalysts for improving the
songwriters share of income and where they sit in
the economic equation
• Identifying under-exploited Songs in a Catalogue
with significant opportunity for active management
• Having a lower ratio of Songs to each
individual in the team managing the Songs,
thereby targeting opportunities more effectively,
generating enhanced returns
• Tailoring the Catalogue to fit the new requirements
of popular culture and media, including playlists,
social and virtual reality platforms
• High exposure to streaming and low exposure
to live music
Our Strategic Advantages
• We see ourselves, and are determined to
be seen by others, as Song Managers and
custodians for the songwriter
• Our relationships are key to sourcing Catalogues
and opportunities
• In addition, we have a competitive advantage
over most of the major publishers because we
have created an Advisory Board, assembled
from leading music industry figures, who we
believe are well placed to advise on any given
Song’s potential market, reach and popularity.
Hipgnosis Songs Fund Limited
Annual Report 2020
23
Strategic Report
Investment Adviser’s Report
Continued
Market Conditions
2020 has not been the year expected with the world
feeling the devastating effects of COVID-19, not only
on the global economy, but also with the tragic loss
of lives.
Feelgood hits, such as ‘Sweet Dreams (Are Made
Of This)’ and ‘Livin’ On A Prayer’, have performed
particularly strongly during the pandemic where
consumers have sought comfort in these Songs. Some
selected examples of this include:
At this difficult time, people have looked to music for
a sense of positivity and comfort. This is being seen
most evidently with streaming where there has been
a surge in listening to vintage (10+ years) Songs.
Spotify’s first quarter 2020 results showed a 5%
quarterly increase in paid streaming subscribers,
which was at the top end of their expectations set
before the onset of COVID-19. In addition, Neilson’s
report, ‘COVID-19: Tracking the Impact on the
Entertainment Landscape – Release 3’, highlighted
that streaming subscriptions in the first two weeks
of April were higher than the previous 8 weeks as
consumers looked to stay entertained through
lockdown. Importantly for Hipgnosis, consumers are
re-discovering ‘older hits’ during this time with 62%
listening to ‘music they used to listen to but have not
heard in a while’.
There will be reductions in Public Performance and
Live Income as the lockdown impacts the leisure
and live entertainment industry. Whilst it is too early
to quantify this impact, the Company’s Portfolio of
vintage Catalogues have a relatively low weighting
to these sectors with Live Income representing
approximately 3% and Public Performance 12%
of Catalogue revenues.
In addition, whilst advertising budgets were
temporarily affected and film releases were being
paused, the Company has not seen a decrease in the
demand for Song placements and synchronisations
and it is expected there will be significant uptake
for Songs due to increased productions for TV, HBO,
Netflix and Hulu.
Hipgnosis’ investment strategy of building a Portfolio
with a core of extraordinarily successful proven hit
Songs, which have a high exposure to streaming and
low exposure to live music, leaves it well positioned
in the COVID-19 world. Overall, we expect that the
income growth from streaming will exceed any lost
earnings from Public Performance and Live Income.
• ‘Don’t Stop Believin’’, by Journey, which entered the
Top 200 most streamed weekly Songs on Spotify UK
at the start of lockdown and has steadily risen since
with 362k streams per week. On Apple Music the
song is doing more than 2.7 million plays per week
globally!
• ‘Something Just Like This’, by The Chainsmokers
featuring Coldplay, which re-entered the Global
Top 200 chart at the beginning of April
• ‘Shallow’, performed by Lady Gaga and co-written
by Mark Ronson, which has consistently remained
within Spotify’s Top 100 most streamed weekly Songs
throughout the pandemic
• ‘Thinking of You’, by Sister Sledge and co-written
by Bernard Edwards, which has experienced over
500% growth in synchronisation income since the
pandemic
Portfolio
To take advantage of the structural growth drivers
outlined above we identify Catalogues of culturally
important proven hit Songs which offer significant
value opportunities both from market growth and
active management.
In order to generate the most attractive return for
Shareholders, the Portfolio is mostly comprised
of seasoned, classic Songs (often referred to as
‘evergreen’), which are Songs older than 3 years from
release. These Songs, which as ‘Catalogue’ make
up approximately 65% of consumption on streaming,
have often been badly managed or neglected yet
still produce highly reliable steady state income that
will grow progressively with the continued adoption
of streaming and the addition of being actively
managed responsibly.
In addition, with streaming growth being the backbone
of the Company’s investment thesis, the Investment
Adviser will also invest in some newer ‘hits’ of extraordinary
success. These newer ‘hits’ are at the heart of highly
concentrated streaming across only 400 or so Songs
that make up 35% of total consumption.
24
Annual Report 2020
Hipgnosis Songs Fund Limited
Since inception, the Company has acquired 1,810 Songs
that have held Number 1 positions in global charts,
7,013 Songs that have held Top 10 positions in global
charts and 49 Grammy award winning Songs. This
provides not only significant diversification with a
multitude of highly predictable revenue streams, but
also provides significant opportunities to extract value
through our active management capabilities.
• Adoption of new music consumption methods
which are not currently included in the valuations
(for example TikTok, Facebook video and Peloton)
• The Investment Adviser’s active management
which is increasing revenues from previously under-
managed Songs
• Several music valuation experts have reduced
The entire Portfolio includes 8 of the 25 most streamed
Songs of all time on Spotify and 4 out of the top 5
of Billboard’s “Hot 100 Songs of 2010s” including the
Number 1 song ‘Uptown Funk’.
During the year, the Company has invested a further
£560 million through the acquisition of 42 Catalogues
taking the total Portfolio to 54 Catalogues comprising
13,291 Songs. The Portfolio has been independently
valued at £757 million representing an increase of 11.4%
on the aggregate purchase price of £679 million (of
which approximately 89% has been acquired in USD).
This value reflects a multiple of 15.0x historic annual
earnings compared to the blended acquisition multiple
of 13.9x. The increase in the acquisition multiple since
30 September 2019 reflects the acquisition of some of
what we consider to be the finest vintage Catalogues
of all time during the period including those of Journey,
Richie Sambora (Bon Jovi), Timbaland, Brendan O’Brien,
Tom DeLonge (Blink 182), Brian Higgins, 10cc, Fraser T
Smith, Al Jackson Jr, and Mark Ronson.
In order to derive a fair value, the Independent
Valuer, in line with market practice, values music
publishing rights based on a Discounted Cash Flow
(DCF) valuation. Discount rates have remained
constant during the period at 9% with the like for like
increase in the fair value of the Catalogue driven by:
• Royalty statements exceeded both management’s
and the valuer’s expectations by 2% thereby
increasing baseline revenues in valuation models; and
• Streaming growth rates increased in the
Independent Valuer’s assumptions
We believe that there continues to be significant
valuation upside and hidden value in the Portfolio from:
• Paid streaming consumer numbers continuing
to grow, particularly into markets where it has
historically been difficult to monetise recorded
music (for example in China and India)
their discount rates to reflect changing consumer
behaviours towards streaming music, which is
becoming a utility, rather than consumers making
discretionary music purchases. As proven hit Songs
produce long-term cash flows (typically around
100 years 5, any decrease in discount rates would
have a significant impact on the Portfolio’s
valuation. For example a 100 basis point decrease
in the discount rate would increase the valuation
of the Portfolio by 18%; likewise, a 100 basis point
increase in the discount rate would decrease the
valuation of the Portfolio by 15%
• A “Portfolio Effect” that comes from having curated
54 Catalogues of this quality into 1 portfolio
Our proven hit Songs are highly diversified by vintage,
genre and recording artist as set out below:
Selected Globally successful original
recording artists:
Our Songs are represented by some of the most
successful original recording artists of all time,
a selection of which are:
Eurythmics, Al Green, Diana Ross, Cher, Beyoncé,
Rihanna, Adele, Justin Timberlake, Madonna,
Britney Spears, Jay Z, Bruno Mars, Journey, Chic,
Sister Sledge, Booker T & The MG’s, Rudimental,
Jess Glynne, One Direction, Mick Jagger, Tom Petty
& The Heartbreakers, 10cc, Little Mix, Justin Bieber,
The Chainsmokers, Sugarhill Gang, Camila Cabello,
Mariah Carey, Mary J. Blige, No Doubt, Gwen Stefani,
Sia, David Guetta, Shawn Mendes, Maroon 5, Stormzy,
John Newman, James Morrison, Jason Aldean,
Ariana Grande, Ed Sheeran, Taylor Swift, Mark Ronson,
Kanye West, Pearl Jam, Bruce Springsteen, Red Hot
Chilli Peppers, Harry Styles, Rick Ross, Rage Against
The Machine, Panic At The Disco, TLC, Michael
Jackson, Robbie Williams, Amy Winehouse, Bon Jovi,
Lana Del Rey, Miley Cyrus, Dua Lipa, Diplo, A$AP
Rocky, Rod Stewart, Miguel, Paul McCartney, Fun,
AC/DC, Kylie Minogue, Duran Duran, Santana, Celine
Dion, Timbaland and Blink 182.
Hipgnosis Songs Fund Limited
Annual Report 2020
25
Strategic Report
Investment Adviser’s Report
Continued
Breakdown of Portfolio by genre
(based on fair value)
Breakdown of Portfolio by age
(based on fair value)
9
3
8
2019
4
5
6
7
9
8
10
1 2 3
4
5
6
2020
7
1
3
2019
2
1
3
2020
2
Genre
31 March 2019
31 March 2020
Age
31 March 2019
31 March 2020
1. Christian
2. Country
3. Dance 6
4. Disco
5. Hip-Hop
6. Latin Rock
7. Pop
8. R&B
9. Rock 7
10. Soul
0%
0%
18%
7%
2%
3%
50%
15%
5%
0%
2%
2%
6%
1%
4%
1%
45%
10%
28%
1%
1. 0-3 years
2. 3-10 years
3. 10+ years
14%
76%
10%
9%
59%
32%
The full list of Catalogues acquired is set out in the
Financial and Operational Highlights on pages 8 to 9.
26
Annual Report 2020
Hipgnosis Songs Fund Limited
Recent Portfolio Highlights
In February 2020, ‘Shallow’ by Lady Gaga and Bradley
Cooper re-entered the Top 40 on iTunes, after a cover
of the song became a global internet sensation.
In April 2020, Camila Cabello's ‘My Oh My’ rose
to No. 1 on Billboard's Pop Songs radio airplay chart.
The song was co-written by Savan Kotecha and was
part of the Catalogue when acquired by Hipgnosis.
‘My Oh My’ debuted on the Pop Songs chart in
January and ascended to the summit in its 19th week.
We have 4 Songs in the new Will Farrell “Eurovision”
movie which is the #1 movie in the US with a Top 10
soundtrack album.
The IFPI also recently issued a report stating that
‘Shallow’ by Lady Gaga and Bradley Cooper was in
the global top 10 digital singles of 2019, whilst Taylor
Swift’s album ‘Lover’, featuring songs by Jack Antonoff,
was ranked second in the IFPI global top albums of 2019.
streaming and performance revenues exceeding
expectations, which has offset any negative impact
from COVID-19. There has also been a reversal of the
negative FX effect recognised in the post C Share
conversion Operative NAV as at 10 January 2020 as
GBP:USD exchange rates have fallen back to the levels
experienced at the beginning of the financial year.
Operative NAV Bridge from 1 April 2019 to
31 March 2020:
Opening Operative NAV per Ordinary Share 103.27p
Increase in fair value of Catalogues 8
Net income
Dividends paid
FX impact
Share Issue Costs*
9.50p
5.68p
-2.96p
3.07p
-1.83p
Closing Operative NAV per Ordinary Share 116.73p
* Share issue costs include the costs of the issue of C Shares on 22 October 2019,
which were borne out of the gross proceeds of the issue.
Financial Review
As at 31 March 2020, the IFRS NAV per Ordinary Share
was 100.91p reflecting an increase of 2.7% since
31 March 2019.
The IFRS NAV as at April 2019 was 98.92p and as at
March 2020 it was 100.91p per Ordinary Share. The
bridge between the Operative NAV and the IFRS NAV
is disclosed within the financial statements.
As the Board have noted, in order for Shareholders
to fully understand the potential of the Company’s
Catalogues of Songs, the Operative NAV has been
used as an alternative performance measure as this
includes the fair value of the Company’s Catalogues
as valued by the Independent Valuer.
As at 31 March 2020, the Operative NAV per
Ordinary Share was 116.7p reflecting an increase
of 13.0% since 31 March 2019 and 14.3% since the
last published Operative NAV per Ordinary Share
of 102.2p as at 10 January 2020.
Operative NAV Bridge from 11 January 2020 to
31 March 2020:
Opening Operative NAV per Ordinary Share 102.16p
Increase in fair value of Catalogues 8
Net income
Dividends paid
FX impact
8.16p
2.45p
-0.79p
4.75p
Closing Operative NAV per Ordinary Share
116.73p
Closing Operative NAV per Ordinary Share 116.73p
Including dividends paid, at 31 March 2020 Hipgnosis
has produced a Total NAV Return of 17.7% since
31 March 2019, and 22.7% in less than two years since
the IPO on 11 July 2018.
In the year to 31 March 2020, Catalogue revenue
increased to £64.7 million with cash receipts from
royalty statements on average 2% higher than
expected at the time of Catalogue acquisitions,
driven by streaming revenues.
This growth in the Operative NAV is primarily a result
of an 8.6% increase in the fair value of the Portfolio
since acquisition, excluding the impact of foreign
exchange gains and losses. Discount rates have
remained constant during the period at 9% with
the increase in value principally due to Catalogue
The Portfolio has been built around Catalogues
positioned to benefit most as recorded music and
Song publishing revenues grow dramatically through
the continual uptake of paid streaming. Music is fast
becoming a utility rather than luxury purchase.
Hipgnosis Songs Fund Limited
Annual Report 2020
27
Strategic Report
Investment Adviser’s Report
Continued
Accordingly, a significant proportion of royalty income
is received from streaming. Streaming accounts for
87% of digital income and approximately 39% of total
Catalogue revenue, as seen below in the breakdown
of the sources of Catalogue revenue during the year:
Portfolio Income by Source
5
1
2020
2
4
3
Income Source
At 31 March 2020
1. Mechanical
2. Performance 9
3. Digital
4. Synchronization
5. Other
Total
£’000
5,905
22,804
28,824
5,925
1,132
64,695
%
9%
35%
45%
9%
2%
Are Made Of This’ are the UK’s most streamed Songs
from 1981 and 1983 respectively, whilst ‘Livin’ On
A Prayer’ is not only Bon Jovi’s but also 1986’s most
streamed song. These Songs have benefited not only
from strong organic growth in streaming but also from
settlement payments from Peloton and Spotify for
historical streams unpaid.
The newer, 0-3 year Catalogues have also seen strong
growth in streaming income from the prior year.
This is largely as 2019 income from these Catalogues
is heavily weighted towards some of the biggest
streaming Songs of 2019 as they produced peak
earnings in the year. This includes Ariana Grande’s
album ‘thank u, next’, which included 4 Songs co-
written by Savan Kotecha, and pushed her to be the
third biggest streaming artist of 2019 and Lana Del
Rey’s multiple Grammy nominated ‘Norman F*cking
Rockwell’ co-written and produced by Jack Antonoff.
Streaming growth in the 3 to 10 year vintage
Catalogues grew less than the Portfolio average as
some of these Catalogues include some newer Songs
which are still in decay from peak earnings.
When acquiring Catalogues, the Company makes
various assumptions about the future income they will
generate. These assumptions include forecast market
growth, enhancement of earnings from CRB Ruling
as well as collection efficiencies and any ‘decay’ in
earnings expected where Catalogues have not yet
reached steady state income.
Analysing our Catalogues from publishing royalties,
on which the most granular data is available, streaming
revenues grew across all vintages of Catalogues as
shown below:
Typically, income from a Song is expected to ‘decay’
for 5 years following peak earnings. In total, revenues
are assumed to decay by 50-70% of their peak
earnings over that 5 year period.
Age
0-3 years
3-10 years
10+ years
Cal. 2019 YOY
% growth
+75%
+11%
+80%
In order to accurately forecast future earnings from
a Catalogue, a decay matrix is utilised to identify how
revenues from newer Catalogues will perform over
time. The level of decay applied on each Catalogue’s
revenues is dependent on:
Streaming grew particularly strongly in the Catalogues
aged over 10 years. We have acquired vintage Songs
that transcend generations of listeners and therefore
have a high proportion of streaming income so as
to benefit from the market growth in streaming. For
example, ‘Don’t Stop Believin’’ and ‘Sweet Dreams
i) how many annual periods have passed since the
Catalogue’s “peak”; and
ii) the composition of royalty streams within the
Catalogue, with mechanical physical sales shown
to decay more quickly and decline ad infinitum,
whereas more modern royalty sources such as
streaming experience less significant decay.
28
Annual Report 2020
Hipgnosis Songs Fund Limited
In 2019, the Catalogues where we expected decay
in earnings at the time of acquisition exceeded
management’s expectations by 3%; this was driven
by better than expected performance and streaming
revenues.
Accruals and Receivables
There is an inherent time lag with royalties between
the time a Song is performed and the revenue being
received by the Copyright owner. The time lag can be
as much as 24 months on international income.
A breakdown of the Revenue Accruals and
Receivables, at 31 March 2020, is set out below:
• A £12.4 million receivable relates to invoices raised
for 2019 H2 earnings which were reported in royalty
statements received prior to the financial year
end. As at the time of writing, £10.3 million of these
invoices have now been paid in full, with a further
£1.0 million received as banked cheques which are
waiting to clear and the remainder is expected to be
received within the next 30 days.
• A £29 million income accrual was recognised as
at 31 March 2020. In calculating the accrual, latest
forecast earnings are considered and adjusted for
the latest trend of earnings reported. The accrued
income comprises of:
– £7 million related to Q2 to Q4 2019 earnings for
Catalogues acquired less than 6 months before
the year end date, where royalty reporting is
still in the process of being switched over to
Hipgnosis. These accruals are based on royalty
statements received with invoices due to be
raised on completion of the Letter of Direction
being concluded.
– £12.5 million for Q1 2020 earnings where, due to the
time lag in royalty reporting, statements are not
expected to be received until 30 September 2020.
– £5.4 million related to Q3 to Q4 2019 PRO earnings
due to be reported in Q2 2020 and Q3 2020
– A further £4.1 million income accrual relating
to time-lagged international reporting on
PRO earnings. International PRO reporting has
a significant time lag due to the additional
collection time taken for PROs to collect and
distribute income from International territories.
The lag in collection is due to the nature of
collecting and processing royalties locally then
distributing them to the domestic PRO which will
in turn process and distribute these royalties to
Hipgnosis. The Company's policy is to accrue
for 6 months of international PRO earnings,
although the lag can typically result in earnings
for 12-24 months to be due.
• As of 31 May 2020, the last full reported month
prior to the publication of the annual accounts,
£1.7 million of royalty statements have been
received which are in line with the accruals.
Right To Income
As previously highlighted, on acquisition, the
Company sometimes receives a right-to-income as
part of the Catalogue acquisition, which is typically
dependent on the timing of the negotiations. The
right-to-income, which related to a period before
1 April 2019, was £13.3 million. Whilst these revenues will
not recur next year, this is expected to be partly offset
by Catalogues representing a fair value of £109 million
which received less than 12 months income due to
the timing of the acquisition.
The Company, through its Investment Adviser,
continues to actively manage Songs to increase
their revenue earning capability. During the period,
over 1,000 synchronisation deals were issued with
highlights including: Bernard Edwards’ ‘Good Times’,
‘Le Freak’ and ‘We Are Family’; Journey’s ‘Don’t Stop
Believin’’; Eurythmic’s ‘Sweet Dreams (Are Made of
This)’; Al Jackson’s ‘Green Onions’ and ‘Let’s Stay
Together’; Richie Sambora’s ‘Wanted Dead Or Alive’;
Brian Higgins’ ‘Believe’; Tom DeLonge’s ‘All The Little
Things’; Jack Antonoff’s ‘We Are Young’; The-Dream’s
many Songs with Beyoncé; and Sam Hollander’s ‘High
Hopes’, which was arguably the most synced song of
2019. Following the placement of a Song it is typical to
see an increase in consumption of that Song through
all other channels. Due to the inherent time lag with the
receipt of royalties, the revenue and valuation impact of
these placements will continue to feed into next year’s
revenues and valuations as the full value of these deals
comes through in the associated cash flows.
Hipgnosis Songs Fund Limited
Annual Report 2020
29
Strategic Report
Investment Adviser’s Report
Continued
In addition, the Investment Adviser moved seven
Catalogues to the Preferred Portfolio Administrator
securing a higher income flow-through to the Company.
I am delighted to say that every aspect of our thesis has
come to fruition and in most cases been exceeded.
During the period, adjusted Operating Costs were
£10 million. Accordingly the Ongoing Charges
decreased as a percentage of the weighted average
Operative NAV, from 1.7% to 1.52%, reflecting the
increased scale of the Company. The Board believes
that Operating Costs as a percentage of Operative
NAV will continue to fall, in particular once costs
related to acquisitions decrease when the Company
reaches stabilisation/steady state.
The Operative NAV Profit before Tax excluding total
amortisation, was £51.6 million. EPS, excluding total
amortisation of Catalogues, was 10.7p, representing
over 2x cover on our full year dividend target of 5p per
Ordinary Share.
As at 31 March 2020, net debt was £45.9 million, with
£60 million drawdown and facility headroom of
£39.5 million. Post year end the Company entered into
an agreement to increase its RCF to £150 million (and
may request a further increase of £50 million subject to
certain conditions).
In addition, on 29 May 2020, the Company announced
that it was seeking shareholder support to increase
the Company's current borrowing limit of 20% of its
Operative NAV to a maximum of 30% of its Operative
NAV. This was subsequently approved by a majority
of voting shareholders at an EGM on 11 June 2020.
Market Outlook
Our thesis when we listed 2 years ago was as follows:
1. We had access as a result of my track record
managing artists.
2. Streaming was going to grow the revenue pie
exponentially.
3. The Copyright Board would vote the songwriter
a greater share of the income.
4. We would add value with significant active
management.
5. We would add value by bringing efficiencies and
savings to collection.
6. Our strategy of recognising the songwriter would
make us the preferred buyer in the community.
30
Annual Report 2020
Hipgnosis Songs Fund Limited
We have demonstrated our access to what we
believe to be some of the finest songs of all time
by having invested total capital raised to date in a
portfolio that has a fair value of close to US$1 billion
as at 31 March 2020.
Paid subscribers to streaming services have gone from
just over 50 million paid subscribers globally at the
date of our IPO to the current 400 million today with
projections of 458 million by the end of the year and
2 billion by 2030. Very few of those new subscribers are
factored into the revenue data on which we buy the
Catalogues.
The Copyright Board passed into law last year a 44%
increase to the songwriter incrementally by the end of
2022. We have seen the 1st increment increase already
and are about to see the 2nd increment shortly.
Over 1,000 synchronisation licenses have been issued
in respect of the Company’s Songs this year, in movies,
TV commercials, TV programmes, video games and
musicals. We have also had artists record new covers
and interpolations including John Legend’s new
album which includes an interpolation of ‘Let’s Stay
Together’ and is expected to be #1 in the US this week.
In addition to this our team actively works to put our
songs on the most important playlists for both old
and new music. We are rapidly replacing traditional
publishing with Song Management to the benefit of
the songs, our songwriters and our shareholders.
We are moving Catalogues at the earliest opportunity
to our Preferred Portfolio Administrator bringing
cost savings and increased revenues which drop
immediately to the bottom line.
Our strategy has perhaps been the biggest factor in
our success. I have made my reputation and success
with artists, songwriters and producers and that is a
distinct contrast to other buyers in the marketplace.
Our articulated vision of recognising the songwriter
and pressing for reform on where the songwriter sits
in the economic equation is not only in complete
alignment with the best interests of our shareholders
but has also unequivocally made us the preferred
buyer for songwriters, artists and producers who care
about their legacy.
All of the above has led to the Company’s stellar
NAV and financial performance for the year ended
31 March 2020.
When compared with the 3 major song companies
we have achieved between 7% and 12.5% of their
revenue on between 0.5% and 0.9% of their number
of Songs. Our small Catalogue of 13,291 Songs, albeit
with an extraordinarily high ratio of success within it,
is earning £4,868 per song vs something less than
£150 per song for our competitors.
With over £1 billion of acquisitions in the pipeline
covering some of the most important Songs and artists
of all time, much of it in exclusivity already, we have
just launched a placing targeting £200 million to help
capture this pipeline and deliver further returns for our
shareholders. With all of this in mind we are very much
looking forward to the year ahead where we will work
extremely hard to offset any adverse effects of the
COVID-19 pandemic and deliver added value to our
shareholders.
It remains only for me to thank our incredible
shareholders for their support and the Songwriter,
Artist and Producer community for entrusting us with
their incomparable work that is the energy that makes
the world go around whether times are good or bad,
happy or sad.
Thank you all for joining us in our mission: To champion
the power of Songs and songwriters of the greatest
cultural importance.
Merck Mercuriadis
Founder of Hipgnosis Songs Fund Limited and Founder/CEO
of The Family (Music) Limited (Investment Adviser to
Hipgnosis Songs Fund Limited)
3 July 2020
Footnotes
1 A number of Alternative Performance Measures are used within the Annual
5 Assumption based on the income streams protection by copyright law. For
Report and can be found on page 115 (the APM page)
2 Catalogues of Songs are classified as intangible assets and measured at
amortised cost or cost less any impairment in accordance with IFRS.
3 The Directors are of the opinion that an Operative NAV provides a meaningful
alternative performance measure and the values of Catalogues of Songs are
based on fair values produced by an Independent Valuer.
4 This is a target only and there can be no assurance that the target can or will
be met and should not be taken as an indication of the Company's expected
or actual future results. Accordingly, potential investors should not place any
reliance on this target in deciding whether or not to invest in the Company or
assume that the company will make any distributions at all and should decide for
themselves whether or not the target dividend yield is reasonable or achievable.
example in the UK, copyright in written, dramatic and musical work endures for
70 years after the death of the last co-songwriter, and copyright in a sound and
music recording endures for 70 years from first production.
6 Relatively high compared to other genres given it includes the Chainsmokers
who are an electronic dance music act.
7 The increase from prior year is driven by investments in Journey, Richie Sambora
and Brendan O’Brien.
8 Including any right to income on acquisition of Catalogues.
9 Includes royalties collected from Shops, Bars and Restaurants, TV and Radio
Performance and Live Concerts.
Hipgnosis Songs Fund Limited
Annual Report 2020
31
Strategic Report
The Advisory Board
The Advisory Board assembled by Merck
Mercuriadis assists the Investment Adviser
assists in sourcing attractive investment
opportunities.
Nile Rodgers
Rock And Roll Hall Of Fame and
Songwriters Hall Of Fame Inductee,
Chairman Of The Songwriters Hall
Of Fame. Grammy award-winning
songwriter, producer and musician.
Founder of the band Chic. Co-
writer and producer of iconic hits
for David Bowie, Madonna, Duran
Duran and Daft Punk.
The-Dream
Grammy award-winning
songwriter, producer and musician.
Wrote and produced iconic hits
for Beyoncé, Jay Z, Kanye West,
Rihanna, Mariah Carey, Britney
Spears and Justin Bieber.
David Stewart
One of the most successful
Songwriters, Artists and Producers
of all time. His work with Eurythmics,
Tom Petty & The Heartbreakers,
Shakespears Sister, No Doubt,
Mick Jagger, Bob Dylan and Eric
Clapton amongst many others
defines its era.
Starrah
Amongst the most important
young songwriters having
written 14 hit singles singles thus
far including the No. 1 Songs
"Havana” by Camila Cabello
and "Girls Like You” by Maroon 5.
“Havana” was the biggest song in
the world in 2018.
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Hipgnosis Songs Fund Limited
Giorgio Tuinfort
Grammy award winning songwriter
and one of the most important
pop writers of the last 10 years. The
partner of choice for David Guetta
and Akon. He has written number
1 Songs for Sia, Gwen Stafani and
Ariana Grande.
Nick Jarjour
Manager of several songwriters
and producers, such as Starrah.
He began his music career at
16 for what was to become
the youngest partnership at
Maverick Management, a division
of Maverick Entertainment.
Bill Leibowitz
Attorney, founding partner of
Roberts, Leibowitz and Hafitz PLLC.
Former COO and General Counsel
for The Sanctuary Group (and
continued in this capacity after The
Sanctuary Group was acquired
by Universal Music Group until
Bill returned to private practice).
Specialises in intellectual property
law and during his legal career
of 35 years he has represented
many renowned artists and major
international intellectual property
companies.
Jason Flom
American music industry executive
and CEO of Lava Records and
Lava Music Publishing. Flom
previously served as Chairman and
CEO at Atlantic Records, Virgin
Records and Capitol Music Group
and is personally responsible for
launching acts such as Kid Rock,
Katy Perry and Lorde. The New
Yorker described him as “one of
the most successful record men
of the past 20 years…known for his
specialty in delivering ‘monsters’”.
Michael Naylor
Chairman of the London FTSE listed
Jupiter Green Investment Trust plc.
Advisory Board appointments
include the US$400 million Toronto-
based water private equity fund
XPV Capital LLP and the $1.3 billion
Energy Fund III of the emerging
markets private equity firm Actis.
In 2013, Michael joined the board
of the University of Cambridge
Institute for Sustainability
Leadership (CISL).
Poo Bear
Multi-platinum producer, singer
and songwriter aficionado, Jason
Boyd, better known to the masses
as Poo Bear, is a five-time Grammy
winning musical force of nature
having sold over 500 million
records worldwide. Best known for
his unforgettable collaborations
with Ed Sheeran and Justin Bieber.
Ian Montone
Attorney and founder of Monotone
Management and Third Man
Records. Manager of Jack
White, The White Stripes, Vampire
Weekend, The Shins and Danger
Mouse.
Hipgnosis Songs Fund Limited
Annual Report 2020
33
Strategic Report
Our Resources and Relationships
To achieve our purpose, Hipgnosis has to generate
attractive financial returns from our business; to
do that we need to have the right resources and
relationships in place, and to nurture them.
As a consequence of the nature of what we do –
music – we have a profound influence on communities
and society at large, and we recognise that this
privilege carries with it significant responsibilities. An
important facet of this is having a clear approach to
environmental, social and governance matters.
As a young company, we are developing our
approach and the necessary processes and systems
to manage how we do this effectively. The speed with
which we went from IPO to joining the Main Market
to being in the FTSE250, with all that each step has
entailed, has presented us with some interesting
challenges, but good ones. We know we have work
to do, but that is what growing your Company is all
about.
From the outset, the whole team has been aware
that there is a careful balance to be struck between
our creation of financial value and providing wider
social returns. This is why our ulterior motive is at the
heart of our stated purpose. That motive is to use
the importance of our unparalleled Catalogue
and financial clout as influence to improve the
songwriter’s position in the economic equation. That
concern flows into wider issues in society and the
environment, and we have set out our position at the
start of this journey in this section of our report.
Key Decisions
We view key decisions as those that are material to
the success and sustainability of Hipgnosis, but also as
those that are materially significant to any of our key
stakeholders, or that have a material impact on our
community or environment. In making a decision, we
consider the outcome based on our understanding
from our stakeholder engagement activities, as
well as the need to maintain a reputation for high
standards of business conduct.
Understandably, the major decisions for us this year
have been mostly financial (discussed in the Corporate
Governance Report on pages 48 to 49); the Company
has to grow in order to achieve its ulterior motive.
There have, however, been two very big decisions
that were not hard to make – the most important was
to confirm our support for Black Lives Matter loudly,
wholeheartedly and unequivocally, and the other
was to do our bit to help deal with the COVID-19
pandemic.
Relations with Stakeholders
The culture, and success, of the music industry
are founded on relationships. We are very much
part of this and welcome it. We have groups of
stakeholders with whom we have close and direct
relationships fundamental to our existence, they
are our shareholders, our service providers and
Advisory Board, the song writing community, and the
publishers, administrators and PROs. There are many
others who we recognise as well, even though we
may not interact with them directly – prime amongst
these are the millions who listen to music.
Hipgnosis places great importance on its relationships
with its Shareholders, as they provide us with the
resources to make the acquisitions necessary to
build our portfolio and so support song writers and
performers. We undertake the typical engagement
activities with this group and this is covered in more
detail in the Corporate Governance Report on page 49.
Hipgnosis does not have any direct employees, but
we do operate through, and work closely with, a
number of service providers including the Investment
Adviser, Administrator, Company Secretary, corporate
brokers, lawyers and other professional advisers.
The quality and timeliness of their service provision is
critical to the success of the Company. Throughout the
evolving working conditions imposed by the COVID-19
pandemic, the Company has assessed the business
continuity plans of all major service providers to assure
itself of safe working practices at this time of elevated
health and safety risk for those who undertake our
outsourced services. Each year, a detailed review of
the service providers’ performance is undertaken by
the Management Engagement Committee.
Our Investment Adviser, The Family (Music), is at the
heart of our engagement work and is responsible for
the day-to-day interactions with our stakeholders.
The Investment Adviser manages the vital input of our
Advisory Board, discussed on pages 10, 20, 23, 32 and
33. Our Investment Adviser also enables us to engage
with the writers and composers of song Catalogues
acquired to update them on management
activity around the Catalogues, explore creative
projects, create new interpolations and discuss
new commercial opportunities. An example of
this is placing songwriters, who are featured in the
Hipgnosis portfolio, in the recording studio together to
collaborate and create new compositions together.
The Investment Adviser also has regular
communications with publishers and Administrators
(such as Kobalt) and the PROs (such as ASCAP) who
administer the payment of royalties due to a songwriter
or recording artist in respect of a Song, either directly
from the end user or from royalty collection agents,
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Annual Report 2020
Hipgnosis Songs Fund Limited
in order to assess that the royalties paid through are
accurate and delivered in a timely manner.
The Company first arranged a £100 million Revolving
Credit Facility (RCF) with JPMorgan Chase Bank
(JP Morgan) as Lead Arranger. Post year end the
Company entered into an agreement to increase
its RCF to £150 million (and may request a further
increase of £50 million subject to certain conditions).
The term of the facility was also extended to 5 years.
The Directors and the Investment Adviser believe that
the Company’s assets and their associated income
streams are well suited to supporting leverage. Due to
the quality of the Catalogues acquired, the Company
has been able to obtain leverage on terms that
the Directors consider to be attractive. As a result,
acquiring Catalogues using leverage is expected to
be earnings accretive for the Company whilst not
materially impacting the risk profile of the Company.
The Investment Adviser liaises closely with JPMorgan on
a monthly and quarterly basis with regard to covenant
reporting and disclosure of all new acquisitions as they
become security to the RCF.
Community and Environmental Impacts
The Social Mandate
While the Company’s motive is to give our
shareholders a strong, reliable and uncorrelated
return on investment we also have an ‘ulterior motive’
which is to use the importance of our unparalleled
Catalogue and financial clout as influence to
improve the songwriter’s position in the economic
equation. The songwriter has been treated as the low
man or woman in the music industry for too long and
reforming how they are remunerated is an important
responsibility and in alignment with our shareholders.
We fully support TFM and its Advisory Board, who
are equally active in using that same influence as a
catalyst for an end to all discrimination including sex,
ethnicity, background or other discriminatory lenses.
We endorse their strong Anti-Racist, Anti Gender and
Anti LGBTQQIAAP bias and welcome social change
organisations and programmes which fight for equality
such as Black Lives Matter Foundation, to which the
Company has made a donation. We support the
actions taken by TFM to promote #blacklivesmatter
initiatives and calls to action and the important
achievements of the We Are Family Foundation
founded by its Advisory Board Member, Nile Rodgers,
which has created programmes to amplify the voices
of diverse youth leaders across the globe addressing
issues surrounding basic human needs including the
fight against systemic racism. We are further grateful
for the contribution of TFM Advisory Board Member,
Jason Flom, founding board member of the Innocence
Project, in his work for criminal justice reform and
his advocacy for those who have been wrongfully
convicted and imprisoned. We are also donating to
the Reva May Nash Foundation which was established
by TFM Advisory Board Member, Terius ’The-Dream’
Nash, and LaLonne Nash to honour the legacy of The-
Dream’s late mother and which assists cancer survivors
and their families facing critical need as a result of the
cost of cancer treatments.
We are proud that our sponsorship of the MITS (Music
Industry Trusts Award) has directly benefited Nordoff
Robbins whose groundbreaking work uses music as
therapy to enrich the lives of people with life limiting
illnesses, disabilities and feelings of isolation and that
TFM contributes to the talent of tomorrow via the UK’s
leading educational establishment in Performing
and Creative Arts, The BRIT School. We are happy
to support Songwriters Hall of Fame, chaired by Nile
Rodgers, and their work celebrating and developing
writing talent and also MusiCares which helps music
people in times of need. We are grateful that in the
last 16 months the ‘Nile Rodgers BRIT Awards Viewing
Party’ which was established and funded by TFM
to give our institutional investors the opportunity of
celebrating the UK Music Industry’s biggest night of
the year, has raised over £750,000 to jointly support
The BRIT School and the We Are Family Foundation
and the important work they undertake.
The Board acts responsibly with regard to social factors.
The Company invests in a multi-culturally diverse range
of Songs, with a particular emphasis on supporting
music from African-American heritage. The Company
has adopted a responsible investing policy and
legal due diligence is undertaken to make sure the
Company acquires assets from reputable sources.
The Environment
Hipgnosis’ direct environmental impact is very limited,
whilst the activities of our Investment Adviser are also
limited to running office facilities and the international
transport of key personnel.
Hipgnosis acquires, curates and creatively manages
a growing portfolio of music copyrights. As intangible
real assets, returns from these assets are generated
by the provision of Songs into a variety of third-
party channels including retail, hospitality, digital
entertainment, advertising, film and others. With the
exception of digital service providers specialised
exclusively in music entertainment (e.g. Spotify), our
assets are being consumed and monetised as an
adjunct to other, more environmentally impactful,
business activities that would occur whether our
assets were used or not.
We keep under consideration the impact on the
environment relating to the shift from the physical
to digital consumption of music. The popularity of
streaming as the preferred method of enjoying digital
entertainment has generated concerns about a
concomitant increase in the energy consumption of
the required data centre infrastructure. At the moment
there is considerable debate, with no clear evidence
either way, or the development of a consensus view,
on the relative environmental merits and impacts of the
various channels, physical and virtual, used to supply
entertainment. Indirectly, we continue to monitor the
environmental commitments made by DSPs to reduce
the energy intensity of their datacentres.
The necessity for international travel is another area
on which much attention has been focussed, brought
into stark practical relief by the necessary responses
to the pandemic. The entertainment industry
generally, and our business model specifically, are
heavily reliant on the establishment and maintenance
of personal relationships; to us, these relationships are
amongst our most valuable assets. Hipgnosis, and its
suppliers, are applying the lessons learned during the
pandemic about the various alternatives to physical
meetings and are working to keep international travel
to the level needed to sustain these key relationships.
Hipgnosis Songs Fund Limited
Annual Report 2020
35
Strategic Report
Principal Risks and Uncertainties
1. Due Diligence risk
Probability: Medium; Impact High
Description
The due diligence process that the Investment
Adviser undertakes in evaluating Catalogues for
the Company may not reveal all facts that may
be relevant in connection with such investment
opportunities and any mismanagement, fraud or
accounting irregularities on the part of any seller of
Catalogues, or their advisers, may materially affect
the integrity of the Investment Adviser’s due diligence
on investment opportunities
Mitigation
When conducting due diligence and making an
assessment regarding an investment, the Investment
Adviser and the Company’s legal and financial
advisers are required to rely on resources available to
them, including internal sources of information as well
as information provided by existing and potential sellers
of Songs. The due diligence process may at times be
required to rely on limited or incomplete information.
The Investment Adviser will select investment
opportunities to be tabled to the Directors for their
consideration in part on the basis of information and
data relating to potential investments that has been
made directly available to the Investment Adviser by
the sellers. Although the Investment Adviser will verify
and evaluate all such information and data, and
seek independent corroboration when it considers
it appropriate and reasonably available, the
Investment Adviser may not be in a position to confirm
the completeness and accuracy of such information
and data. Further, investment analysis and decisions
by the Investment Adviser may be undertaken on
an expedited basis in order to make it possible for
the Company to take advantage of short-lived
investment opportunities. Where there is lack of time
or information the Investment Adviser is dependent
upon the integrity of the management of the sellers
as regards such information and of such third parties.
The value of the investments made by the
Company may be affected by adverse reputation
accruing to performers of a song or Songs, fraud,
misrepresentation or omission on the part of the
sellers of the Songs, by parties related to the sellers
or by other parties. Such fraud, misrepresentation or
omission may increase the likelihood of an intellectual
36
Annual Report 2020
Hipgnosis Songs Fund Limited
property rights dispute relating to such Songs or
may adversely affect the valuation of the Songs in
question or may adversely affect the Company’s
ability to enforce its contractual rights in relation to
the investment.
The Company conducts a thorough review of all
due diligence conducted on potential Catalogue
purchases. However, due to a number of factors, the
Company cannot guarantee that the due diligence
investigation carried out by the Investment Adviser
and the Company’s legal and financial advisers with
respect to any investment opportunity will reveal or
highlight all relevant facts that may be necessary or
helpful to the Directors in evaluating such investment
opportunity, which may therefore lead the Directors
to decide to acquire Songs which subsequently fail
to perform in line with expectations and may have a
material adverse effect on the Company’s financial
situation.
2. Key person risk
Probability: Low; Impact High
Description
The ability of the Company to achieve its investment
objective depends on the services and reputation
of the Investment Adviser and in particular on
the experience of Merck Mercuriadis as the chief
executive of the Investment Adviser. As a result, the
success of the Company will depend largely upon the
continuing availability of Merck Mercuriadis and the
ability of the Investment Adviser’s team to meet the
strains of a rapidly growing portfolio of Catalogues.
The death, incapacity or loss of service of Merck
Mercuriadis at the Investment Adviser could have
a material adverse impact on the business of the
Company and the investments made.
Mitigation
The Company has an agreement with the
Investment Adviser which sets out the basis on
which the Investment Adviser provides services to
us. In order to meet the continuing rapid growth of
the portfolio of catalogues the Investment Adviser
is continually growing its internal and external
resource. The Investment Adviser is also supported
by the Advisory Board members (named on pages
32 to 33 of this report), who bring their considerable
industry experience to bear in support of the
Company’s investment objectives. Furthermore
the third party Administrators to the Company’s
Catalogues (e.g. Kobalt), each have an important
role to play in pursuing efficiencies in the collection
of payments and active management of the
Songs that the Company owns. The Investment
Adviser’s longstanding relationships with those third
party Administrators bring with them further music
management experience that adds support for
Merck Mercuriadis and his team in the performance
of their services to the Company.
3. Adverse change in distribution policies
and royalty rates set by Performing Rights
Organisations (PROs)
Probability: Low/Medium; Impact High
Description
PROs represent the rights and interests of publishers
and songwriters. They collect royalties, create
collection policies and set royalty rates for the use
of music copyrights. There are over 120 PROs around
the world and most of them have agreements
and frameworks in place with each other. Should
PROs alter the way that they collect royalties, or
set lower royalty rates, the Company may receive
significantly reduced revenues compared to the level
it had forecast at the time of acquiring the relevant
Catalogues or Songs. The threat to revenue as a
result of the COVID-19 pandemic is ongoing and the
Company is particularly conscious of the pressures
that may be brought to bear on the PROs to collect
and account in a timely manner.
Mitigation
The Investment Adviser actively monitors the market
and will provide the Company with any data or
intelligence of which it becomes aware, including
that relating to the COVID-19 pandemic. Updates
to the financial model will be made to reflect any
such regulatory or industry changes. In the current
opinion of the Company any royalty payment delay
resulting from the COVID-19 pandemic is likely to be
temporary over one or two semi-annual accounting
periods but it continues to assess the situation at every
opportunity.
4 Risks associated with the lack of
commercial success of individual Songs
Probability: Medium; Impact Medium
Description
The commercial success of a Song is dependent upon
the public’s response to it, which may not always be
predictable, the existence and success of competing
entertainment offerings and general economic
circumstances. Consequently, a Song may not prove
to be as popular, or as commercially successful,
as had been forecast at the time of acquisition.
Mitigation
Whilst the Company intends primarily to acquire
Catalogues containing evergreen Songs from
established recording artists and will carry out
substantial due diligence on each Catalogue
(including on the historic revenues of each Song),
there can be no guarantee that the historic
performance of a Song will continue in the future.
5. Exchange rate risks
Probability: Medium; Impact High
Description
The Company has issued share capital denominated
in Pounds Sterling and aims to pay regular dividends
in that currency. However, much of the Group’s
revenue is received in other currencies, particularly
US Dollars, and exchange rate fluctuations may
significantly affect the NAV and the ability to pay the
targeted dividends.
Mitigation
In order to mitigate this risk, the Company considers
on a regular basis the benefits and cost of hedging
this exposure. To date the Company has considered
that currency risk hedging is not advisable, given
the associated costs, investor sentiment and a
potential distraction from the core focus of acquiring
catalogues.
Hipgnosis Songs Fund Limited
Annual Report 2020
37
Strategic Report
Principal Risks and Uncertainties
Continued
6. Risks associated with streaming
Probability: Medium; Impact High
7. Operational reliance on service providers
Probability: Low; Impact Medium
Description
The Company is heavily reliant on streaming, or
an equivalent technology which generates high
volumes and rates of royalty revenues for songwriters,
continuing to be popular with consumers. Historically
the music industry has been shown to be especially
innovative, with new technology causing changes
in consumer demand and experience. Whilst it is
possible that new technology may reduce non-
synchronisation related royalty revenues, it is also
possible that technological advances would lead to
a growth in royalties as consumers’ access to music
continues to improve. Furthermore, the streaming
business model is yet to be proven in the long term
and the streaming market is vulnerable to online
domination by one DSP. Additionally, a limited
number of online streaming and online music stores
have achieved a large market share, giving them
market power to alter the prices or selection of
music offered to consumers and therefore the royalty
revenue received by the Group. Any further market
concentration could increase this risk.
Mitigation
The Company will be heavily reliant on the continuing
presence and popularity of DSPs in order to maximise
access to the consumer market. The Company is
continuously reviewing this risk and most recently
took note from the Goldman Sachs report (published
14 May 2020) that they have increased their
global streaming subscriptions estimates by 6% to
US$1.22 billion by 2030 on the back of faster-than-
expected streaming adoption and a proliferation
of new streaming services.
Description
The Company does not have any employees of its
own and relies on service providers for its routine
operations. In particular, although the ultimate
responsibility for the investment strategy lies with
the Company, the Investment Adviser is responsible
for sourcing potential opportunities and advising
the Company on acquisitions, active management
and disposals of Catalogues. The performance
of the Group is dependent on the diligence, skill
and judgment of the personnel of the Investment
Adviser, and in particular on the key executive,
Merck Mercuriadis.
The Company also depends heavily on the specialist
administrative services of the Investment Adviser, the
Preferred Portfolio Administrator and other collection
agents. In the event that these service providers
experience business disruption or cyber security
breaches, the ability of the Group to collect revenues
due may be limited.
Mitigation
The Company continually reviews the performance
of its service providers and will raise any concerns
regarding performance or efficiency should the
need arise.
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Annual Report 2020
Hipgnosis Songs Fund Limited
8. Cyber Risk
Probability: Low; Impact Medium
Description
The Company (as with all companies) continues
to be exposed to external cyber-security threats
which have the possible impact of sensitive
information leakage and cyber fraud.
Mitigation
The Company recognises the increased incidence
of cyber-security threats and has recently reviewed
its policies, procedures and defences to mitigate
associated risks, as well as those of the Investment
Adviser, Administrator and key service providers;
engaging market-leading specialists where
appropriate.
9. Risks associated with withholding taxes
Probability: Low; Impact High
Description
Withholding tax is a complex issue that requires
analysis of domestic legislation, double tax treaties
and the submission of forms and documents to
relevant payers and tax authorities.
Mitigation
Due to the inherent complexities there is a risk that
not all withholding tax has been accounted correctly.
The Company, therefore, continues to consult with
tax specialists on a regular basis to consult and review
its tax structuring arrangements.
Emerging Risks
Emerging risks are regularly considered to assess any
potential impact on the Group and to determine
whether any actions are required. Emerging risks
include those related to regulatory/legislative change
and macroeconomic and political change.
The threat to revenue as a result of the pandemic is
ongoing and the Company is particularly conscious
of the pressures that may be brought to bear on
music publishers and PROs to collect and account in
a timely manner. As time passes there is the additional
danger that the worldwide rise in unemployment will
result in a reduction of streaming subscriptions. As we
emerge from the global pandemic the Investment
Adviser will be closely monitoring the situation and will
continue to meet with the Board regularly to assess
these risks.
The risk surrounding Brexit, with the transition phase
scheduled to end at the end of this year, remains
a focus for the Company. Having considered the
implications that could possibly arise, such as a
restriction on the flow of royalties or the introduction of
a withholding tax on royalties between the UK and the
countries of the EU, and having taken advice on this
matter, the Company presently believes that Brexit will
have no material impact on the business.
Both the political risk surrounding the US Presidential
election and extended COVID-19 issues could add
additional volatility to the USD:GBP FX rate.
With 89% of the portfolio fair value and 84% of
revenues denominated in USD, an adverse movement
of the exchange rate could have a serious effect
on the Company’s performance and the portfolio
valuations.
In summary, the above risks are mitigated and
managed by the Company through continual review,
policy setting and updating of the Company’s risk
matrix at each quarterly meeting to ensure that
procedures are in place with the intention of minimising
the impact of the above-mentioned risks. The
Company relies on periodic reports provided by the
Investment Adviser and Administrator regarding risks
that the Group faces. When required, experts including
tax advisers and legal advisers will be employed to
gather information and to provide advice.
Hipgnosis Songs Fund Limited
Annual Report 2020
39
Strategic Report
Key Statements
Going Concern
The Directors monitor the capital and liquidity
requirements of the Company on a regular basis.
They have also reviewed cash flow forecasts prepared
by the Investment Adviser which are based in part
on assumptions about the future purchase of
Catalogues of Songs, and the returns from existing
Catalogues of Songs.
Viability Statement
The Directors have assessed the future prospects
of the Group.
The Board have conducted a Portfolio review for
a period of three years to 31 March 2023 which is
deemed appropriate given:
Based on these sources of information and their own
judgement, the Directors believe it is appropriate to
prepare the Consolidated Financial Statements of the
Group on a going concern basis.
(i) The long-term outlook for music publishing and
recorded music remains very positive;
(ii) The remaining copyright term of the Company’s
Portfolio as at 31 March 2020;
The Directors have considered the immediate and
potential impacts of COVID-19 on the Group as
reflected in the Viability Statement below.
(iii) The accuracy of external forecasts to support the
income projections; and
(iv) Experience to date regarding the performance
of the portfolio of Catalogues against their
acquisition business plans.
Based on past performance, the returns generated
within the investment Portfolio are expected to be
stable and predictable in both the medium and
longer term.
The Investment Adviser has prepared, and the Board
has reviewed, the Portfolio projections which forecast
the Group’s revenue, cashflow and working capital
projections over the next four years and considered
the impact of the principal risks and some of the
emerging risks of the Group.
On a rolling basis, the Directors evaluate the outcome
of the portfolio of Songs and the Group’s financial
position as a whole.
In support of this statement, the Directors have
taken into account all of the principal risks and the
emerging risks and their mitigation as identified in the
risk register that is periodically reviewed by the Board.
The most relevant potential impacts of the identified
principal risks and uncertainties on viability were
determined to be:
• Royalties due to a songwriter or recording artist
are earned globally and paid in global currencies,
the largest of which is USD and which represents
84% of the Group’s income. The Ordinary Shares
are denominated in Sterling and therefore adverse
currency movements in revenues held in currencies
40
Annual Report 2020
Hipgnosis Songs Fund Limited
The Investment Adviser and the Board have also
considered the impact of Brexit on the performance
of the Portfolio once the transition period ends on
31 December 2020. The Board is satisfied that Brexit
does not pose an existential risk to the business given
that the underlying European sources of income
collection for rights owners remain unchanged
by Brexit, the acquisition pipeline remains strong,
together with the fact that the majority of investments
are made in the US.
The Investment Adviser and the Board have also
considered the scope for the Portfolio’s performance
to be impacted by the global pandemic that was
declared by the World Health Organisation on
11 March 2020 in response to the spread of COVID-19.
An unprecedented and evolving situation, COVID-19
has had a negative impact on the global economy,
and has resulted in travel restrictions, social distancing
measures, a shutdown of the hospitality and non-
essential retail sectors, and restrictions on the off line
entertainment industry.
The Investment Adviser and the Board are actively
monitoring this and its potential effect on the
Company and its Catalogues. It is believed that
impacts will be felt in the short term as a result of
the decline in live music, commercial radio, retail
outlet licence revenues, and reduced leisure facility
offerings. Additionally, although streaming would
seem to have benefitted and compensated for any
decline in other revenue areas to date it is possible
that the increase in global unemployment may
reverse some or all of this benefit over the coming
24-36 months until employment numbers restabilise.
The Board is of the opinion that the long-term outlook
for music publishing and recorded music continues to
remain favourable. As further explained in Principal
Risks and Uncertainties on pages 36 to 39 the Directors
do not consider the effects of COVID-19 to have
had an impact on their assessment of the Company
as a going concern or the future prospects of the
Company.
other than Sterling may impact the Company’s
ability to meet its dividend targets as these will only
be paid in Sterling. As previously noted, the Group’s
strategy is currently to not employ any currency
hedging;
• Risk of delays in deployment of capital, resulting in an
adverse impact on dividend yield from cash drag;
• The due diligence process that the Investment
Adviser undertakes in evaluating Catalogues for
the Company may not reveal all facts that may
be relevant in connection with such investment
opportunities and any mismanagement, fraud/
misrepresentation or accounting irregularities on the
part of any seller of Catalogues, or their advisers,
may materially affect the integrity of the Investment
Adviser's due diligence on investment opportunities;
• The risks relating to Brexit and COVID-19, as
discussed further below;
• The risk that the Company may not meet its debt
covenants and reporting requirements with regard
to the Revolving Credit Facility (RCF) with JPMorgan
Chase Bank;
• Risk of decreasing royalty rates being paid to rights
holders, such risks not being detected or analysed
resulting in underperformance or a higher risk profile
than investors expect; and
• The ability of the Company to achieve its investment
objective depends heavily on the experience of
Merck Mercuriadis as the Investment Adviser. As
a result, the success of the Company will depend
largely upon the continuing availability of Merck
Mercuriadis. The death, incapacity or loss of service
of this key individual at the Investment Adviser could
have a material adverse impact on the business of
the Company and the investments made.
Having conducted a robust analysis of the above
scenarios and the stresses applied to each, the
Directors are satisfied that the Company is a going
concern and can meet its liabilities as they fall due
and that it remains viable over the period under
consideration (to March 2023). Notwithstanding this
assessment, forecasting for individual Catalogues can
deliver variances versus the actual revenues received,
but these variances are considered immaterial in
the context of the whole diversified Portfolio. Any risk
is therefore reduced to a low level, and the overall
forecast assumptions adopted are considered to be
reasonable and sustainable at the present time.
Hipgnosis Songs Fund Limited
Annual Report 2020
41
Strategic Report
Key Statements
Continued
Section 172(1) Statement
Section 172 of the UK Companies Act 2006 applies
directly to UK domiciled companies. Nonetheless the
AIC Code requires that the matters set out in section
172(1) are reported on by all companies, irrespective
of domicile. This requirement does not conflict with
Guernsey company law.
section 172. The Directors consider that they have
acted in good faith in the way that would be most
likely to promote the success of the Company for
the benefit of its members as a whole, while also
considering the broad range of stakeholders who
interact with and are impacted by our business.
The Directors have had regard for the matters
set out in section 172(1)(a)-(f) of the Companies
Act 2006 when performing the duties set out in
The table below indicates where the relevant
information is in this annual report that demonstrates
how we act in accordance with the requirements
of s.172(1).
Impact of the Company’s operations on the
community and environment
Introduction from Merck Mercuriadis, page 4
Hitting the Key Notes in Our Musical World, pages 16 to 19
Investment Adviser’s report pages, 12 to 13, 24 to 31
Our Purpose and Business Model, pages 20 to 21
Our Song Acquisition Strategy, page 23
Our Resources and Relationships pages, 34 to 35
Principal Risks and Uncertainties pages, 36 to 39
The Company’s reputation for high standards
of business conduct
Introduction from Merck Mercuriadis, page 4
The Chair’s Statement pages, 10 to 11
Hitting the Key Notes in Our Musical World pages, 16 to 19
Our Purpose and Business Model pages, 20 to 21
Our Song Acquisition Strategy, page 23
Our Resources and Relationships, pages 34 to 35
Principal Risks and Uncertainties, pages 36 to 39
Board Leadership and Company Purpose, pages 48 to 49
The need to act fairly as between members
of the Company
The Chair’s Statement, pages 10 to 11
Our Investment Objective and Policy, page 22
Our Resources and Relationships, pages 34 to 35
Principal Risks and Uncertainties, pages 36 to 39
Viability Statement, pages 40 to 41
Board Leadership and Company Purpose, pages 48 to 49
Report of the Directors, page 67
s172 matter
Likely consequences of any decision in
the long term
Introduction from Merck Mercuriadis, page 4
The Chair’s Statement, pages 10 to 11
Hitting the Key Notes in Our Musical World, pages 16 to 19
Investment Adviser’s report, pages 12 to 13, 24 to 31
Our Purpose and Business Model, pages 20 to 21
Our Investment Objective and Policy, page 22
Our Song Acquisition Strategy, page 23
Our Resources and Relationships, pages 34 to 35
Principal Risks and Uncertainties, pages 36 to 39
Viability Statement, pages 40 to 41
Board Leadership and Company Purpose, pages 48 to 49
Division of Responsibilities, pages 50 to 52
Composition, Succession and Evaluation, page 53
Report of the Nomination Committee, pages 56 to 57
Audit, Risk and Internal Control, pages 58 to 59
Report of the Audit and Risk Management
Committee, pages 60 to 63
Report of the Management Engagement
Committee, page 64
The interests of the Company's employees
Hipgnosis Songs Fund Limited does not have
any employees
The need to foster the Company’s business
relationships with suppliers, customers and others
Introduction from Merck Mercuriadis, page 4
The Chair’s Statement, pages 10 to 11
Hitting the Key Notes in Our Musical World, pages 16 to 19
Investment Adviser’s report pages, 12 to 13, 24 to 31
Our Purpose and Business Model, pages 20 to 21
Our Investment Objective and Policy, page 22
Our Song Acquisition Strategy, page 23
Our Resources and Relationships, pages 34 to 35
Principal Risks and Uncertainties, pages 36 to 39
Viability Statement, pages 40 to 41
Board Leadership and Company Purpose, pages 48 to 49
Report of the Audit and Risk Management
Committee, pages 60 to 63
Report of the Management Engagement
Committee, page 64
42
Annual Report 2020
Hipgnosis Songs Fund Limited
Governance
Contents
44 Corporate Governance Report
44 Compliance Statement
44 Application of AIC Code Principles
47 Other Key Governance Statements
48 Board Leadership and Company Purpose
50 Division of Responsibilities
53 Composition, Succession and Evaluation
54 Board of Directors
56 Report of the Nomination Committee
58 Audit, Risk and Internal Control
60 Report of the Audit and Risk
Management Committee
64 Report of the Management
Engagement Committee
65 Report on Remuneration
67 Report of the Directors
67 General Information
67 Principal Activities
68 Results and Dividend
68 Share Capital
68 Shareholdings of the Directors
69 Directors’ Authority to Buy Back Shares
69 Directors’ and Officers’ Liability Insurance
69 Substantial Shareholdings
70 Articles of Incorporation
70 AEOI Rules
71 Directors’ Responsibilities Statement
73 Independent Auditor’s report
Hipgnosis Songs Fund Limited
Annual Report 2020
43
Governance
Corporate Governance Report
Compliance Statement
Hipgnosis Songs Fund Limited is a company registered
in Guernsey and has a Premium Listing on the Main
Market in London. The Company became a member
of the AIC on 22 August 2018.
The Board has considered the Principles and
Provisions of the AIC Code of Corporate Governance
(AIC Code). The AIC Code addresses the relevant
Principles and Provisions set out in the UK Corporate
Governance Code (the UK Code), as well as setting
out additional Provisions on issues that are of specific
relevance to the Company.
The Board considers that reporting against the
Principles and Provisions of the AIC Code, which has
been endorsed by the Financial Reporting Council
and the Guernsey Financial Services Commission,
provides more relevant information to shareholders.
By reporting against the AIC Code we are meeting
our obligations under the UK Code (and associated
disclosure requirements under paragraph 9.8.6 of
the Listing Rules) and as such do not need to report
further on issues contained in the UK Code which are
irrelevant to us.
Throughout the year ended 31 March 2020, the
Company has applied the Principles (as explained
on pages 44 to 46), and complied with the relevant
Provisions of the AIC Code.
The AIC Code is available on the AIC website
(www.theaic.co.uk). It includes an explanation
of how the AIC Code adapts the Principles and
Provisions set out in the UK Code to make them
relevant for investment companies.
Application of the AIC Code Principles
The AIC Code, and the underlying UK Code, have
placed increased emphasis on “apply and explain”
with regard to the Principles of the Codes.
Our explanations about how we have applied
application of the main principles of the AIC Code
can be found as follows:
Board leadership and Company purpose
Principle A. A successful company is led by an
effective Board, whose role is to promote the
long-term sustainable success of the company,
generating value for shareholders and contributing
to wider society.
Principle B. The Board should establish the
company’s purpose, values and strategy, and
satisfy itself that these and its culture are aligned.
All Directors must act with integrity, lead by
example and promote the desired culture.
Principle C. The Board should ensure that the
necessary resources are in place for the company
to meet its objectives and measure performance
against them. The Board should also establish a
framework of prudent and effective controls, which
enable risk to be assessed and managed.
Strategic Report, pages 2 to 42
Governance, pages 44 to 72
Strategic Report, pages 2 to 42
Board Leadership and Company Purpose,
pages 48 to 49
Our Resources and Relationships, pages 34 to 35
Principal Risks and Uncertainties, pages 36 to 39
Section 172(1) Statement, page 42
Board Leadership and Company Purpose,
pages 48 to 49
Audit, Risk and Internal Control, pages 58 to 59
Report of the Audit and Risk Management
Committee, pages 60 to 63
Principle D. In order for the company to meet its
responsibilities to shareholders and stakeholders,
the Board should ensure effective engagement with,
and encourage participation from, these parties.
Our Resources and Relationships, pages 34 to 35
Section 172(1) Statement, page 42
Board Leadership and Company Purpose,
pages 48 to 49
44
Annual Report 2020
Hipgnosis Songs Fund Limited
Division of responsibilities
Principle F. The chair leads the Board and is
responsible for its overall effectiveness in directing
the company. They should demonstrate objective
judgement throughout their tenure and promote
a culture of openness and debate. In addition, the
chair facilitates constructive Board relations and the
effective contribution of all Non-executive Directors,
and ensures that Directors receive accurate, timely
and clear information.
Principle G. The Board should consist of an
appropriate combination of Directors (and, in
particular, independent Non-executive Directors)
such that no one individual or small group of
individuals dominates the Board’s decision making.
Principle H. Non-executive Directors should have
sufficient time to meet their Board responsibilities.
They should provide constructive challenge, strategic
guidance, offer specialist advice and hold third party
service providers to account.
Principle I. The Board, supported by the company
secretary, should ensure that it has the policies,
processes, information, time and resources it needs
in order to function effectively and efficiently.
Composition, succession and evaluation
Principle J. Appointments to the Board should
be subject to a formal, rigorous and transparent
procedure, and an effective succession plan should
be maintained. Both appointments and succession
plans should be based on merit and objective criteria
and, within this context, should promote diversity of
gender, social and ethnic backgrounds, cognitive
and personal strengths.
The Chair’s Statement, pages 10 to 11
Board Leadership and Company Purpose,
pages 48 to 49
Division of Responsibilities, pages 50 to 52
Division of Responsibilities, pages 50 to 52
Board Directors, pages 54 to 55
The Chair’s Statement, pages 10 to 11
Board Leadership and Company Purpose,
pages 48 to 49
Division of Responsibilities, pages 50 to 52
Report of the Audit and Risk Management
Committee, pages 60 to 63
Report of the Management Engagement
Committee, page 64
Our Resources and Relationships, pages 34 to 35
Principal Risks and Uncertainties, pages 36 to 39
Section 172(1) Statement, page 42
Board Leadership and Company Purpose,
pages 48 to 49
Division of Responsibilities, pages 50 to 52
Audit, Risk and Internal Control, pages 58 to 59
Report of the Audit and Risk Management
Committee, pages 60 to 63
Report of the Management Engagement
Committee, page 64
Report of the Nomination Committee, pages 56 to 57
Hipgnosis Songs Fund Limited
Annual Report 2020
45
Governance
Corporate Governance Report
Continued
Composition, succession and evaluation
Principle K. The Board and its committees should
have a combination of skills, experience and
knowledge. Consideration should be given to the
length of service of the Board as a whole and
membership regularly refreshed.
Principle L. Annual evaluation of the Board should
consider its composition, diversity and how effectively
members work together to achieve objectives.
Individual evaluation should demonstrate whether
each director continues to contribute effectively.
Audit, risk and internal control
Principle M. The Board should establish formal and
transparent policies and procedures to ensure the
independence and effectiveness of external audit
functions and satisfy itself on the integrity of financial
and narrative statements.
Principle N. The Board should present a fair,
balanced and understandable assessment of the
company’s position and prospects.
Board of Directors, pages 54 to 55
Report of the Nomination Committee, pages 56 to 57
Audit, Risk and Internal Control, pages 58 to 59
Report of the Audit and Risk Management
Committee, pages 60 to 63
Strategic Report, pages 2 to 42
Audit, Risk and Internal Control, pages 58 to 59
Report of the Audit and Risk Management
Committee, pages 60 to 63
Financial Statements, pages 84 to 113
Principle O. The Board should establish procedures to
manage risk, oversee the internal control framework,
and determine the nature and extent of the principal
risks the company is willing to take in order to achieve
its long-term strategic objectives.
Principal Risks and Uncertainties, pages 36 to 39
Viability Statement, pages 40 to 41
Audit, Risk and Internal Control, pages 58 to 59
Report of the Audit and Risk Management
Committee, pages 60 to 63
Notes to the Financial Statements, pages 88 to 113
Remuneration
Principle P. Remuneration policies and practices
should be designed to support strategy and promote
long-term sustainable success.
Principle Q. A formal and transparent procedure
for developing policy [on] remuneration should
be established. No director should be involved in
deciding their own remuneration outcome.
Principle R. Directors should exercise independent
judgement and discretion when authorising
remuneration outcomes, taking account of
company and individual performance, and wider
circumstances.
46
Annual Report 2020
Hipgnosis Songs Fund Limited
Strategic Report, pages 2 to 42
Board Leadership and Company Purpose,
pages 48 to 49
Report on Remuneration, pages 65 to 66
Report on Remuneration, pages 65 to 66
Report on Remuneration, pages 65 to 66
Other key governance statements
The Directors confirm that:
Going concern
The Going concern statement is made on page 40.
Viability
The Viability Statement is made on pages 40 to 41.
Further details of the Board’s assessment of the
viability of the Company are set out in Audit, Risk and
Internal Control on pages 58 to 59. The Principal Risks
and Uncertainties are set out on pages 36 to 39.
Robust assessment of principal risks
The Board has undertaken a robust assessment of
the Group’s principal and emerging risks, including
those that would threaten its business model, future
performance, solvency or liquidity. This annual report
identifies the procedures to identify these risks, see
Audit, Risk and Internal Control on pages 58 to 59 and
Principal Risks and Uncertainties on pages 36 to 39 for
further information on how these risks are identified
and managed.
Review of risk management and internal control
A continuing process for identifying, evaluating and
managing the risks the Company faces has been
established and the Audit and Risk Committee has
reviewed the effectiveness of the internal control
systems. Further details are set out in the Audit, Risk
and Internal Control on pages 58 to 59.
Continuing appointment of the Investment Adviser
The continuing appointment of The Family (Music)
Limited as the Investment Adviser, on the terms
agreed, is in the interests of the shareholders as a
whole. Further details on the basis for this conclusion,
and the terms, are set out in the Management
Engagement Committee report on page 64.
Fair, balanced and understandable
The annual report and accounts taken as a whole
are fair, balanced and understandable and provide
the information necessary for shareholders to assess
the Company’s performance, business model
and strategy. See the Repor ot the Audit and Risk
Committee on pages 60 to 63 for further information
on how this conclusion was reached.
Section 172(1)
The Section 172(1) statement is made on page 42.
It provides cross-references to the required detail set
out throughout this annual report.
Hipgnosis Songs Fund Limited
Annual Report 2020
47
Governance
Board Leadership and Company Purpose
Key Decisions
Key decisions are defined as both those that are
material to the Company, but also those that are
significant to any of the key stakeholder groups as
discussed above.
In making the following key decisions the Board
considers the outcome from its stakeholder
engagement as well as the need to maintain a
reputation for high standards of business conduct
and the need to act fairly between the members
of the Company.
Dividends
The Board has given consideration to FRC
announcements regarding dividends, viability and
going concern and is proud to declare that the
commitment made in the Prospectus to pay total
dividends to Shareholders of 5p per Ordinary Share
with respect to the financial year has been achieved.
Share Issues, Migration to a Premium Listing on
the Main Market and FTSE 250 Index promotion
On 25 September 2019 the Company migrated to
a Premium Listing on the Main Market of the London
Stock Exchange, and on 16 October 2019 the
Company issued 231,000,000 C Shares which were
converted on 10 January 2020 to 226,287,600 Ordinary
Shares. Following conversion, the total number of
Ordinary Shares in issue is 615,851,887. The Company
engaged with the Corporate Broker who advised
on specific areas of compliance throughout each
process. The Board was delighted that the Company’s
successful growth was evidenced by promotion to the
FTSE250 Index on 20 March 2020, within 22 months of
the Company’s launch.
Leverage Facility
The RCF was concluded in order to act as a bridge of
financing between equity raises in order to maintain
the pace of acquisition of Writer Catalogues,
manage capital more efficiently and to continue
to provide access to investment opportunities and
stable returns for Shareholders.
The Board
The Company is led and controlled by a Board of
Directors, which is collectively responsible for the long-
term success of the Company. It does so by acting in
the interests of the Company, creating and preserving
value and has as its foremost principle to act in the
interests of Shareholders.
The Directors believe that the composition of the
Board is a fundamental driver of its success as the
Board must provide strong and effective leadership
of the Company. The current Board was selected,
as their biographies illustrate, to bring a breadth of
knowledge, skills and business experience to the
Company. The Directors’ details are listed on pages 54
to 55 which set out their range of investment, financial
and business skills and experience.
Culture and Values
The Board recognises that tone and culture are
set from the top, and that every interaction with
the Company’s stakeholders, whether the Board’s
interaction with its Shareholders, or one of The Family
Music’s junior analyst’s day to day business dealings
with the Company’s service providers, all have a
great influence on the sustainability of long-term
shareholder value. The importance of sound ethical
values and behaviours is crucial to the ability of the
Company to achieve its objectives successfully.
The Board individually and collectively seeks to act
with diligence, honesty and integrity and expects the
same values from its service providers. It encourages
its members to express differences of perspective
and to challenge views and opinions but always
in a respectful, open, cooperative and collegiate
fashion. The Board encourages diversity of thought
and approach and chooses its members with this
approach in mind.
The Company’s culture emulates that of the
Investment Adviser, with a focus on long lasting
relationships with its investor base; investment
excellence delivered with integrity; and world-class
leadership backed by extensive industry knowledge
that will help create a song-writer community rapport
and a diverse, innovative, multi-cultured portfolio of
song assets.
48
Annual Report 2020
Hipgnosis Songs Fund Limited
of all relevant market commentary on the Company
by the Investment Adviser and the Corporate Broker.
The Directors and Investment Adviser receive informal
feedback from analysts and investors, which is
presented to the Board by the Corporate Broker. The
Company Secretary also receives informal feedback
via queries submitted through the Company’s
website and these are addressed by the Board, the
Investment Adviser or the Company Secretary, where
applicable.
Financial results, events, corporate reports, webcasts
and fact books are all stored in the Investor Relations
section of our website: https://www.hipgnosissongs.
com/investorinfo
Conflicts of interest
A Director has a duty to avoid a situation in which
he or she has, or can have, a direct or indirect
interest that conflicts, or possibly may conflict, with
the interests of the Company. The Board requires
Directors to regularly declare all appointments
and other situations that could result in a possible
conflict of interest and has adopted appropriate
procedures to manage and, if appropriate, approve
any such conflicts. The Board is satisfied that there
is no compromise to the independence of those
Directors who have appointments on the Boards of, or
relationships with, companies outside the Company.
Whistleblowing
The Board has considered the AIC Code
recommendations in respect of arrangements by
which staff of the Investment Adviser or Administrator
may, in confidence, raise concerns within their
respective organisations about possible improprieties
in matters of financial reporting or other matters.
It has concluded that adequate arrangements are
in place for the proportionate and independent
investigation of such matters and, where necessary,
for appropriate follow-up action to be taken within
their organisation.
Acquisitions
As at 31 March 2020, the Company had acquired
54 Catalogues for a total of approx. £679 million. These
are principally Writer Catalogues but also include
sound recording royalties from artists and producers.
Each Catalogue was reviewed in detail by the
Portfolio Committee and the Board at the 23 ad-hoc
meetings called for this purpose. On every occasion,
in advance of the meeting, a comprehensive
investment paper and financial model was presented
to the Board by the Investment Adviser along with
an Independent Valuation Report. A majority of the
Board approved all Catalogues acquired.
Relations with Shareholders
Relationships with our other stakeholders is discussed
on pages 34 to 35.
The Board welcomes Shareholders’ views and
places great importance on communication with
its Shareholders. The Company reports formally to
Shareholders in a number of ways; regulatory news
releases through the London Stock Exchange’s
Regulatory News Service, and announcements issued
in response to events or routine reporting obligations.
In addition, the Company’s website contains
comprehensive information, including Company
notifications, share information, financial reports,
investment objectives and policy, investor contacts
and information on the Board and corporate
governance. Shareholders and other interested
parties can subscribe to email news updates by
registering online on the website. In its first full financial
year, the Company hosted a Capital Markets Day on
10 September 2019 and plans to do so annually. It is
the Company’s intention to provide shareholders
with a chance to engage with and learn more
about the opportunities for rights owners in a growing
market for music entertainment and the strategic
themes which the Company offers exposure to
(e.g. technology within the value chain).
The Investment Adviser has regular contact with
Shareholders and any views that they may have are
communicated to the Board. All shareholders have
access to the Chairman and the other Directors, who
are available to discuss any questions which they
may have in relation to the running of the Company.
All major shareholders were given the opportunity
to meet with the Chairman and Committee Chairs
during the year. The Board is also kept fully informed
Hipgnosis Songs Fund Limited
Annual Report 2020
49
Governance
Division of Responsibilities
Duties and Responsibilities
The Board is responsible for the determination of the
Company’s Investment Objective and Policy and has
overall responsibility for maximising the Company’s
success by directing and supervising the affairs of
the business and meeting the appropriate interests
of Shareholders and relevant stakeholders, and also
ensuring the protection of investors. A summary of the
matters reserved for the Board is as follows:
• strategic matters;
• risk assessment and management including
reporting, compliance, governance, monitoring
and control and financial reporting;
• statutory obligations and public disclosure;
• declaring Company dividends;
• managing and assessing the performance of the
Company’s advisers and service providers; and
• other matters having a material effect on the
Company.
The Directors have access to the advice and services
of the Administrator, who also assist the Board in
ensuring that Board procedures are followed and
the Board complies with the Companies Law and
applicable rules and regulations of the GFSC and the
London Stock Exchange. Where necessary, in carrying
out their duties, the Directors may seek independent
professional advice and services at the expense of
the Company. The Company maintains appropriate
Directors’ and Officers’ liability insurance in respect of
legal action against its Directors on an on-going basis.
The Board’s responsibilities for the Annual Report are
set out in the Directors’ Responsibilities Statement on
pages 71 to 72. The Board is also responsible for issuing
appropriate Interim Reports and other price-sensitive
public reports.
Chair
The Chair leads the Board and is responsible for
its overall effectiveness in directing the Company.
The Chair is appointed in accordance with the
Company’s Articles of Incorporation. In considering the
independence of the Chair, the Board took note of the
provisions of the AIC Code relating to independence
and has determined that Mr Sutch is an independent
director. The Board is satisfied that the Chair has no
relationships that may create a conflict of interest
between his interests and those of shareholders.
50
Annual Report 2020
Hipgnosis Songs Fund Limited
Senior Independent Director
Mr Burger, an existing independent Non-Executive
Director, was appointed as Senior Independent
Director on 9 September 2019.
Independence
The Board considers that every Director is independent.
Commitment
One of the key criteria the Company uses when
selecting non-executive Directors is their confirmation
prior to their appointment that they will be able to
allocate sufficient time to the Company to discharge
their responsibilities in a timely and effective manner.
Meetings and advice
The Board meets at least four times a year for regular
quarterly Board meetings. At each meeting the Board
follows a formal agenda that covers the business to
be discussed. In addition, a considerable number of
ad-hoc Board meetings, and Board Portfolio and/or
Asset Management Committee meetings (as detailed
on page 51), have been held regularly since the
Company’s launch. The Directors meet regularly with
the senior management employed by the Investment
Adviser both formally and informally to ensure the
Board remains regularly updated on all issues. The
Board also has regular contact with the Administrator,
and the Board requires to be supplied in a timely
manner with information by the Investment Adviser,
the Company Secretary and other advisers in a form
and of a quality to enable it to discharge its duties.
The Company has adopted a share dealing code
for the Board and seeks to ensure compliance by
the Board and relevant personnel of the Investment
Adviser and other third party service providers with
the terms of the share dealing code.
Attendance
The Board formally met four times during the year for
scheduled Board meetings and the ad-hoc Board
meetings were called in relation to specific events
or to issue approvals, often at short notice, and did
not necessarily require full attendance. Each Board
member receives a comprehensive Board pack
prior to each meeting which incorporates a formal
agenda together with supporting papers for items
to be discussed at the meeting. Directors who
have been unable to attend a meeting have,
without exception, given the Chair their views and
comments on matters to be discussed, in advance.
In addition to their meeting commitments, the Directors also liaise with the Investment Adviser whenever
required and there is regular contact outside the Board meeting schedule.
Attendance is further set out below:
Director
Paul Burger 2
Sylvia Coleman 3, 4
Simon Holden
Andrew Sutch 1
Andrew Wilkinson
Scheduled
Board
Meetings
4 of 4
1 of 1
4 of 4
4 of 4
4 of 4
Ad-hoc
Board
Meetings
21 of 23
8 of 8
21 of 23
23 of 23
20 of 23
Committee
of the
Board
Audit and Risk
Management
Committee
Portfolio
Committee
Meetings
6 of 7
1 of 2
7 of 7
6 of 7
6 of 7
3 of 3
2 of 2
3 of 3
3 of 3
3 of 3
22 of 22
10 of 10
18 of 22
19 of 22
20 of 22
Total 5
Meetings
attended
56 of 59
22 of 23
53 of 59
55 of 59
53 of 59
1 Chair
2 Senior Independent Director
3 Ms Coleman was appointed to the Board from 27 November 2019 at which point three Board Meetings had already taken place
4 Ms Coleman was appointed to the Audit and Risk Committee, Portfolio Committee from 27 November 2019, at which point one Audit
and Risk Committee Meeting, 12 Portfolio Committee Meetings, 6 Board Committee Meetings and 15 ad-hoc Board Meetings had already
taken place
5 Directors work extensively with the Investment Adviser, brokers and administrator on strategy, acquisition, operating and reporting related
matters between the formal Board meetings recorded herewith. Compared with typical investment trusts, this highlights the more executive
level of management and oversight commensurate with the intrinsic opportunities and risks of this high-growth, intangible asset class,
A quorum is comprised of any two or more members of the Board from time to time, to perform administrative
and other routine functions on behalf of the Board, subject to such limitations as the Board may expressly
impose on this committee from time to time.
Committees of the Board
The Board believes that it and its committees
have an appropriate composition and blend of
backgrounds, skills and experience to discharge
their duties effectively. The Board is of the view
that no one individual or small group dominates
decision-making. The Board keeps its membership,
and that of its committees, under review to ensure
that an acceptable balance is maintained, and that
the collective skills and experience of its members
continue to be refreshed. It is satisfied that all Directors
have sufficient time to devote to their roles and that
undue reliance is not placed on any individual.
Each committee of the Board has written terms of
reference, approved by the Board, summarising its
objectives, remit and powers, which are available on
the Company’s website (www.hipgnosissongs.com)
and are reviewed on an annual basis. Each
Committee has access to such external advice
as it may consider appropriate.
All committee members are provided with an
appropriate induction on joining their respective
committees, as well as on-going access to training.
Minutes of all meetings of the committees are made
available to all Directors and feedback from each
of the committees is provided to the Board by the
respective committee Chair at the next Board meeting.
The Chair of each committee attends the AGM to
answer any questions on their committee’s activities.
The Board and its committees are supplied with
regular, comprehensive and timely information in a
form and of a quality that enables them to discharge
their duties effectively. All Directors are able to
make further enquiries of the Investment Adviser or
Administrator whenever necessary and have access
to the services of the Company Secretary.
Nomination Committee
The Nomination Committee activities are contained
in the Report of the Nomination Committee on pages
56 to 57.
Audit and Risk Management Committee
The Audit and Risk Management Committee activities
are contained in the Report of the Audit and Risk
Management Committee on pages 60 to 63.
Management Engagement Committee
The Management Engagement Committee activities
are contained in the Report of the Management
Engagement Committee on page 64.
Hipgnosis Songs Fund Limited
Annual Report 2020
51
Governance
Division of Responsibilities
Continued
Asset Management Committee
The Asset Management Committee is chaired
by Mr Sutch and also comprises Mr Wilkinson,
Mr Holden and Mr Burger, all of whom held office
throughout the year, and Ms Coleman who joined
on 27 November 2019. The principal duties of the
Asset Management Committee are to consider the
ongoing management and revenue maximisation of
the Catalogues of Songs acquired by the Company,
which includes performing the following functions:
• making any final decision required to be made as
to the allocation of assets that might arise under the
arrangements with portfolio administrators;
• making any final decision required to be made
as to whether or not to enter into or terminate any
contract with a portfolio administrator or other
royalty collection agent;
• reviewing and, if considered appropriate,
approving any updates to the strategies to
maximise revenue collection from the Portfolio; and
• making any final decision required to be made as
to whether or not to pursue any recommended
revenue maximisation opportunity which exceeds
£500,000 in revenues, provided that such decisions
will be made in a timely manner and the Asset
Management Committee shall use all reasonable
endeavours to effect such decisions within the
timetables proposed by the Investment Adviser.
The Asset Management Committee meets on an ad
hoc basis when requested on reasonable prior notice
from the Investment Adviser. The quorum for any
meeting of the Asset Management Committee shall
be at least one Director. All Board members shall use
reasonable endeavours to attend each meeting of
the Asset Management Committee.
Remuneration Committee
The Remuneration Committee’s activities are
contained in the Report on Remuneration on
pages 65 to 66.
Portfolio Committee
The Portfolio Committee is chaired by Mr Burger and
also comprises Mr Sutch, Mr Wilkinson and Mr Holden,
all of whom held office throughout the year, and
Ms Coleman who joined on 27 November 2019.
The principal duties of the Portfolio Committee are
to undertake the following functions:
• making the final decision as to the acquisition of
Catalogues of Songs based on a comprehensive
investment paper and financial model as presented
by the Investment Adviser along with an Independent
Valuation Report;
• determining, in collaboration with the Company’s
legal, tax or corporate finance advisers, the most
appropriate means for acquiring the Catalogues
of Songs in the event that such Catalogues of Songs
are not directly transferable, but are available in
an intermediated form (such as a special purpose
company, or similar) including determining any
adjustments to the price if necessary or appropriate;
• making enquiries, at any stage, of the Investment
Adviser with regards to the pipeline opportunities
identified by the Investment Adviser from time to
time;
• making the final decision as to the disposal of any
Catalogue of Songs; and
• determining, in collaboration with its legal, tax or
corporate finance advisers, the most appropriate
means for disposal of the Catalogues of Songs
in the event that such Catalogues of Songs
are not directly transferable but are held in an
intermediated form (such as a special purpose
company, or similar).
The Portfolio Committee meets on an ad hoc basis
when requested on reasonable prior notice from the
Investment Adviser. The quorum for any meeting of
the Portfolio Committee shall be at least one Director.
All Board members shall use reasonable endeavours
to attend each meeting of the Portfolio Committee.
52
Annual Report 2020
Hipgnosis Songs Fund Limited
Composition, Succession and Evaluation
Board Tenure and Re-election
No member of the Board has served for longer
than nine years as the Company was incorporated
on 8 June 2018. As such no issue has arisen to be
considered by the Board with respect to long tenure.
In accordance with the AIC Code, when and if
any Director shall have been in office (or on re-
election would at the end of that term have been
in office) for more than nine years the Company will
consider further whether there is a risk that such a
Director might reasonably be deemed to have lost
independence through such long service. The Board
recognises that Directors serving nine years or more
may appear to have their independence impaired.
However, the Board may nonetheless consider
Directors to remain independent and will provide
a clear explanation with future Annual Report
and Consolidated Financial Statements as to
their reasoning.
Directors are appointed under letters of appointment,
copies of which are available at the registered office
of the Company. The Board considers its composition
and succession planning on an on-going basis.
The Company’s Articles of Incorporation specify
that each of the Directors shall retire and may offer
themselves for re-election at each AGM of the
Company.
All of the Directors are non-executive and are each
considered independent for the purposes of Chapter
15 of the Listing Rules.
Hipgnosis Songs Fund Limited
Annual Report 2020
53
Governance
Biographies
Board of Directors
Andrew Sutch
Chair, Non-executive Independent
Director and chair of the Asset
Management Committee
Paul Burger
Senior Non-executive Independent
Director, chair of the Portfolio
Committee and chair of the
Nomination Committee
Andrew Wilkinson
Non-executive Independent Director
and chair of the Audit and Risk
Management Committee
Tenure: 1 year 10 months
Tenure: 1 year 9 months
Tenure: 1 year 10 months
Experience
Mr Sutch is a corporate lawyer and
a consultant to Stephenson Harwood
LLP. He was a partner of that firm for
over 30 years and its senior partner for
10 years. He has extensive experience
in advising investment funds and
investment managers. He is chair of
JPMorgan Claverhouse Investment
Trust Plc and European Opportunities
Trust Plc, and a council member of the
Royal Academy of Dramatic Art.
Experience
Mr Wilkinson is a chartered accountant
who has worked at Peat Marwick
Mitchell and merchant bankers
Leopold Joseph. Mr Wilkinson was a
founder of the Promo Group, which
managed the business affairs of the
Rolling Stones. In 1981, he became a
partner of Prince Rupert Loewenstein,
providing business management
services to clients in the entertainment
and sports sectors. Mr Wilkinson is co-
founder and CEO of Music Plus Sport
Ltd. and its subsidiary Live at the Races
Limited. The group specialises in large-
scale concerts at sporting events.
Further, Mr Wilkinson was founder and
chief executive of Kingstreet Tours
Limited, a company that was in the
forefront of concert tour production
for over 30 years and delivered
worldwide concert tours for artists
including The Rolling Stones, Pink Floyd,
Sir Elton John, Robbie Williams and
Shakira. Mr Wilkinson is a member
of the fundraising committee and
former treasurer of Nordoff Robbins,
a charity that uses music therapy in the
treatment and care of autistic children.
Experience
Mr Burger’s career spans more than
40 years working with music artists of
very diverse backgrounds in a variety
of locations. Having previously served
as President, Europe, Middle East, and
Africa for Sony Music Europe, his last
corporate posting after having worked
for 27 years in senior management
positions within Sony Music (including
chair & chief executive officer of Sony
Music UK & Ireland; president Sony Music
Canada; VP Marketing Sony Music
Europe), Mr Burger founded SohoArtists
in 2003, a boutique artist management
company focused largely on new
and developing talent. In addition to
artist management, SohoArtists runs a
consultancy arm for artists, labels and
entertainment companies.
From 2012-2018 Mr Burger served
as chair of the board of governors
of England’s The BRIT School for
Performing Arts & Technology, a state-
funded school sponsored by the British
music industry focussed on providing
training for careers in the creative
industries, and he continues to serve
as a governor of the school. Some of
the school’s famous graduates include
Adele, Jessie J, Rizzle Kicks, Leona
Lewis, Rex Orange County, and Katie
Melua. Furthermore, Mr Burger is a
long-time director of The BRIT Trust Ltd
where he recently was appointed as
Chair of the Finance Committee, and
continues to serve as a trustee of the
University of Pennsylvania Foundation
(UK) Ltd. He recently stood down after
16 years as a board member of the
Music Managers Forum (UK) and Chair
of their Governance and Nominations
Committee.
54
Annual Report 2020
Hipgnosis Songs Fund Limited
Founder
Simon Holden
Non-executive Independent Director
and chair of the Remuneration
Committee
Sylvia Coleman
Non-executive Independent Director
(Appointed 27 November 2019)
Tenure: 1 year 10 months
Tenure: 4 months
Experience
Mr Holden, a Guernsey resident,
brings board experience from both
private equity and portfolio company
operations roles at Candover
Investments and then Terra Firma
Capital Partners. Since 2015, Mr Holden
has become an independent director
to listed investment companies, many
focused on alternative assets (HICL Plc.,
Trian Investors 1 Limited, Merian
Chrysalis Investment Company Limited
and JPMorgan Global Core Real
Assets Limited), private equity funds
as well as private company and States
of Guernsey owned Trading Assets
boards.
Mr Holden holds the DipIoD in
Company Direction from the Institute
of Directors, graduated from the
University of Cambridge with an MEng
and MA Cantab. in Manufacturing
Engineering and is an active member
of Guernsey’s GIFA, NED Forum and
IP Commercial Group.
Experience
Ms Coleman, initially a lawyer with
Stephenson Harwood, has since spent
most of her career in the Music Industry
serving, across 25 years, as Senior
Vice President of Legal and Business
Affairs at EMI Music and prior to that,
Sony Music where she was responsible
for overseeing the Company’s
International and European legal
and business affairs respectively. Most
recently, she co-founded BPureSounds,
a boutique urban music IP rights
company which launched in early
2019. Additionally Ms Coleman was
a Non-Executive Director of FTSE 250
bwin.party digital entertainment plc
until its acquisition by GVC Holdings plc.
She also served as a long-standing
Chair of Chickenshed Theatre
Company, a not for profit music and
theatre company for young people
celebrating diversity and inclusion
and was on the Board of Reprieve, a
charitable human rights organisation.
She also co-founded Ceroc Enterprises,
a dance company franchising a
contemporary dance phenomenon
across the UK.
Merck Mercuriadis
Founder of Hipgnosis Songs Fund
Limited and its Investment Adviser,
The Family (Music) Ltd.
Mr Mercuriadis is also the CEO and
managing partner of Hipgnosis
Songs Ltd, an artist management
firm label based in London and
Los Angeles.
Experience
Mr Mercuriadis is the manager
of music legend Nile Rodgers
and the former manager of
several notable award winning
artists and songwriters including
Sir Elton John, Guns’N’Roses, Iron
Maiden, Morrissey, Pet Shop Boys,
Mary J. Blige, Jane’s Addiction,
Diane Warren and Justin Tranter
to name a few. Additionally,
Mercuriadis is notable for serving
from 1986-2007 as Director and
CEO of The Sanctuary Group PLC,
a major management company,
an independent record label, a
merchandise company (Bravado)
and a booking agency (Helter
Skelter now CAA UK) based in
London, New York and Los Angeles.
Hipgnosis Songs Fund Limited
Annual Report 2020
55
Governance
Report of the Nomination Committee
An informal evaluation of each Director and the Board
was carried out by the Board as a whole, and the
non-executive directors discussed, without the Chair
present, the Chair’s performance. A formal, written
process will be introduced for the current year and
plans are being made for the performance of external
board evaluations in the future.
The evaluation concluded that the Board is performing
satisfactorily and is acquitting its responsibilities well
in the areas reviewed which incorporated: investment
matters, Board composition and independence,
relationships and communication, shareholder
value, knowledge and skills, Board processes and the
performance of the Chair. The Board believes that the
current mix of skills, experience, knowledge and age
of the Directors is appropriate to the requirements of
the Company.
The Nomination Committee has also reviewed the
composition, structure and diversity of the Board, the
independence of the Directors and whether each of
the Directors has sufficient time available to discharge
their duties effectively. The Committee and the Board
confirm that they believe that the Board has an
appropriate mix of skills and backgrounds and that
all Directors should be considered as independent
in accordance with the provisions of the AIC Code
and have the time available to discharge their duties
effectively. Accordingly, the Board recommends that
Shareholders vote in favour of the re-election of all
Directors at the forthcoming AGM.
In considering appointments to the Board, the
Nomination Committee takes into account the
ongoing requirements of the Company and evaluates
the balance of skills, experience, independence,
knowledge and time commitments of each
candidate. Appointments are therefore made on
personal merit and against objective criteria with the
aim of bringing new skills and different perspectives
to the Board whilst taking into account the existing
balance of knowledge, experience and diversity.
The Board also believes that diversity of experience
and approach, including gender diversity, amongst
Board members is of great importance and it is the
Company’s policy to give careful consideration to
issues of Board balance and diversity when making
new appointments.
Membership
The Nomination Committee was established on
9 September 2019 and is chaired by Mr Burger and
also comprises Mr Wilkinson, Mr Holden and Mr Sutch,
all of whom held office since establishment, and
Ms Coleman who joined on 27 November 2019. The
Nomination Committee will meet at least once a year
pursuant to its terms of reference.
Remit
The Nomination Committee’s remit is to review regularly
the structure, size and composition of the Board, to
give full consideration to succession planning for
Directors, to keep under review the leadership needs
of the Company and be responsible for identifying and
nominating, for the approval of the Board, candidates
to fill Board vacancies as and when they arise.
The Chair is not permitted to chair the Nomination
Committee at such times when dealing with the
appointment of their successor.
During the year Ms Coleman was appointed as
a Director. Her recruitment took place before the
Company migrated to a Premium Listing on the Main
Market and, after the process was completed, the
decision was taken to appoint Ms Coleman with effect
from 27 November 2019. In making the appointment
the Board took into account the profile and experience
of the existing Board and the factors to be considered
in appointing new directors.
Board performance and evaluation
In accordance with Provision 26 of the AIC Code, the
Board is required to undertake a formal and rigorous
evaluation of its performance on an annual basis.
The Board believes that annual evaluations are helpful
and provide a valuable opportunity for continuous
improvement. Internal evaluation of the Board,
individual Directors and the Chair is carried out under
the mandate of the Nomination Committee.
56
Annual Report 2020
Hipgnosis Songs Fund Limited
The Board recognises the progress being made to
improve the governance of listed companies by
increasing both gender and racial diversity amongst
the Directors who serve these businesses. The
appointment of Ms Coleman on 27 November 2019
is part of the Board’s commitment to support the
recommendations of the Hampton Alexander and
Parker Reviews. We acknowledge our responsibility
to strive to meet the targets set for us now we are a
member of the FTSE 250 – this became a requirement
for us a couple of weeks before the end of the period
covered by this report. Additional female and ethnic
minority candidates will be considered by the Board
as part of its next phase of recruitment designed to
improve its own composition in 2020.
Directors regularly meet with the senior management
employed by the Investment Adviser both formally
and informally to ensure that the Board remains
regularly updated on all issues. All members of the
Board are members of professional bodies and serve
on other Boards, which ensures they are kept abreast
of the latest technical developments in their areas
of expertise. New Directors receive an induction on
joining the Board. The Board arranges for presentations
from the Investment Adviser, the Company’s brokers
and other advisers on matters relevant to the
Company’s business. The Board assesses the training
needs of Directors on an annual basis.
On behalf of the Nomination Committee,
Paul Burger
Chair of the Nomination Committee
3 July 2020
Hipgnosis Songs Fund Limited
Annual Report 2020
57
Governance
Audit, Risk and Internal Control
Internal Control and Financial Reporting
The Directors acknowledge that they are responsible
for establishing and maintaining the Group’s system
of internal controls and reviewing its effectiveness.
Internal control systems are designed to manage
rather than eliminate the failure to achieve business
objectives and can only provide reasonable but not
absolute assurance against material misstatements or
loss. The Directors can confirm they have carried out
a robust assessment of the principal and emerging
risks facing the Company, including those that would
threaten its business model, future performance,
solvency or liquidity. The key procedures which have
been established to provide internal control are:
• the Board has delegated the day to day operations
of the Group to the Administrator, Investment
Adviser and Preferred Portfolio Administrator;
however, it remains accountable for all functions
it delegates;
• the Board clearly defines the duties and
responsibilities of the Company’s agents and
advisers and appointments are made by the Board
after due and careful consideration. The Board
monitors the on-going performance of such agents
and advisers and will continue to do so through the
management engagement committee;
• the Board monitors the actions of the Investment
Adviser at regular Board meetings and is also given
frequent updates on developments arising from the
operations and strategic direction of the underlying
borrowers; and
• the Administrator provides administration and
company secretarial services to the Company.
The Administrator maintains a system of internal
control on which it reports to the Board.
The Company’s service providers demonstrated a
resilience of controls under COVID-19. The service
providers activated their business continuity plans
and their regular working patterns have changed
to remote working, though with all staff continuing
to assume their day-to-day responsibilities remotely.
The Board has reviewed the need for an internal
audit function and has decided that the systems
and procedures employed by the Administrator
and Investment Adviser, including their own internal
controls and procedures, provide sufficient assurance
that an appropriate level of risk management and
58
Annual Report 2020
Hipgnosis Songs Fund Limited
internal control, which safeguards Shareholders’
interests and the Group’s assets, is maintained. An
internal audit function specific to the Company is
therefore considered unnecessary, as explained
on page 62.
Internal controls over financial reporting are designed
to provide reasonable assurance regarding the
reliability of financial reporting and the preparation
of financial statements for external reporting
purposes. The Administrator and Investment
Adviser both operate risk controlled frameworks
on a continual ongoing basis within a regulated
environment. The Administrator undertakes an ISAE
3402: Assurance Report on Controls at a Service
Organisation audit annually which is provided to the
Board when finalised. The Administrator also formally
reports to the Board quarterly through a compliance
report. The Investment Adviser formally reports to the
Board quarterly, including relevant updates regarding
their policies and procedures, and also engages
with the Board on an ad-hoc basis as required.
No weaknesses or failing within the Administrator or
Investment Adviser have been identified.
The systems of control referred to above are designed
to ensure effectiveness and efficient operation,
internal control and compliance with laws and
regulations. In establishing the systems of internal
control, regard is paid to the materiality of relevant
risks, the likelihood of costs being incurred and costs
of control. It follows, therefore, that the systems of
internal control can only provide reasonable but
not absolute assurance against the risk of material
misstatement or loss. This process has been in place
for the year under review and up to the date of
approval of this Annual Report and Consolidated
Financial Statements. It is reviewed by the Board
and is in accordance with the FRC’s internal control
publication: Guidance on Risk Management, Internal
Control and Related Financial and Business Reporting.
Principal and Emerging Risks
Each Director is fully aware of the risks inherent in the
Company’s business and understands the importance
of identifying, evaluating and monitoring these risks.
The Board has adopted procedures and controls
that enable it to carry out a robust assessment of
the risks facing the Company, manage these risks
within acceptable limits and to meet all of its legal
and regulatory obligations. The Board thoroughly
considers the process for identifying, evaluating
and managing any significant risks faced by the
Company on an ongoing basis and these risks are
reported and discussed at Board meetings. It ensures
that effective controls are in place to mitigate these
risks and that a satisfactory compliance regime
exists to ensure all applicable local and international
laws and regulations are upheld. For each material
risk, the likelihood and consequence are identified,
management controls and frequency of monitoring
are confirmed and results reported and discussed at
the quarterly Board meetings.
The Group’s assets consist mainly of intangible
assets representing copyright interests in musical
compositions and associated intellectual property
rights. The primary focus is on what the Investment
Adviser considers to be proven Songs from well-known
songwriters with a sufficient proven track record of
producing royalty income to enable them to be
viewed as evergreen. In those instances where the
acquisition of a Catalogue is made with different
criteria in mind, for example where in the opinion of
the Investment Adviser the acquisition is strategic and
may facilitate the acquisition of a more significant
Catalogue in due course, the Board considers the
exceptional circumstances carefully before reaching
a decision on the acquisition in question. On some
occasions such an acquisition may be made in the
knowledge that the forecast revenue steam will be
below the target revenue stream for the portfolio as
a whole.
The Company’s principal and emerging risks are
related to market conditions in the music business in
general, but also the particular circumstances of the
Catalogues of Songs in which it is invested. The Board
and the Investment Adviser seek to mitigate these
risks through active asset management initiatives and
carrying out due diligence work on potential targets
before entering into any investments.
The principal risks and uncertainties of the Company,
as set out on pages 36 to 39, are continually
monitored by the Board, with assistance from the
Investment Adviser and its Advisory Board.
Hipgnosis Songs Fund Limited
Annual Report 2020
59
Governance
Report of the Audit and
Risk Management Committee
Responsibilities
The main duties of the Audit Committee are:
• reviewing and monitoring the integrity of the
Financial Statements of the Group and any formal
announcements relating to the Group’s financial
performance, reviewing significant financial
reporting judgements contained in them;
• reporting to the Board on the appropriateness
of the Group’s accounting policies and practices
including critical judgement areas;
• reviewing the valuations of the Group’s investments
as prepared and presented in report format by the
Independent Valuer, and making a recommendation
to the Board on value of the Group’s investments;
• meeting regularly with the external auditor to review
their proposed audit plan and the subsequent audit
report and assess the effectiveness of the audit
process and the levels of fees paid in respect of
both audit and non-audit work;
• making recommendations to the Board in relation
to the appointment, re-appointment or removal
of the external auditor and approving their
remuneration and the terms of their engagement;
• monitoring and reviewing annually the auditor’s
independence, objectivity, expertise, resources,
qualification and non-audit work;
• considering annually whether there is a need for the
Group to have its own internal audit function;
• monitoring the internal financial control and risk
management systems on which the Group is reliant;
• reviewing and considering the Corporate
Governance Code, the AIC Code, the FRC
Guidance on audit committees; and
• reviewing the risks facing the Group and monitoring
the risk matrix.
The Audit Committee reports formally its findings
to the Board, identifying any matters on which it
considers that action or improvement is needed, and
make recommendations on the steps to be taken.
The external auditor is invited to attend the Audit
Committee meetings as the Directors deem
appropriate and at which they have the opportunity
to meet with the Audit Committee without
representatives of the Investment Adviser or the
Administrator being present at least once per year.
The Audit and Risk Management Committee (the
Audit Committee), chaired by Mr Wilkinson, operates
within clearly defined terms of reference (which are
available from the Company’s website) and includes
all matters indicated by Disclosure and Transparency
Rule 7.1, the AIC Code and the UK Code. Its other
members are Mr Sutch, Mr Burger and Mr Holden,
all of whom held office throughout the year, and
Ms Coleman who was appointed on 27 November
2019. At the time of incorporation of the Company
there were only four members of the Board and it
was considered appropriate by the Chair of the
Audit Committee that all Board members should join
the Audit Committee. The expansion of the Board,
the Company having recently joined the FTSE 250, is
under review by the Nomination Committee and the
membership of the Audit Committee will be adjusted,
if considered advisable, following that review.
The Audit Committee members have considerable
financial and business experience and the Board
has determined that the membership as a whole has
sufficient recent and relevant sector and financial
experience to discharge its responsibilities given that the
Chair is a chartered accountant and other members
have significant business experience, both within the
music industry and in the asset management industry.
The duties of the Audit Committee include reviewing the
Annual Report and Consolidated Financial Statements
and the Interim Report, the system of internal controls,
and the terms of appointment of the Company’s
independent auditor together with their remuneration.
It is also the formal forum through which the auditor will
report to the Board of Directors. The objectivity of the
auditor is reviewed by the Audit Committee which will
also review the terms under which the external auditor
is appointed to perform non-audit services and the fees
paid to them or their affiliated firms.
60
Annual Report 2020
Hipgnosis Songs Fund Limited
Financial Reporting
The primary role of the Audit Committee in relation to
financial reporting is to review with the Administrator,
the Investment Adviser and the external auditor
the appropriateness of Interim Reports and Annual
Reports, concentrating on, amongst other matters:
• assessment of the independence of the external
auditor;
• assessment of the effectiveness of the external audit
process as described below; and
• review of the Group’s key risks and internal controls.
• the quality and acceptability of accounting policies
and practices;
• the clarity of the disclosures and compliance with
financial reporting standards and relevant financial
and governance reporting requirements;
• material areas in which significant judgements have
been applied or there has been discussion with
both any external consultant as appointed by the
Investment Adviser and the external auditor;
• whether the Annual Report, taken as a whole, is fair,
balanced and understandable and provides the
information necessary for Shareholders to assess the
Group’s performance, business model and strategy;
and
• any correspondence from regulators in relation to
the Group’s financial reporting.
To aid its review, the Audit Committee considers
reports from the Investment Adviser and also reports
from the external auditor on the outcomes of
their annual audit. The Audit Committee supports
PricewaterhouseCoopers CI LLP in displaying the
necessary professional scepticism their role requires.
Meetings
During the year ended 31 March 2020, the Audit
Committee met formally on three occasions. The
matters discussed at those meetings include:
• review of the terms of reference of the Audit
Committee for approval by the Board;
• review of the accounting policies and format
of the Interim Financial Statements;
• detailed review of the Interim Report and
recommendation for approval by the Board
including the going concern basis and the
viability statement;
• review of the Group’s risk matrix;
• review and approval of the audit plan and final
Audit Committee report of the auditor;
• discussion and approval of the fee for the
external audit;
Primary Areas of Judgement and Estimation
The Company has issued share capital denominated
in Pounds Sterling and aims to continue paying
regular dividends in that currency. However, much
of the Group’s revenue is received in other currencies,
particularly US Dollars, and exchange rate fluctuations
may affect the NAV and the ability to pay the
targeted dividends.
The Board, alongside the Investment Adviser,
is involved in various estimates and judgements,
as noted below:
• Forecasting income for each Catalogue that
is acquired in order to appraise investment
opportunities. These judgements are based on
detailed reports and management accounts
prepared by the Investment Adviser showing
historical earnings as well as industry projections,
published by verified third parties. For the income
that is driven by ‘active management’, judgements
are made based on a Song by Song assessment
by the Investment Adviser;
• Accruals, as estimates, are booked in the financial
period are based on historical analysis from royalty
statements and a prudent calculation is derived.
These calculations are reviewed by the Board with
the Investment Adviser and the Auditors;
• The estimated Amortisation booked per annum
is based on 20 years which is the Company’s
judgement of the useful life of the asset; and
• Indicators of impairment are considered on a
timely basis and a judgement would be made as
to whether a Catalogue should be written down.
Hipgnosis Songs Fund Limited
Annual Report 2020
61
Governance
Report of the Audit and
Risk Management Committee
Continued
Risk Management
The Board is accountable for carrying out a robust
assessment of the principal risks facing the Group,
including those threatening its business model, future
performance, solvency and liquidity. On behalf of the
Board, the Audit Committee reviews the effectiveness
of the Group’s risk management processes. The
Group’s risk assessment process and the way in which
significant business risks are managed is a key area
of focus for the Audit Committee. The work of the
Audit Committee is driven primarily by the Company’s
assessment of its principal risks and uncertainties as
set out in the Corporate Governance Report. The
Audit Committee receives reports from the Investment
Adviser and Administrator on the Company’s risk
evaluation process and reviews changes to significant
risks identified.
Internal Audit
The Audit Committee continues to review the need
for an internal audit function and has decided
that the systems and procedures employed by the
Administrator and the Investment Adviser, including
their own internal controls and procedures, provide
sufficient assurance that an appropriate level of risk
management and internal control, which safeguards
Shareholders’ interests and the Group’s assets, is
maintained. An internal audit function specific to the
Company is therefore considered unnecessary.
External Audit
PricewaterhouseCoopers Cl LLP has been appointed
as the Company’s external auditor with Mr Roland
Mills as the lead audit partner who can serve as such
until the year ended 31 March 2024 in accordance
with normal audit partner rotation arrangements at
which point a new audit partner will be introduced
The non-audit services provided by PwC were:
Nature of service
Fee (£)
Threat(s) to independence
Safeguard(s) in place
Reporting
accountant
services
£147,500
Agreed upon
procedures
£10,000
There may exist a self-interest threat
where the fees from non audit services
are in excess of the statutory audit
fee or otherwise considered material
to PwC.
A self review threat may exist where
the audit team places reliance on
work performed by the reporting
accountant team.
There may exist a self-interest threat
where the fees from non audit services
are in excess of the statutory audit fee
or otherwise considered material to
PwC.
A self review threat may exist where
the audit team places reliance on
work performed by the reporting
accountant team.
The total non audit fees for the year
are less than the total proposed audit
fee for the year ended 31 March 2020,
and the total fees paid to the Group
for both audit and non audit services
is immaterial to total PwC CI firm
revenue.
The reporting accountant services
rendered are delivered and supervised
by a separate independent team,
including a partner and manager
fully independent of the audit team,
to ensure appropriate segregation.
The total non audit fees for the year are
less than the total audit fee for the year
ended 31 March 2020, and the total
fees paid to the Group for both audit
and non audit services is immaterial to
total PwC firm revenue.
The agreed upon procedures
undertaken relate to the C-Share
conversion and are generally
considered in the normal course of
business when converting C-shares, with
it being common practice on having
the auditors to undertake this service.
£157,500
The fees charged by PwC for the financial year ended 31 March 2020 are further detailed in Note 20.
62
Annual Report 2020
Hipgnosis Songs Fund Limited
to the Company. The Companies Law requires the
reappointment of the external auditor to be subject
to Shareholders’ approval at the AGM.
• a report from the external auditor describing its
arrangements to identify, report and manage any
conflicts of interest; and
The objectivity of the external auditor is reviewed by
the Audit Committee which also reviews the terms
under which the external auditor may be appointed
to perform non-audit services and the level of non-
audit fees. In order to safeguard external auditor
independence and objectivity, the Audit Committee
ensures that any other advisory and/or consulting
services provided by the external auditor does
not conflict with its statutory audit responsibilities.
Advisory and/or consulting services will generally
only cover reviews of interim financial statements, tax
compliance and capital raising work. Any non-audit
services conducted by the external auditor outside
of these areas require the consent of the Audit
Committee before being initiated.
The external auditor may not undertake any work
for the Company in respect of preparation of the
financial statements, preparation of valuations used
in financial statements, provision of investment
advice, taking management decisions or advocacy
work in adversarial situations.
The Audit Committee regularly monitors non audit
services being provided by PricewaterhouseCoopers
Cl LLP to ensure there is no impairment to their
independence or objectivity. The only non-audit
services provided by PricewaterhouseCoopers Cl LLP
related to the role as reporting accountant on the
migration of the Company to a Premium Listing on
the Main Market and the agreed upon procedures
in respect of the conversion of the C Shares into
Ordinary Shares. All approved non-audit services are
discussed and sanctioned at meetings of the Audit
Committee.
Notwithstanding such services, the Audit Committee
considers PricewaterhouseCoopers Cl LLP to be
independent of the Company and that the provision
of such non-audit services is not a threat to the
objectivity and independence of the conduct of the
audit as appropriate safeguards are in place.
• the extent of non-audit services provided by the
external auditor.
To assess the effectiveness of the external auditor,
the Audit Committee reviewed:
• the external auditor’s fulfilment of the agreed audit
plan and variations from it;
• reports highlighting the major issues that arose
during the course of the audit; and
• feedback from the Investment Adviser and
Administrator evaluating the performance of the
audit team;
• arrangements for ensuring independence and
objectivity; and
• the robustness of the auditor in handling key
accounting and audit judgements.
The Audit Committee is satisfied with
PricewaterhouseCoopers Cl LLP’s effectiveness and
independence as external auditor having considered
the degree of diligence and professional scepticism
demonstrated by them. As such, the Audit Committee
has not considered it necessary this year to conduct
a tender process for the appointment of its external
auditor. Having carried out the review described
above and having satisfied itself that the external
auditor remains independent and effective, the Audit
Committee has recommended to the Board that
PricewaterhouseCoopers Cl LLP be reappointed as
external auditor for the year ending 31 March 2021.
A resolution to reappoint PricewaterhouseCoopers Cl
LLP as independent external auditor to the Company
will be proposed at the forthcoming AGM.
Subject to the COVID-19 restrictions being lifted, the
Chair of the Audit Committee will be available at the
AGM to answer any questions about the work of the
Audit Committee.
On behalf of the Audit Committee,
To fulfil its responsibility regarding the independence of
the external auditor, the Audit Committee considered:
Andrew Wilkinson
Chair of the Audit and Risk Management Committee
• the audit personnel in the audit plan for the
3 July 2020
current period;
Hipgnosis Songs Fund Limited
Annual Report 2020
63
Governance
Report of the Management Engagement
Committee
Investment Advisory Agreement
The Board is responsible for the determination of
the Company’s Investment Objective and Policy
and has overall responsibility for its activities. The
Company has, however, entered into an Investment
Advisory Agreement dated 27 June 2018 with the
Investment Adviser under which it will advise the
Group in relation to the acquisition, holding, disposal
and management of Songs, whether organised into
Catalogues or otherwise, and provide the subsidiaries
with certain assets related and other ongoing
services.
The Group is responsible for paying an advisory fee
to the Investment Adviser in return for their services,
and, subject to the fulfilment of certain conditions,
an additional performance fee.
In accordance with Listing Rule 15.6.2(2)R and having
formally appraised the performance and resources of
the Investment Adviser, in the opinion of the Directors
the continuing appointment of the Investment
Adviser on the terms agreed is in the interests of the
Shareholders as a whole.
On behalf of the Management Engagement
Committee,
Andrew Sutch
Chair of the Management Engagement Committee
3 July 2020
The Management Engagement Committee is
chaired by Mr Sutch and also comprises Mr Burger,
Mr Holden and Mr Wilkinson, all of whom held office
from 27 September 2019 when the the Management
Engagement Committee was formed, and
Ms Coleman who was appointed on 27 November
2019. The Management Engagement Committee
will meet at least once a year pursuant to its terms
of reference.
The Management Engagement Committee
provides a formal mechanism for the review of the
performance of the Investment Adviser and the
Company’s other advisers and service providers.
It carries out this review through consideration of
a number of objective and subjective criteria and
through a review of the terms and conditions of the
advisers’ appointments with the aim of evaluating
performance, identifying any weaknesses and
ensuring value for money for the Shareholders.
64
Annual Report 2020
Hipgnosis Songs Fund Limited
Report on Remuneration
of the Audit and Risk Management Committee and
the Portfolio Committee. These increases sought to
begin to recognise the considerable commitment
and involvement of the Directors, outside the basic
cycle of the quarterly Board meetings, in attending
to committee and ad hoc Board work largely related
to the review of new Catalogue acquisitions and
oversight of the development of the Investment
Adviser’s operational infrastructure. This level of
commitment can be seen in the number of meetings
shown in the attendance table on page 51 and
is expected to be maintained as the Company
continues to grow and to acquire new Catalogues.
The Directors intend to confirm their commitment to
their roles by increasing over time their investment
in Ordinary Shares of the Company, in accordance
with their personal circumstances and individual
investment arrangements.
The Directors expect that the levels of remuneration
will be reviewed annually in the light of the expected
level of the commitment and involvement of the
Directors outside of regular Board meetings. For
any change in Directors remuneration, it would be
necessary to seek shareholder consent to increasing
or removing the remuneration cap contained within
the Company’s Articles of Incorporation.
During the year ended 31 March 2020 the Directors’
remuneration was as follows:
31 March
2020
£
Paul Burger
61,250
Sylvia Coleman (appointed 27 Nov 2019) 17,295
56,250
Simon Holden
64,375
Andrew Sutch
61,250
Andrew Wilkinson
31 March
2019
£
24,374
–
28,455
36,586
32,521
The Directors’ remuneration, excluding disbursements,
which include the additional payment for the C Share
issue referred to below, for the year amounted to
£260,420 with outstanding fees of £nil due to the
Directors at 31 March 2020 (31 March 2019: £121,936
with outstanding fees of £nil due at 31 March 2019).
In light of the work undertaken for the C Share issue
an additional payment of £10,000 was granted to
each of the then Directors following the successful
completion of the C Share launch on 8 October 2019.
Hipgnosis Songs Fund Limited
Annual Report 2020
65
The Remuneration Committee is chaired by
Mr Holden and also comprises Mr Burger, Mr Sutch and
Mr Wilkinson, all of whom held office from 9 September
2019 when the Remuneration Committee was formed,
and Ms Coleman who was appointed on 27 November
2019. Mr Holden takes the Remuneration Committee
Chair for the first time for the Company. However,
Mr Holden already sits on the Remuneration Committees
of several other listed company committees and chairs
the Risk, Market & Risk, Management Engagement
committees of some of them. In addition, Mr Holden
has experience of negotiating executive compensation
schemes from his previous career as a private equity
Investment Director.
The Remuneration Committee is responsible for
recommending and monitoring the level and structure
of remuneration for all the Directors, taking into
account the time commitments and responsibilities
of Directors and any other factors which it deems
necessary, including the recommendations of the AIC
Code. The Remuneration Committee will meet at least
once a year pursuant to its terms of reference.
Directors’ Remuneration
The level of remuneration of the Directors reflects
the time commitment and responsibilities of their
roles. Directors also get reimbursed for out of pocket
expenses, including travel. At 1 April 2019 the Chair
was entitled to annual remuneration of £45,000. The
Chair of the Audit and Risk Management Committee
and the Portfolio Committee were entitled to annual
remuneration of £40,000. The other Directors were
entitled to annual remuneration of £35,000. The
Remuneration Committee resolved that, with effect
from 1 July 2019, the annual remuneration for each
Director would be increased to £50,000, with an
additional £7,500 per annum for the Chair and an
additional £5,000 per annum for each of the Chairs
Governance
Report on Remuneration
Continued
Compared with the majority of investment
companies, the more operational nature of the
Company’s business of acquiring, integrating and
overseeing the effective management of its song
rights places an unusually high and sustained
workload on the Directors. In addition, the Company
invests in intangible real assets which inherently
require more nuanced scrutiny through due diligence,
custodianship and business intelligence reporting
than more traditional tangible assets. The schedule of
the Directors’ attendance is testament to the breadth
and depth of investment, strategy and other project
work they have supported or lead during the year.
Whilst deal volumes invariably will not be consistent
every quarter, in between periods of investment
activity the Directors are closely involved in planning
work to evolve the Company’s capital structure to
scale its asset base and improve shareholder returns.
The Directors reflected on the lessons learned about
the Board’s role over the first 18 months in which
the Company was established and successfully
grown in several phases and, in December 2019,
the Remuneration Committee commissioned
Tyzack Associates in London (after considering at
least 3 further options) to perform an independent
remuneration review of appropriate levels and models
for Directors’ fees to take account of these factors.
Tyzack has no other connection with the Company or
any Directors.
Tyzack Associates were appointed to the role on
account of their combined experience of advising on
independent directorship roles within both investment
companies, as well as listed trading companies where
Board involvement extends to governance and
oversight within more of an operational environment.
This combination better reflects the nature of the
Company’s business model, the time and risk
commitments of the Directors in fulfilling their roles, as
well as their more integrated role in self-managing the
Company’s rapid growth and development.
Following conclusion of the independent
remuneration review by Tyzack Associates, the
Remuneration Committee resolved on 28 April 2020 to
grant an additional payment to each of the Directors
of £25,000, and £9,000 to Ms Coleman reflecting her
appointment on 27 November 2019, in consideration
of the variable elements of workload during FY2020.
The additional payment was paid following the year
end and is included as an operating cost of the
Company. The Directors have each undertaken to
reinvest the net amount of these additional payments
(after tax) in Ordinary Shares of the Company.
Tyzack Associates also recommended an
increase in the Directors’ normal annual fees.
This, if implemented, would require Shareholder
approval to a variation of the remuneration cap
contained in the Articles. Accordingly, it is proposed
that major Shareholders will be consulted on a
proposal to increase Directors’ fees and, following
and dependent on that consultation, a resolution
regarding fees will be proposed at the AGM.
On behalf of the Remuneration Committee,
Simon Holden
Chair of the Remuneration Committee
3 July 2020
66
Annual Report 2020
Hipgnosis Songs Fund Limited
Report of the Directors
The Directors hereby present the Annual Report
and Audited Consolidated Financial Statements
for the Group, Hipgnosis Songs Fund Limited and
its subsidiaries, for the year ended 31 March 2020.
Please note that the reporting periods are not entirely
comparable as the results at 31 March 2019 were
reported for a shorter period, from incorporation on
8 June 2018. This Report of the Directors should be
read together with the Strategic Report on pages 2 to
42 and the Corporate Governance Report on
pages 40 to 66, which are both incorporated into this
Report of the Directors by reference.
General Information
The Company is a company limited by shares
incorporated on 8 June 2018 under the Companies
Law. The Company’s registration number is 65158, and
it has been registered with the GFSC as a registered
collective investment scheme. The Company’s
Ordinary Shares were admitted to trading on the
Specialist Fund Segment of the London Stock
Exchange on 11 July 2018, and migrated to a Premium
Listing on the Main Market of the London Stock
Exchange on 25 September 2019. The Company was
promoted to the FTSE 250 Index on 20 March 2020.
The registered office address is Floor 2, Trafalgar Court,
Les Banques, St Peter Port, Guernsey, GY1 4LY.
Principal Activities
The investment objective of the Group is to provide
Shareholders with an attractive and growing level
of income, together with the potential for capital
growth, from investment in a portfolio of Songs
and their associated musical intellectual property
rights. The Group’s principal activities are to invest
in a diverse Portfolio of Song Catalogues, to collect
income generated across a wide variety of sources
from the ongoing exploitation of those copyrights,
and to manage the development of those assets as
intensively as possible to broaden awareness and
stimulate consumption.
Provision of information elsewhere in this
annual report.
Business Review
A review of the Group’s business and its likely future
development is provided in the Strategic Report on
pages 2 to 42.
Financial Risk Management Policies and
Objectives
Financial risk management policies and objectives
are disclosed in Note 16 on pages 106 to 109.
Section 172(1) Statement
The Section 172(1) statement is made on page 42.
Going Concern and Viability Statements
Going Concern and Viability Statements are made
on pages 40 to 41.
Principal and Emerging Risks
Principal and emerging risks are discussed in the
Strategic Report on pages 36 to 39.
Subsequent Events
Significant subsequent events have been disclosed in
Note 21 on page 113.
Alternative Performance Measures
The Directors believe that the performance indicators
detailed in the Financial Highlights, on page 9, and
Financial Review on pages 27 to 30, will provide
Shareholders with sufficient information to assess how
effectively the Company is meeting its objectives. The
alternative performance measures are described in
the table on page 115.
Listing Requirements
Since being admitted to the Official List of the UK Listing
Authority, as maintained by the FCA, the Company has
complied with the applicable Listing Rules.
Hipgnosis Songs Fund Limited
Annual Report 2020
67
Governance
Report of the Directors
Continued
Results and Dividends
The results for the year are set out in the Consolidated Financial Statements on pages 84 to 87.
During the year, and since the year end, the Directors declared the following dividends:
Dividend
Quarter Ended
Date of Declaration
Payment Date
Interim dividend
30 June 2019
24 June 2019
30 August 2019
Interim dividend
30 September 2019
24 October 2019
29 November 2019
Interim dividend
31 December 2019
23 January 2020
21 February 2020
Interim dividend
31 March 2020
29 April 2020
27 May 2020
Amount per
Ordinary Share
(pence)
1.25
1.25
1.25
1.25
Share Capital
The Company has two classes of share capital:
(i) Ordinary Shares; and (ii) C Shares. C Shares
constitute a temporary and separate class of shares
which can be issued at a fixed price determined by
the Company. These are subsequently converted into
Ordinary Shares, at NAV, once the proceeds of each
C Share issue have been invested or substantially
invested in accordance with the Company’s
investment policies. The Company’s Prospectus
currently accommodates C-share issuance and this
authority expires on 25 September 2020. There are no
C-shares in issue at 31 March 2020.
Under the Company’s Articles of Incorporation, each
Shareholder present in person or by proxy has the
right to one vote at general meetings. On a poll, each
Shareholder is entitled to one vote for every Ordinary
Share or C Share held.
Shareholders are entitled to all dividends paid by
the Company and, on a winding up, provided
the Company has satisfied all of its liabilities, the
Shareholders are entitled to all of the residual assets
of the Company.
Shareholdings of the Directors
The Directors with beneficial interests in the Ordinary
Shares of the Company as at 31 March 2020 are
detailed below:
Ordinary
Shares
held
31 March
2020
% holding
at
31 March
2020
Ordinary
Shares
held
31 March
2019
% holding
at
31 March
2019
Director
Paul Burger
32,296
0.005
15,000
0.007
Sylvia Coleman
25,000
0.004
–
–
Simon Holden
64,796
0.010 15,000
0.007
Andrew Sutch
30,041
0.005
10,090
Andrew Wilkinson
51,462
0.008
15,000
0.005
0.007
In addition, the Company also provides the same
information as at 2 July 2020, being the most current
information available:
Director
Paul Burger
Sylvia Coleman
Simon Holden
Andrew Sutch
Andrew Wilkinson
Ordinary
Shares
held
2 July
2020
47,500
25,000
64,796
44,598
51,462
% holding at
2 July
2020
0.008
0.0 04
0.011
0.007
0.008
68
Annual Report 2020
Hipgnosis Songs Fund Limited
Directors’ Authority to Buy Back Shares
The Directors will consider repurchasing Ordinary
Shares in the market if they believe it to be in the
Shareholders’ interests as a whole and as a means
of correcting any imbalance between supply and
demand for the Ordinary Shares.
The timing, price and volume of any buy back of
Ordinary Shares will be at the absolute discretion
of the Directors and is subject to the Company
having sufficient working capital for its requirements
and surplus cash resources available. Ordinary
Shares acquired pursuant to this authority are subject
to compliance with the solvency test and any other
relevant provisions of the Companies Law.
Annually the Company passes a resolution granting
the Directors general authority to purchase in the
market up to 14.99% of the number of Ordinary Shares
in issue. The Directors intend to seek renewal of this
authority from the Shareholders at the AGM.
In the event that the Board decides to repurchase
Ordinary Shares, purchases will only be made through
the market for cash at prices not exceeding the last
reported IFRS NAV per Share and such purchases
will only be made in accordance with: (a) the Listing
Rules, which currently provide that the maximum
price to be paid per Ordinary Share must not be more
than the higher of: (i) 5% above the average of the
mid-market values of the relevant Ordinary Shares for
the five business days before the purchase is made; or
(ii) the higher of: (1) the price of the last independent
trade; and (2) the highest current independent bid for
an Ordinary Share on the trading venues where the
market purchases by the Company pursuant to the
authority conferred by that resolution will be carried
out; and (b) the Companies Law, which provides
among other things that any such purchase is subject
to the Company passing the solvency test contained
in the Companies Law at the relevant time.
The Directors will not buy back any Shares from
any class of C Shares in issue prior to Conversion.
Therefore, the Company will not assist any class of
C Shares in limiting discount volatility or provide an
additional source of liquidity.
Directors’ and Officers’ Liability Insurance
The Group maintains insurance in respect of Directors’
and Officers’ liability in relation to their activities on
behalf of the Group.
Substantial Shareholdings
As at 31 March 2020, the Company had been notified,
in accordance with Chapter 5 of the Disclosure and
Transparency Rules, of the following substantial voting
rights as Shareholders of the Company.
Shareholder
Shareholding % holding
Newton Investment Mgt (London)
59,253,159
CCLA Investment Mgt (London)
43,903,558
JO Hambro Capital Mgt (London)
38,492,296
Quilter Investors (London)
37,718,413
Schroder Investment Mgt (London) 34,901,545
Heartwood Investment Mgt
(London)
Aviva Investors (London)
Investec Wealth & Investment (RS)
(London)
33,801,181
21,964,124
20,254,516
9.62
7.13
6.25
6.12
5.67
5.49
3.52
3.29
In addition, the Company also provides the same
information as at 10 June 2020, being the most current
information available.
Shareholder
Shareholding % holding
Newton Investment Mgt (London)
58,944,335
CCLA Investment Mgt (London)
42,778,821
JO Hambro Capital Mgt (London)
42,417,864
Quilter Investors (London)
34,910,882
Schroder Investment Mgt (London) 31,005,314
Heartwood Investment Mgt
(London)
Aviva Investors (London)
Investec Wealth & Investment (RS)
(London)
26,681,337
24,692,654
22,799,807
9.57
6.95
6.89
5.67
5.03
4.33
4.01
3.70
The Directors confirm that there are no securities
in issue that carry special rights with regard to the
control of the Company.
Hipgnosis Songs Fund Limited
Annual Report 2020
69
Governance
Report of the Directors
Continued
Independent External Auditor
PricewaterhouseCoopers CI LLP has been the
Company’s external auditor since the Company’s
incorporation. The Audit and Risk Management
Committee reviews the appointment of the external
auditor, its effectiveness and its relationship with
the Company, which includes monitoring the use
of the external auditor for non-audit services and
the balance of audit and non-audit fees paid,
as included in Note 20. Following a review of the
independence and effectiveness of the external
auditor, a resolution will be proposed at the AGM
to re-appoint PricewaterhouseCoopers CI LLP. Each
Director believes that there is no relevant information
of which the external auditor is unaware. Each had
taken all steps necessary, as a Director, to be aware
of any relevant audit information and to establish
that PricewaterhouseCoopers CI LLP is made aware
of any pertinent information. This confirmation is
given and should be interpreted in accordance
with the provisions of Section 249 of the Companies
Law. Further information on the work of the external
auditor is set out in the Report of the Audit and Risk
Management Committee on pages 60 to 63.
Articles of Incorporation
The Company’s Articles of Incorporation may only be
amended by special resolution of the Shareholders.
AEOI Rules
Under AEOI Rules the Company continues to comply
with both FATCA and CRS requirements to the extent
relevant to the Company.
Annual General Meeting
The Company will make a future announcement as
to the date and time of the AGM and will post the
Notice of AGM to Shareholders at that time.
Subject to the restrictions in place as a result of
COVID-19 it is intended that members of the Board will
be in attendance at the AGM and will be available to
answer shareholder questions.
By order of the Board,
Andrew Sutch
Chair
3 July 2020
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Hipgnosis Songs Fund Limited
Directors’ Responsibilities Statement
The Directors are responsible for preparing the Annual
Report and Consolidated Financial Statements in
accordance with applicable law and regulations.
The Companies Law requires the Directors to prepare
the Annual Report and Consolidated Financial
Statements for each financial year. Under the
Companies Law, the Directors must not approve
the Consolidated Financial Statements unless they
are satisfied that they give a true and fair view of
the state of affairs of the Group and of the profit or
loss of the Group for that period. In preparing these
Consolidated Financial Statements, the Directors are
required to:
• select suitable accounting policies and then apply
them consistently;
• make judgements and estimates that are
reasonable and prudent;
• present information, including accounting policies,
in a manner that provides relevant, reliable,
comparable and understandable information;
• provide additional disclosures when compliance
with the specific requirements in IFRS is insufficient
to enable users to understand the impact of
particular transactions, other events and conditions
on the Group’s financial position and financial
performance;
• state that the Group has complied with IFRS, subject
to any material departures disclosed and explained
in the Consolidated Financial Statements; and
• prepare the Consolidated Financial Statements on
a going concern basis unless it is inappropriate to
presume that the Group will continue in business.
The Directors confirm that they have complied with
the above requirements in preparing the Annual
Report and Consolidated Financial Statements.
The Directors have considered the immediate and
potential impacts of COVID-19 on the Company as
reflected in the Viability Statement on pages 40 to 41.
The Directors are responsible for keeping proper
accounting records, which disclose with reasonable
accuracy at any time the financial position of
the Group and enable them to ensure that the
Consolidated Financial Statements comply with
the Companies Law. They are also responsible for
safeguarding the assets of the Company and hence
for taking reasonable steps for the prevention and
detection of fraud, error and non-compliance with
law and regulations.
The Directors are responsible for ensuring that
the Annual Report and Consolidated Financial
Statements, taken as a whole, are fair, balanced
and understandable and provide the information
necessary for shareholders to assess the Group’s
performance, business model and strategy.
The Directors are also responsible under the AIC Code
to promote the success of the Group for the benefit of
its members as a whole and in doing so have regard
for the needs of wider society and other stakeholders.
As part of the preparation of the Annual Report and
Consolidated Financial Statements the Directors
have received reports and information from the
Company’s Administrator and Investment Adviser.
The Directors have considered, reviewed and
commented upon the Annual Report and Financial
Statements throughout the drafting process in order
to satisfy themselves in respect of the content.
The Directors are responsible for the maintenance
and integrity of the corporate and financial
information included on the website (www.
hipgnosissongs.com).
Legislation in Guernsey governing the preparation and
dissemination of the Consolidated Financial Statements
may differ from legislation in other jurisdictions.
Hipgnosis Songs Fund Limited
Annual Report 2020
71
Governance
Directors’ Responsibilities Statement
Responsibility Statement of the Directors
in Respect of the Annual Report under the
AIC Code of Corporate Governance 2019
The Directors are responsible for preparing the Annual
Report and Consolidated Financial Statements in
accordance with applicable law and regulations.
Having taken advice from the Audit and Risk
Management Committee, the Directors consider
the Annual Report and Consolidated Financial
Statements, taken as a whole, are fair, balanced
and understandable and that they provide the
information necessary for Shareholders to assess the
Group’s performance, business model and strategy.
By order of the Board
Andrew Sutch
Chair
3 July 2020
Hipgnosis Songs Fund Limited
Responsibility Statement of the Directors
in Respect of the Annual Report under the
Disclosure and Transparency Rules
Each of the Directors confirms to the best of their
knowledge and belief that:
• the Consolidated Financial Statements, prepared in
accordance with IFRS, give a true and fair view of
the assets, liabilities, financial position and profit or
loss of the Company and the undertakings included
in the consolidation taken as a whole;
• the Annual Report includes a fair review of the
development and performance of the business and
the position of the Company and its subsidiaries,
together with a description of the principal risks and
uncertainties faced; and
• the Annual Report and Consolidated Financial
Statements include information required by the FCA
and ensuring that the Company complies with the
provisions of the Listing Rules, Disclosure Guidelines
and Transparency Rules of the FCA. With regard to
corporate governance, the Company is required
to disclose how it has applied the principles and
complied with the provisions of the Corporate
Governance Code applicable to the Company
with which it has voluntarily agreed to comply.
In addition, there is no information that is required
to be disclosed under Listing Rules 9.8.4.
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Hipgnosis Songs Fund Limited
Independent Auditor’s Report
to the members of Hipgnosis Songs Fund Limited
Report on the audit of the consolidated
financial statements
Our audit approach
Overview
Our opinion
In our opinion, the consolidated financial statements
give a true and fair view of the consolidated
financial position of Hipgnosis Songs Fund Limited
(the “Company”) and its subsidiaries (together “the
Group”) as at 31 March 2020, and of their consolidated
financial performance and their consolidated cash
flows for the year then ended in accordance with
International Financial Reporting Standards and have
been properly prepared in accordance with the
requirements of the Companies (Guernsey) Law, 2008.
What we have audited
The Group’s consolidated financial statements comprise:
• the consolidated statement of financial position
as at 31 March 2020;
• the consolidated statement of comprehensive
income for the year then ended;
• the consolidated statement of changes in equity
for the year then ended;
• the consolidated statement of cash flows for the
year then ended; and
• the notes to the consolidated financial statements,
which include a description of the significant
accounting policies.
Basis for opinion
We conducted our audit in accordance with
International Standards on Auditing (“ISAs”). Our
responsibilities under those standards are further
described in the Auditor’s responsibilities for the audit
of the consolidated financial statements section of
our report.
We believe that the audit evidence we have
obtained is sufficient and appropriate to provide
a basis for our opinion.
Independence
We are independent of the Group in accordance
with the ethical requirements that are relevant to
our audit of the consolidated financial statements of
the Group, as required by the Crown Dependencies’
Audit Rules and Guidance. We have fulfilled our other
ethical responsibilities in accordance with these
requirements.
Materiality
• Overall Group materiality was £6.4 million which
represents 1% of the Group’s Adjusted Net Asset
Value.
• The Group’s Adjusted Net Asset Value is calculated
as £641 million, being the Net Asset Value of the
Group calculated in accordance with International
Financial Reporting Standards, adjusted for by
adding back the cumulative amortisation of
intangible assets and deducting any cumulative
impairment of intangible assets.
Audit scope
• The Company is incorporated in Guernsey and
has underlying subsidiaries incorporated in the
United Kingdom (“UK”). The consolidated financial
statements are a consolidation of the Company
and all of the underlying subsidiaries.
• We conducted our audit of the consolidated
financial statements based on information provided
by Estera International Fund Managers (Guernsey)
Limited who on 6 April 2020 changed their name
to Ocorian Administration (Guernsey) Limited (the
‘Administrator’) and The Family (Music) Limited
(the ‘Investment Adviser’), to whom the board of
directors has delegated the provision of certain
functions.
• We conducted our audit work in Guernsey and we
tailored the scope of our audit taking into account
the types of investments within the Group, the
involvement of the third parties referred to above,
and the industry in which the Group operates.
• We performed an audit of the complete financial
information of the Guernsey and UK components
of the Group.
• The components of the Group where we performed
full scope audit procedures accounted for 100% of
the net assets and total comprehensive income.
Key audit matters
• Risk of fraud and error in revenue recognition
• Impairment and fair value disclosure of intangible
assets
• Management’s consideration of the impact
of COVID-19
Hipgnosis Songs Fund Limited
Annual Report 2020
73
Governance
Independent Auditor’s Report
to the members of Hipgnosis Songs Fund Limited
Audit scope
As part of designing our audit, we determined
materiality and assessed the risks of material
misstatement in the consolidated financial
statements. In particular, we considered where the
directors made subjective judgements; for example,
in respect of significant accounting estimates that
involved making assumptions and considering future
events that are inherently uncertain. As in all of our
audits, we also addressed the risk of management
override of internal controls, including among
other matters, consideration of whether there was
evidence of bias that represented a risk of material
misstatement due to fraud.
We tailored the scope of our audit in order to perform
sufficient work to enable us to provide an opinion on
the consolidated financial statements as a whole,
taking into account the structure of the Group, the
accounting processes and controls, and the industry
in which the Group operates.
Scoping was performed at the Group level,
irrespective of whether the underlying transactions
took place within the Company or within the
subsidiaries. The Group audit was led, directed and
controlled by PricewaterhouseCoopers CI LLP and all
audit work for material items within the consolidated
financial statements was performed in Guernsey by
PricewaterhouseCoopers CI LLP.
The transactions relating to the Company and the
subsidiaries are maintained by the Administrator
and therefore we were not required to engage
with component auditors from another PwC global
network firm operating under our instruction. Our
testing was therefore performed on a consolidated
basis using thresholds which are determined with
reference to the overall Group materiality and the risks
of material misstatement identified.
As noted in the Audit scope section above, the
components of the Group for which we performed full
scope audit procedures accounted for 100% of the
net assets and total comprehensive income.
Materiality
The scope of our audit was influenced by our
application of materiality. An audit is designed
to obtain reasonable assurance whether the
consolidated financial statements are free from material
misstatement. Misstatements may arise due to fraud
or error. They are considered material if individually or
in aggregate, they could reasonably be expected to
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Hipgnosis Songs Fund Limited
influence the economic decisions of users taken on the
basis of the consolidated financial statements.
Based on our professional judgement, we determined
certain quantitative thresholds for materiality,
including the overall Group materiality for the
consolidated financial statements as a whole as
set out in the table below. These, together with
qualitative considerations, helped us to determine the
scope of our audit and the nature, timing and extent
of our audit procedures and to evaluate the effect of
misstatements, both individually and in aggregate on
the consolidated financial statements as a whole.
Overall Group materiality
£6.4 million (period ended 31 March 2019: £2 million)
How we determined it
1% of Adjusted Net Asset Value
Rationale for the materiality benchmark
We believe that the Adjusted Net Asset Value
represents the most appropriate materiality
benchmark given the nature and activities of
the Group, and that this is a key consideration
for investors when assessing the financial
performance.
The Group’s Adjusted Net Asset Value is calculated
as £641 million (period ended 31 March 2019:
£200 million), being the Net Asset Value of the
Group calculated in accordance with International
Financial Reporting Standards, adjusted for by
adding back the cumulative amortisation of
intangible assets and deducting any cumulative
impairment of intangible assets.
We agreed with the Audit Committee that we would
report to them misstatements identified during our
audit above £320,000, as well as misstatements below
that amount that, in our view, warranted reporting for
qualitative reasons.
Key audit matters
Key audit matters are those matters that, in our
professional judgment, were of most significance in
our audit of the consolidated financial statements of
the current period. These matters were addressed in
the context of our audit of the consolidated financial
statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion
on these matters.
Key audit matter
How our audit addressed the Key audit matter
Risk of fraud and error in revenue recognition
Please refer to Notes 3 and 12 to the consolidated
financial statements.
The Group earns revenue from the catalogues
of songs in which it owns interests. Such revenue
takes the form of royalties, licence fees and/or
other payments including mechanical royalties,
performance royalties, and synchronisation fees.
Revenue is collected by the portfolio administrators/
royalty collection agents, reported on a quarterly or
semi-annual basis and paid based on predetermined
revenue payment dates thereafter. These contractual
revenue arrangements entered into by the Group with
the portfolio administrators/royalty collection agents
may be complex in nature and there is therefore
a risk of error, in that revenue may be incorrectly
recognised in the accounting records of the Group, or
subject to manipulation.
In addition, because of the contractual reporting
and revenue payment dates with the various
portfolio administrators/royalty collection agents,
the directors make an estimate of the revenue
accrued to the Group at the period end, but
for which revenue reports from the portfolio
administrators/royalty collection agents may be
unavailable at the time of reporting. The directors
seek the input of the Investment Adviser in making
these estimates and accrual, which involves
significant judgement (see Note 3). The period end
accrual is based on the catalogues of songs’ historic
performance for previous periods, adjusted for the
Investment Adviser’s and directors’ assessment of the
expected performance of the various catalogues
of songs, based on the latest available music
consumption information.
Revenue is also one of the key performance indicators
for the Group and changes to the contractual
arrangements with the portfolio administrators/
royalty collection agents, which may report on a
basis that is not coterminous with the period end, and
the associated accrual determined by the directors,
can have a significant impact on the recognition
of revenue by the Group. As a result, there is a
heightened risk of material misstatement and hence
this is considered a significant risk for audit purposes.
We met with the directors and Investment Adviser and
understood and evaluated the Group’s processes,
internal controls and revenue recognition policies as
a result of the various music royalty, licence fee and
other payments earned from the catalogues of songs
owned by the Group.
We also assessed the Group’s revenue recognition
accounting policies for compliance with International
Financial Reporting Standards, and in particular IFRS 15
– Revenue from Contracts with Customers.
We performed the following procedures:
• We reviewed the contractual basis for recognising
revenue from each catalogue of songs by reading
and understanding each catalogue agreement
and the contracts in place with each portfolio
administrator/royalty collection agent;
• We selected a sample of portfolio administrator/
royalty collection agent statements, which we
obtained through download from the respective
portfolio administrator/royalty collection agent
websites, and reconciled these to the revenue
recognised by the Group for each of these
respective catalogues of songs. In addition,
we traced these amounts to the subsequent cash
receipts (where applicable);
• We identified, evaluated and verified journal entries
that impacted revenue; and
• In line with International Standards on Auditing,
we incorporated an element of unpredictability in
our testing approach which involved independently
observing the download of a sample of royalty
statements from the relevant online portals for
each portfolio administrator, and obtaining direct
confirmations from the portfolio administrators of
a sample of royalty statements to confirm their
authenticity.
We also performed the following procedures in
assessing the period end revenue accrual determined
by the directors with the input of the Investment
Adviser:
• We evaluated the methodology applied by the
Investment Adviser in developing the period end
revenue accrual recommended to the directors;
Hipgnosis Songs Fund Limited
Annual Report 2020
75
Governance
Independent Auditor’s Report
to the members of Hipgnosis Songs Fund Limited
Key audit matter
How our audit addressed the Key audit matter
• We evaluated the underlying information used
by the Investment Adviser in the revenue accrual
model by comparing this to the revenue information
already audited (as discussed above);
• We evaluated the reasonableness of the revenue
accrual assumptions made by the directors and
Investment Adviser against supporting information,
such as the fair value models provided by the
Independent Valuer; and
• We reconciled the details of a sample of the royalty
statements previously received by the Group to
the amounts included as a basis for the revenue
accrual model and checked the arithmetic
accuracy of the revenue accrual calculation.
We did not identify any material issues from our
procedures.
With regard to the catalogues of songs recognised
as intangible assets and carried at amortised
cost, we evaluated management’s processes and
assumptions used to initially recognise and measure
the catalogues of songs at amortised cost and used
to assess the need for impairment (if any) of the
respective catalogues of songs. We performed the
following procedures:
• We obtained and read the purchase agreements
for each catalogue of songs held by the Group to
ensure they have been accounted for correctly, and
agreed to the cash payments made;
• We also discussed with management any
deferred compensation terms within the purchase
contracts and assessed whether these have been
appropriately recognised and/or disclosed within
the consolidated financial statements;
• We discussed the useful life of each catalogue with
the Investment Adviser and considered these in light
of industry benchmarks;
• We recalculated the carrying value in accordance
with the useful life determined by the directors and
the purchase agreements for each catalogue of
songs; and
• We obtained, discussed and challenged the
directors and Investment Adviser on their impairment
assessment undertaken with respect to each
catalogue of songs (which included the assessment
of the fair value of the catalogues of songs
discussed below).
Impairment and fair value disclosure
of intangible assets
Please refer to Notes 3 and 5 to the consolidated
financial statements.
The primary activity of the Group is to acquire and
hold catalogues of songs and earn the music royalty,
licence fees and other revenue associated with its
ownership.
The Group’s portfolio of songs are classified as
intangible assets under IAS 38. The various catalogues
of songs are held at cost and amortised over their
useful life (which is determined at acquisition of
each of the catalogue of songs) less impairment.
The catalogues of songs are subject to an
impairment assessment at the earlier of the end of
each accounting period and when an indicator of
impairment is identified. The determination of the useful
life of each catalogue requires the application of
significant judgement by the directors (see Note 3).
The directors have chosen to voluntarily disclose the
fair value of the catalogues of songs (see Note 5). The
directors also present an ‘Operative Net Asset Value’,
which takes into account the catalogue of songs
at this fair value rather than at the IFRS amortised
cost value, as included in the consolidated financial
statements and reflected in the IFRS Net Asset Value.
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Key audit matter
How our audit addressed the Key audit matter
The directors have, in consultation with the Investment
Adviser, engaged the Independent Valuer to assess
the fair value of each catalogue. In general, the
fair value of each catalogue is determined using
a discounted cash flow model and incorporates
assumptions that are subject to significant judgement
by the Independent Valuer, Investment Adviser and
directors. These estimates and assumptions include
future catalogue revenue and cash flow projections;
aggregate catalogue maturity; music industry
growth rates by revenue type (e.g. physical sales,
downloads, streaming etc.); and the determination
of an appropriate discount rate. The fair value of the
catalogues of songs as disclosed in Note 5 reflects
the fair value as calculated by the Independent
Valuer, recommended by the Investment Adviser and
adopted by the board of directors.
The directors have also used the fair value determined
by the Independent Valuer as an initial point of
consideration in their impairment assessment of the
catalogues of songs held at amortised cost, based
on a comparison of the fair value of each catalogue
to the carrying value calculated under International
Financial Reporting Standards.
As the catalogues of songs are significant to the Net
Asset Value of the Group and because of the level of
judgement applied in determining the useful life, the
need for impairment and in determining the fair value
of each catalogue, there is a heightened risk
of misstatement. As a result, both the carrying value
at which the catalogues of songs are measured in the
consolidated financial statements and the fair value
as disclosed in the notes to the consolidated financial
statements (and used in determining the Operative
Net Asset Value by the directors) are considered
significant risks from an audit perspective.
Based on our work performed, we did not identify any
material differences.
With regard to the fair value of the catalogues of
songs disclosed in Note 5 to the consolidated financial
statements, and used in determining the Operative
Net Asset Value of the Group by the directors and as
an initial basis of the impairment review undertaken by
the directors, we performed the following procedures:
• We discussed with the directors and Investment
Adviser the process of appointment of the
Independent Valuer;
• We contacted the Independent Valuer directly and
obtained their valuation model for each catalogue
of songs;
• We held discussions with the Independent Valuer,
confirmed their independence and evaluated their
experience and objectivity;
• We gained an understanding of the assumptions
the Independent Valuer adopted to determine the
projected growth rates for each revenue stream and
catalogue, and in determining the discount rate
applied to the projected revenue/cash flow streams;
• We challenged the Independent Valuer on the
impact of COVID-19 on the valuations of the
catalogues of songs, and in particular considered
the appropriateness of the assumptions made by
the Independent Valuer on future cash flows by
revenue type for each catalogue;
• We agreed the forecasted revenue assumptions
used by the Independent Valuer in their model to
the revenue recognised by the Group with respect to
each catalogue and the latest revenue reports from
the portfolio administrators/royalty collection agents.
We assessed the rationale for any adjustments made
thereto against supportable data;
• We compared the discount rate used to available
independent industry benchmarks;
• We recalculated the arithmetic accuracy of the
valuation for each catalogue of songs; and
• We performed a benchmark analysis of the
valuation by obtaining independent music industry
market growth data by revenue stream, applying
this to the baseline revenue/cash flow projections,
discounting at the assessed discount rate and
comparing this to the Independent Valuer’s
determination of fair value.
Based on our work performed, we did not identify any
material differences.
Hipgnosis Songs Fund Limited
Annual Report 2020
77
Governance
Independent Auditor’s Report
to the members of Hipgnosis Songs Fund Limited
Key audit matter
How our audit addressed the Key audit matter
Management’s consideration of the impact
of COVID-19
Management and the directors have considered
the impact of the events that have been caused
by the pandemic, COVID-19, on the current and
future operations of the Group (Note 21). In doing
so, management have made estimates and
judgements that are critical to the outcomes of these
considerations with particular focus on the Group’s
ability to continue as a going concern for a period of
at least 12 months from the date of the consolidated
financial statements.
As a result of the impact of COVID-19 on the wider
financial markets we have determined management’s
consideration of the impact of COVID-19 (including
their associated estimates and judgements) to be a
key audit matter.
In assessing management’s consideration of the
impact of COVID-19, we have undertaken the
following audit procedures:
• We obtained management’s most recent financial
results forecasts and liquidity analysis underlying their
going concern assessment and verified the integrity
of the forecasts;
• We inspected management’s most recent
forecasts and assessed the underlying calculations
and assumed duration of the disruption having
considered information from recent industry sources;
• We challenged management on the key
assumptions included in the scenarios and we
subjected management’s most recent forecasts
to additional stress testing to confirm that both
management and the directors have considered
a balanced range of outcomes in their assessment
of the impact of COVID-19 on the Group;
• We also considered the likelihood and effect
of potential mitigating actions available to
management which had not been reflected in their
assessment;
• We discussed the most recent forecasts with the
Investment Adviser to understand management’s
and the directors’ views on going concern and
the impact of COVID-19 on the Group; and
• We considered the appropriateness of the
disclosures made by management and the directors
in respect to the impact of COVID-19 on the current
and future operations of the Group, which include
the operational resilience of the Group’s major
service providers.
Based on our procedures and the information
available at the time of the directors’ approval of
the consolidated financial statements we have not
identified any matters to report with respect to both
management and the directors’ consideration of
the impact of COVID-19 on the current and future
operations of the Group, albeit acknowledging that
the situation continues to evolve.
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Other information
The directors are responsible for the other information.
The other information comprises all the information
included in the Annual Report 2020 (the “Annual
Report”) but does not include the consolidated
financial statements and our auditor’s report thereon.
with ISAs will always detect a material misstatement
when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in
aggregate, they could reasonably be expected to
influence the economic decisions of users taken on
the basis of these consolidated financial statements.
Our opinion on the consolidated financial statements
does not cover the other information and we do not
express any form of assurance conclusion thereon.
As part of an audit in accordance with ISAs, we
exercise professional judgement and maintain
professional scepticism throughout the audit. We also:
In connection with our audit of the consolidated
financial statements, our responsibility is to read
the other information identified above and, in
doing so, consider whether the other information is
materially inconsistent with the consolidated financial
statements or our knowledge obtained in the audit,
or otherwise appears to be materially misstated. If,
based on the work we have performed, we conclude
that there is a material misstatement of this other
information, we are required to report that fact. We
have nothing to report in this regard.
Responsibilities of the directors for the
consolidated financial statements
The directors are responsible for the preparation of the
consolidated financial statements that give a true and
fair view in accordance with International Financial
Reporting Standards, the requirements of Guernsey law
and for such internal control as the directors determine
is necessary to enable the preparation of consolidated
financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the consolidated financial statements,
the directors are responsible for assessing the Group’s
ability to continue as a going concern, disclosing, as
applicable, matters related to going concern and
using the going concern basis of accounting unless
the directors either intend to liquidate the Group or to
cease operations, or have no realistic alternative but
to do so.
Auditor’s responsibilities for the audit of the
consolidated financial statements
Our objectives are to obtain reasonable assurance
about whether the consolidated financial statements
as a whole are free from material misstatement,
whether due to fraud or error, and to issue an
auditor’s report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance
• Identify and assess the risks of material misstatement
of the consolidated financial statements, whether due
to fraud or error, design and perform audit procedures
responsive to those risks, and obtain audit evidence
that is sufficient and appropriate to provide a basis
for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for
one resulting from error, as fraud may involve collusion,
forgery, intentional omissions, misrepresentations, or
the override of internal control.
• Obtain an understanding of internal control relevant
to the audit in order to design audit procedures
that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the
effectiveness of the Group’s internal control.
• Evaluate the appropriateness of accounting policies
used and the reasonableness of accounting
estimates and related disclosures made by the
directors.
• Conclude on the appropriateness of the directors’ use
of the going concern basis of accounting and, based
on the audit evidence obtained, whether a material
uncertainty exists related to events or conditions that
may cast significant doubt on the Group’s ability
to continue as a going concern over a period of at
least twelve months from the date of approval of the
consolidated financial statements. If we conclude
that a material uncertainty exists, we are required to
draw attention in our auditor’s report to the related
disclosures in the consolidated financial statements
or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit
evidence obtained up to the date of our auditor’s
report. However, future events or conditions may
cause the Group to cease to continue as a going
concern.
• Evaluate the overall presentation, structure and
content of the consolidated financial statements,
including the disclosures, and whether the
consolidated financial statements represent the
underlying transactions and events in a manner that
achieves fair presentation.
Hipgnosis Songs Fund Limited
Annual Report 2020
79
Governance
Independent Auditor’s Report
to the members of Hipgnosis Songs Fund Limited
• Obtain sufficient appropriate audit evidence
regarding the financial information of the entities
or business activities within the Group to express an
opinion on the consolidated financial statements.
We are responsible for the direction, supervision and
performance of the Group audit. We remain solely
responsible for our audit opinion.
Report on other legal and regulatory
requirements
Company Law exception reporting
Under The Companies (Guernsey) Law, 2008 we are
required to report to you if, in our opinion:
We communicate with those charged with
governance regarding, among other matters, the
planned scope and timing of the audit and significant
audit findings, including any significant deficiencies in
internal control that we identify during our audit.
• we have not received all the information and
explanations we require for our audit;
• proper accounting records have not been kept; or
• the consolidated financial statements are not in
agreement with the accounting records.
We also provide those charged with governance with
a statement that we have complied with relevant
ethical requirements regarding independence, and
to communicate with them all relationships and other
matters that may reasonably be thought to bear on
our independence, and where applicable, related
safeguards.
From the matters communicated with those charged
with governance, we determine those matters
that were of most significance in the audit of the
consolidated financial statements of the current
period and are therefore the key audit matters. We
describe these matters in our auditor’s report unless
law or regulation precludes public disclosure about
the matter or when, in extremely rare circumstances,
we determine that a matter should not be
communicated in our report because the adverse
consequences of doing so would reasonably be
expected to outweigh the public interest benefits
of such communication.
Use of this report
This independent auditor’s report, including the
opinions, has been prepared for and only for the
members as a body in accordance with Section 262
of The Companies (Guernsey) Law, 2008 and for no
other purpose. We do not, in giving these opinions,
accept or assume responsibility for any other purpose
or to any other person to whom this report is shown or
into whose hands it may come save where expressly
agreed by our prior consent in writing.
We have no exceptions to report arising from this
responsibility.
Listing Rules of the Financial Conduct Authority (FCA)
The Company has reported compliance against
the 2019 AIC Code of Corporate Governance
(the “Code”) which has been endorsed by the
UK Financial Reporting Council as being consistent
with the UK Corporate Governance Code for the
purposes of meeting the Company’s obligations,
as an investment company, under the Listing Rules
of the FCA.
We have nothing material to add or draw attention
to in respect of the following matters which we have
reviewed based on the requirements of the Listing
Rules of the FCA:
• The directors’ confirmation that they have carried
out a robust assessment of the principal and
emerging risks facing the Group, including a
description of the principal risks, what procedures
are in place to identify emerging risks, and an
explanation of how those risks are being managed
or mitigated.
• The directors’ explanation as to how they have
assessed the prospects of the Group, over what
period they have done so and why they consider
that period to be appropriate, and their statement
as to whether they have a reasonable expectation
that the Group will be able to continue in operation
and meet its liabilities as they fall due over the
period of their assessment, including any related
disclosures drawing attention to any necessary
qualifications or assumptions.
80
Annual Report 2020
Hipgnosis Songs Fund Limited
We have nothing to report having performed
a review of the directors’ statement that they have
carried out a robust assessment of the principal and
emerging risks facing the Group and the directors’
statement in relation to the longer-term viability of
the Group. Our review was substantially less in scope
than an audit and only consisted of making inquiries
and considering the directors’ process supporting
their statements; checking that the statements
are in alignment with the relevant provisions of the
Code; and considering whether the statements are
consistent with the knowledge and understanding
of the Group and its environment obtained in the
course of the audit.
Additionally, we have nothing to report in respect
of our responsibility to report when:
• The directors’ statement relating to Going Concern
in accordance with Listing Rule 9.8.6R(3) is materially
inconsistent with our knowledge obtained in the audit.
• The statement given by the directors that they
consider the Annual Report taken as a whole to be
fair, balanced and understandable, and provides
the information necessary for the members to assess
the Group’s position and performance, business
model and strategy is materially inconsistent with
our knowledge of the Group obtained in the course
of performing our audit.
• The section of the Annual Report describing
the work of the Audit Committee does not
appropriately address matters communicated by
us to the Audit Committee.
• The directors’ statement relating to the Company’s
compliance with the Code does not properly
disclose a departure from a relevant provision of the
Code specified, under the Listing Rules, for review
by the auditors.
Roland Mills
For and on behalf of PricewaterhouseCoopers CI LLP
Chartered Accountants and Recognised Auditor
Guernsey, Channel Islands
3 July 2020
Hipgnosis Songs Fund Limited
Annual Report 2020
81
Governance
82
Annual Report 2020
Hipgnosis Songs Fund Limited
Financial Statements
Contents
84 Consolidated Statement of Comprehensive
Income
85 Consolidated Statement of Financial Position
86 Consolidated Statement of Changes in Equity
87 Consolidated Statement of Cash Flows
88 Notes to the Consolidated Financial Statements
Hipgnosis Songs Fund Limited
Annual Report 2020
83
Financial Statements
Consolidated Statement
of Comprehensive Income
For the year ended 31 March 2020
Income
Total revenue
Interest income
Total income
Expenses
Advisory fees
Performance fee
Amortisation of Catalogues of Songs
Amortisation of capitalised borrowing costs
Administration fees
Directors’ remuneration
Broker fees
Royalty costs
Audit fees
Legal and professional fees
Loan Interest
Other operating expenses
Foreign exchange (losses)/gains
Total expenses
Operating profit for the year/period before taxation
Taxation
Profit for the year/period after tax
Total comprehensive income for the year/period
Basic Earnings per Share (pence)
Diluted Earnings per Share (pence)
All activities derive from continuing operations.
Notes
12
1 April 2019 to
31 March 2020
£
June 2018 to
31 March 2019
£
64,694,500
986,807
65,681,307
7,218,852
682,491
7,901,343
18
18
5
9
18
17
20
9
13
14
(4,597,567)
–
(18,463,798)
(463,490)
(816,997)
(260,420)
(103,739)
(103,856)
(287,265)
(1,960,582)
(374,675)
(1,526,610)
(4,053,809)
(1,579,190)
(429,054)
(1,491,922)
–
(155,954)
(121,936)
(44,550)
–
(110,000)
(813,714)
–
(267,821)
104,773
(33,012,808)
(4,909,368)
32,668,499
(7,474,588)
2,991,975
(632,521)
4
25,193,911
2,359,454
25,193,911
6.14
2,359,454
1.17
6.14
1.17
19
19
The accompanying Notes form an integral part of these Consolidated Financial Statements.
84
Annual Report 2020
Hipgnosis Songs Fund Limited
Consolidated Statement
of Financial Position
As at 31 March 2020
Assets
Catalogues of Songs
Trade and other receivables
Cash and cash equivalents
Total assets
Liabilities
Bank loan
Other payables and accrued expenses
Total liabilities
Net assets
Equity
Share capital
Retained earnings
Notes
31 March 2020
£
31 March 2019
£
5
7
6
659,435,205
42,440,593
14,098,374
118,458,818
10,808,398
108,483,752
715,974,172 237,750,968
9
8
56,082,763
38,411,448
–
39,192,142
94,494,211
39,192,142
621,479,961 198,558,826
10
614,208,042
7,271,919
198,221,140
337,686
Total equity attributable to the owners of the Company
621,479,961 198,558,826
Number of Ordinary Shares in issue at year/period end
615,851,887 202,176,800
IFRS Net Asset Value per Ordinary Share (pence)
Operative Net Asset Value per Ordinary Share (pence)
11
11
100.91
98.21
116.73
103.27
Approved and authorised for issue by the Board of Directors on 3 July 2020 and signed on their behalf by:
Andrew Sutch Chair
Andrew Wilkinson Director
The accompanying Notes form an integral part of these Consolidated Financial Statements.
Hipgnosis Songs Fund Limited
Annual Report 2020
85
Financial Statements
Consolidated Statement
of Changes In Equity
For the year ended 31 March 2020
Notes
Number of
Ordinary
Shares
Share
capital
£
Retained
earnings
£
Total
equity
£
As at 1 April 2019
Shares issued
C Share Conversion
Share issue costs
Dividends paid
Profit for the year
As at 31 March 2020
10
10
15
202,176,800 198,221,140
192,844,052
231,000,000
(7,857,150)
–
–
187,387,487
226,287,600
–
–
–
337,686 198,558,826
192,844,052
231,000,000
(7,857,150)
(18,259,678)
25,193,911
–
–
–
(18,259,678)
25,193,911
615,851,887 614,208,042
7,271,919 621,479,961
For the period from incorporation on 8 June 2018 to 31 March 2019
As at 8 June 2018
Shares issued
Share issue costs
Dividends paid
Profit for the period
As at 31 March 2019
Notes
10
10
15
Number
of shares
–
202,176,800
–
–
–
Share
capital
£
–
202,176,800
(3,955,660)
–
–
Retained
earnings
£
–
–
–
(2,021,768)
2,359,454
Total
equity
£
–
202,176,800
(3,955,660)
(2,021,768)
2,359,454
202,176,800 198,221,140
337,686 198,558,826
The accompanying Notes form an integral part of these Consolidated Financial Statements.
86
Annual Report 2020
Hipgnosis Songs Fund Limited
Consolidated Statement
of Cash Flows
For the year ended 31 March 2020
Cash flows used in operating activities
Operating profit for the year/period before taxation
Adjustments for non-cash items:
Movement in trade and other receivables
Movement in other payables and accrued expenses
Movement in equity for share based payments
Amortisation of Catalogues of Songs and borrowing costs
Foreign exchange (gains)/losses
Taxation
Purchase of Catalogue of Songs
Net cash used in operating activities
Cash flows generated from financing activities
Proceeds from issue of shares
Issue costs paid
Dividends paid
Interest paid
Borrowing costs
Bank loan
Net cash generated from financing activities
1 April 2019 to
31 March 2020
£
June 2018 to
31 March 2019
£
Notes
32,668,499
2,991,975
7
8
14
5
(31,793,657)
(1,381,185)
225,884
18,927,288
4,053,809
(10,808,398)
39,192,142
–
1,491,922
(104,773)
27,700,638
(7,474,588)
(559,440,185)
32,762,868
(632,521)
(119,950,740)
(544,214,135) (87,820,393)
10
10
15
9
423,618,166
(7,857,150)
(18,259,678)
(374,675)
(4,380,727)
60,000,000
202,176,800
(3,955,660)
(2,021,768)
–
–
–
452,745,936 196,199,372
Net movement in cash and cash equivalents
(91,468,199) 108,378,979
Cash and cash equivalents at the start of the year/period
Effect of foreign exchange rate changes on cash and cash equivalents
Cash and cash equivalents at the end of the year/period
108,483,752
(2,917,179)
–
104,773
14,098,374 108,483,752
14
6
The accompanying Notes form an integral part of these Consolidated Financial Statements.
Hipgnosis Songs Fund Limited
Annual Report 2020
87
Financial Statements
1. General information
Hipgnosis Songs Fund Limited was incorporated and registered in Guernsey on 8 June 2018 with registered number
65158 and is governed in accordance with the provisions of the Companies Law. The registered office address
is Floor 2, Trafalgar Court, Les Banques, St Peter Port, Guernsey, GY1 4LY.
The Company’s Ordinary Shares were admitted to trading on the Specialist Fund Segment of the London Stock
Exchange on 11 July 2018, and migrated to a Premium Listing on the Main Market of the London Stock Exchange
on 25 September 2019. The Company was added as a constituent of the FTSE 250 Index effective from after the
market close on 20 March 2020.
The Company makes its investments through its subsidiaries, which are registered in the UK as limited companies,
in which the Company is the sole shareholder. The principal place of business of the subsidiaries is the UK.
The Consolidated Financial Statements present the results of the Group for the year to 31 March 2020, rounded
to the nearest pound Sterling, compared to the results for the Group as at 31 March 2019. Please note that the
reporting periods are not entirely comparable as the results at 31 March 2019 were reported for a shorter period,
from incorporation on 8 June 2018. The Group is principally engaged in investing in and managing music copyrights
and associated musical intellectual property.
2. Accounting policies
The principal accounting policies applied in the preparation of these Consolidated Financial Statements are set out
below. These policies have been consistently applied, unless otherwise stated.
New and amended standards and interpretations applied
On incorporation, the Company adopted all of the IFRS standards and interpretations that were in effect at that
date and are applicable to the Group. No new standards during the year ended 31 March 2020 had a material
impact on the Consolidated Financial Statements.
Amended standards and interpretations not applied
The following are amended standards and interpretations in issue effective from years beginning on or after
1 January 2020:
Amended standards and interpretations
IFRS 7
IFRS 9
Financial Instruments Disclosures (Amendments regarding pre-replacement
issues in the context of the IBOR reform)
Financial Instruments (Amendments regarding pre-replacement
issues in the context of the LIBOR reform)
IFRS 17
Insurance Contracts
IAS 1
IAS 8
Presentation of Financial Statements
(Amendments regarding the definition of material)
Accounting Policies, Changes in Accounting Estimates and Errors
(Amendments regarding the definition of material)
Effective date
1 January 2020
1 January 2020
1 January 2023
1 January 2020
1 January 2020
88
Annual Report 2020
Hipgnosis Songs Fund Limited
Notes to the Consolidated Financial StatementsFor the year ended 31 March 2020
The Company has considered the IFRS standards and interpretations that have been issued but are not yet
effective. None of these standards or interpretations are likely to have a material effect on the Company,
as it is the belief of the Board that the activities of the Company are unlikely to be affected by the changes
to these standards, although any disclosures recommended by these standards, where applicable, will be
provided as required.
a) Group information
As at 31 March 2020, the details of the Company’s subsidiaries are as follows:
Name of the subsidiary
Hipgnosis Holdings UK Limited
Hipgnosis SFH I Limited
Hipgnosis SFH II Limited*
Hipgnosis SFH III Limited*
Hipgnosis SFH IV Limited*
Hipgnosis SFH V Limited*
Hipgnosis SFH VI Limited*
Hipgnosis SFH VII Limited*
Hipgnosis SFH VIII Limited*
Hipgnosis SFH IX Limited*
Hipgnosis SFH X Limited*
Hipgnosis SFH XI Limited*
Hipgnosis SFH XII Limited*
Hipgnosis SFH XIII Limited*
Hipgnosis SFH XIV Limited*
Hipgnosis SFH XV Limited*
Hipgnosis SFH XVI Limited*
Hipgnosis SFH XVII Limited*
Hipgnosis SFH XVIII Limited*
Hipgnosis SFH XIX Limited
Hipgnosis SFH XX Limited
RubyRuby(London)Limited†
Place of
incorporation
and operation
% of voting
rights
% Interest
Consolidation
method
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
*During the year a restructuring took place and the subsidiaries as highlighted above transferred their Catalogues and all other assets and liabilities to Hipgnosis SFH 1 Limited.
After a three-month period of dormancy, on 1 April 2020 an application was made to Companies House to strike off these subsidiaries.
†This is a subsidiary of Hipgnosis SFH XX Limited and therefore an indirect subsidiary of Hipgnosis Songs Fund Limited.
The subsidiaries of the Company are considered tax resident in the UK and are subject to UK corporation tax.
Hipgnosis Songs Fund Limited
Annual Report 2020
89
Financial Statements
2. Accounting policies (continued)
b) Going concern
The Directors monitor the capital and liquidity requirements of the Company on a regular basis. They have also
reviewed cash flow forecasts prepared by the Investment Adviser which are based in part on assumptions about
the future purchase and returns from existing Catalogues of Songs and the annual operating cost.
Based on these sources of information and their own judgement, the Directors believe it is appropriate to prepare
the Consolidated Financial Statements of the Group on a going concern basis.
c) Basis of preparation
Basis of Accounting
The Consolidated Financial Statements have been prepared in accordance with IFRS and applicable company
law. The Consolidated Financial Statements have been prepared on a historical cost basis as amended from time
to time by the fair valuing of certain financial assets and liabilities where applicable.
Consolidation
In accordance with section 244 of the Companies Law, the Directors have elected to prepare consolidated
accounts for the financial period for the Group. Therefore, there is no requirement to present individual accounts for
the Company within the Consolidated Financial Statements.
The Company is not considered to be an Investment Entity, as defined in IFRS 10. The Company, in addition
to evaluating the Portfolio on a fair value basis as demonstrated by the Operating NAV provided as an alternate
performance measure, also manages the acquisitions and revenue of those Songs.
All companies in which the Company has a controlling interest, namely those in which it has the power to govern
financial and operational policies in order to obtain benefits from their operations, are fully consolidated. The
Control defined by IFRS 10 is based on the following three criteria to be fulfilled simultaneously to conclude that the
parent company exercises control:
• a parent company has power over a subsidiary when the parent company has existing rights that give it the
current ability to direct the relevant activities of the subsidiary, i.e., the activities that significantly affect the
subsidiary’s returns. Power may arise from existing or potential voting rights, or contractual arrangements. Voting
rights must be substantial, i.e., they shall be exercisable at any time without limitation, particularly during decision
making related to significant activities. The assessment of the exercise of power depends on the nature of the
subsidiary’s relevant activities, the internal decision-making process, and the allocation of rights among the
subsidiary’s other shareowners;
• the parent company is exposed, or has rights, to variable returns from its involvement with the subsidiary which
may vary as a result of the subsidiary’s performance. The concept of returns is broadly defined and includes,
among other things, dividends and other economic benefit distributions, changes in the value of the investment
in the subsidiary, economies of scale, and business synergies; and
• the parent company has the ability to use its power to affect the returns. Exercising power without having any
impact on returns does not qualify as control.
Consolidated financial statements of a group are presented as if the Group were a single economic entity. The
Group does not include any non-controlling interest.
90
Annual Report 2020
Hipgnosis Songs Fund Limited
Notes to the Consolidated Financial StatementsFor the year ended 31 March 2020
Segmental reporting
The chief operating decision maker is the Board of Directors. The Directors are of the opinion that the Group
is engaged in a single segment of business, being the investment of the Group’s capital in the Portfolio, with
an attractive and growing level of income, together with the potential for capital growth.
All of the Company’s income is global but received from sources within US, Europe, UK and Guernsey.
All of the Company’s non-current assets are located in UK and Guernsey.
d) Revenue Recognition
Bank Interest Income
Interest income from cash deposits is recognised as it accrues by reference to the effective interest rate applicable,
which is the rate that exactly discounts the estimated future cash flows through the expected life of the financial
asset to the asset’s carrying value or principal amount, and is accounted for on an accruals basis.
Revenue from operations and associated costs
Revenues from operations are recorded when it is probable that future economic benefits will be obtained by the
Group and when they can be reliably measured. The revenue earned by the Group is recognised in accordance
with IFRS 15 and solely consists of royalty income, which is divided into three main revenue categories:
i) Mechanical royalties – these are collected by performance rights organisations (“PROs”) worldwide which
represent songwriters and other copyright owners. Mechanical royalties are also collected by royalty collection
agents or the portfolio administrators with whom the Group contracts;
ii) Performance royalties – these are collected by various performance rights organisations (“PROs”) worldwide
which represent songwriters and other copyright owners; and
iii) Synchronisation fees – these are typically paid directly to the owner of the relevant copyright or its publisher,
on the terms and in the amounts agreed with the relevant film or television production company, advertising
agency or end customer.
These revenue categories are further disaggregated into individual revenue streams which are disclosed
in detail in Note 12. The Group follows the same accounting policies in respect of all revenue streams, unless
otherwise disclosed.
As royalty income is typically reported by the royalty collection agents/performance rights organisations
on an arrears basis via statement (3-6 months for mechanical royalties and 6-12 months for performance royalties)
and where statements have not been received at the year end, the Group accrues for those reporting delays
by assessing historic and forecasted earnings over the equivalent reporting period based on evidenced historic
revenue reporting, seasonality and industry consumption and growth rates since the last statement date.
Hipgnosis Songs Fund Limited
Annual Report 2020
91
Financial Statements
2. Accounting policies (continued)
Licence arrangements-for all income types which include publishing income (mechanical, performance,
downloads, streaming, synchronisation and writer share income), income derived from master recordings
and producer royalties
The Company enters into licence arrangements in respect of Catalogues of Songs with third party collection
agents. Licences granted to collection agents are deemed to constitute usage based, right of use licences as per
IFRS 15. Revenue arising from licences entered into with collection agents is therefore recognised in the period.
Payment is made upon reporting of those usages within royalty statements delivered typically 3-6 months after
usage (see above). The significant payment terms are 60-90 days. This revenue is disaggregated to be reviewed
by song usage period, source of income, work title, reporting period and royalty deductions (i.e. administration fee
retained by the collection agent). The contractual basis of the licence arrangements are such that the agents are
deemed as ‘principals’ for tax purposes, therefore the Company recognises its revenue net of administration fees.
Where available at the end of each month or earlier interval to which the revenue relates, revenue is recorded
on the basis of royalty statements received from collection agents.
Where notification has not yet been received from collection agents, an estimate is made of the revenue due
to the Company at the end of the month to which the usage of the music copyright relates. Estimates are made
on the basis of the historical track record of music Catalogues, ad hoc data provided by collection agents, industry
forecasts and expected seasonal variations.
Non-recourse fixed fee arrangements are recognised at the point at which control of the licence passes
to the collection agents. Variable consideration is recognised in the period when the usage of the Catalogues
of Songs occurs.
e) Expenses
Expenses are accounted for on an accruals basis. Expenses are charged through the Statement
of Comprehensive Income.
f) Dividends to Shareholders
Dividends are accounted for in the period in which they are declared and approved by the Board of Directors.
g) Assets
Catalogues of Songs
Catalogues of Songs include music catalogues, artists’ contracts and music publishing rights and are recognised
as intangible assets measured initially at the fair value of the consideration paid. Catalogues of Songs are
subsequently amortised in expenses over the useful life of the asset and shown net of any impairment considered
necessary. This amortisation is shown in the Statement of Comprehensive Income as ‘amortisation of catalogues
of songs’. Useful life is separately considered for each Catalogue and is reviewed at the end of each
reporting period.
Asset impairment
Each time events or changes in the respective Catalogues of Songs or economic environment indicate a risk
of impairment of intangible assets, the Group re-examines the value of these assets for indicators of impairment.
When there are indicators of impairment, the impairment test is performed to compare the recoverable amount
to the carrying value of the asset. The recoverable amount is determined as the higher of: (i) the value in use; or (ii)
the fair value (less costs to sell) as described hereafter, for each individual asset.
92
Annual Report 2020
Hipgnosis Songs Fund Limited
Notes to the Consolidated Financial StatementsFor the year ended 31 March 2020
The value in use of each asset is determined by the Board and Investment Adviser with the support of independent
third parties commissioned to appraise the catalogue value at time of acquisition, which is the discounted value
of future cash flows by using cash flow projections consistent with the expected portfolio cash flows and the most
recent forecasts as at that time. Applied discount rates are determined by reference to an appropriate benchmark
as determined by the Board and reflect the current assessment by the Group of the time value of money and
risks specific to each asset. Growth rates used for the evaluation of individual assets are based on industry growth
rates sourced from independent market reports and other third-party sources. This value in use methodology
applies to all except very small acquisitions that don’t warrant the independent valuation, given the related
expense. In these instances, the value in use is established from the Investment Adviser’s internal discounted
cash flow method.
The fair value (less costs to sell) is considered to be equal to the fair value determined by the portfolio Independent
Valuer, which is also the discounted value of future cash flows by using cash flow projections consistent with the
expected Portfolio cash flows and the most recent forecasts as at that time cross referenced, where appropriate,
against market multiples for recent transactions for similar assets. The portfolio Independent Valuer use their own
propriety analysis to project out income streams, which is based on independent market reports and third-party
sources. The discount rate used by the Portfolio Independent Valuer is 9.0%.
Whilst the Board and Investment Adviser regularly assess other indicators of impairment (such as a songwriter’s
or key performance artist’s reputation etc.), the Board and Investment Adviser typically use the fair value of the
assets, being the Catalogues of Songs, as an initial indicator of impairment. For assets that are currently valued
below their fair value, the Board and Investment Adviser will consider the qualitative and quantitative aspects
of the respective asset in determining its value in use to determine if the indicator of impairment holds true.
If the recoverable amount is still lower than the carrying value of an asset or group of assets and the qualitative and
quantitative aspects do not support a recoverable amount higher than the carrying amount, an impairment loss
equal to the difference is recognised in profit and loss. The impairment losses recognised in respect of intangible
assets may be reversed in a later period if the recoverable amount becomes greater than the carrying value,
within the limit of impairment losses previously recognised.
Loans and receivables
Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted
in an active market initially measured at fair value plus transaction costs directly attributable to the acquisition, and
subsequently measured at amortised cost using the effective interest method, less allowance for Expected Credit
Loss (Note 3). Interest income is recognised by applying the effective interest rate, except for short term receivables
when the recognition of interest would be immaterial.
Derecognition of assets
The Group derecognises an asset only when the contractual rights to the cash flows from the asset expire, or when
it transfers the asset and substantially all the risks and rewards of ownership of the asset to another entity.
If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control
the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts
it may have to pay.
On derecognition of an asset in its entirety, the difference between the asset’s carrying amount and the sum of the
consideration received is recognised in profit or loss.
Hipgnosis Songs Fund Limited
Annual Report 2020
93
Financial Statements
2. Accounting policies (continued)
h) Contingent consideration
Under the terms of the acquisition agreements for Catalogues, contingent consideration may be payable
dependent on future independent valuations of the Catalogues or revenue received within a specific time frame
of acquiring the Catalogues that reach agreed upon revenue targets. At 31 March 2020 the likelihood of the
aforementioned performance condition to be met was deemed remote and hence the possibility of economic
outflows remote, and therefore no contingent consideration was disclosed.
i) Deferred consideration
In such cases where payment is deferred under the terms of the acquisition agreements for Catalogues, a liability
will be recognised at net present value with any associated finance charge to be accrued over the respective
deferral period.
j) Financial liabilities and equity
Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance
of the contractual arrangement.
Equity instruments
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all
of its liabilities. Equity instruments issued by the Company are recognised at the value of proceeds received, net
of direct issue costs.
Repurchase of the Company’s own equity instruments is recognised and deducted directly in equity. No gain or loss
is recognised in profit or loss on the purchase, sale, issue or cancellation of the Company’s own equity instruments.
During the year 231,000,000 C Shares were issued on 22 October 2019 and converted on 10 February 2020
to 226,287,600 Ordinary Shares at a conversion rate of 0.9796 Ordinary Shares for each C Share held.
Financial liabilities
Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs.
Financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest
expense recognised on an effective yield basis.
Derecognition of financial liabilities
The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged,
cancelled or they expire.
k) Share based payments
Investment Adviser’s Performance fee
The Group recognises the variable fee for the services received in a share-based payment transaction as the
Group becomes liable to the variable fee on an accruals basis.
The fair value of the performance fee, as defined in the Investment Advisory Agreement, which is payable
to the Investment Adviser in Shares is recognised as an expense when the fees are earned with a corresponding
increase in equity.
94
Annual Report 2020
Hipgnosis Songs Fund Limited
Notes to the Consolidated Financial StatementsFor the year ended 31 March 2020
l) Cash and Cash Equivalents
Cash at bank and short term deposits which are held to maturity are carried at cost. Cash and cash equivalents
are defined as call deposits, short term deposits with a term of no more than three months from the start of the
deposit and highly liquid investments readily convertible to known amounts of cash and subject to insignificant
risk of changes in value. Cash and cash equivalents consist of cash in hand and short-term deposits in banks with
an original maturity of three months or less.
m) Functional and Foreign currency
Items included in the Consolidated Financial Statements of each of the Group’s entities are measured using the
currency of the primary economic environment in which each entity operates (‘the functional currency’). The
Consolidated Financial Statements are presented in Sterling, which is the functional and presentation currency
of the Company and each of its subsidiaries.
At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are
translated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated
in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-
monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange
differences are recognised in profit or loss in the period in which they arise. Transactions denominated in foreign
currencies are translated into sterling at the rate of exchange ruling at the date of the transaction.
3. Significant accounting judgements, estimates and assumptions
The preparation of the Group’s Consolidated Financial Statements requires the application of estimates and
assumptions which may affect the results reported in the financial statements. Uncertainty about these estimates
and assumptions could result in outcomes that require a material adjustment to the carrying amount of the asset
or liability affected in future periods. Estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future
periods affected.
The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date,
that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within
the next financial year, are discussed below. The Group based its assumptions and made estimates based on the
information available when the Consolidated Financial Statements were prepared. However these assumptions
and estimates may change based on market changes or circumstances beyond the control of the Group.
Critical estimates in applying the Group’s accounting policies – revenue recognition:
In calculating accruals, we make judgments around seasonality, over or under performance, and commercial
factors based on historical performance, our knowledge of each catalogue and our regular correspondence with
the various administrators, record labels and international societies.
Estimated royalty revenue receivable is accrued for on the basis of historical earnings for each Catalogue, which
incorporates an element of uncertainty. The estimated revenue accrual may not therefore directly equal the actual
cash received in respect of each accounting period and adjustments may therefore be required throughout the
financial period when the actual revenue received is known, and these adjustments may be material.
Hipgnosis Songs Fund Limited
Annual Report 2020
95
Financial Statements
3. Significant accounting judgements, estimates and assumptions (continued)
Net revenues also include an accrual for performance income, to account for the writer’s share of performance
royalties which are subject to a significant time lag in reporting in the industry, but which the Company is entitled
to receive in due course. In recommending the estimate of this accrual to the Board of Directors and the
auditors, the Investment Adviser used its analysis of each Catalogue’s revenue history as well its knowledge of the
respective Catalogue performance trends to recommend the estimated accruals. The PRO income accrual
is based on analysis of each Catalogue’s revenue history as well as knowledge of the respective Catalogue’s
performance trends.
Expected Credit Loss (ECL) in relation to revenue receivables
Royalty earnings for accruals and receivables recognised in the period ending 31 March 2020 are distributed
by Performance Rights Organisations (PROs), Publishers and Record Labels who collect royalties at the source
of usage and distribute those earnings directly to Hipgnosis.
The Company’s current risk assessment includes analysis of the exposure to commercial risk by PROs Publishers and
Record Labels, and the likely impact of their credit risk on Hipgnosis’ revenue streams.
Findings from management’s sensitivity analysis demonstrates revenue by source from the following types
of organisations:
• 40% US PROs
• 8% European PROs
• 29% Major publishers (US & UK)
• 14% Independent publishers
• 9% Record labels
The probability of future default has been deemed close to nil, due to the long-standing history of PROs, Publishers
and Record Labels within the music industry and the existing framework of cash collection amongst the Company’s
stakeholders. Whilst there are smaller/newer organisations that have relatively unproven credit resilience these
account for a small minority of our receivables. In addition, as demonstrated in the following breakdown of revenue
accruals and receivables, 83% of the £12.4m royalty statement debtors balance has been received at the time
of writing, with the remainder expected within 30 days. To date, there has been no default of debt for royalty
payments by PROs, Publishers or Record Labels.
Additional credit risk with regards to accruals is taken into consideration at the point of calculating each
accrual. On calculation, latest forecast earnings are considered and adjusted down for the latest trend of cash
receipted earnings if there is any suggestion of a downwards performance indicator. In some cases, a trim
(of varying size depending on the source) is applied to ensure a prudent accrual against future royalty reporting.
As of 31 May 2020, £1.7 million of royalty statements have been received which are in line with the accruals for those
statements made at 31 March 2020.
96
Annual Report 2020
Hipgnosis Songs Fund Limited
Notes to the Consolidated Financial StatementsFor the year ended 31 March 2020
A breakdown of the Revenue Accruals and Receivables, at 31 March 2020, is set out below:
• A £12.4 million receivable relates to invoices raised for calendar second half 2019 earnings which were reported
in royalty statements received prior to the financial year end. £10.3 million of these invoices have now been paid
in full, with a further £1.0 million received as banked cheques which are waiting to clear. Of that £2.1 million debtor,
the remaining receivable of £1.0 million is expected to be received within the next 30 days.
• A £29 million income accrual was recognised as at 31 March 2020. In calculating the accrual, latest
forecast earnings are considered and adjusted for the latest trend of earnings reported. The accrued
income comprises of:
• £7 million related to calendar second quarter through to fourth quarter 2019 earnings for catalogues acquired
less than 6 months before the year end date, where royalty reporting is still in the process of being switched
over to Hipgnosis. These accruals are based on royalty statements received with invoices due to be raised
on completion of the letter of direction being concluded.
• £12.5 million for calendar first quarter 2020 earnings where, due to the time lag in royalty reporting, statements
are not expected to be received until 30 September 2020.
• £5.4 million related to calendar third quarter to fourth quarter 2019 PRO earnings due to be reported in calendar
second quarter and third quarter 2020.
• A further £4.1million income accrual relating to time-lagged international reporting on PRO earnings. International
PRO reporting has a significant time lag due to the additional collection time taken for PROs to collect and
distribute income from International territories. The lag in collection is due to the nature of collecting and
processing royalties locally then distributing them to the domestic PRO which will in turn process and distribute
these royalties to Hipgnosis. For prudence, 6 months of international PRO earnings are accrued, although the lag
can typically result in earnings for 12-24 months to be due.
Management have also assessed potential increased credit risk, due to COVID-19.
The £12.4 million royalty statement debtor relates to periods up to September 2019 and therefore has no exposure
to any commercial risks related to COVID-19.
The £29 million earnings accrual relates to the period up to 31 March 2020, which was before the lockdown impact
of COVID-19 therefore the impact by 31 March is expected to be immaterial.
The major PROs have released statements since the financial year end date attesting to their ability to meet their
obligations, in both the short and mid-term, despite the impact of COVID-19. The Investment continues to evaluate
credit risk during COVID-19 and has not become aware of any issues with cash collections or changes in the existing
royalty collection arrangements.
Hipgnosis Songs Fund Limited
Annual Report 2020
97
Financial Statements
3. Significant accounting judgements, estimates and assumptions (continued)
Assessment of useful life of intangible assets
In order to calculate the amortised cost of the intangible assets it is necessary to assess the useful economic
life of the copyright interests in Songs. This requires forecasts of the expected future revenue from the copyright
interests, which contains significant uncertainties as the ongoing popularity of a Song can fluctuate unexpectedly.
Based on the Board's consideration of the international music market and the sustained growth in streaming
revenues, the Board has separately considered the useful life of each Catalogue of Songs. The Board has assessed
the weighted average useful life of the Catalogues of Songs to be 20 years. In making this estimate, the Board has
also considered the period over which revenue is expected to be reliably generated by each Catalogue of Songs.
The Board notes this is in line with useful life estimates of other large music companies.
Assessment of impairment and the Calculation of Operative NAV
As disclosed in Note 2(g) above, intangible assets are subject to annual impairment review which relies
on assumptions made by the Board. Assumptions are updated annually, specifically those relating to future cash
flows and discount rates.
The fair value estimates that are prepared in order to calculate the Operative NAV and Operative NAV per Share
are also used to assess whether there is evidence that the intangible assets may be impaired.
Valuations of music publishing rights typically adopt the DCF valuation approach which measures the present value
of anticipated future revenues from acquiring the Catalogues, which are discounted at a ‘market cost of capital',
9.0% and a terminal value in 10 years. This method is accepted as an objective way of measuring future benefits;
taking into account income projections from various music industry sources across various revenue flows whilst also
factoring in the associated cost of capital.
It is the intention of the Board that Catalogues of Songs will be valued on an ongoing basis using a consistent DCF
valuation methodology, and that this be used as an initial indicator of impairment for each Catalogue of Songs.
98
Annual Report 2020
Hipgnosis Songs Fund Limited
Notes to the Consolidated Financial StatementsFor the year ended 31 March 2020
4. Taxes
The major components of income tax expense for the year ended 31 March 2020 and period ended
31 March 2019 are:
Current Income tax
1 April 2019 to
31 March 2020
£
8 June 2018 to
31 March 2019
£
United Kingdom corporation tax based on the profit for the year at 19% (2019: 19%)
Non-reclaimable withholding tax on royalty payments received
7,400,000
74,588
632,521
–
Total current tax
7,474,588
632,521
Deferred taxation
Origination and reversal of timings differences
Total tax
–
–
7,474,588
632,521
The Company is exempt from taxation in Guernsey under the provisions of the Income Tax (Exempt Bodies)
(Guernsey) Ordinance, 2008 and is charged an annual fee of £1,200.
Whilst the Company is incorporated in Guernsey, all of the Company’s subsidiaries are incorporated and tax resident
in the UK and the majority of the Group’s income and expenditure is incurred in these entities. Therefore, it is considered
most appropriate to prepare the tax reconciliation below at the standard UK tax rate for the year of 19% (2019: 19%).
The actual tax charge for the current year and the previous period differs from the standard rate for the reasons set
out in the following reconciliation:
Profit on the Group’s ordinary activities before tax
Tax on the profit on the Group’s ordinary activity at the standard UK rate
Factors affecting charge for the year:
Expenses incurred by the Company in the period on which no tax credit is recorded
Net non-reclaimable withholding tax on royalty payments received
Total actual amount of current tax
1 April 2019 to
31 March 2020
£
32,688,499
6,207,015
8 June 2018 to
31 March 2019
£
2,991,975
568,475
1,192,985
74,588
64,046
–
7,474,588
632,521
Hipgnosis Songs Fund Limited
Annual Report 2020
99
Financial Statements
5. Catalogues of Songs
Cost
At 1 April 2019
Additions
At 31 March 2020
Amortisation and impairment
At 1 April 2019
Amortisation
Impairment
At 31 March 2020
Net book value
At 1 April 2019
At 31 March 2020
Fair value as at 31 March 2020
Cost
At 8 June 2018
Additions
At 31 March 2019
Amortisation and impairment
At 8 June 2018
Amortisation
Impairment
At 31 March 2019
Net book value
At 8 June 2018
At 31 March 2019
Fair value as at 31 March 2019
£
119,950,740
559,440,185
679,390,925
1,491,922
18,463,798
–
19,955,720
118,458,818
659,435,205
756,818,538
–
119,950,740
119,950,740
–
1,491,922
–
1,491,922
–
118,458,818
128,694,535
The Group amortises Catalogues of Songs with a limited useful life using the straight-line method of 20 years (other
than in exceptional circumstances for specific Catalogues of Songs). At 31 March 2020 the Portfolio consisted
of Catalogues of Songs held for no longer than 2 years. Useful life is separately considered for each Catalogue
of Songs and is reviewed at the end of each reporting period. At 31 March 2020 accumulated amortisation for
Catalogue of Songs is £19,955,720 and the accumulated impairment to date is £nil.
100
Annual Report 2020
Hipgnosis Songs Fund Limited
Notes to the Consolidated Financial StatementsFor the year ended 31 March 2020
The Board engaged portfolio Independent Valuer, Massarsky Consulting, Inc., to value the Catalogues
as at 31 March 2020. Each income type from each Catalogue was analysed and forecast to derive the fair value
of the Catalogues by adopting a DCF valuation methodology using a discount rate of 9.0%. Income was analysed
and forecast at the level of each individual Catalogue and by income type. Future revenues were also estimated,
often at the level of individual Songs, and incorporated into their valuation. Massarsky Consulting has also taken
into consideration macro factors including the growth of streaming revenue, the global growth of the recorded
music industry and the short and medium term impact of COVID-19 in their analysis. The Board has approved and
adopted the valuations prepared by the portfolio Independent Valuer.
The sensitivity to the discount rate used in the Operative NAV is as follows:
-1% discount rate will grow the FV of the Portfolio by 18%, increasing the Operative NAV by £133.1 million which
represents an increase of +21.6p Operative NAV per share.
+1% discount rate will reduce the FV of the Portfolio by 15%, reducing the Operative NAV by £98.7 million which
represents a decrease of – 16p Operative NAV per share.
6. Cash and cash equivalents
Cash and cash equivalents comprise cash held by the Group available on demand, cash held in deposits and
cash in a money market fund. Cash and cash equivalents were as follows:
Cash available on demand
Cash held in deposits
Money market fund
Cash and cash equivalents
7. Trade and other receivables
Loan receivable
Income receivable
Accrued income
VAT recoverable
Prepayments
Trade and other receivables
31 March 2020
£
31 March 2019
£
5,642,057
3,138
8,453,179
3,720,550
37,064,106
67,699,096
14,098,374 108,483,752
31 March 2020
£
31 March 2019
£
–
12,392,520
28,954,040
–
1,094,033
3,957,500
2,040,135
3,847,679
852,201
110,883
42,440,593
10,808,398
Hipgnosis Songs Fund Limited
Annual Report 2020
101
Financial Statements
8. Other payables and accrued expenses
Investment acquisition payable
Performance fee
Accrued borrowing costs
Loan interest payable
Amounts owed to Songwriters
Administration fees
Legal and professional fees
Advisory fees
VAT payable
Audit fees
Corporation tax
Other expenses
31 March 2020
£
31 March 2019
£
31,081,376
–
2,867,849
233,537
103,888
169,412
392,722
547,475
11,773
241,765
2,627,197
134,454
37,711,582
429,054
–
–
97,352
101,528
110,533
–
–
100,000
632,521
9,572
Other payables and accrued expenses
38,411,448
39,192,142
As at 31 March 2020 an amount of £31,081,376 relating to the acquisition prices for five Catalogues remained
outstanding (31 March 2019: £37,711,582, relating to the acquisition prices for three Catalogues). Since 31 March 2020
the Investment acquisitions payable has reduced, following subsequent payments, to £9,570,857 at 31 May 2020
(17 May 2019: £nil).
9. Revolving credit facility
On 2 September 2019 it was announced the Company had entered into a Revolving Credit Facility, (RCF), with
JP Morgan Chase Bank (JPM) as Lead Arranger of £100 million which was uplifted post year end to £150 million.
As detailed in Note 21, this is capped at £150 million though calculated as 20% of most recent music catalogue
valuation and 20% of acquisitions since most recent valuation valued at purchase price, capped at £20m. The loan
bears interest at 3.75%. The Revolving Credit Facility, which had an original maturity date of 29 August 2022 and
has been extended for a further three years to 2 April 2025 on 15 April 2020, provides the Company with greater
flexibility to fund investments and provide additional working capital. The RCF’s key covenant imposes a loan
to value test and a liquidity test reviewed quarterly and is secured by, inter alia, a charge over the shares in all the
subsidiaries of the Company and over all of their assets including all Catalogues of Songs of the Company held
through these subsidiaries, a charge over the bank accounts of the Company and a floating charge over all its
assets the fair value of which deemed by JPM. The Company has also provided a parent company guarantee.
In accordance with the Investment Policy, any borrowings by the Company will not exceed 30 percent of the
value of the net assets of the Company.
During the year £4,380,727 of costs relating to the set-up of the Revolving Credit Facility were capitalised, to be
amortised over the 5 year length of the agreement, with £3,917,237 remaining on the Statement of Financial Position
at the year end.
At the year end £60,000,000 remained drawn down with £374,675 paid in interest. This figure is drawn in Sterling
as both Hipgnosis Holdings UK Limited and Hipgnosis Songs Fund Limited, which are the principal Group companies
party to the RCF, are English and Guernsey companies respectively.
102
Annual Report 2020
Hipgnosis Songs Fund Limited
Notes to the Consolidated Financial StatementsFor the year ended 31 March 2020
10. Share capital and capital management
The share capital of the Company may consist of an unlimited number of: (i) Ordinary Shares of no par value which
upon issue the Directors may classify as Ordinary Shares; and (ii) C Shares denominated in such currencies as the
Directors may determine.
Ordinary Shares of no par value
Issued and fully paid:
Shares as at 1 April 2019
Shares issued on 17 April 2019
Shares issued on 29 August 2019
Shares issued on 30 December 20191
Shares issued on 10 February 20202
Shares as at 31 March 2020
Issued and fully paid:
Share capital at 1 April 2019
Shares issued on 17 April 2019
Share issue costs
Shares issued on 29 August 2019
Share issue costs
Shares issued on 30 December 20191
Share issue costs
Shares issued on 10 February 20202
Share issue costs
Shares as at 31 March 2020
Issued and fully paid:
Shares issued on 11 July 2018
Shares as at 31 March 2019
Issued and fully paid:
Shares issued on 11 July 2018
Share issue costs
Shares as at 31 March 2019
No.
202,176,800
138,750,000
48,429,541
207,946
226,287,600
615,851,887
£
198,221,140
141,525,000
(2,853,852)
51,093,166
(981,727)
225,884
–
231,000,000
(4,021,571)
614,208,042
No.
202,176,800
202,176,800
£
202,176,800
(3,955,660)
198,221,140
1 Shares issued as performance fee in respect of year ended 31 March 2019.
2 231,000,000 C Shares converted to 226,287,600 Ordinary Shares.
During the year 231,000,000 C Shares were issued on 22 October 2019 and converted on 10 February 2020
to 226,287,600 Ordinary Shares at a conversion rate of 0.9796 Ordinary Shares for each C Share held.
Under the Company’s Articles of Incorporation, each Shareholder present in person or by proxy has the right to one
vote at general meetings. On a poll, each Shareholder is entitled to one vote for every Ordinary Share held.
Shareholders are entitled to all dividends paid by the Company and, on a winding up, provided the Company has
satisfied all of its liabilities, the Shareholders are entitled to all of the residual assets of the Company.
Hipgnosis Songs Fund Limited
Annual Report 2020
103
Financial Statements
11. Net Asset Value per Share and Operative Net Asset Value per Share
Number of Ordinary Shares in issue
IFRS NAV per share (pence)
Operative NAV per share (pence)
31 March 2020
31 March 2019
615,851,887
100.91
116.73
202,176,800
98.21
103.27
The IFRS NAV per share and the Operative NAV per share are arrived at by dividing the IFRS Net Assets and
Operative Net Assets (respectively) by the number of Ordinary Shares in issue.
Catalogues of Songs are classified as intangible assets and measured at amortised cost or cost less impairment
in accordance with IFRS.
The Directors are of the opinion that an Operative NAV provides a meaningful alternative performance measure
and the values of Catalogues of Songs are based on fair values produced by the portfolio Independent Valuer.
Reconciliation of IFRS NAV to Operative NAV
IFRS NAV
Adjustments for revaluation of Catalogues of Songs to fair value
Reversal of amortisation
Operative NAV
12. Revenue
Mechanical income
Performance income
Digital downloads income
Streaming income
Synchronisation income
Producer royalties
Masters Income
Writer’s share income
Other income*
Total revenue
31 March 2020
£
31 March 2019
£
621,479,961 198,558,826
76,964,123
20,419,210
8,743,795
1,491,922
718,863,294 208,794,543
31 March 2020
£
31 March 2019
£
3,455,973
10,074,708
2,290,250
11,985,267
6,038,054
3,933,048
4,275,739
21,494,155
1,147,306
417,487
1,104,493
232,741
1,285,485
1,212,161
–
–
2,914,228
52,257
64,694,500
7,218,852
*Other Income refers to any income not covered by the other income types, for example sheet income and lyric exploitation.
There is an inherent time lag with royalties between the time a Song is performed, and the revenue being
received by the Copyright owner. The time lag ranges from 3-6 months on domestic income and 12-18 months
on international income. The revenue accruals booked in the period are disclosed in detail within the Accruals
and Receivables.
All revenue streams disclosed in this Note are in scope of IFRS 15.
104
Annual Report 2020
Hipgnosis Songs Fund Limited
Notes to the Consolidated Financial StatementsFor the year ended 31 March 2020
13. Other operating expenses
Regulatory fees
Listing fees
Directors and officers Insurance
Directors expenses
Registrar fees
Postage, stationery and printing
Public relation fees
Travel and accommodation fees
Bank charges
Credit facility bank charges
Aborted Deal Expenses
Disbursements and sundry
Total other operating expenses
14. FX Gains and losses in Profit or Loss
FX Gain/(loss) creditors/debtors
FX Gain/(loss) cash and cash equivalents
Total FX Gain/(loss)
Currency risk is discussed further in Note 16.
15. Dividends
A summary of the dividends is set out below:
1 April 2019 to 31 March 2020
Interim dividend in respect of quarter ended 31 March 2019
Interim dividend in respect of quarter ended 30 June 2019
Interim dividend in respect of quarter ended 30 September 2019
Interim dividend in respect of quarter ended 31 December 2019
8 June 2018 to 31 March 2019
Interim dividend in respect of period ended 30 September 2018
Interim dividend in respect of period ended 31 December 2018
1 April 2019 to
31 March 2020
£
8 June 2018 to
31 March 2019
£
33,958
385,562
20,601
2,238
36,329
16,790
275,133
339,853
19,297
19,000
237,152
140,697
8,605
17,667
14,104
1,329
6,306
12,777
48,371
88,438
4,469
–
–
65,755
1,526,610
267,821
31 March 2020
£
31 March 2019
£
(1,136,630)
(2,917,179)
796
103,977
4,053,809
104,773
Dividend per share
Pence
Total dividend
£
1.25
1.25
1.25
1.25
4,261,585
4,261,585
4,866,954
4,869,554
5.00
18,259,678
Dividend per share
Pence
Total dividend
£
0.50
0.50
1.00
1,010,884
1,010,884
2,021,768
Subsequent to the year end, the Company announced an interim dividend for the first quarter of the new financial
year from 1 April to 30 June 2020 of 1.25p per Ordinary Share.
Hipgnosis Songs Fund Limited
Annual Report 2020
105
Financial Statements
16. Financial Risk Management
Financial Risk Management Objectives
The Company’s activities expose it to various types of financial risk, principally market risk, credit risk, and liquidity
risk. The Board has overall responsibility for the Company’s risk management and sets policies to manage those risks
at an acceptable level.
Fair values
Management assessed that the fair values of cash and cash equivalents, trade and other receivables, trade and
other payables and royalty advances approximate their carrying amount largely due to the short-term maturities
and high credit quality of these instruments.
Capital Risk Management
The Company manages its capital to ensure that the Company will be able to continue as a going concern while
maximising the capital return to Shareholders. The capital structure of the Company consists of issued share capital
and retained earnings, as stated in the Statement of Financial Position.
In order to maintain or adjust the capital structure, the Company may buy back shares or issue new shares. There
are no external capital requirements imposed on the Company.
During the year ended 31 March 2020, the Company drew down £60,000,000 from the RCF which remained drawn
down as at 31 March 2020 (31 March 2019: nil).
The Company’s investment policy is set out in the Investment Objective and Policy section of the Annual
Report, on page 22.
Market Risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result
of changes in market prices. The Company is exposed to currency risk and interest rate risk.
a) Currency risk
Currency risk is the risk that the fair values of future cashflows will fluctuate because of changes in foreign exchange
rates. The revenue earned from the Catalogue of Songs may be subject to foreign currency fluctuations.
Royalties are earned globally and paid in a number of currencies, therefore the Company may be impacted
by adverse currency movements. The Company will convert the majority of overseas currency receipts into Sterling
by agreeing to currency exchange arrangements with collection agents, or otherwise itself undertaking foreign
exchange conversions. The Company may engage in full or partial foreign currency hedging and interest rate
hedging. The Company will not enter into such arrangements for investment purposes.
106
Annual Report 2020
Hipgnosis Songs Fund Limited
Notes to the Consolidated Financial StatementsFor the year ended 31 March 2020
The currencies in which financial assets and liabilities are denominated are shown below:
As at 31 March 2020
Trade and other receivables
Cash and cash equivalents
Total financial assets
Revolving Credit Facility
Trade and other payables
Total financial liabilities
Net asset position
GBP
£
6,540,128
8,830,608
USD
Converted to
£
35,124,967
5,031,014
EUR
Converted to
£
Total
£
775,498
236,752
42,440,593
14,098,374
15,370,736
40,155,981
1,012,250
56,538,967
60,000,000
7,161,908
–
31,172,786
–
76,754
60,000,000
38,411,448
67,161,908
31,172,786
76,754
98,411,448
(51,791,172)
8,983,195*
935,496** (41,872,481)
*At the reporting date 31 March 2020, if the USD had strengthened/weakened by 10% against GBP with all other variables held constant, the net assets and movement
in profit and loss would have been £898,320 higher/lower.
**At the reporting date 31 March 2020, if the EUR had strengthened/weakened by 10% against GBP with all other variables held constant, the net assets and movement
in profit and loss would have been £93,550 higher/lower.
As at 31 March 2019
Trade and other receivables
Cash and cash equivalents
Total financial assets
Trade and other payables
Total financial liabilities
Net asset position
GBP
£
1,185,147
27,217,708
USD
Converted to
£
9,623,168
81,266,044
28,402,855
90,889,212
39,154,329
39,154,329
37,813
37,813
EUR
Converted to
£
Total
£
83
–
10,808,398
108,483,752
83 119,292,150
–
–
39,192,142
39,192,142
(10,751,474)
90,851,399*
83** 80,100,008
*At the reporting date 31 March 2019, if the USD had strengthened/weakened by 10% against GBP with all other variables held constant, the net assets and movement in profit
and loss would have been £10,094,600 higher/lower.
**At the reporting date 31 March 2019, if the EUR had strengthened/weakened by 10% against GBP with all other variables held constant, the net assets and movement
in profit and loss would have been £9 higher/£8 lower.
b) Cash flow and fair value interest rate risk
The Company is exposed to cash flow interest rate risk on cash and cash equivalents and also on the interest
bearing RCF. The RCF bears interest at 3.75% which when annualised for the £60 million drawn down at the
year end would have been covered 6.2 times by the closing cash balance at 31 March 2020. This interest
rate is the London Interbank Offered Rate (LIBOR) rolling over at 7 Nov 2020, the Company is able to elect 1, 3
or 6 month rollovers.
Credit Risk
Credit risk is the risk of loss due to failure of a counterparty to fulfil its contractual obligations. The Group is exposed
to credit risk in respect of its contracts with PROs. This exposure is minimised by dealing with reputable PROs whose
credit risk is deemed to be low given their respective position in the industry.
As reported in Note 3, there is no impairment of the receivables balance, credit risk of third parties has been taken
into account when calculating accruals, and expected credit loss has been deemed nil, or close to nil.
The Group is exposed to credit risk through its balances with banks and its indirect holdings of money market
instruments through those money market funds which are classified as cash equivalents for the purposes of these
Consolidated Financial Statements.
Hipgnosis Songs Fund Limited
Annual Report 2020
107
Financial Statements
16. Financial Risk Management (continued)
The table below shows the Group’s material cash balances and the short-term issuer credit rating or money-market
fund credit rating as at the year end date:
Barclays Bank plc
Investec Bank plc
Blackrock Institutional Sterling Liquidity Fund
*Rated by Standard & Poor’s
**Rated by Moody’s
Location
Guernsey
UK
UK
Rating
A-1*
P-1**
AAAm*
31 March 2020
£
31 March 2019
£
5,642,057
3,138
8,453,179
3,720,550
37,064,106
67,699,096
Liquidity Risk
Liquidity risk is the risk that the Company will encounter in realising assets or otherwise raising funds to meet financial
commitments. The Company’s liquidity risk is managed on an ongoing basis by the Investment Adviser and
Directors on a monthly basis.
Liquidity risk is the risk that the Company may not be able to meet their financial obligations as they fall due.
The Company maintains a prudent approach to liquidity management by maintaining sufficient cash reserves
to meet foreseeable working capital requirements. In order to mitigate liquidity risk, the Group aims to have
sufficient cash balances to meet its obligations for a period of at least twelve months.
The Company prepares a 12 month rolling cash forecast, which is reviewed by the Board on a monthly basis.
The cash flow forecast includes a sensitivity analysis with downside scenarios on income streams impacted
specifically relating to COVID-19. Cash is delivered with royalty statements, and the majority are delivered quarterly
or semi-annually. A small number of collections are delivered monthly. Cash is collected and processed throughout
calendar quarters or half years by the administrators and paid out on either 60/90 day accounting.
During the year ended 31 March 2020, the Group had no financial liabilities other than the RCF and trade and
other payables.
108
Annual Report 2020
Hipgnosis Songs Fund Limited
Notes to the Consolidated Financial StatementsFor the year ended 31 March 2020
At the reporting date, the Company’s financial assets and financial liabilities are:
Trade and other
receivables
Income receivable
Accrued income
Prepayments
Carrying
amount
assets
£’000
12,393
28,954
1,094
Less than
1 month
£’000
9,677
10,004
1,094
1-3
months
£’000
2,716
5,699
–
3-12
months
£’000
–
13,251
–
Total
42,441
20,775
8,415
13,251
Between
1 and 2
years
£’000
Between
2 and 5
years
£’000
Total
Over contractual
cash flows
£’000
5 years
£’000
–
–
–
–
–
–
–
–
–
–
–
–
12,393
28,954
1,094
42,441
Other payables and
accrued expenses
Bank loan
Investment acquisition
payable
RCF costs accrued
Loan interest payable
Amounts owed to songwriter
Administration fees
Legal & professional fees
Advisory fees
Audit fees
VAT
Corporation tax
Other expenses
Carrying
amount
assets
£’000
60,000
31,081
2,868
234
104
169
386
547
242
11
2,627
141
Less than
1 month
£’000
–
20,312
2,868
–
–
169
386
547
123
–
–
141
1-3
months
£’000
–
1,277
–
234
–
–
–
–
–
11
–
–
Total
98,410
24,546
1,522
Net receivable/(payable) (55,969)
(3,772)
6,893
3-12
months
£’000
Between
1 and 2
years
£’000
Between
2 and 5
years
£’000
Total
Over contractual
cash flows
£’000
5 years
£’000
–
–
60,000
5,588
–
–
104
–
–
–
119
–
2,627
–
8,438
4,813
921
–
–
–
–
–
–
–
–
–
–
2,984
–
–
–
–
–
–
–
–
–
–
921
62,984
(921) (62,984)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
60,000
31,081
2,868
234
104
169
386
547
242
11
2,627
141
98,410
(55,969)
17. Related Party Transactions and Directors’ remuneration
Parties are considered to be related if one party has the ability to control the other party or exercise significant
influence over the party in making financial or operational decisions.
The Company Directors’ fees for the year amounted to £260,420 with outstanding fees of £nil due to at year
end (31 March 2019: £121,936 with outstanding fees of £nil due at 31 March 2019). (see Corporate Governance
Report pages 44 to 47. Further detail on the additional payments made to the Directors is disclosed in the Report
on Remuneration on pages 65 to 66.
Merck Mercuriadis is the founder and owner of the Investment Adviser. Merck was a Director of Jonny Coffer Limited
and RubyRuby London (Limited) as at 31 March 2020 and stepped down from his duties on the 13 May 2020.
Hipgnosis Songs Fund Limited
Annual Report 2020
109
Financial Statements
18. Material Agreements
Investment Adviser
The Company has entered into an Investment Advisory Agreement with the Investment Adviser pursuant to which
the Investment Adviser will source Songs and provide recommendations to the Board on acquisition and disposal
strategies, manage and monitor royalty and/or fee income due to the Company from its copyrights and collection
agents, and develop strategies to maximise the earning potential of the Songs in the portfolio through improved
placement and coverage of Songs.
The Investment Adviser is entitled to receive an advisory fee (payable in cash) and a performance fee (usually
payable predominantly in Shares subject to an 18 month lock up arrangement). The full terms and conditions of the
calculation of the advisory and performance fees are disclosed in the Company’s prospectus, which is available
on the Company’s website (www.hipgnosissongs.com). However in summary:
Advisory Fee
The advisory fee is calculated at the rate of:
(i)
1% per annum of the Average Market Capitalisation up to, and including, £250 million;
(ii) 0.90% per annum of the Average Market Capitalisation in excess of £250 million and up to and including
£500 million; and
(iii) 0.80% per annum of the Average Market Capitalisation in excess of £500 million.
Performance fee
In respect of each accounting period, the Investment Adviser (or, where the Investment Adviser so directs, any
member of the Investment Adviser’s team) is entitled to receive a performance fee (the ‘‘Performance Fee’’) equal
to 10% of the Excess Total Return relating to that accounting period provided that the Performance Fee shall be
capped such that the sum of the advisory fee (payable in respect of the Average Market Capitalisation of Ordinary
Shares only) and the Performance Fee paid in respect of that accounting period is no more than 5% of the lower
of: (i) Net Asset Value; or (ii) Closing Market Capitalisation at the end of that accounting period.
The Excess Total Return for an accounting period is calculated by reference to: (i) the difference between the
Performance Share Price at the end of that Accounting Period and the higher of: (a) the Performance Hurdle
(being issue price compounded by 10% per annum from initial Admission subject to appropriate adjustments
in certain situations); and (b) high watermark (being the Performance Share Price at the end of the last Accounting
Period where a Performance Fee was payable); multiplied by (ii) the weighted average of the number of Ordinary
Shares in issue (excluding any shares held in treasury) at the end of each day during that accounting period.
For the purposes of calculating the Performance Fee:
‘‘Performance Share Price’’ means, in relation to each accounting period, the average of the middle market
quotations of the Ordinary Shares for the one month period ending on the last business day of that accounting
period (which shall be adjusted as appropriate: (i) to include any dividend declared but not paid where the
Ordinary Shares are quoted ex such dividend at any time during that month; (ii) to exclude any dividend paid
in respect of the shares during that month; and (iii) for the PSP Adjustments). During the period, the average of the
middle market quotations was 108.27p; and
‘‘PSP Adjustments’’ means adjustments to the Performance Share Price to (i) include the gross amount of any
dividends and/or distributions paid in respect of an Ordinary Share since initial Admission; and (ii) make such
adjustments to take account of C Shares as were agreed between the Company and the Investment Adviser,
acting reasonably and in good faith, at the time of issuance of such C Shares.
110
Annual Report 2020
Hipgnosis Songs Fund Limited
Notes to the Consolidated Financial StatementsFor the year ended 31 March 2020
The amount of Performance Fee payable to the Investment Adviser shall be paid in the form of a combination
of: (a) cash equal to all taxes or charges payable with respect to the Performance Fee by the Investment Adviser
or member(s) of the Investment Adviser’s Team; and (b) Ordinary Shares (‘‘Performance Shares’’) which are either
issued by the Company where the Ordinary Shares are on average trading at par or at a premium to the last
reported Operative NAV per Ordinary Share at the relevant time or purchased from the secondary market where
the Ordinary Shares are on average trading at a discount to the last reported Operative NAV per Ordinary Share
at the relevant time and transferred to, the Investment Adviser or member(s) of the Investment Adviser’s Team.
The Performance Shares is subject to 18 month lock-up arrangements.
There was no performance fee for the year with no amount accrued at the reporting date (31 March 2019: £429,054
had been accrued with the whole amount outstanding as at the reporting date).
Administration Agreement
Pursuant to the Administration Agreements: (i) Ocorian Administration (Guernsey) Limited has been appointed
as Administrator of the Company; and (ii) Ocorian Administration (UK) Limited has been appointed as administrator
to the subsidiaries. The Administrator or Ocorian Administration (UK) Limited (as applicable) are responsible for the
day to day administration of the Company and the subsidiaries which accedes to the relevant Administration
Agreement (including but not limited to the calculation and publication of the semi-annual NAV, the IFRS NAV
and Operative NAV) and general secretarial functions required by the Companies Law (including but not limited
to maintenance of the Company’s accounting and statutory records). For the purposes of the RCIS Rules, the
Administrator is the designated manager of the Company.
Investors should note that it is not possible for the Administrator or Ocorian Administration (UK) Limited to provide
any investment advice to investors.
Under the terms of the Administration Agreement between the Administrator and the Company, with effect
from 1 October 2019 the Administrator is entitled to a fixed fee of £172,500 (2019: £139,000) per annum for services
such as administration, accounting, corporate secretarial, corporate governance, regulatory compliance and
stock exchange continuing obligations. Additional ad hoc fees are payable in respect of certain additional
services. Administration fees for the year amounted to £418,660 (31 March 2019: £104,470) of which £28,891
(31 March 2019: £50,045) was outstanding at the year end.
Under the terms of the Administration Agreement between Ocorian Administration (UK) Limited and the subsidiaries,
with effect from 1 October 2019 the administrator is entitled to a fixed fee of £15,000 per annum (£14,000 per annum
effective from 1 January 2019) per subsidiary and £6,500 per annum per additional Catalogue held by a subsidiary
for services such as administration, corporate secretarial and accounting. Administration fees for the subsidiaries
for the year amounted to £398,337 (31 March 2019: £51,484) of which £140,521 (31 March 2019: nil) was outstanding
at the year end.
Registrar Agreement
Computershare Investor Services (Guernsey) Limited (a company incorporated in Guernsey on 3 September 2009
with registered number 50855) has been appointed as registrar to the Company pursuant to the Registrar
Agreement. In such capacity, the Registrar will be responsible for the transfer and settlement of Shares held
in certificated and uncertificated form. The Registrar is also entitled to reimbursement of all out of pocket costs,
expenses and charges properly incurred on behalf of the Company.
Under the terms of the Registrar Agreement, the Registrar is entitled to a fixed fee of £7,500 per annum in respect
of the Ordinary Shares and £5,500 per annum in respect of the C Shares (if applicable), together with additional
ad hoc fees in respect of additional out of scope services provided by the Registrar. Registrar fees for the year were
£6,306 with £1,440 outstanding at the reporting date.
Hipgnosis Songs Fund Limited
Annual Report 2020
111
Financial Statements
19. Earnings per share
Profit for the year (£)
Weighted average number of Ordinary Shares in issue
Earnings per share (pence)
Profit for the period (£)
Weighted average number of Ordinary Shares in issue
Earnings per share (pence)
Basic
25,193,911
410,527,510
6.14
Basic
2,359,454
202,176,800
1.17
31 March 2020
Diluted
25,193,911
410,527,510
6.14
31 March 2019
Diluted
2,359,454
202,176,800
1.17
The earnings per share is based on the profit or loss of the Group for the year and on the weighted average number
of Ordinary Shares for the year ended 31 March 2020.
There are no dilutive shares at 31 March 2020.
20. Auditor’s Remuneration
Audit and non-audit fees payable to the auditors can be analysed as follows:
PricewaterhouseCoopers Cl LLP FY 2020 audit fees*
PricewaterhouseCoopers Cl LLP audit fees
PricewaterhouseCoopers Cl LLP project accounting fees relating to the
migration to premium segment
PricewaterhouseCoopers Cl LLP C Share conversion fees
PricewaterhouseCoopers Cl LLP professional fees in relation to the
IPO in their role as reporting accountants
31 March 2020
£
31 March 2019
£
287,265
110,000
287,265
110,000
147,500
10,000
–
–
–
80,000
PricewaterhouseCoopers Cl LLP non audit fees
157,500
80,000
*This includes £26,000 relating to under accrued amount in year ending 31 March 2019
112
Annual Report 2020
Hipgnosis Songs Fund Limited
Notes to the Consolidated Financial StatementsFor the year ended 31 March 2020
21. Subsequent events
On 15 April 2020 the Company increased its Revolving Credit Facility from £100 million to £150 million. In addition
to the increase of the commitment of the Revolving Credit Facility, the maturity date has been extended from
29 August 2020 to 2 April 2025.
On 29 April 2020 the Company declared a dividend of 1.25p per Ordinary Share in respect of the quarter ended
31 March 2020 payable on 27 May 2020.
On 3 July 2020 the Company declared a dividend of 1.25p per Ordinary Share in respect of the quarter ended
30 June 2020 payable on 31 July 2020.
The lockdown due to COVID-19 has had a devastating impact on the economy. Despite music being uncorrelated
there are still certain income streams that have been impacted. Live events are not possible, and it may be 2021
before mass gatherings are widely permitted. Revenue from licenses issued to shops, gyms, bars and restaurants
that are temporarily closed will feel adverse effect despite most of them being annual licences paid in advance.
Given the inherent time-lag in the collection and accounting of the royalty statements the Company is currently
unable to quantify the impact of COVID-19 on revenue as the majority of these statements are to expected
until September 2020. The Company however continues to monitor the development and impact of COVID-19
and is mitigating any potential shortfall in revenues through the active management of synchronisation deals
where possible.
Music streaming however remains buoyant it is expected that this will outpace the decline in other revenues
streams, and this is reflected in Goldman Sachs’ COVID-19* report which projects that Song related revenues, across
music publishing, will grow by 3.5% overall in 2020.
* Source: Goldman Sachs (Equity Research), ‘Music in the Air, The show must go on’
Hipgnosis Songs Fund Limited
Annual Report 2020
113
Financial Statements
Additional Information
Contents
115 Alternative Performance Measures
116 Glossary of Capitalised Defined Terms
119 Directors and General Information
120 Corporate Summary
120 Advice to Shareholders
114
114
Annual Report 2020
Annual Report 2020
Hipgnosis Songs Fund Limited
Hipgnosis Songs Fund Limited
Alternative Performance Measures
Performance Measure
Definition
Reason for Use
Annualised ongoing charges
Adjusted Operating Costs
(£10,032,000) less Non Recurring
administrative expenses (£1,369,957)
over a twelve month period
Ongoing charges are a good
indicator of expenses likely to recur
in the foreseeable future
Adjusted Operating Costs
EPS excluding total Amortisation
NAV Return
Net Debt
Non Recurring
administrative expenses
Ongoing charges %
Operational expenses (£33,012,808)
excluding the cost of amortisation
of investments (£18,927,288) and
foreign exchange gains/losses
arising on investments (£4,053,809)
Profit after Tax excluding total
Amortisation (£44,121,199)
divided by Weighted average
number of Ordinary Shares
in issue (410,527,510)
Latest published Operative NAV per
share (116.7p as at 31 March 2020)
increase as a percentage
of the last published Operative
NAV per share 103.27p
as at 31 March 2019 equals 13%
Ongoing charges are a good
indicator of expenses likely to recur
in the foreseeable future
The Operating profit adjusted
for Amortisation aligns with the
Operative NAV which reflects that
the values of Catalogues of Songs
are based on fair values produced
by an Independent Valuer
To show how the assets have
performed over time to shareholders
Loan facility amount (£60,000,000
utilised less cash held in bank
(£14,098,000)
Liquidity metric used to determine
how well a company can
pay all of its debts if they were
due immediately
Exceptional Costs included
within legal and professional
fees (£758,130) plus Aborted deal
expenses (£237,152) plus Interest
Costs (£374,675)
Good indicator of expenses
not likely to recur in the
foreseeable future
Annualised ongoing charges
(£8,662,043) divided by weighted
average Operative NAV
(£570,576,564)
To monitor the likely to recur
expenses relative to the fund
size over time
The Operative NAV
Profit before Tax
Operating profit for the year/period
before taxation (£32,668,499) plus
total Amortisation (£18,927,288)
The Operating profit adjusted
for Amortisation aligns with the
Operative NAV which reflects that
the values of Catalogues of Songs
are based on fair values produced
by an Independent Valuer
Total NAV Return
Nav Return (13%) plus dividend yield
(4.7%, based on average share
price of 105p)
The average was taken given
the share issuance has grown
rapidly over the year
Weighted Average Operative NAV
Average of the Operative
NAV as at 30 September 2019
(£422,289,834) and the
Operative NAV as at 31 March 2020
(£718,863,294)
The average was taken given
the share issuance has grown
rapidly over the year
Hipgnosis Songs Fund Limited
Annual Report 2020
115
Additional Information
Glossary of Capitalised Defined Terms
“Administrator” means Ocorian Administration
(Guernsey) Limited;
“Board” or “Directors” means the Directors of the
Company;
“Admission” means admission, on 11 July 2018, to
trading on the SFS of the London Stock Exchange,
of the Ordinary Shares becoming effective in
accordance with the Listing Rules and/or the LSE
Admission Standards and on 25 September 2019 to
a Premium Listing on the Main Market;
“AEOI” means Automatic Exchange of Information;
“BMI” means Broadcast Music, Inc;
“BPI” means the British Phonographic Institute;
“Brexit” means the departure of the UK from the EU;
“C Shares” means a temporary and separate class of
shares which are issued at a fixed price determined by
the Company;
“AIC” means the Association of Investment
Companies;
“Catalogue” means one or more Songs acquired from
a single songwriter or artist;
“AIC Code” means the AIC Code of Corporate
Governance;
“CBS” means a US commercial broadcast television
and radio network;
“Annual General Meeting” or “AGM” means the
annual general meeting of the Company;
“Annual Report” or “Annual Report and
Consolidated Financial Statements” means the
annual publication of the Company provided to the
Shareholders to describe their operations and financial
conditions, together with their Consolidated Financial
Statements;
“Apple Music” means the music and video streaming
service developed by Apple Inc.;
“Articles of Incorporation” or “Articles” means the
articles of incorporation of the Company;
“ASCAP” means the American Society of Composers,
Authors and Publishers;
“Asset Management Committee” means a
committee which considers the ongoing management
and revenue maximisation of the Catalogues of Songs;
“Audit Committee” or “Audit and Risk Management
Committee” means a formal committee of the Board
with defined terms of reference;
“Average Market Capitalisation’’ means, in relation
to each month where the advisory fee is payable,
(‘‘A’’ multiplied by ‘‘B’’) plus (‘‘C’’ multiplied by ‘‘D’’),
where:
‘‘A’’ is the average of the middle market quotations
of the Ordinary Shares for the five day period ending
on the last business day of that month (adjusted
as appropriate to exclude any dividend where the
Ordinary Shares are quoted ex such dividend at any
time during that five day period);
“CD” means compact disc;
“CEO” means chief executive officer;
“CISAC” means the International Confederation of
Societies of Authors and Composers;
‘‘Closing Market Capitalisation’’ means, in relation to
each Accounting Period, ‘‘E’’ multiplied by ‘‘F’’, where:
‘‘E’’ is the Performance Share Price; and ‘‘F’’ is the
weighted average of the number of Ordinary Shares in
issue (excluding any Shares held in treasury) at the end
of each day during the Accounting Period;
“Companies Law” means the Companies (Guernsey)
Law, 2008, (as amended);
“Company” means Hipgnosis Songs Fund Limited.
References to the Company are also considered to be
references to the Group, where applicable;
“Company Secretary” means Ocorian Administration
(Guernsey) Limited;
“Consolidated Financial Statements” means
the audited financial statements of the Company,
including the Statement of Financial Position, the
Statement of Comprehensive Income, the Statement
of Cash Flows, the Statement of Changes in Equity and
associated notes;
“Conversion” means the conversion of C Shares to
Ordinary Shares;
“Copyright Royalty Board” means the US Copyright
Royalty Board;
“Corporate Broker” means Nplus1 Singer Advisory LLP
(N+1 Singer) and J P Morgan Securities plc;
‘‘B’’ is weighted average of the number of Ordinary
Shares in issue (excluding any Shares held in treasury)
at the end of each day during that month;
“Corporate Governance Code” means The UK
Corporate Governance Code 2019 as published by
the Financial Reporting Council;
“C’’ is the average of the middle market quotations
of a class of C Shares in issue for the five day period
ending on the last business day of that month
(adjusted as appropriate to exclude any dividend
where the C Shares of that class are quoted ex such
dividend at any time during that five day period); and
‘‘D’’ is weighted average of the number of that class of
C Shares in issue (excluding any Shares held in treasury)
at the end of each day during that month;
“COVID-19” means the global coronavirus pandemic;
“DCF” means discounted cash flow;
“Disclosure Guidance and Transparency Rules” or
“DTRs” mean the disclosure guidance published by
the FCA and the transparency rules made by the FCA
under section 73A of FSMA;
“Downloads” means royalties for the permanent
digital mechanical transfer of music;
116
Annual Report 2020
Hipgnosis Songs Fund Limited
“DSP” means digital service providers;
“Earnings per Share” or “EPS” means the Earnings per
Ordinary Share and is expressed in pounds Sterling;
“ECL” means expected credit losses;
“Excess Total Return” means for an accounting
period, it is calculated by reference to:
(i) the difference between the Performance Share
Price at the end of that accounting period and the
higher of: (a) the Performance Hurdle (being issue
price compounded by 10% per annum from initial
Admission subject to appropriate adjustments in
certain situations); and (b) high watermark (being
the Performance Share Price at the end of the last
accounting period where a performance fee was
payable); multiplied by
(ii) the weighted average of the number of Ordinary
Shares in issue (excluding any shares held in treasury) at
the end of each day during that accounting period;
“EU” means European Union;
“FCA” means the UK Financial Conduct Authority
(or its successor bodies);
“FRC” means Financial Reporting Council;
“FSMA” means the UK Financial Services and Markets
Act 2000;
“GFSC” or “Commission” means the Guernsey
Financial Services Commission;
“GFSC Code” means the GFSC Finance Sector Code
of Corporate Governance;
“GMR” means Global Music Rights;
“Grammy” means an award presented by the
Recording Academy to recognise achievements in the
music industry;
“Group” means Hipgnosis Songs Fund Limited and its
subsidiaries;
“IAS” means international accounting standards as
issued by the Board of the International Accounting
Standards Committee;
“IFPI” means International Federation of the
Phonographic Industry;
“IFRIC” means International Financial Reporting
Interpretations Committee;
“IFRS” means the International Financial Reporting
Standards, being the principles-based accounting
standards, interpretations and the framework by
that name issued by the International Accounting
Standards Board;
“IFRS NAV” means the value of the Gross Assets of
the Company less its liabilities (including accrued but
unpaid fees) in accordance with the accounting
policies adopted by the Directors;
“Independent Valuer” means Massarsky Consulting,
Inc., appointed by the Board to independently value
the Company’s Catalogues within the Portfolio;
“Interim Report” means the Company’s half yearly
report and unaudited condensed consolidated
financial statements for the period ended
30 September;
“Investment Adviser” means The Family (Music) Limited;
“Investment Advisory Agreement” means the
investment advisory agreement dated 27 June 2018
between The Family (Music) Limited, the Company
and Hipgnosis SFH I Limited;
“Investment Entity” means an entity whose business
purpose is to invest funds solely for returns from capital
appreciation, investment income or both;
“IPO” means the initial public offering of shares by
a private company to the public;
“ISAE 3402” means International Standard on
Assurance Engagements 3402, “Assurance Reports on
Controls at a Service Organisation;
“ISIN” means an International Securities Identification
Number;
“LGBTQQIAAP” means the abbreviation of ‘lesbian,
gay, bisexual, transgender, transsexual, queer,
questioning, intersex, asexual, allies, and pansexual.’
“LIBOR” means the London Interbank Offered Rate the
basic rate of interest used in lending between banks
on the London interbank market and also used as a
reference for setting the interest rate on other loans.
“Listing Rules” means the listing rules made by the
UK Listing Authority under section 73A FSMA;
“Live” means publishing revenue derived from the live
performance of music copyrights at concerts;
“London Stock Exchange” or “LSE” means London
Stock Exchange Plc;
“MAR” means EU regulation 596/2014 on market
abuse;
“MAU” means monthly active users;
“Mechanical” means royalties for reproducing music,
for example CD, vinyl, etc. (excluding mechanical
downloads and mechanical streaming);
“NAV per Share” means the Net Asset Value
attributable to the Ordinary Shares in issue divided
by the number of Ordinary Shares in issue (excluding
any Shares held in treasury) at the relevant time and
expressed in Sterling;
“Net Asset Value” or “NAV” means the value of the
assets of the Company less its liabilities as calculated in
accordance with the Company’s valuation policy and
expressed in pounds Sterling;
“Nomination Committee” means a formal committee
of the Board with defined terms of reference;
“Operative NAV” means NAV as adjusted for the fair
value of Catalogues of Songs;
Hipgnosis Songs Fund Limited
Annual Report 2020
117
Additional Information
Glossary of Capitalised Defined Terms
Continued
“Ordinary Shares” means redeemable ordinary shares
of no par value in the capital of the Company issued
and designated as “Ordinary Shares” and having
the rights, restrictions and entitlements set out in the
Articles;
“Recording Academy” means a US academy of
musicians, producers, recording engineers and other
musical professionals;
“Registrar” means Computershare Investor Services
(Guernsey) Limited;
“Other income” means any income not covered by
the other income types, for example sheet income
and lyric exploitation;
“Performance” means royalties for playing music
in public, for example TV/radio broadcasts, live
performance, etc. and paid through to the publisher;
“Performance Right Organisations” or “PROs”
means a performing rights organisation, such as PRS
or BMI, which represents and collects performance
royalties for and on behalf of each of its members;
“Performance Share Price” means in relation to
each accounting period, the average of the middle
market quotations of the Ordinary Shares for the one
month period ending on the last business day of that
accounting period;
“Portfolio” means the portfolio of Songs (whether
organised into Catalogues or otherwise) held by the
Company directly or indirectly from time to time;
“Portfolio Committee” means a committee which
approves all purchases of Catalogues of Songs;
“Preferred Portfolio Administrator” means the
portfolio administrators appointed by the Company
in order to assist with the administration of the
Portfolio including Kobalt Music Services Limited,
the Company’s preferred portfolio administrator;
“Premium Listing” means the a Premium Listing on the
Main Market of the London Stock Exchange;
“Premium to Operative NAV” means the situation
where the Ordinary Shares of the Company are trading
at a price higher than the Company’s Operative NAV;
“Prospectus” means the prospectus issued by the
Company on 27 June 2018 and further prospectus
published on 27 September 2019;
“PSP Adjustment” means adjustments to the
Performance Share Price to (i) include the gross
amount of any dividends and/or distributions paid in
respect of an Ordinary Share since initial Admission;
and (ii) make such adjustments to take account of
C Shares as were agreed between the Company and
the Investment Adviser, acting reasonably and in good
faith, at the time of issuance of such C Shares;
“Public Performance” means revenue generated
from licenses for the right to play music publicly in a
commercial environment e.g. shops, bars, restaurants
and shopping malls;
“QR” means quick response;
“Remuneration Committee” means a formal
committee of the Board with defined terms of
reference;
“RIAA” means Recording Industry Association
of America;
“SFS” means London Stock Exchange’s specialist fund
segment of the main market for listed securities;
“Shareholder” means the holder of one or more
Ordinary Shares;
“Song” means a songwriter's and/or publisher's
share of copyright interest in a song, being a
musical composition of words and/or music and the
songwriter's proportion of the publishing rights of a
single musical track, and when construction permits,
the collection of words and/or music as purchased by
consumers;
“Streaming” means performance and mechanical
royalties for digitally playing music in real-time, for
example through Spotify;
“Synchronisation” means royalties for playing music
in connection with visual media (for example film, TV,
advertisements);
“The-Dream” means the Catalogue purchased
from Terius Nash, better known by his stage name
‘The-Dream’;
“TMS” means the Catalogue purchased from an
English songwriting and music production team
comprised of Thomas ‘Froe’ Barnes, Benjamin Kohn
and Peter ‘Merf’ Keller;
“TV” means television;
“UK” or “United Kingdom” means the United Kingdom
of Great Britain and Northern Ireland;
“UKLA” means UK Listing Authority;
“US” or “United States” means the United States of
America, its territories and possessions, any state of the
United States and the District of Columbia;
“Writer’s Share” means performance royalties
collected by a Performance Rights Organisation and
paid through directly to the songwriter as opposed to
the publisher share of performance;
“YouTube” means the US video-sharing website;
“£” or “Pounds Sterling” or “Sterling” means British
pound sterling and “p” or “pence” means British
pence;
“RCIS Rules” means the Registered Collective
Investment Scheme Rules 2015;
“$” or “USD” means United States dollars and “cents”
means United States cents; and
“Record Labels” means a company that owns,
distributes and promotes musical recordings;
“€” or “EUR” means the official currency of the
majority of member states of the EU.
118
Annual Report 2020
Hipgnosis Songs Fund Limited
Directors and General Information
Company Registration Number: 65158
Board of Directors
Chair – Andrew Sutch
Senior Independent
Director – Paul Burger
Andrew Wilkinson
Simon Holden
Sylvia Coleman
Founder
Merck Mercuriadis
Advisory Board
Nile Rodgers
The-Dream
Giorgio Tuinfort
Starrah
Nick Jarjour
David Stewart
Bill Leibowitz
Ian Montone
Jason Flom
Poo Bear
Investment Adviser
The Family (Music) Limited
Merck Mercuriadis, CEO
Bjorn Lindvall, COO
Chris Helm, CFO
35 Tileyard Studios
Tileyard Rd
Kings Cross
London
N7 9AH
www.hipgnosissongs.com
Registered Office
PO Box 286
Floor 2
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 4LY
Administrator and
Company Secretary
Estera International Fund
Managers (Guernsey) Limited
(merged with Ocorian
10 September 2019)
PO Box 286
Floor 2
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 4LY
Effective from 6 April 2020
Ocorian Administration
(Guernsey) Limited
PO Box 286
Floor 2
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 4LY
Corporate Brokers
N+1 Singer Advisory LLP
1 Bartholomew Lane
London
EC2N 2AX
J P Morgan Securities plc
(Appointed 10 September 2019)
25 Bank Street
Canary Wharf
London
E14 5JP
Independent Auditor
PricewaterhouseCoopers Cl LLP
Royal Bank Place
1 Glategny Esplanade
St Peter Port
Guernsey
GY1 2HJ
Music Specialist Legal Counsel
Bill Leibowitz
271 Madison Avenue
20th Floor
New York
New York 10016
Legal Advisers to the Company
Herbert Smith Freehills LLP
Exchange House
Primrose Street
London
EC2A 2EG
Legal Advisers to the Company
as to Guernsey Law
Ogier (Guernsey) LLP
Redwood House
St Julian’s Avenue
St Peter Port
Guernsey
GY1 1WA
Principal Banker
Barclays Bank PLC
PO Box 41
Le Marchant House
St Peter Port
Guernsey
GY1 3BE
Registrar
Computershare Investor Services
(Guernsey) Limited
1st Floor
Tudor House
Le Bordage
St Peter Port
Guernsey
GY1 1DB
Identifiers
ISIN: GG00BFYT9H72
Ticker: Song
SEDOL: BFYT9H7
Website: www.hipgnosissongs.com
LEI: 213800XJIPNDVKXMOC11
GIIN: 5XGPC8.99999.SL.831
Managing your account online
The Company’s registrar,
Computershare Investor Services
(Guernsey) Limited, allows you
to manage your shareholding
online. If you are a direct investor
you can view your shareholding,
change the way the registrar
communicates with you and buy
and sell shares. If you haven’t
used this service before, all you
need to do is enter the name
of the Company and register
your account at:
https://www-uk.computershare.
com/investor.
You’ll need your Investor code (IVC)
printed on your share certificate
in order to register.
Hipgnosis Songs Fund Limited
Annual Report 2020
119
Additional Information
Corporate Summary
Advice to Shareholders
Structure
The Company is an investment company limited by
shares, registered and incorporated in Guernsey under the
Companies Law on 8 June 2018. The Company is registered
with the Guernsey Financial Services Commission under the
Registered Collective Investment Scheme Rules 2015, and
the Protection of Investors (Bailiwick of Guernsey) Law, 1987,
as amended. The Company is not authorised or regulated
by the Financial Conduct Authority.
The Company makes and manages its investments directly
or indirectly through a number of wholly owned subsidiary
companies incorporated in England & Wales, together
referred to as the Group.
Investment Process
The Company's Investment Adviser, The Family (Music)
Limited, was founded by Merck Mercuriadis. Merck is the
manager and/or former manager of globally successful
recording artists such as Elton John, Guns N' Roses, Morrissey,
Iron Maiden, Nile Rodgers and Beyoncé, and hit songwriters
such as Diane Warren, Justin Tranter and The-Dream. Merck
is the former CEO of The Sanctuary Group plc.
The Family (Music) Limited has been appointed by the Board
to source Songs and provide recommendations to the Board
on acquisition and disposal strategies. The Investment Adviser
is also responsible for managing and monitoring royalty and/
or fee income due to the Company from its copyrights and
collection agents, and developing strategies to maximise
the earnings potential of the Songs in the portfolio through
improved placement and coverage of Songs.
The Investment Adviser continues to assemble an Advisory
Board of highly successful music industry experts which
include award winning members of the artist, songwriter,
publishing, legal, financial, recorded music and music
management communities, all with in-depth knowledge
of music publishing and access to a significant network
of relationships in the music industry.
The Board has formed a Portfolio Committee which
considers the recommendations of the Investment Adviser
before granting its approval to purchase the Catalogues
of Songs, as well as an Asset Management Committee
which considers the ongoing management and revenue
maximisation of the Catalogues of Songs. These committees
are chaired by Mr Burger and Mr Sutch, respectively.
AIC
The Company is a member of the Association of
Investment Companies, complies with the AIC Code and
is the sole constituent of the AIC’s “Royalties” Specialist
Investment Trusts sector classification. The Company’s
page on the AIC’s website is at https://www.theaic.co.uk/
companydata/0P0001BL9D.
Website
The Company’s website, which can be found at
www.hipgnosissongs.com, includes information on the
Company, such as its launch prospectus, past reports
and accounts, policies, media coverage and regulatory
news announcements.
120
Annual Report 2020
Hipgnosis Songs Fund Limited
In recent years investment related scams have become
increasingly sophisticated and difficult to spot. We are therefore
warning all our Shareholders to be cautious so that they can
protect themselves and spot the warning signs.
Fraudsters will often:
• contact you out of the blue
• apply pressure to invest quickly
• downplay the risks to your money
• promise tempting returns that sound too good to be true
• say that they are only making the offer available to you
• ask you to not tell anyone else about it
You can avoid investment scams by:
• Rejecting unexpected offers – Scammers usually cold
call but contact can also come by email, post, word
of mouth or at a seminar. If you have been offered
an investment out of the blue, chances are it’s a high risk
investment or a scam.
• Checking the FCA Warning List – Use the FCA Warning List
to check the risks of a potential investment. You can also
search to see if the firm is known to be operating without
proper FCA authorisation.
• Getting impartial advice – Before investing get impartial
advice and don’t use an adviser from the firm that
contacted you. If you are suspicious, report it
• You can report the firm or scam to the FCA by contacting
their Consumer Helpline on 0800 111 6768 or using their
online reporting form.
• If you have lost money in a scam, contact Action Fraud
on 0300 123 2040 or www.actionfraud.police.uk.
For further helpful information about investment scams and
how to avoid them please visit www.fca.org.uk/scamsmart.
Cautionary Statement
The Chair’s Statement, the Investment Adviser’s Report and the Report of the
Directors have been prepared solely to provide additional information for
shareholders to assess the Company’s strategies and the potential for those
strategies to succeed. These should not be relied on by any other party or for any
other purpose.
The Chair’s Statement, Investment Adviser’s Report and the Report of the
Directors may include statements that are, or may be deemed to be, “forward-
looking statements”. These forward-looking statements can be identified by the
use of forward-looking terminology, including the terms “believes”, “estimates”,
“anticipates”, “expects”, “intends”, “may”, “will” or “should” or, in each case, their
negative or other variations or comparable terminology.
These forward-looking statements include all matters that are not historical facts.
They appear in a number of places throughout this document and include
statements regarding the intentions, beliefs or current expectations of the Directors
and the Investment Adviser, concerning, amongst other things, the investment
objectives and investment policy, financing strategies, investment performance,
results of operations, financial condition, liquidity, prospects, and distribution policy
of the Company and the markets in which it invests.
By their nature, forward-looking statements involve risks and uncertainties because
they relate to events and depend on circumstances that may or may not occur
in the future. Forward-looking statements are not guarantees of future performance.
The Company’s actual investment performance, results of operations, financial
condition, liquidity, distribution policy and the development of its financing strategies
may differ materially from the impression created by the forward-looking statements
contained in this document.
Subject to their legal and regulatory obligations, the Directors and the Investment
Adviser expressly disclaim any obligations to update or revise any forward-looking
statement contained herein to reflect any change in expectations with regard
thereto or any change in events, conditions or circumstances on which any
statement is based.
Hipgnosis Songs Fund Limited
PO Box 286, Floor 2, Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 4LY
Further information available online: www.hipgnosissongs.com
Follow Your Fire • All Loved Up • Empress • Better Life • Flames • Not In That Way • Shed A
Light • Get Ur Freak On • Million Reasons • End Of Time • Billionaire • Don’t • Bad Idea • My
Story • Raise Your Hands • Strawberries & Cigarettes • Think Before I Talk • Night Changes •
Ascension (Don’t Ever Wonder) • Purpose • Who Says You Can’t Go Home • Kiss The Sky
• Feel The Love • Talking To The Moon • Baby, You Make Me Crazy • Sexy Bitch • Run It • Nina •
Sky Full Of Song • Ride • Ghostin • Partition • Wings • Be The Man • King Of The Clouds
• 2 Phones • Chain Breaker • 1 + 1 • Lovin’, Touchin’, Squeezin’ • The Fire • Get Used To It • Two
Weeks • We Belong Together • Dangerous • Afire Love • Drops In The Ocean • Ask The Lonely
• Mi Gente • Drowns the Whiskey • Crying In The Club • God With Us • Upside Down • Mercy •
Faithful • Flawless • Let You Go • Love Is A Stranger • Best Song Ever • Marry Me • I Wish You
Would • Rockin’ That Thang • Luv • This One’s For You • Who’s That Girl? • Burning • The Louvre
• Faith • Accidently In Love • Gorilla • Wildflowers • Black And White • Never Say Goodbye •
In God I Trust • In These Arms • Countdown • Can’t Help But Wait • Shy Guy • Lamb Of God
• Sober • Hard 2 Face Reality • Is This Love • Bibia Be Ye Ye • Like To Be You • We Loved It • Mo
Money Mo Problems • Code Blue • Just Fine • Have A Nice Day • Sin Pijama • Adam’S Song
• Hope Is A Dangerous Thing For A Woman Like Me To Have- But I • My Type • Venice Bitch •
Heaven • Home • La La La • Send Her My Love • I Sip • Calling All My Lovelies • Nights With You
• Carry On • Bloodstream • No Money No Love • Try Sleeping With A Broken Heart • Last Day
Alive • Patricia • House On Fire • Taking Chances • Hold Me Tight Or Don’t • Ring The Alarm
• Kiss It Better • I’ll Sleep When I’m Dead • Coming Home • Novacane • Break Up Every
Night • First Date • Beat To My Melody • This Ain’t A Love Song • Old Fashioned • Without You • Youth
• Life Is Worth Living • Take It Back • Where Were You In The Morning • More Mess • Roaring 20s •
The Phone • Sweet Lady • Some
Body • Never Let You Go • Pick Up
• Ul Go Siph Ji Anh A • Captain
Nights • Lily Was Here • Buttons
Mars • Missionary Man • In The
Crash & The Beauty Queen From
Read All About It Part Iii • Dear
Name Of Love • Found In You •
• Keep On Runnin’ • I Luv Your Girl
Darlin’ • Dancing’s Not A Crime
Hard Feeling / Loveless • Sober Ii
• Boom Boom • Crazy=Genius •
• No Drama • Want To Want
(Melodrama) • Ahead Of Myself
Don’t Know • Kanye • My Heart
Me • Level Up • Higher • They
Know It All • Salute • Dammit •
Is Yours • Burning House • Mr
In Me • When Tomorrow Comes
New Love • Burnin’ It Down • Fire
Everything And Nothing Less •
• Way You Move • Cudi Zone •
Poppin • Magnify • Emperor’s
New Clothes • How To Be A
Heartbreaker • All On My Mind • Girl Is Mine • Hoodie • Joanne • Don’t Say • John Wayne • Mark
My Words • Gettin’ Warmed Up • One Of The Drunks • Black Hole Sun • Children • Steal My Girl •
Kiwi • Lost Highway • I Care • These Days • Wake Up Alone • Guts Over Fear • My Kind Of Love
• Diamonds • Bedroom Floor • Thank You For Loving Me • Hell Of A Night • Jesus Son
Of God • Don’t Call Me Angel (Charlie’s Angels) • Do What You Want To • Golden Days •
Why Can’t We Be Friends • Don’t Give In • Any Ol’ Barstool • Video Phone • Totally Spies
• Freedom • Lady • Writer In The Dark • Beautiful Goodbye • Will I See You • Young, Wild
And Free • Life On Earth • Caught Up • The Rock Show • Late Night Feelings • Bambola •
Girls • Satisfied • All That Matters • Hey Mama • Headlights • My Kinda Party • Exalted Over
All • You Are In Love • Guillotine • Show Me How You Burlesque • Miss You • This We Know •
Prayers Up • Breathe • Blood On Blood • Do You Know • May I Have This Dance • Always
• Infinity • Not In That Way • Shed A Light • Get Ur Freak On • Million Reasons • End Of
Time • Billionaire • Don’t • Bad Idea • My Story • Raise Your Hands • Strawberries & Cigarettes
• Think Before I Talk • Night Changes • Ascension (Don’t Ever Wonder) • Purpose •
Who Says You Can’t Go Home • Kiss The Sky • Feel The Love • Talking To The Moon
• Baby, You Make Me Crazy • Sexy B**** • Run It • Nina • Sky Full Of Song • Ride •
Ghostin • Partition • Wings • Be The Man • King Of The Clouds • 2 Phones • Chain Breaker
• 1 + 1 • Lovin’, Touchin’, Squeezin’ • The Fire (B-Unique) • Get Used To It • Two Weeks • We
Belong Together • Dangerous • Afire Love • Drops In The Ocean • Ask The Lonely • Mi Gente
• Drowns the Whiskey • Crying In The Club • God With Us • Upside Down • Mercy •
Faithful • Flawless • Let You Go • Love Is A Stranger • Best Song Ever • Marry Me • I Wish You Would
• Rockin’ That Thang • Who’s That Girl? • Never Say Goodbye •In God I Trust • In These Arms •
Hipgnosis Songs Fund Limited
Floor 2, Trafalgar Court, Les Banques
St Peter Port, Guernsey GY1 4LY
www.hipgnosissongs.com