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Hipgnosis shareholders are seeking to overhaul the board of the company that pioneered music rights as an investment but is now battling to win a make-or-break vote over its future.
Merck Mercuriadis, a former manager of stars including Beyoncé and Elton John, established Hipgnosis in 2018 and listed it in London as an investment trust. With interest rates at record lows, Mercuriadis dazzled investors with his pitch for music royalties, likening them to “oil or gold”.
But higher interest rates have hit music valuations, denting the market that Mercuriadis helped create when investors were hungry for alternatives to low-yielding government bonds. Shareholders have also expressed concerns over governance of the group.
Shares in Hipgnosis are down 44 per cent since hitting a record high in late 2021, preventing it from adding to a music catalogue that includes songs from Neil Young and Blondie.
Investor frustration came to a head last week when Hipgnosis axed its dividend after warning over a potential breach in covenants. Shareholders will decide at the group’s annual general meeting on Thursday whether to continue to back the investment trust for another five years.
The vote is a required for investment trusts in London, but has assumed huge significance given the struggles of Hipgnosis over the past year.
One top-ten Hipgnosis shareholder said that the company was at increasing risk of being unable to reach the 50 per cent threshold needed to continue as an investment trust. The investor said they had sounded out other shareholders.
If shareholders vote against Hipgnosis continuing as an investment trust, then the board would need to put forward proposals to reorganise the fund within six months.
Andrew Sutch, the chair of Hipgnosis, and board directors Andrew Wilkinson and Paul Burger will also face opposition from shareholders at the company’s annual shareholder meeting.
Tom Treanor, executive director at Asset Value Investors, a top-ten shareholder, said that AVI would vote against the reappointment of Sutch, Wilkinson and Burger. AVI will also vote against the company in the continuation vote.
In an open letter shareholders, activist investor Metage announced it would vote against the three directors, saying it had run out of patience with the turmoil at the company.
Sutch has already said that he would step down, while Wilkinson has said that he would retire as a board director, which will reduce the company’s board to five directors. However, a vote against their re-election would accelerate the changes.
Shareholders have been angered by several recent decisions as well as the widening gap between its share price and the value of its assets.
In an effort to raise cash and cut the group’s debts, the board in September proposed a $440mn music rights portfolio sale to a sister fund run and backed by private equity firm Blackstone. The sale is expected to be shot down at the AGM, with multiple investors telling the Financial Times that the price is too low.
Blackstone bought Mercuriadis’s management company in 2021 and set up a separate $1bn fund to buy song copyrights. Blackstone owns a controlling stake in Hipgnosis Songs Management, which collects fees for managing the listed Hipgnosis fund. HSM, which is tasked with maximising royalty revenue from the songs Hipgnosis acquires, last year posted an operating loss of £3mn, according to Companies House filings.
Blackstone declined to comment.
Blackstone was the highest-profile and biggest backer Mercuriadis attracted during a voracious acquisition spree that helped establish song royalties — historically an opaque, niche sector — into a mainstream asset class. Hipgnosis raised more than £1bn from investors, including the Church of England.
In a statement, Hipgnosis said that the group remains “uniquely positioned to deliver value to shareholders as a result of our deep relationship with the songwriters that make up the catalogue and our song management expertise. We intend to continue to demonstrate this through our actions.”
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