Review: Amplify Music SEIS 6
According to the Financial Times, music streaming has powered the fastest growth for the music industry in nearly two decades, and has helped offset shrinking digital and album sales. Some commentators, including Goldman Sachs, are heralding it as a new dawn for the music industry.
Whilst the amount earned by artists per stream is minuscule, it provides those involved with a potentially life long income. Traditionally consumers would buy an album and the artist/record company would receive a one off payment only, despite the buyer listening to the album for years to come. Streaming artists and record companies now get paid every time someone streams their song (potentially forever).
Amplify Music SEIS 6, the sixth incarnation of this popular SEIS fund, invests in five recording artists. Investors benefit from all the various types of revenue they generate. The artists are chosen by the members of the Music Managers Forum (MMF) who personally manage artists such as Radiohead, Robbie Williams, Mumford & Sons and Paul McCartney.
- Considerable downside protection via non-returnable advances, typical to the music industry, which should underpin 50p per £1 invested
- Exit expected within three to four years
- Risk spread over five artists chosen by the board members of the Music Managers’ Forum who personally manage artists such as Radiohead, Robbie Williams, Mumford & Sons and Paul McCartney
- Advance Assurance received
- £10,000 minimum investment
- You can apply online
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Why could investing in the music industry be a good fit with SEIS?
The music industry can be well suited to an SEIS structure. This is because standard industry practice is to seek non-returnable advances for live performances, distribution and publishing contracts. For example, an advance might guarantee 50% of ticket sales to a band for just turning up on a tour. Even if no tickets are sold, the tour financiers (i.e. the SEIS company) should get half their money back. When coupled with up to 50% income tax relief under SEIS this can provide attractive downside protection, unusual for a high risk SEIS investment.
How is the music industry doing?
The advent of streaming and illegal downloads has taken its toll. A lot has been made of declining CD sales – they fell 11.7% last year alone.
However, despite these challenges the UK music industry shows strong signs of good health. The fall of the CD has been offset by growing streaming and vinyl sales. Moreover, recorded music is just a small component of the wider music industry. Live music, merchandising and licensing are all booming. In 2015 a total audience of 27.7 million attended live music events in the UK. In the same year, 767,000 overseas music tourists attended live music concerts and festivals generating £1.1billion towards the UK economy.
British music dominates charts all over the world. Music makes a significant contribution to the UK’s economy. The Measuring Music report is an annual economic study of the industry. Last year the report found the sector contributed £4.1 billion overall to the UK’s economy. Music exports and employment were both up 11%, a faster growth rate than many other areas of the economy.
Amplify 6 is a joint venture between Amp Channel Music (“Amp”) and the Music Managers Forum (MMF). Amp is a company founded by Tom Bywater, an experienced financier with a passion for music. The MMF was established in 1992 and is the global trade body for artist managers. MMF board members represent internationally-acclaimed artists such as Arctic Monkeys, Robbie Williams and Sir Paul McCartney. Its only official tie-up is with the Amplify Music SEIS, which aims to promote emerging talent.
Watch a video interview with Tom Bywater:
Amplify’s business is to invest in artists. Historically the record industry itself provided investment to emerging artists, however they now tend to only invest in well-established acts, leaving a funding gap for earlier stage talent. Amplify 6 seeks up-and-coming artists as well as those that have a proven live following.
Investors into Amplify 6 will invest into 10 different companies, which will back five artists. Each artist has the backing of two SEIS companies: a recording company and a publishing / live events / merchandising one. The first pays for the recording of an album. The latter funds and benefits from all other music-related activity. Each pair of companies effectively takes a cut of all revenue the artist generates. Physical album sales (vinyl, CD, DVD and Blu-ray), digital album sales (streaming and subscription services), airtime on radio, ticket sales, merchandising and synchronisation fees are key revenue lines. Each Investee Company will undertake one of two separate trades:
- creating and exploiting recorded music and related products (Recording Companies)
- creating and exploiting songs, live performances, merchandising and related products (Publishing Companies)
Amp and MMF have different roles. MMF compiles a shortlist of suitable artists through their extensive contacts, crucially with managers who have the ability to exploit their financial potential. Amp structures each artist’s deal and makes the final decision on where to invest. MMF managers manage and run the investee companies. As part of the investment process and to spread and reduce risk, the managers will ensure a variety of different genres are covered, such as rock, pop, dance, urban, country, jazz and classical.
The managers are looking to identify prospective artists with key characteristics including:
- already generating revenues (or with a clear path to revenue generation expected within 18 months)
- ability to secure Non-Returnable Advances from suitable counterparties (in line with standard industry practice)
- high growth potential
- evidence that an artist’s recordings or performances are innovative and have market potential
Funds raised have to be used to retain the SEIS benefits. However, to help mitigate the risk, Amplify Music SEIS 6, like their previous offers, intends to underpin 50p in the £1 with advance payments against future revenues. These contractual advances come from publishers, event promoters and music distributors, all of which is standard practice in the music industry and should be qualifying for SEIS purposes. When you consider SEIS tax relief of 50%, an investor should benefit from considerable downside protection.
With Amplify 6, the target return is £1.45 per £1 invested, which is not guaranteed. Once investors have received 105 pence per share per company, the performance fee becomes payable (see details in "Fees" below).
There is a secondary target to return at least 50 pence per £1 invested shortly after the third anniversary, again not guaranteed.
The success of the artist remains important. However, the tax benefits mitigate the impact of any failures. For instance, Amplify 1 (a previous offer) featured only one artist whose revenue streams weren’t as good as predicted. As a result, investors have received 62 pence back compared to a £1 subscription price. However, once the income tax rebate and capital gains wipe out are taken in consideration, investors will have made an effective profit, although remember past performance is not a guide to the future.
The manager believes there are a number of different exit options.
As this is largely a cash-based business, they anticipate the underlying companies will have enough cash on the balance sheet to return some cash after the third anniversary. There could also be the option of selling the twin companies back to the artists if they have been particularly successful. 70% to 80% of the revenues are expected in the first three to four years, however there is a long-term income stream for successful artists, which has a resale value.
As well as the usual risks associated with a higher risk SEIS investment, there are additional considerations. The obvious risk is the individual artist may not deliver records on time or not sell enough tickets or merchandise for example. Much of previous profit has been generated from selling rights to use in TV and film, but this is a notoriously difficult market in which to prosper. Finally, the manager’s downside protection strategy might not work and the counterparty might not be able to honour their contractual guarantees. The downside protection strategy is based on advancing only part of the funds raised to the artist and requiring a percentage to be repaid before further advances.
This is an SEIS investing in the smallest unquoted companies. SEIS investments are illiquid and capital is at risk. Investors should only invest money they can afford to lose.
Tax rules can change and tax benefits depend on individual circumstances.
As with many SEIS, fees are relatively high. The upfront cost is 7%, charged to investee companies with an annual administration fee of 0.5%. In addition, each company will be charged £600 per month in directors’ fees. A performance fee is payable once investors have received £1.05 per £1 invested on an individual company basis, rather than on a portfolio basis. The management team receive 35% of any distribution above this level. This means if out of two companies one loses and the other makes money, a performance fee would still be payable. This isn’t particularly satisfactory, but is standard practice.
This is an innovative and proven way of tapping into the music world via SEIS. In our view it is a well thought out way of accessing SEIS benefits. It is structured sensibly to offer a degree of downside protection and, if an artist is successful, investors should profit. The team is experienced in SEIS (and EIS) management and appears to have the right contacts, crucial for this type of investment. It is encouraging to see the structure working in practice.
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Wealth Club aims to highlight investments we believe have merit, but you should form your own view. You should decide based on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination. 21.09.2017
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