Review - Amplify Music SEIS 5
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. Indeed many are heralding it as a new dawn for the music industry.
Whilst the amount earned by artists per stream is miniscule 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 (theoretically forever).
Amplify Music SEIS 5, the fifth 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.
- One of the few capital preservation focused SEIS
- Considerable downside protection via
non-returnable advances (typical to the music industry) which should underpin
50p per £1 invested
- Defined exit within three to four-years
- Risk spread over five artists
- Advance Assurance received
- SEIS3 certificates expected promptly: the company is already trading so tax certificates should arrive before the 31 January 2018 (not guaranteed)
- £10,000 minimum
Why investing in the music industry fits well with SEIS
The music industry is well suited to the 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.
Amplify 5 is a joint venture between Amp Channel Music and the Music Managers Forum (MMF). Amp is a company founded by Tom Bywater, a 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 SEIS, which aims to promote emerging talent.
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 5 seeks up-and-coming artists as well as those that have a proven live following.
Investors into Amplify 5 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)
Gone are the days when record sales were the most important source of revenue for recording artists. Today live events, merchandise sales, and synchronisation (selling songs into movies and adverts) are as important, if not more so, than record sales and radio airtime. Amplify Music SEIS 5 intends to invest in five recording artists with investors accessing all different revenue streams they generate.
Record sales now account for only 10-15% of revenue, even for a successful artist. Therefore it doesn't matter if record sales are in decline as live music and other revenue streams are increasingly important. The streaming market is growing rapidly and the future prospects for long-tail record revenues look bright. From the manager’s point of view, they don’t have a preference for the source of the revenue.
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 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 5, 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 are qualifying for SEIS purposes. When you consider SEIS tax relief of 50%, an investor should benefit from considerable downside protection.
With Amplify SEIS 5, the target return is £1.45 per £1 invested. 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 of returning at least 50 pence per £1 invested shortly after the third anniversary.
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 have made an effective profit.
The manager believes there are 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%-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 an SEIS investment, there are some 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 most 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 fairly standard.
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. As previously said although the artist in Amplify 1 wasn’t that successful (and unlike the later SEIS it only invested in one artist) 62 pence per £1 gross invested was returned to investors. With the tax relief at the time the effective profit was 24% for investors with SEIS tax relief only and a staggering 182% for investors with both SEIS tax relief and GCT wipe-out relief.
Amplify 2 is faring much better. It is expected to make an initial return of capital to investors in April 2017 of approximately 65 pence per £1 invested and, depending on the rate of growth in the streaming market, investors stand a fair chance of receiving back their £1 investment by the time the scheme eventually winds up.
This review is not intended to be advice or a personal recommendation to buy the investment mentioned, nor is it a research recommendation. Wealth Club aims to highlight investments we believe have merit, but investors should form their own view on any proposed investment and read the provider’s documents carefully.
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Please note that although the Investment Memorandum states a closing date of 31 March 2017, the offer has been reopened for 2017/18 and applications will continue to be accepted.
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