Its often joked that we now have only two certainties in life: death, and fees.

But in the last 12 months ft alphaville is confident weve encounter a third: rnss from uk-listed hipgnosis songs fund a 1bn closed-end fund that spends in track royalties.

To say the fund is acquisitive could be an understatement. since its launch during summer of 2018, hipgnosis has splashed the 1.2bn its raised on around 60,000 tracks from bob dylan to blondie to neil teenage. it is like scarcely a few days passes before yet another news release lands inside our inbox announcing a deal, usually combined with a grandiose declaration from the perma-pouting president, merck mercuriadis.

Hipgnosiss pitch is not difficult to comprehend. long ago when, repayments from tracks had been lumpy and front-loaded because of the release period of real records. these days, thanks to the continual and growing nature of payments from online streaming systems, theyre smoother and much more bond-like. by aggregating magazines of songs into one investment, hipgnosis can make a stream of cash flows that can be paid out to investors. in a world starved of yield, a 4.3 percent dividend which uncorrelated along with other assets feels like a fairly great deal on paper.

The town of london is obviously enthused. hipgnosiss shareholder register listings brands such as for instance newton, baillie gifford and church of england fund supervisor ccla, to name but a few.

One analyst, however, isnt therefore yes. in an email posted thursday, stifels max haycock and his staff downgraded hipgnosis to simple on the straight back of issues in regards to the resources valuation methodologies and cash flow profile. we advice finding the piece whenever you can, but listed below are two of the tips made by mr haycock, which we think can be worth revealing.

Among the best how to measure a resources performance is through its net asset price (nav). a great principle is the fact that in the event that quantity increases, thats a very important thing and alternatively, if it goes down, thats bad. for resources that spend money on fluid assets with everyday prices including detailed equities investors can typically trust that net asset price is money great.

The matter becomes thornier with private and alternative possessions, where transactions tend to be slender, and much more available to manipulation. witness, by way of example, how neil woodford drove the valuation of just one his biggest exclusive assets benevolentai when you look at the middle 2010s, reserving nav gains for their own funds in the process. or lehman brothers infamous degree 3 asset disclosures back 2008. as our visitors might remember, neither tale finished well.

Most useful training then, whether with property, private equity or infrastructure, should cautiously mark the asset at price. then, if asset appreciates, you can easily realise an increase when its offered.

Whats odd however, is the fact that hipgnosis has got into a design of composing up its investments once its purchased all of them. heres mr haycock:

And heres figure 1:

Haycock once again:

Of program, instant uplifts in valuations results in a confident period for hipgnosis, by which they are able to boost more equity, get even more magazines, book much more gains and so forth. if that concept makes you uneasy, it wont assist to know that the fund rarely discloses the multiples of cash movement its investing in these tune magazines. as an example wednesdays declaration announcing the neil younger catalogue acquisition had 603 terms from mr mercuriadis, and zero regarding economics.

To once more state the bleedin obvious: in an income fund such as hipgnosis, income is crucial.

Yet, according to mr haycocks evaluation, cash collection is a little of a problem for hipgnosis.

From the note:

So up to 40 percent of accrued income owed may possibly not be gathered within annually? ouch.

Such a figure may be of issue to investors because accrued income is money owed which has however is invoiced, versus common receivables that will be cash invoiced and yet becoming obtained.

Accrued income is therefore often viewed as a lower-quality kind of earnings, specially as in the last it was at the heart of a number of accounting scandals especially at quindell, isoft and redcentric.

Still, theres small explanation to question hipgnosis wont be able to gather this money fundamentally, however when money investment is continually increasing fresh equity although it really is for acquisitions these types of numbers do about provide pause for thought.

Lets only hope the music keeps on playing.

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