Of the many alternative investments outside stocks and bonds that pension funds can buy, a few are putting retirement money into music copyrights.
RPMI Railpen, the manager of one of the largest and oldest UK pension funds, is leading a $345 million investment in a fund rolled out Monday by Kobalt Capital, the subsidiary of music royalties collection and technology company Kobalt.
“With low expected returns from many traditional asset classes, we are prepared to allocate in alternative investments that can help us to pay members’ pensions well into the future,” Craig Heron, deputy investment director, RPMI Railpen, told CNBC this week in an email.
Through the fund, Railpen buys music copyrights and receives royalties collected by Kobalt.
“This is an innovative investment opportunity that offers the type of long-term returns that we need to meet our mission,” Heron said. “As a truly long-term investor we see our relationship with Kobalt as being an important one for us in the future.”
Founded in 2000, Kobalt counts artists such as The Chainsmokers, Miles Davis and Sam Smith as clients, and has developed software allowing clients to track their earnings from Spotify and other streaming services in real time. The company has attracted investors such as Michael Dell’s family fund and Hearst Entertainment.
In October, Google Ventures founder Bill Maris joined Kobalt’s board and led a $14 million investment round through his new fund, Section 32.
Kobalt founder and CEO Willard Ahdritz said that as of the beginning of November, Kobalt has extracted roughly $3 billion more in overall revenue from royalties for clients than they would have received by trying to track their earnings using traditional routes.
Such payouts could be attractive in a growing industry. In the first half of this year, total revenuesfrom streaming platforms for the U.S. music business grew 48 percent to $2.5 billion, according to The Recording Industry Association of America. Revenue from streams accounted for 62 percent of total retail revenue from recorded music in the U.S., which grew 17 percent in the first half of the year to $4 billion.
Meanwhile, U.S. and European stocks are near record highs. U.S. Treasury yields are rising as the Federal Reserve tightens monetary policy by reducing its balance sheet and raising short-term interest rates. The Bank of England also raised rates for the first time in more than a decade last week.
Bond prices fall when yields rise, and vice versa. Many prominent investors worry a sharp rise in yield will prompt a wave of investor money flowing into bonds out of stocks, while the equity market itself may have run too far ahead of actual economic growth.
In that environment, money managers are increasingly betting on alternative assets such as real estate and private equity funds. In 2016, the top 100 alternative asset managers in the world saw assets under management rise 10 percent to $4 trillion, according to an annual report from Willis Towers Watson released July 17. Pension funds contributed about $100 billion to that increase.
Railpen was one of two pension funds to invest in a similar fund Kobalt Capital launched in 2011. That first fund invested more than $350 million in music copyrights.
“In fund one I am proud to say we have executed and delivered the return we have promised our investors,” Ahdritz told CNBC in a phone interview. He pointed out that since music publishing is not correlated to the financial markets, “it’s very suitable for long-term investors like pension funds.”