Kobalt, the music tech startup that has built a platform for rights holders to track incremental and full plays of music across a wide sea of platforms (in order to collect royalties on those plays), is announcing another big step in its bid to put its money where its mouth is. The company's fully owned subsidiary Kobalt Capital is unveiling a $600 million music royalties fund to buy up music copyrights to collect royalties themselves.
The fund's lead investor is the RPMI Railpen, the UK workers' pension fund, along with other institutional investors. Railpen had also been a significant investor in Kobalt Capital's previous $350 million fund, raised in tranches to help the company buy into music copyrights.
Willard Ahdritz, founder and CEO of Kobalt and CIO of Kobalt Capital Ltd, said in an interview last week that this first fund is now fully invested.
"I'm not allowed to tell you about the returns as we are regulated and I'm under orders not to disclose it, but I can tell you that we have been delivering the stated returns to investors," he said. "That's why our main investor from Fund I invested in Fund II."
That fund, over a series of about 100 deals, now owns things likes the back catalog for Steve Winwood, over 170 songs from his time with Traffic, Blind Faith and other acts; music from the catalog of Lindsey Buckingham from Fleetwood Mac; and music from the B-52s. (Artists that use the platform but whose copyrights are not owned by Kobalt include Paul McCartney, Dave Grohl, Maroon 5 and Skrillex.)
"Having crossed six years of activity in the first fund we have made over 100 investments and delivered attractive returns to our investors," said Johan Ahlström, CEO of Kobalt Capital Ltd., in a statement. "With the backing of prominent institutional investors, it validates our strategy and outlook for a robust music industry that is trending upward."
The fund is a special purpose vehicle -- that is, money that is raised not directly for the equity of Kobalt itself, but towards developing a secondary line of business that also happens to be tied to the company's main technology. The fund is divided up with $345 million in equity for the investors, with the rest in debt, and none of this part of its business sits on Kobalt's own balance sheet. "We're continuing with our service model," said Ahdritz. "We don’t want to own copyrights, but we want to be aligned with our customers."
In other words, with this fund, Kobalt remains at the same valuation as it had in its last round -- $789 million -- which was extended a couple of weeks ago when Bill Maris (the ex-GV founder who is now running an independent VC firm) put $14 million into Kobalt and joined the board.
The business of owning music copyright is an interesting counterpoint melody in the world of music today.
On the one hand, there has been a lot of discussion about the trials and tribulations of making money out of digital music. Some have asked just how profitable digital music companies like Spotify can ever become because of the money that they must pay to music rights holders, while at the same time there has also been an ongoing issue with artists complaining that they never actually get paid very much. (The most notable of these in the last few years has probably been when Taylor Swift removed music from Spotify for this reason, although there have been many other examples.)
But on the other hand, there is a lot of IP out there that is not being monetised that is ripe for the tracking, so to speak. So it makes sense that Kobalt would try to tap into its own technology to do that.
Ahdritz estimates that Kobalt has created "$3 billion in copyright value" for creators and music publishers that use its platform. And there are a lot of creators and publishers on there: Kobalt says that some 40 percent of the world's top 100 tracks are using Kobalt to collect revenues on full and partial plays of its music.
The move to buy up copyrights is a long-tail play around that, tapping into the many licenses that are essentially left on the table because no one else is bothering to collect on usage. Ahdritz said that in the previous fund, around half the deals were actually private deals, essentially cut between Kobalt Capital and the existing rights owners.
"We have a huge network of managers and lawyers of clients who want to be on our platform," he said, adding that even if artists or labels sell publishing rights, they tend to keep a residual right so they continue to get returns, and often more than they were getting before the sale. "We collect 40 percent more money for them than if they were not on our platform, just through the residual rights," he said. "That's why people want to move to our platform."
This article originally appeared on TechCrunch.