Q+A: The $2 trillion asset class most investors overlook
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What is the main topic discussed in this episode?
Welcome to Fear and Greed Q&A, where we ask and answer questions about business, investing, economics, politics, and more. I'm Sean Aylmer. Today, a closer look at an asset class many investors may not consider much, royalties. That can mean income streams tied to music catalogues, film rights, natural resources, and intellectual property, assets that can, theoretically, continue generating cash flow for decades. Remember, this is general information only and you should seek advice tailored to your circumstances before making investment decisions. Stephen Otter is head of royalties at Partners Group. He's visiting Australia at the moment and joins me now. Stephen, welcome to Fear and Greed Q&A.
What is royalties investing and why is it important?
Hey, Sean. Thank you for having me. So up front, what exactly is royalties investing? In Australia, we know about it through mining and there are companies here listed purely on the back of mining royalties, but we're talking about something much, much broader.
Yeah, correct. So we see royalties as being a two trillion market opportunity, and that's because it's across many different sectors. So we see it primarily in the healthcare sector. So when you buy or create a royalty over a specific treatment in the healthcare space and you receive a percentage of the revenue from the asset when it's sold. We see it being very large in the entertainment space, as you alluded to in your intro. It's music, it's film and TV, it's music from film and TV. It's also things like video gaming, book royalties, theater IP, YouTube royalties, and then it's very big in the energy space. As you mentioned, there's a lot of listed mining royalty players in Australia.
How is the royalties market valued at $2 trillion?
But it's also very big in gas. It's very big in carbon. So it's an incredibly diverse opportunity set. I think the key thing to remember about royalty investing and why it's slightly different from an equity or credit investment is the following three features. The first is we are an asset owner. So we typically are an owner of an asset of things like IP, so copyrights, patents, license agreements. We also own subsurface rights and land title. So that makes us different from credit. We are the asset owner. We're not lending. Number two, though, and this is what makes us different from an equity or an infrastructure type investment. While we own the asset, we don't operate the asset. And so a third party operates the assets.
They fund all of the costs associated with the assets. And then last but not least, when the asset that we own, which is operated by a third party, generates revenue, we receive a percentage of the revenue line.
Okay, so let's take us through an example and let's stay away from mining. We do too much mining in Australia. I know you're Swiss-based, you're English, born and bred in Australia at the moment.
What sectors are involved in royalties investing?
So let's talk about Justin Bieber. Why wouldn't you? Canada's greatest export. If you've got an attachment to a Justin Bieber song or something like that, how does that work? Just sort of take us through the nuts and bolts.
Yeah, so it's relatively complicated. Let me try and keep it high level for the purpose of the conversation. Simplistically, whenever a song is created, two copyrights are created. So the sound recording, i.e. what you actually hear of that song, and the second copyright is related to the lyrics and the melody. And on the back of those two copyrights, basically anybody who provided input to the song will be granted their own royalty over the song. So Justin Bieber, his songwriter, record label, producers, etc. And so every time you then hear that song played on the radio or streamed on Spotify or played in a live performance, each of those royalty owners, i.e. the people who contributed to the song, will be getting paid royalties.
a percentage from the proceeds of the song that it's making. So as a royalty investor, you can actually go out and buy those different royalty income streams such that whenever you hear the song being played, you're getting a percentage of the revenue from that. I think the cleanest way to think about it is that when you pay a subscription to Spotify, Spotify obviously keeps a percentage internal for profits to run Spotify.
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Chapters
6 chapters
1
What is the main topic discussed in this episode?
0:05–0:46
2
What is royalties investing and why is it important?
0:46–1:39
3
How is the royalties market valued at $2 trillion?
1:39–2:41
4
What sectors are involved in royalties investing?
2:41–8:34
5
How do royalties differ from traditional investments?
8:34–13:27
6
What are the risks associated with predicting future royalties?
13:27–13:41
Speakers
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