Artists who decided to sell their catalogs in 2023 did a little better, on average, than the year before, according to a new report by Shot Tower Capital, a Baltimore-based investment banking firm that focuses on media and entertainment.

The average multiple of private music publishing catalogs — excluding a small number of iconic catalogs that fetch a premium — increased to 17.2 times net publisher’s share (or gross profit after paying writer royalties) in 2023 from 16.7 times NPS in 2022. Including iconic catalogs, the average multiple decreased slightly in 2023 to 19.2 times net publishers share from 19.4 times NPS in 2022.

While the average multiple improved this year, the 17.2 times NPS average was well below the peak of 20.1 times NPS in 2019, as well as below the 17.9 NPS average for the period spanning 2019 to 2023.

Even so, catalog valuations have held up well amid recent higher inflation rates, Shot Tower explains, even as interest rates — which began to climb in 2021 after falling to historic lows at the onset of the COVID-19 pandemic in 2020 — have tamped down valuations. That’s because buyers’ future growth expectations have increased, due in part to increased upcoming distributions from the Music Licensing Collective — thanks to favorable Copyright Royalty Board rate determinations this year — and the development of new digital sources such as TikTok.

A shift amongst buyers in the catalog market has also brought catalog valuations down from their 2019 peak.

Hipgnosis Songs Fund, the publicly traded investment trust founded by Merck Mercuriadis, was the price-setter from 2018 to 2021. In the latter year, Hipgnosis Songs Fund bought stakes in such catalogs as Neil Young, Shakira and Red Hot Chili Peppers. Before Hipgnosis Songs Fund’s IPO in 2018, the average publishing catalog multiple was 16.2 times NPS in 2017. That jumped to 18.8 times NPS in 2018 and 20.1 times NPS in 2019 and 18.8 times NPS in 2020. In 2022, though, when Hipgnosis Songs Fund was unable to raise more money through additional equity offerings and stopped buying catalogs, the average publishing multiple dropped to 16.9 times NPS. Since 2022, Hipgnosis Songs Management has been employing a more disciplined approach for its privately held fund, Hipgnosis Songs Capital, which is backed by Blackstone, sources tell Billboard.

Shot Tower believes catalog buyers like Hipgnosis Songs Fund and Round Hill Music Royalty Fund — another publicly listed investment trust that Concord acquired in October — now have less influence in current transaction valuations. Instead, large companies are showing their willingness to pay a premium to control rights such as licensing. As interest rates increase, the Shot Tower report states, “yield-focused financial investors have pulled back” and strategic buyers — major labels and publishers — “continue their focus on acquiring quality assets with control where they can impact long-term growth.”

New capital investment will favor the approach taken by these strategic buyers, according to the report. Publishing and recorded music catalogs that provide full control — such as owning 100% of the publisher’s and songwriter’s shares — will continue to be highly valued by strategic buyers. Rights of “marginal quality” catalogs and passive income “are finding less demand.” There’s are good reasons for placing a premium on control: Shot Tower estimates the ability to eliminate third-party distribution and administration costs is equal to an immediate increase in a valuation multiple of 2.0 times NPS or NLS. In addition, having control over a catalog provides opportunities for licensing and new projects with “potential to drive growth far in excess of industry averages.”

While the typical publishing catalog transaction value has leveled off since the 2019 peak, a few iconic catalogs — Shot Tower defines them as exceeding $200 million — approached 30 times NPS in 2023, a level matched in 2021 but higher than amounts paid in 2022. These catalogs go “primarily to an existing label/publisher with highly strategic (and sometimes defensive) reasons for purchasing at above-market prices,” the report explains.

One such iconic recorded music catalog sold for nearly 30 times net label share in 2023, according to the report — a much higher multiple than recorded music deals in previous years. (The report does not name the iconic catalog sold in 2023, but the only recorded music transaction exceeding $200 million that was made public this year was Litmus Music’s purchase of Katy Perry’s catalog for $225 million.) In previous years, iconic recorded music catalogs sold for between 22 times and 26 times net label share, or profit after royalty payments; and distribution, manufacturing, warehousing and shipment costs, but before marketing expenses.

Recorded music multiples — for both iconic and non-iconic catalogs — have risen over time while publishing multiples are consistent with levels seen in the late ‘90s, according to Shot Tower. That’s because the record business’s shift from physical to digital has helped improve record labels’ margins. Shot Tower points to Warner Music Group as an example: In 2010, when physical sales exceeded digital revenues, WMG’s adjusted earnings before taxes, interest, depreciation and amortization margin was 13.4%. By 2023, WMG’s adjusted EBITDA margin had improved to 23.8%. Shot Tower estimates that every 1% shift in revenue from physical to digital and streaming has increased WMG’s EBITDA and cash flow margins by about 25 basis points (a basis point is one-hundredth of a percentage point). If digital sources eventually account for 95% of recorded music sales, margins have the potential to improve another 5%.

Expect similar multiples in the coming years, says Shot Tower. Although its crystal ball is “a bit hazy” — uncertain interest rate and macroeconomic environments make predictions difficult — the firm expects interests to “moderate” in the first half of 2024 and multiples “to remain steady for the foreseeable future with higher-than-projected industry growth being offset by the continued drag of higher interest rates.”

Based on current growth projections, and adjusting for the current interest rate environment, ex-icon publishing multiples will range from 15.9 to 16.7 times NPS over the next four years. That’s in line with prior periods but a slip from the most recent years and well below the peaks from 2018 to 2020. Multiples averaged 16.4 times NPS from 2014 to 2022 but exceeded 18.0 times NPS from 2018 and 2020 and peaked at 20.1 times NPS in 2019.

As for recorded music, Shot Tower expects an average ex-icon multiple of 12.9 to 13.4 times net label share over the next four years. That’s in line with post-2020 trends that saw multiples jump as investors became convinced streaming would be a financial boon to recorded music revenues. Historically, the larger marketing spending associated with master recordings and a lower diversity of revenue streams has caused recorded music to trade at lower multiples to publishing assets. Shot Tower believes recorded music will continue to trade at a discount to publishing multiples despite margins improving as streaming accounts for a higher percentage of recorded music’s revenue mix.

But the value gap has become closer between music publishing and recorded music assets. In 2020, recorded music transactions carried an average NLS multiple of 10.4 times while music publishing transactions averaged an 18.8 NPS multiple that year — with a gap of 8.4 times between them. In 2022, that gap narrowed to 4.3 times, with a 12.4 times NLS multiple for recorded music and a 16.7 NPS for music publishing.

Shot Tower Capital has closed financings and M&A transactions in excess of $16 billion since its founding in 2012. Those have included such deals as the sale of Imagem to Concord, the sales of Phil Collins and Genesis catalogs also to Concord, and Michael Jackson’s estate share of Sony/ATV to Sony. If the Shot Tower principals David Dunn and Rob Law’s entertainment deals from the prior employment at the firms Alex. Brown and and Bear Stearns, respectively, are included, they have closed over 125 media, entertainment and consumer related transactions representing aggregate value exceeding $70 billion, according to the report.