West Palm Beach’s Sound Royalties Leading Hedge Funds To 30% Fees ??

West Palm Beach’s Sound Royalties Leading Hedge Funds To 30% Fees ??

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By Miles Weiss
(Bloomberg) — Stephen Marley comes from music royalty.
Sean Garrett has written and produced smash hits for Beyoncé,
Usher and Ciara.
Even so, when they and hundreds of lesser-known names in
the world of hip-hop and rap needed cash, one Wall Street figure
emerged as an unlikely source behind the financing: hedge-fund
titan Jamie Dinan.
In a few short years, Sound Royalties, a West Palm Beach
firm started within a unit of Dinan’s York Capital Management,
has become ubiquitous in the music industry. Proudly billing
itself as “artist friendly,” it offers cash advances to
musicians, who often have to tide themselves over between
royalty checks that can take months to arrive. A big selling
point is that unlike a loan, it’s quick and easy. No credit
checks or hassling with banks. Just your money, fast.
There’s just one catch. While Sound Royalties doesn’t
disclose how much it earns from cash advances, its fees are
usually far higher than the “industry-leading” 4 percent rate it
advertises online, according to court filings and interviews
with ex-employees and industry insiders. Those who have reviewed
the contracts say they’re hard for non-financial types to
understand, and some artists can end up paying rates of 30
percent or more. And because they’re structured as advances
instead of loans, state usury laws don’t apply.

Not a Loan

“That’s why they call it a fee,” says Charles Koppelman, a
former financial adviser to the late Michael Jackson. He now
heads C.A.K. Entertainment, which counts Jennifer Lopez and
Nicki Minaj as clients. “What they are taking is more than the
law would allow if it were treated as a loan.”
It’s not hard to see why demand for royalty financing has
jumped. With the possible exception of bona fide superstars,
people in the music world regularly live paycheck-to-paycheck
for months at a time. Many face trading away their rights to
fund their careers.
And Wall Street’s interest is part of a growing trend, says
Diane Standaert, director of state policy at the Center for
Responsible Lending. More and more, hedge funds and private
equity firms are looking to consumer finance to reap big
profits, whether it’s by charging sky-high rates, lobbying to
roll back regulations or exploiting a hodgepodge of state laws.
“We certainly haven’t seen them changing the predatory
nature of these practices,” Standaert says.

Royalty Financing

Granted, consumer finance by all accounts contributes just
a fraction of the profits for these Wall Street firms.
Nevertheless, outfits like Sound Royalties are primed for
growth. After starting a $10 million pilot program in 2016,
according to Billboard, Sound Royalties said in February 2017
that it would extend at least $100 million of cash advances over
the next 24 months. That’s helped bring royalty financing from
the fringes into the mainstream.
A spokesman for York and Dinan, who also co-owns the
Milwaukee Bucks, declined to comment. Pamela Armstrong, a
spokeswoman for Sound Royalties, says the firm fills a need. Its
service lets artists get paid without having to cede ownership
of their work, which has historically been the case.
“Traditional bank financing is largely unavailable to the
creative community,” Armstrong said in a statement. “Sound
Royalties proudly provides valuable access to a broad spectrum
of customized funding solutions which ensure that creatives
retain their copyrights.”

Tough Business

The music industry lends itself to such non-traditional
financing. Typically, performers must wait up to nine months to
receive royalties. Organizations collecting money on their
behalf pay out quarterly.
The type of financing offered by Sound Royalties is a
“close-to-last-resort” option for artists often struggling to
make ends meet, says Derek Crownover, a Nashville entertainment
lawyer who reviewed one contract. Crownover says the terms
certainly aren’t the worst he’s seen in his 25 years in the
music industry, but they’re emblematic of how tough the business
can be. And the high rates can be partly explained by the risk
an artist declares bankruptcy.
“This could be ‘artist friendly’ in our world,” he says.
“That’s the irony.”
While Sound Royalties has gotten a lot of buzz in the music
industry of late, the firm’s Wall Street ties aren’t widely
known.
York’s involvement with the niche business of royalty
financing can be traced to 2015, when its private equity arm
brought in Alex Heiche to help run its structured-settlements
firm called Novation Ventures, according to people familiar with
its dealings, who asked not to be named because the details
aren’t public. Structured settlements, a frequent target of
consumer advocates and regulators, offer lump-sum payouts at
steep discounts to lottery winners, disability recipients and
annuity holders, in return for their ongoing payments.

Lump-Sum Payouts

Heiche, formerly an executive at a rival firm, came up with
the idea to start Sound Royalties. With York’s backing, Sound
Royalties became a line of business within Novation, the people
say. When Novation was sold off in June, Sound Royalties was
separated from the unit and wasn’t offered to SuttonPark
Capital, which bought Novation, according to a person with
knowledge of the sale. York and Sound Royalties declined to
discuss their ties or whether Sound Royalties is still backed by
York’s private equity arm. Heiche also declined to comment,
according to Sound Royalties.
Heiche, the public face of Sound Royalties, is described on
the firm’s website as a “strong and outspoken” advocate for
those in the creative world who want to be “fairly compensated
for their work.” The firm’s website advertises rates starting at
4 percent on advances up to one year.
In practice, however, the firm aggressively pushed clients
to take longer deals, at rates far higher than the norm, two of
the people say. (Estimates vary, but they range from 5 percent
on bank loans for top musicians to 10 to 20 percent for Sound
Royalties’ competitors.)

Longer Deals

Many say it’s no coincidence. Unlike most rivals, Sound
Royalties adopted the structured-settlements model and its
complex financing terms. The firm set up its marketing
specifically to push five-year contracts, the people say, which
are much more costly than industry-standard terms of 12 to 18
months.
The contracts were customized, but it generally worked like
this. Sound Royalties projects how much money an artist will
make over a set period, say three to seven years. It advances a
percentage of that, minus an upfront fee that typically equals
10 percent. She pays back the projected amount over the life of
the contract with her royalties, which bypass the artist and are
sent directly to Sound Royalties.
If her royalties exceed that amount before the term
expires, Sound Royalties pays her back. But if the artist falls
short, she could incur additional interest until it’s repaid.
The overall cost is rarely spelled out in a way that’s easy to
understand. Often times, clients aren’t aware of how expensive
it can be.

Complex Structure

“They have some complicated deal structures,” says Parviz
Omidvar, head of Royalty Advance Funding, a rival firm based in
Beverly Hills. “Financial people and hedge fund people might be
used to” such terms, he said, “but people in the music world may
not be.”
Sound Royalties’ advances, ranging from $5,000 to $10
million, have nevertheless proven to be popular. Backed by
York’s deep pockets and, at least until the recent sale,
Novation’s large telemarketing team, over 300 people have signed
up since mid-2015, state records show. One of them is Aaron
Lockhart, a musician who lives in Riviera Beach, Florida, and
heard about the firm through a friend. He was matter-of-fact
about his high rates and didn’t take issue with Sound Royalties’
terms.
“As a musician, you have bills,” he says. My royalty checks
“only get paid quarterly, so sometimes that money runs out.”

Rap, Hip-Hop

Initially, Sound Royalties sought deals tied to pop, rock
and country, the most durable genres for producing royalty
income, and bigger names, according to three people familiar
with the firm. Clients like Larry Weiss, who wrote Glen
Campbell’s “Rhinestone Cowboy” and Stephen Marley, a Grammy
award-winner and son of Bob Marley, UCC financing statements
filed with state regulators show. Now, a large number of clients
are in rap and hip-hop, like Ace Hood and Bizzy Crook, the UCC
filings show.
Marley, Ace Hood and Bizzy Crook — whose real names are
Antoine McColister and Lazaro Camejo — didn’t respond to
requests for comment.
Weiss says he was “a little careless” in not reviewing the
contracts more closely. After taking multiple cash advances,
Sound Royalties was soon collecting all his royalty income.
Weiss also wound up getting hit with a bigger tax bill than he
anticipated.
The firm “didn’t really go into how the structure worked”
verbally, he says, referring to how much the financing would
actually cost.
Another example shows how costly it can be. Sean Garrett,
whose real name is Garrett Hamler, produced and wrote a number
of chart-topping hits in the 2000s. Last August, Sound Royalties
agreed to advance him $44,852, minus a 10 percent fee, a copy of
the contract the firm filed as part of a lawsuit against him
showed. It would collect $74,174 over three years, its estimate
of what Hamler would earn, with repayment front-loaded into the
first year.

Cost of Financing

The overall cost of the financing, in percentage terms,
appears nowhere in the 11-page document. Based on a basic
interest rate calculator, it comes out to about 28 percent per
year. However, the effective APR rises as high as 34 percent
because the bulk of the repayment occurs early in the contract
term. Depending on how it’s calculated, the cost could be
upwards of 50 percent, one industry insider says. (The contract
was subsequently amended after it was signed.) Hamler’s
attorney, Frederick Dawkins, says his client didn’t want to
comment and that Sound Royalties voluntarily dropped its
complaint.
These contracts allow “songwriters or artists to get some
cash when virtually no one else will give it you,” Crownover
says. However, “the negatives are that the rates in some states
could be usury if you do the math on it.”

To contact the reporter on this story:
Miles Weiss in Washington at mweiss@bloomberg.net
To contact the editors responsible for this story:
David Gillen at dgillen3@bloomberg.net;
Margaret Collins at mcollins45@bloomberg.net
Michael Tsang, Anne Reifenber