With Wall Street pouring billions into music-backed debt – reaching a record $6.7 billion this year – royalties investing is gradually entering the mainstream narrative.
While most commonly associated with music, royalties cover a wide spectrum. They are broadly defined as payments made to asset owners by those who wish to use the asset, spanning intellectual property in music, technology and pharmaceuticals, as well as land usage in mining and energy.
This week, global private markets giant Partners Group launched an evergreen royalties fund in Australia, giving wholesale investors access to the firm’s established global cross-sector royalties strategy.
According to its head of private wealth Australia, Jonathan Abraham, the portfolio serves as an effective diversifier due to its “low correlation with other asset classes” and inflation hedge.
Betashares’ head of equities, Thong Nguyen, also championed royalties’ strategic role, saying the firm has “long believed that royalty companies are one of the best kept secrets in finance”.
Betashares was the world’s first to launch a pure global royalties exchange-traded fund (ETF) in September 2022, offering exposure to a portfolio of royalty companies across multiple sectors, including mining and energy, music, medical and biopharma technology.
According to the firm, since it began trading, Betashares Global Royalties ETF (ASX: ROYL) has returned 20 per cent per annum, showing a lower correlation with traditional equity and bond benchmarks, and offering investors an alternative exposure that promises to enhance risk-adjusted returns.
Betashares investment analyst Tom Wickenden added that royalty revenues can offer a dual advantage against inflation.
“They can benefit from both rising prices and are less exposed to input cost inflation, providing protection in inflationary environments,” he told InvestorDaily.
As Nguyen explained, royalties investing is not new. Ever since David Bowie decided to sell the rights to the future income from his music catalogue in 1997, high-profile artists such as Bob Dylan, Stevie Nicks, Taylor Swift and Bruce Springsteen have followed suit.
“Nowadays, Universal Music Group and Warner Music Group own a wide range of iconic labels and make significant portions of revenue from the income associated with royalties,” he said, adding that both companies have achieved a return on equity in excess of 50 per cent.
He highlighted that royalties are capital-light, requiring minimal direct operational involvement and producing annuity-like income.
“As a result, they tend to have strong cash flows, high gross margins, and high return on capital,” Nguyen said.
Scaling limitations
Despite low correlations with domestic and global equities, royalty ETFs remain rare in Australia. Few royalty companies are listed on the ASX, with most held privately or overseas.
Unlike Betashares’ Nguyen, senior product and investment strategist at Global X, Billy Leung, holds reservations about the future of royalties investing – particularly in ETF format.
He told InvestorDaily that while Global X has explored the concept of building a royalties ETF, it found it challenging because royalties are not a unified asset class.
“A royalties ETF ends up holding a mix of gold miners, biotech licensing firms and music publishers. The only link between them is that part of their revenues happen to be structured as royalties, which makes it hard to justify as a stand-alone theme,” he said.
Looking forward, Leung said the expansion of royalty ETFs in Australia is “unlikely”, noting that investors typically seek either broad income exposures like dividends, hybrids and fixed income or high-growth thematic stories such as AI and semiconductors.
“Royalties sit awkwardly between those two categories. The eclectic mix of exposures makes it a harder product to explain and less compelling as a core ETF allocation,” he told InvestorDaily.
Leung also noted that royalty cash flows tend to have opaque valuations and thin secondary liquidity, while growth potential is limited because assets or catalogues are finite.
By contrast, he cited subscription software companies, which can scale cash flows over time. He compared Universal Music, which has returned 7 per cent since 2021, to Autodesk, a pure recurring-revenue software business, which has delivered nearly 15 per cent over the same time frame.
“Compared with software subscriptions or dividend equities, royalty exposures look less flexible and harder to scale,” he said. Leung concluded that, at least for now, royalty ETF investing is likely to remain niche due to the need for liquidity, breadth and a simple narrative.
“Royalties struggle on all three counts. They might appeal to a small pool of specialist allocators, but they lack the scalability of dividend strategies or recurring-revenue growth themes.”
