Diversifying your assets, Royalty Exchange
With inflation at a 40-year high and the markets recovering from a global pandemic, now more than ever is a great time to diversify your assets to create a more balanced portfolio.
Royalty Exchange
Have you ever watched Shark Tank, and seen a deal where in addition to a percentage of the company, the shark also received a cut of the profits from every unit sold? Well with the Royalty Exchange, you can purchase the future payments of royalties for differing time windows (Generally either for a decade or a lifetime).
While most listings on the site are songs, occasionally other types of royalties will pop up. For example, notably unique royalties have included:
A variety of royalties related to popular ice cream flavor Cherry Garcia,
The sales royalties for Listerine Mouthwash,
And being listed as of writing this, royalties for the alert tones on iPhone. If you are looking to expand your portfolio by obtaining royalties, here is something to focus on when considering a royalty.
What are you getting?
Is the royalty permanent, or do you only get it for a decade before reverting to the original owner? Another thing to look at here is where exactly royalty is in effect. For example, some of the song royalties you can buy here will only give you the royalties for international sales, but not US ones, which is a HUGE impact when most of the singer’s fanbase resides in the US.
Will it hold up?
Sure, that song may be popular now, but how about a year from now? Two? Five? Songs come and go at lightning speed in the world of music, meaning that even if you buy a decade of royalties, you might see 80% of the earnings in the first two years of owning it. For that reason, I would heavily recommend for those of you who are not musical fanatics to try to stay away from the songs and look more for physical items, which are considerably easier to judge how long they will last. Take Listerine, the mouthwash. By looking at graphs, you can work out some key details that help understand the royalty better. Within 5 minutes, here are some facts I found out about Listerine using Chrome and some elbow grease. Since its creation in 1879, Listerine has obtained a 44.4% global market share and sells hundreds of millions of dollars worth of mouthwash each year.
Sales of the leading mouthwash/dental rinse brands in the United States in 2018
Source: Statista Aa quick look at a graph of leading US mouthwashes shows Listerine as three of the top five brands. Royalties will continue until either the contract runs its course, or the product is discontinued, so finding the vitality of the product is a huge factor in determining the value of the royalty
Royalty Exchange also shows how much capital different royalties have made over time, giving a rough estimate as to the length of time with a pass before you break even. It is set up in an auction-house format, so negotiations on price are acceptable. Royalties are a great alternative investment because given proper research it has the potential for massive profits, as you make money consistently like a bond, but the success of the product determines the value of a the investment like a stock.
Fascinating... I never considered royalties an asset class, just something that musicians were entitled to. I did some extensive investing in P2P debt (LendingClub, now Prosper is the largest market I think) and got good returns there. With about 100% certainty that my CAGR would be 8.5% - 10% in a diversified portfolio. Not bad, but over the same period smelly old VTI returned like 12%, so I think in retrospect I should have just had more in stocks. Another downside to alternative asset classes is that while diversification is great, having multiple accounts to manage and more complexities at tax time are not always great. Just my two cents.