An Investor’s Standpoint

Pollstar speaks to Harry Heartfield, Partner at Edition Capital and responsible for mergers and acquisitions at Superstruct, the Providence Equity-backed company that bought a majority stake in Sziget at the beginning of this year.

Has the live entertainment sector become more attractive for investors over the past years?

null – Harry Heartfield
Edition Capital

Investors are now looking at live with more scrutiny than they used to. It has become such a large part of what is an incredibly important industry. I think they have to look at it. To look at music and not consider live would be like looking at marketing but not considering the internet. So the sheer expansion in the size of the market place has driven more interest from bigger institutional players and larger funds. I think the other change we’ve pegged when it comes to live is consumption patterns for different generations.

If you look at Facebook in the early days, which in Facebook’s case means 10, 12 years ago, it was all about what you owned, what you had. “Look at my shiny watch, or my shiny new car.” That’s changed, particularly with the introduction of Instagram and other social media. It’s become: look at what I’ve done. It’s almost experience led boasting. It’s my lifestyle, I’m showing what I’m worth by showing what I’ve done, rather than what I own.

Which means that people want to go out and do things. It’s that combination of technological changes and societal changes and the fact that the industry has grown that is making it attractive on all different levels. It’s not just start-up funding where people want £100,000 to launch an event. It moves through the gears, you can find people who are going to put in a million and then ten million and a hundred million. It’s not only money on the way in, it is different exit routes as well that’s really helped everyone. It’s a whole ecosystem as opposed to just being a couple of players like Live Nation or AEG dominating everything.

What does an investment deal usually entail? What’s in it for the festival on the one hand and the investor on the other?

Generally, a deal is done with the company that holds the intellectual property of the festival. It might also hold various long-term contracts over the lease of a particularly interesting site, sponsorship agreements and contracts, but really, for most festivals, the majority of their value is in their brand. They start with almost a clean slate every single year, then they’ve got to go out and find the talent, build an audience, get them on site and only then they’ve made a profit.

From a festival’s perspective, that’s a risky business. Selling a chunk of your festival normally gives you some cash in the bin, which is always nice. It takes a little bit of the risk away.

Particularly when you’re selling to a bigger player you then have the resources that you might not have already had. There are a number of new players. You can look at people like Global who’ve made a number of acquisitions in the UK. We at Superstruct have made a couple of acquisitions, and we’re looking to make a number more over the next six, nine months. It’s always nice to have families of festivals that can help each other and that have got the support of someone with the capital and resources behind them so that if something does go wrong it’s not curtains for them.

What are other advantages of owning “families of festivals”?

Whether you’re just buying a stake in one festival or in a number of festivals, there is an economy of scale, and a diversification aspect. If you’ve got 20 or 30 festivals you’ve got the ability to do cross-portfolio deals on sponsorships and on some production aspects. And if you’ve got enough festivals in the same sort of genre you might be able to secure talent you wouldn’t otherwise get.

I don’t believe in the concept that if you’ve got 10 festivals you’re going to get an artist for the price of eight festivals, because it doesn’t work like that. Really, it’s so competitive now to secure talent, it’s really about securing the right talent. I’d rather secure the right talent for the right price than worry about trying to chop out 5 percent of the costs of the wrong talent, because that’ll kill your brand.

What about the diversification aspect?

Diversification is really important. One of the key lessons people learned from SFX – well, there were a huge number of lessons to learn from SFX – but this one’s key: EDM was the hottest thing out there, particularly in the U.S. If that’s starts to move away from you, if people decide that main market EDM is actually not what they want to see, you don’t have anything to fall back on, because all your eggs are in one basket. That’s why you’ve seen a lot of these larger groups not just focusing on one genre, but spreading the risk around.

And the profit aspect?

Ultimately festivals, if done right, can be incredibly profitable. Let’s be brutally honest: the root of every single investment decision made by these businesses is a longer-term vision that this investment will generate us a really good return. And in that respect festivals are like any other business. That what drives investors.

Say you acquire a part of a festival, do you then receive part of the revenue the festival generates in the future?

You tend to take a share in the company, so you’re getting a share of the profits. So if you’re taking a 5 percent stake, you tend to get 5 percent of the profits. If you’re taking a 60 percent stake, you get 60 percent of the profits. It also determines the relationship between you and the other owners of the festival. So with 5 percent you’re fairly quiet, a little bit in the background, you might be advising, but you’re not integral to it. If you’re 60 percent in, of course you’re integral to it.

Does that share also determine how much of the risk will be covered by the investor?

It depends: if you are really keen to acquire an interest in a festival you might say, “I will take 50 percent of the risk for 40 percent of the upside.” You can split the risk profiles, or the risk percentages from the returns. If you’re just providing cash, someone else is also providing cash and on top of that expertise, skills and services. The promoters are invaluable in that regard, so [splitting the risk] is not always as straight forward.

Do you see more investors becoming involved in live entertainment going forward?

Yes, I do. It’ll be an interesting marketplace in the future. Just taking festivals as an example – I know there are other parts of the live music sector, like venues or any other aspect – but festivals and events in particular are an incredibly fragmented marketplace. Mostly it’s one festival for one operator. Yes, you’ve got big operators out there like Live Nation or AEG, who’ve got an awful lot of festivals within their stable, but the rest of them own one, maybe two, maybe three.

And I think you’re going to start seeing people choosing to go with new families, new groups, so they’ve got that kind of support, that protection from market forces and downturns, but can benefit from the upside as well.

There’ve been scare stories out there, I think SFX damaged the marketplace for a number of larger institutional players, for a while at least. And you’ve got areas where you’ve might reached saturation point. The UK is tough at the moment when it comes to launching a new event or expanding rapidly. But the global marketplace in general is solid, so it comes down to execution.

I think what you’ll start to find is other people doing mini-versions of Live Nation or AEG, where everyone’s got their little group of festivals, whether that’s geographically focused or genre-focused or just completely sector agnostic. I do see more VC money, and private equity money and even private individuals all trying to benefit from this.

In this competitive marketplace, is it necessary for a larger festival at least to have some financial muscle behind them to be able to compete?

Not necessarily. Glastonbury doesn’t, and it does very well. I don’t think it’s necessary to compete. It very much depends on what the individual promoter wants. If that individual promoter wants and is willing to take all the risk, and they do want to expand and do two or three other events, then they can try that.

Often you find that they slightly overstretch themselves, which then causes issues further down the line. I think there are benefits to sitting in one of those groups – as long as you find the right fit. It’s a little bit like a fraternity, in the sense that you’ve got to find the same likeminded group of people. It’s no good to join any old one, and hope you fit. You’ve got to make sure that your management style aligns with the group’s management style, that your festival ethos, and your guiding ethos behind marketing and artist budgets and production, all align. If they do then yes, there are real benefits to be shared between you. If they don’t then you’re just going to end up fighting.

Do you see investors hiring people from the live entertainment business to advise them?

Yeah, they do. You need to know what you’re doing, this is not an easy sector, there are an awful lot of pitfalls at every level. If you don’t have that experience, you are going to fall into one of them. It doesn’t have to be terminal, but you are going to do better if you have that expertise and that team behind you. And that’s true whether you’re an operator of a festival or an investor in a festival. There was a trend for a while where everyone with a field was launching a festival.

Everyone went, “Michael Eavis did that.” Yeah he did. But he’s the exception, he is not the rule. Not anyone with a bit of land can do this, and do this well.

When it comes to investors, even when you look at Superstruct which is backed by Providence. Providence went out and found a team of people who have done this for 20, 30, 40 years, who’ve got the expertise.

They’re one of the largest, if not the largest, investor in media and entertainment globally, and they still said “we’re not going to do this on our own, we need to find the right management team.”

It’s true of everyone, it’s not like Live Nation are sitting there with no expertise in music. You wouldn’t put someone in charge just because they’re good with numbers.