The new directors of Hipgnosis Songs Fund Limited (LSE:SONG) are investigating whether its investment adviser, founder Merck Mercuriadis's Hipgnosis Songs Management (HSM), "cherry picked" the best songs to sell to another fund.
A proposed sale was agreed by Mercuriades's firm to sell 29 catalogues of song rights owned by the SONG fund to Hipgnosis Songs Capital, a separate fund also managed by HSM, for US$465 million, but was blocked after shareholders rejected a continuation vote.
The catalogues, known by the company as the 'First Disposal' portfolio, contained songs from artists including Shakira, Rick James and Barry Manilow. HSM and Hipgnosis Songs Capital are both majority owned by Blackstone.
Directors of the London-listed investment trust said the investigation of the cherry-picking claims follows statements made by two independent research reports that calculated that the songs in the 29 catalogues were growing at materially higher rates to the overall portfolio.
The board said in a statement to investors that it is "investigating whether this is the case, and if so, whether this was properly and fully disclosed to the previous board".
In a note last week, analysts at Stifel noted that the growth of disclosed assets within First Disposal catalogues was 21% in the 12 months to the end of September, compared to an overall portfolio average of circa 10%, "i.e. it appears that investor fears over the portfolio being ‘cherry-picked’ for some of its best assets were much closer to the truth than we expected".
The First Disposal proposal was also priced at around a 20% discount to carrying value, despite this set of catalogues appearing to be growing at around twice the rate of the overall portfolio.
Vote date set
A circular has also been published today by the board to provide notice of a shareholder vote on a proposal to remove the effect of the call option that gives HSM the right to purchase the full portfolio if it is fired as the investment manager.
The proposal is to pay £20 million to anyone who makes a bid for the portfolio that the board recommended to shareholders.
The extraordinary meeting to decide the vote is to be held on the morning of 7 February in London.