As CEO and president of A&M/Octone Records -- home to such acts as Maroon 5 and Flyleaf -- James Diener had a front-row seat to the habits of music creators, specifically the monetary shenanigans and squeezes that could derail their careers. After selling Octone two years ago, Diener decided to do something about those problems, coming up with a financing idea that would offer minimal risk to artists.
Diener and his partner, financier Howard Lipson, launched New York-based Alignment Artist Capital in April. Backed by investment colossus BlackRock, AAC provides structured capital (from $5 million to $20 million) to music artists, songwriters and producers. In return, it takes 15 to 20 percent of adjusted gross income from the artist’s core revenue streams: record sales, touring, publishing and licensing -- over a four- to five-year period. “We earn when they earn, and we don’t earn when they don’t earn,” Diener says. “We take a calculated risk that during the four- to five-year period, they’re going to earn enough that our negotiated percentage will not only pay back our principal, but there will be enough profit in there for us.”
Giving up 15 to 20 percent could be a hard notion for artists to swallow. But AAC says that, unlike with traditional loans, the investment doesn’t threaten an artist’s personal assets and doesn’t require collateral at closing. “If you take $10 million from Bank X, your copyrights, your masters, your houses, your guitars, everything [is] in the pot for them to recover against,” Diener says. “Artists literally wake up one day and they’re on a sofa, because it all went out the door. This is a middle ground that doesn’t exist right now in the industry.”
Should the artist’s career take a dive, AAC risks losing its investment -- though it has built in safeguards, including the possibility of extending the deal. “The structure of the product we have created is a hybrid of debt and equity,” Lipson says. “While it doesn’t have straight debt-like features such as personal recourse and set interest rates, there are features that allow for some adjustments depend- ing on performance that allow us to protect our investment.”
Nashville, Tenn.-based artist manager Ken Levitan, founder and co-president of Vector Management, believes AAC is a smart alternative to traditional financing. “It’s a strong, unique concept that fills a void for successful artists, producers and writers who have an asset base but need larger amounts of cash for projects they are working on without having to dispose of or tie up their assets,” he says.
AAC targets primarily established artists who are generating significant revenue from multiple income streams, as well as frontline acts and heritage musicians who are road warriors with reliable touring and publishing income.
With an average closing period of 45 days, AAC can provide quick money for a multitude of uses -- to settle a copyright lawsuit, expand in a venture outside of entertainment or set up a tour. But AAC does not ask artists how they intend to use the money.
“We are completely passive,” Diener says. “That is a huge selling point. The math works based on the existing business and what [the artist is] projected to do. Artists receive a lump sum. At that point, they’re free to use the money however they want. Hypothetically, they could go right to the track and bet it all on a long shot.”