Sometimes the best returns come from unusual places. One that most savers and investors likely don’t know about are royalties. That’s not surprising, given that royalties are true alternative investments. Unless you work in an industry where royalties are common, you’re probably not remotely aware of the income potential they present.
Royalties can provide a steady stream of income that is totally independent of the stock market and interest rates.
What are Royalties?
Royalties are a form of licensing. You create something and then someone else sells it and you get a check for each sale. The creator can sell their rights to the royalties to an investor – and that's where you come in.
Music is a common example where royalties are used. If you own the rights to a song then anytime someone buys that song you will get a payment.
Royalties are also common in business. A company may invent a product and then license it to a larger company to produce and sell. For example, if you invented a new kind of windshield wiper you might license it to Ford and every time a car was sold with your wiper blades you'd get a check.
Another example of a business royalty is venture financing. A venture capitalist makes an investment in a start-up company and in return they get a small payment each time that company makes a sale.
You can even buy royalties in gas and oil where the owner gets a payment on every barrel sold. Mineral rights are another form of royalty. If you have minerals on your property you can sell the rights to a mining company and you'll get a check based on the value of minerals they extract from your land.
Other industries where this is common include the sale of books, movies videos, photos, copyrighted images, and syndicated TV shows. Each of these is loosely known as entertainment royalties.
What are the Benefits of Investing in Royalties?
There are six major benefits to investing in royalties:
Each Investment is Unique
Whether it’s a business venture or an entertainment royalty, the value comes from the fact that the underlying product is unique.
For example, if you own a slice of the royalties from a popular song written 20 years ago, the original is the only one of its kind. Think of music recorded by the Beatles or the Rolling Stones. Other artists may have recorded covers of much of their work, but the originals will always be unique because of the artists who produced them. There’s virtually no direct competition.
Royalties often generate steady income that produces higher yields than you’ll get on certificates of deposit, bonds, and stock dividends. But much like stocks, the income you earn from royalties is generated from the sales from the underlying product. That is, royalties have a definite economic value.
Stable Investment Value
Compared to stocks, royalties are a stable investment. Since they’re not publicly traded, royalty interests don’t fluctuate in value as much. Your investment will be made to earn a certain stream of revenue, which will be the main reason for owning the royalty.
Of course, it's not risk-free. If the revenue of the company drops then your royalty will drop as well.
A True Alternative Investment
Royalty income is generally not connected to the performance of the financial markets. For example, if you’re looking to move some of your money into investments that won’t get taken down in the next stock market crash, royalties are a way to do that. They can continue to provide steady income regardless of what happens with the stock market or even with interest rates.
The Royalties can be Resold
Since royalties represent a cash flow, they can be both bought and sold. It’s even possible your royalty interest will have more value in future years as the underlying work that provides the revenue becomes increasingly rare. And sometimes a song or movie make a comeback. This can happen for example when an old song is featured in a popular new movie.
It’s a Completely Passive Way to Invest
Once you make your investment in a royalty stream there’s nothing more you need to do. You can sit back, relax, and watch the returns come in. There is no investment management required on your part, and not even any buying and selling. And since royalty values don’t fluctuate on open exchanges, there aren’t even any prices to watch.
How to Invest in Royalties
It is possible to invest in royalties even if you’re completely new to the process. Current owners of royalties sometimes sell part or even their entire royalty position to raise cash. That isn’t to say that you can buy into the royalty stream of any copyrighted item that’s ever been made. But at any given point in time, shares are available in some of them.
Fortunately, there are exchanges and brokers where you can purchase interests in royalties.
Royalty Exchange is an online marketplace and auction platform where you can buy and sell intellectual property. They work with both creators – the people who create the work that generates the royalties – and investors, who are the people who buy into those royalty income streams.
Royalty Exchange arranges the royalties in asset packages to make them investor-friendly. They provide valuation support, risk mitigation, and flexible portfolio development. You can search for royalty opportunities on The Auction House and even sell your positions on the Secondary Market, both of which are available on the online platform.
According to Royalty Exchange, more than 800 transactions have been completed for over $70 million, with an average return on investment of 12.14%. Naturally, that’s better than you can get on any fixed-income investment, but it’s also slightly better than the average annual return of about 10% on stocks.
You can use the marketplace to buy and sell royalties related to music, movies, and trademarks.
They give examples of royalty positions that are currently available:
- The Doobie Brothers “Black Water” and other songs (publishing), can be purchased with an investment of $160,000 for a term of 10 years. It has a current yield of 15%.
- The 1983 comedy classic “Trading Places” (film residuals) can be purchased for $140,300 with a life of rights and a current yield of 6%.
- Children’s Educational Material (trademark) can be purchased for $1,047,500 for a term of 10 years. It has a current yield of 19%.
If you’re going to consider investing in intellectual property, like publishing, film residuals, and trademarks, make sure you thoroughly research the Royalty Exchange website, as well as third-party sources, to become fully familiar with how the process works.
SongVest bills itself as The Stock Market of Music. That’s not surprising, given that the company is a marketplace to buy and sell music-related royalties. In fact, the company is so dedicated to the music industry, that they started their own record label, SongVest Records.
SongVest itself is transitioning to become a listing platform for royalty generating catalogs while investing in new albums has been rolled into SongVest Records. In that way, SongVest Records operates as something of a peer-to-peer platform, which they describe as “where the music fan and the artist meet”. Funding for the creation of new albums is provided by fan investors (“SongVestors”), who are entitled to the royalty income generated by the music produced by the artists.
When you invest in royalties through SongVest it isn’t as passive as other royalty platforms. As an investor, you’ll directly participate in the music business. You’ll be provided with marketing and other tools to promote artists across online platforms to build awareness, increase streaming and sales, as well as drive touring revenues.
This opportunity does seem more speculative than the others since it’s essentially based on promoting new talent. There’s always the possibility an album or artist will fail. But if they take off, you’ll have bought into a stream of future royalty income. You can invest as little as $50, and your investment will be pooled with other investors to promote the artists.
Cypress Growth Capital
Cypress Growth Capital specializes in royalties related to venture capital and business startups. The company was launched in 2010 and has completed more than two dozen multi-million dollar, royalty-based investments. Those investments have been in software and technology-enabled service companies.
They claim to be the largest and most experienced royalty-based growth capital investor in the country, with more than $100 million in capital under management.
The company works by providing emerging companies with up to $5 million to invest in their businesses. The loan is funded by venture capitalists and is repaid by the royalties specified in the deal.
Once the loan is repaid, plus profit for the investor, the deal is complete. The royalties stop.
Each company funded by a Cypress Growth Capital royalty-based investments must be engaged in software or technology-enabled services, have annual revenue of between $3 million and $30 million, have a minimum two-year operating history, be profitable or nearing profitability, be based in the US, and need capital of between $1 million and $5 million.
Other Royalty Opportunities
The companies above are just three examples of the royalty income opportunities that are available. Opportunities also exist in other areas, like oil and gas royalty trusts, alternative investing, gold mining companies, and many more.
Should You Invest in Royalties?
I certainly don’t mean to imply that all investors should rush out and move money into royalty arrangements. Since they usually require you to tie up your money for a long period of time – or even forever – royalties are not suitable for small or inexperienced investors. Royalties are not as liquid as stocks. There is no ready market to buy your investment if you are in a pinch for cash. You'll have to list it on an exchange, like the ones mentioned above, and wait for a buyer.
But if you’re a large investor, looking for above-average returns as well as a way to diversify your investment portfolio, royalty investments may be the perfect way to do that. You can get higher returns than you can get on fixed-income investments, and often even beat the long-term returns on stocks.
Still, you probably won’t want to invest any more than a minority percentage of your portfolio in royalty situations. The whole concept of investing in royalties is only about 10 years old, and while the field is growing, it’s not particularly deep. For that reason, you may want to take a slow approach at the very beginning.
Focus on investing in royalty opportunities in industries and businesses you have some knowledge in. You can expand into less familiar territory once you become more comfortable with how the royalty investment process works.