Charlie Metcalfe, chief executive of First State Investments, says the First State Media Fund has embarked on a fresh round of fundraising after investing virtually all its initial commitments on a diverse range of musical copyrights, and argues that media and entertainment assets tend to be more resilient than other sectors in times of recession.

HW: What is the background to your company and fund?

CM: First State Investments is a specialist asset management business offering a range of investment strategies across categories including the Asia-Pacific region and global emerging markets, global resources and global equities, property securities and infrastructure.

First State Media Group was formed in 2006 as a joint venture between our parent company Colonial First State Global Asset Management and a highly experienced management team led by Steve McMellon.

The FS Media Works Fund I is a closed-ended English limited partnership with a Jersey general partner. Aimed at institutional investors, which invests in a diversified portfolio of media copyrights and related rights.

The fund was launched this year with more than USD130m of new investments. It has already invested substantially all of the commitments raised in the initial close, and is now undertaking additional fundraising to take advantage of a pipeline of attractive investments in its investment field.

HW: Who are your service providers?

CM: Given the nature of the fund's underlying assets, there are no custodians or prime brokers involved. We use a number of law firms around the world, depending on the jurisdiction of the specific asset acquisition.

HW: How and where do you distribute the fund? What is the profile of your current and targeted client base?

CM: The fund has been designed to be able to accommodate institutional investors from around the world. Our targeted client base includes pension funds, private wealth managers and family offices.

Current investors include an Australian-based investment manager, a number of North American institutional investors and private wealth managers, together with First State Media Group management and our parent company, Commonwealth Bank of Australia. We will be targeting like-minded investors worldwide for our next round of fundraising.

HW: What is the investment process of your fund?

CM: Our investment approach is to build a portfolio of media and entertainment copyright investments that can generate attractive long-term risk-adjusted returns.

The investments consist of stable music publishing catalogues that have robust and sustainable royalty streams and are actively managed by our dedicated music industry professionals in appropriate jurisdictions.

Our investment process consists of the identification of potential transactions, preliminary investment review, due diligence (which spans financial and legal due diligence as well as creative and commercial judgment), negotiation and documentation, a final review that incorporates investment committee approval and acquisition, and ongoing investment management and monitoring.

Each stage in the process is important in ensuring that risks associated with the assets are considered and dealt with appropriately.

HW: How do you generate ideas for your fund?

CM: First State Media Group generates ideas from a variety of sources. The majority of transactions are sourced from the US and UK, but others are sourced through First State Media Group's administration companies in Germany, France, Scandinavia and Spain, primarily through third-party relationships.

We may also become aware of potential transactions through songwriters, artists, estates, administration clients, music industry professionals, collection society relationships and professional advisors. Transactions have also been sourced through Colonial First State Global Asset Management via relationships with investment banks.

HW: What is your approach to managing risk?

CM: Our approach to managing risk is embedded within the investment selection process, which incorporates portfolio management as well as a detailed due diligence and documentation process. The process is designed to ensure that we minimise investment risk specific to any single investment, and to reduce the volatility of returns.

Our portfolio risk is minimised by having more than 26,000 works covering a spread of music genres with global income streams, and a repertoire that spans several decades. Any risk relating to one particular song will have a minimal risk to the overall portfolio.

First State Media Group undertakes its own administration and registration of copyrights in most key jurisdictions, which significantly reduces reliance on third-party administrators. This reduces factors such as counterparty risk, enhances transparency and speed of cash collection, and reduces the administration cost of the assets.

Our due diligence and documentation process ensures that transaction-specific risks are appropriately identified and dealt with. Risks can be mitigated in various ways, including a reduction in purchase price or variation in terms. If a risk cannot be dealt with adequately, we will not proceed with the transaction.

HW: What opportunities are you looking at right now?

CM: We have a significant pipeline of further attractive acquisitions that we are currently assessing. In general the catalogues we are assessing range from smaller transactions focused on specific genres to larger, more diversified catalogues that would complement our existing repertoire.

HW: What events do you expect to see in your sector in the year ahead?

CM: The global financial crisis will have some impact on the music and entertainment industry over the next year. However, media and entertainment assets tend to be more resilient than other sectors in times of recession as people still visit the cinema and listen to music in an economic downturn. For this reason we expect to see music publishing assets following this trend.

We envisage increased demand for alternative investment strategies as investors seek to diversify their portfolios away from traditional equity and credit markets, which are currently experiencing enhanced levels of volatility, into less volatile asset classes.

Regardless of an economic downturn, the frequency of usage of music is unlikely to change. For example, radio stations will still require music, as will TV, films and advertising, and commercial venues that play music such as supermarkets and bars will still continue to pay regular licence fees. What we may see less of are the high budgets of advertising campaigns and film producers, meaning large one-off placement royalties are likely to decrease.

We do not expect any major legislative change to impact the industry in 2009. In October this year the US Copyright Royalty Board set the rates for statutory mechanical royalty payments to composers and music publishers for the period covering 2008-2012. Most historical legislative changes have been to the benefit of the copyright owner, a trend that is expected to continue.

HW: How will these developments affect your own portfolio?

CM: Given that changes in legislation are expected to benefit the copyright owner, giving them an increased term of protection, this is considered an upside but is not factored into any of our forecasts.

HW: What differentiates you from other managers in your sector?

CM: As far as we know, this is the first fund of this type to be launched. In terms of this asset class, we can distinguish ourselves through our ability to manage the copyrights through our global network, thanks to our joint venture.


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