We had the pleasure of speaking with Marc Rubinstein, author of Net Interest, a financial sector newsletter, about his essay, From Bowie Bonds to Pipe: Financing Recurring Revenue.
Marc writes:
David Bowie is remembered as one of the most influential musicians of modern times. Less widely appreciated is his side hustle in financial innovation.
In 1997 Bowie turned fifty. By then he had created a massive body of work – over 25 albums including Space Oddity, Ziggy Stardust and Let’s Dance. Together with banker David Pullman, Bowie devised a scheme to raise money against the royalties those albums would generate. Through the process of securitisation, he was able to swap some of his future royalties for $55 million of cash up front. His counterparty was the insurance company, Prudential Financial, which received a 7.9% annual coupon. After ten years, the deal would expire and cash flows linked to the royalties would fully revert to Bowie. Notwithstanding some wobbles along the way – like when peer-to-peer file sharing threatened physical album sales in 2004 – the deal ran its course and liquidated successfully in 2007.
Pullman went on to do similar deals with other artists, but they never really took off, largely because the cost of developing them was high in the context of their relatively small sizes.
Nevertheless, the idea that a predictable set of cash flows can be traded for cash proved alluring. A special financial structure called a whole business securitisation emerged to channel sticky cash flow streams to investors. Today, it is used by companies which generate steady streams of income without the tangible assets that would provide the backbone for more conventional securitisations. Planet Fitness completed a deal in 2018 to raise $1.275 billion in cash against membership fees across its gyms. And in 2020, drive-in restaurant operator, Sonic, raised $900 million against the franchise fees it collects from its restaurants.
Over the past several years, more and more companies have developed streams of revenue that exhibit the predictability of franchise fees and gym memberships. The trend is wrapped up in the penetration of software as a service but also reflects the success of platform and subscription based business models. The trailblazer was Adobe, which now makes 90% of its revenues from subscriptions, up from 10% in 2010. But it is apparent everywhere – even in financial services, where challenger banks are beginning to offer subscription plans in lieu of fees.
Read on or listen to our conversation (recorded on March 15, 2021):
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About This Audio Series:
MOI Global is delighted to engage in illuminating conversations on the financial sector with Marc Rubinstein, whose Net Interest newsletter we have found to be truly exceptional. Our goal is to bring you Marc’s insights into financial services businesses and trends on a regular basis, with Marc’s weekly essays serving as inspiration for our discussions.
About Marc Rubinstein:
Marc is a fellow MOI Global member, managing partner of Fordington Advisors, and author of Net Interest. He is a former analyst and hedge fund manager, most recently at Lansdowne Partners, with more than 25 years of experience in the financial sector. Marc is based in London.
About Net Interest:
Net Interest, authored by Marc Rubinstein, is a newsletter of insight and analysis from the world of finance. Enjoyed by the most senior executives and smartest investors in the industry, it casts light on this important sector in an easy-to-read style. Each post explores a theme trending in the sector. Between fintech, economics and investment cycles—there’s always something to talk about!
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