Private Problems

By Matthew Gutierrez and Shawn O'Malley · December 14, 2023

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Today's sponsor

Pew Research released what you could call a “Spotify Wrapped” of its most interesting findings from 2023. Of note, a quarter of U.S. 40-year-olds have never married, up from 7% in 1980.

And Americans’ opinions on the Supreme Court were more unfavorable than favorable for the first time in 30 years of polling.

Most shocking to us? Most Americans say they would tip 15% or less for a typical dining experience at a sit-down restaurant…

?? You can see all the findings here , and our Chart of the Day shows how folks’ feelings on AI have shifted toward concern in 2023.

— Matthew & Shawn

Here’s today’s rundown:

POP QUIZ

?Stocks move higher in December more often than any other month. How often are we “in the green” for the month? (Scroll to the end to find out!)

Today, we'll discuss the three biggest stories in markets:

• How high interest rates impact music investing
• The big business behind youth sports
• Pfizer’s post-Covid struggles

All this, and more, in just 5 minutes to read.

CHART OF THE DAY

IN THE NEWS

?? High Interest Rates Restrain Enthusiasm for Investing in Music

Two years after Wall Street began splurging on buying music rights, the music has stopped, and interest has seemingly dried up.

Over just a few days in October 2021, Wall Street titans, Blackstone, KKR, and Apollo wrote over $3 billion worth of checks, snapping up music rights.

Payday: It was pocket change to these firms, which command trillions of dollars worth of investment. But for musicians, it was an “unprecedented” opportunity to cash out on their life’s work, per the FT .

• From Stevie Nicks to Shakira, artists raked in the dough hand over first.

Back to reality: Like so many financial assets, music catalog prices frothed into a pandemic-era bubble, only to be humbled by the sting of higher interest rates that raise the opportunity costs of investing in anything other than government bonds (or interest-earning cash.)

• Unlike other pandemic darlings, though, the music market hasn’t bounced back in 2023.
• A few deals have been inked, but not much — KKR, one of the first to invest in music royalties, hasn’t bought any in over a year.

Why it matters:

Music investing’s fall from favor has correlated more broadly with challenges facing the private-market investment strategies that Blackstone, KKR, and Apollo offer institutions and accredited investors.

Private problems: As Nat Zilkha, a former KKR partner, put it, opportunities to earn higher interest rates with more conventional investments have reduced “interest in less liquid, less well-understood asset classes…Music is near the top of that (list).”

Part of the challenge has been that these Wall Street firms were more interested in helping finance deals for others to buy music rather than purchase rights explicitly themselves, “similar…to how traditional private equity deals are financed — put up just a portion of the cash to fund a deal, and borrow the rest” writes the FT.

• Of course, higher interest rates have made financing these deals less economical for music-rights purchasers.
• David Dunn, partner at the investment bank Shot Tower Capital, estimates that prices for music catalogs are down 14% since 2019.

Financializing music has slowed, but not everyone has stopped. Carlyle recently acquired Katy Perry’s catalog for $225 million. Some hope music rights can be an income source uncorrelated with the economy, remaining steady even in recessions.

• For musicians who aren’t A-list celebrities, deals are in a “major correction.”

Read more

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?? The Big Business of Youth Sports

Music rights investing wasn’t esoteric enough for ya? Try investing in youth sports, then. As one youth sports expert told CNBC ,?“Private equity is flowing billions of dollars into the youth sports market.”

• “Firms are buying up and aggregating clubs in a number of sports and creating new products for an industry that serves as many as 30 million children.”

Meet MOJO: Ben Sherwood was a Disney TV exec. He’s also an attentive parent, traveling back and forth across the country to attend his son’s games.

• Now, he’s done at Disney and has launched MOJO Sports, which aims to “bring a little bit of Disney magic to youth sports and build a consumer-facing app that helps parents like me…be involved.”

Youth sports merger: Already, his company has a bidder, with TeamSnap — the sports management platform — agreeing to buy MOJO, hoping to bring its services to millions of users, namely parents and youth team managers.

While TeamSnap was formed in 2009 to organize rosters and schedules and facilitate smoother communication between parents and coaches, they expect MOJO’s coaching resources and live game streaming (for parents and grandparents far away) to make youth sports an even better experience for all involved.

• MOJO also comes with NFL star power via Russell Wilson, a founding partner and investor.

Why it matters:

What has even more devout fans than most pro teams? Your local youth sports team. The average parent in the U.S. pays over $880 per year for one child’s sports activities, and many spend much more than that.

The youth sports industry soaks up between $30 and $40 billion annually from parents.

• Sherwood adds, “I love the Liverpool Football Club, but I’m a way bigger fan of the team my son plays soccer on…You’re a much bigger fan of your child’s team than any pro team, and it’s that fandom that we are trying to unlock.”

Read more

MORE HEADLINES

?? 2024 trends in VC investing to watch

? Millions of Teslas recalled over Autopilot feature

? Buffett’s Berkshire buys more Occidental, now owns 27% stake

?? SmileDirectClub is shutting down — what it means for customers

?? "Eggs " make history as top-ranked Google search on cost in 2023

?? WeightWatchers launches a new membership for Ozempic users

?? Pfizer Continues to Struggle Post-Pandemic

Life was good for Pfizer and Moderna investors during the pandemic. Recently? Not so much.

Investors have turned sour on the pharmaceutical companies, particularly companies that became known for their Covid-19 vaccines. Shares for Pfizer and Moderna have fallen roughly 50% this year vs. the S&P 500’s ~24% gain.

• Pfizer shares kept falling this week to their lowest level in a decade after a disappointing 2024 forecast that showed next year could be even worse.
• Even Pfizer’s leading cancer drugs aren’t enough to compensate for its flailing Covid vaccines and drugs, which millions of people used in 2020, 2021, and 2022. They haven’t since. Forward-looking markets have punished the stock accordingly.
• This week, poor Covid product revenue and sales projections of its shot and pill missed analysts’ estimates by a mile.
• Pfizer will make about $8 billion next year on Covid vaccines and pills, nearly $6 billion less than Wall Street expected. Ouch.?

Bad in the short-term, hopeful long-term: One Citi Bank analyst commented, “Today’s rebasing of Covid and non-Covid revenues should be painful but at least hopefully achieves a reasonable floor consensus.”

• Pfizer said sales might only grow 6% annually into 2025, indicating that it doesn’t have “a high percentage of late-stage products with multi-billion-dollar sales potential,” per a Bloomberg analyst.
• It’s a far cry from 2021, when Pfizer shares nearly doubled as millions took their shots and vaccines.
• As a result of the sales slump, Pfizer said it will expand its cost-cutting measures, including a string of layoffs.?

Why it matters:

Pfizer is another example of how important companies — even those that make life-saving products — don’t necessarily get rewarded in the stock market, which cares about growth.?

Overall, the healthcare sector is roughly flat this year and up about 52% over the past five years, underperforming the broader market despite a pandemic.?

That would be yet another example of how just because a seemingly bullish event happens — in theory, a pandemic should be good for healthcare companies’ revenues — doesn’t necessarily mean the market will respond in textbook fashion.?

• During the pandemic, Pfizer was a stock market darling, performing less like a big pharma firm and more like a hot tech stock.
• But the world has moved on, and investors don’t care anymore about its past role in helping end the pandemic.?

Low expectations: Sometimes, it’s good practice to do the opposite of Nvidia and set low expectations, which Pfizer’s CFO told analysts after reporting earnings on Wednesday.?

• “We want to be conservative,” he said.?

Read more

QUICK POLL

Would you consider investing in music rights or youth-sports companies?

Yes — both!

Just music rights

Just youth-sports businesses

Neither

Yesterday, we asked:?Do you think Argentina will successfully "dollarize" its economy?

— One reader wrote, “If they can pull it off, it will be neither easy nor cheap.”

— Another said, “I’m optimistic for change. Whether dollarization is the right solution remains to be seen, but blame for the country’s woes largely falls on the government’s shoulders.”

TRIVIA ANSWER

The S&P 500 is up about 74% of the time in December, the best mark of any month on the calendar. And, since 1950, the index has gained an average of 2.9% in pre-election year Decembers.

SEE YOU NEXT TIME!

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