THE PORTFOLIO ROCKS

It may have been Guy Hands' cost-cutting overhaul at EMI that grabbed the most headlines last month, but at the other end of the private equity spectrum the quiet launch of a new music-focused venture capital fund was at least as informative for those seeking a better understanding of developments in today's music industry.

Power Amp Music, a new UK-based VC, last month announced it had teamed with music industry mogul Jazz Summers to launch the Power Amp Music Fund, which is seeking to raise £10 million (€13 million; $20 million) to invest in the development of 20 to 30 musicians.

The fund aims to generate returns through the production and promotion of the music artists it represents. Summers, who manages high-profile bands such as The Verve and Snow Patrol, will seek out both emerging and well established artists. The artists will agree that in exchange for funding, they will cede to the fund a share of revenues from recording, publishing, merchandising and live events. The fund will operate according to the UK's Enterprise Investment Scheme, which gives investors tax relief of 20 percent and a deferment of some capital gains tax.

The music market is undergoing a fundamental shift and the commotion taking place at EMI is symptomatic of a wider malaise as the major labels try to stop the rot

Tom Bywater

The fund launch comes at the same time as private equity firm Terra Firma's restructuring plan for record label EMI continues to cause much naval-gazing about how they will make a profit in an age when music can be easily downloaded for free from the internet. Terra Firma's plans to cut 2,000 jobs as part of a £200 million a year cost reduction drive has resulted in three senior executives leaving the company in an acrimonious split. EMI artist Robbie Williams has refused to work in protest over the job cuts. However, Hands has argued that the changes are absolutely necessary to keep EMI afloat. He told UK newspaper Financial Times that 85 percent of artists at the company lose money.

“The music market is undergoing a fundamental shift and the commotion taking place at EMI is symptomatic of a wider malaise as the major labels try to stop the rot,” says Power Amp Music managing director Tom Bywater. “The industry was slow to react to the digital age and now we are seeing it fail to adapt its overall business model to combine artists' needs and interests with wider profitability.”

By targeting the profits to be made from an artist's promotion, touring and merchandising rather than purely album sales, Power Amp hopes to come out ahead as the industry undergoes a tectonic shift. While CD sales have been in steady decline, demand for live performances and merchandise are at an all-time high.

A number of these funds have been popping up recently. Ingenious Media launched its Ingenious Music Venture Capital Trusts, which also seek to give investors a direct stake in the success or failure of music groups, last year. Such funds operate by forming joint venture companies with record labels, artist management firms, independent record producers and music publishers. The companies create new copyrights and license recording, marketing and distribution rights on behalf of the artists.

Sceptics have pointed to the notoriously fickle nature of the music business and the high level of risk: you could find yourself backing a series of artists that fail to deliver a return on investment. Power Amp says investors will be protected from potential declining CD sales by participating in other revenue streams, but it remains to be seen whether merchandising and ticket sales alone can generate a good return on investment.