The Royalty Markets Hedge Funds Hope You Never Discover

Partners,

Let me begin with a small crime: In the kingdom of alternatives, the quietest cash flow is the one nobody wants you to look at, because they’re already eating it. And by “nobody,” I mean the usual suspects:hedge fund princes with permanent data center tans, family offices, and pharmaceutical CFOs who haven’t paid retail for anything since 1998.

Now that I have your attention, here’s the opening:

“While everyone else is flipping houses and complaining about tenants, the smart money is collecting checks on molecules, melodies, and microwave technologies.”

We’re talking royalties - the most underpriced, misunderstood, and criminally ignored corner of the global cash-flow universe.

Street signs pointing towards the iconic Wall Street in New York City, set against the backdrop of historic architecture and a traffic light.

The WTF Truth

Here’s the thesis in three sentences your private banker will never articulate out loud:

1. Intellectual property royalties are one of the only cash flows in the world that become more valuable the more the economy digitizes.

2. The asset class behaves like fixed-income with upside -except the “tenant” is the global economy itself.

3. Hedge funds want this market small, opaque, and under-discussed because it is yield without competition.

Now let me show you the numbers.

Data Meets Drama

1. Royalty Flow Is Becoming Institutional

According to Ocean Tomo, intangible assets now represent 90%+ of S&P 500 market value. In 1975 it was 17%.

Translation: The economy no longer runs on factories - it runs on rights.

2. Patent Royalties Are a $500–$600 Billion Annual Market

Between pharma, semiconductors, industrial tech, software licensing, and process patents, global patent royalties quietly punch near half a trillion per year.

Yet retail investors? Zero access.

3. Creative Royalties Are Becoming the New “Bond Alternative”

Music catalogs alone traded $5.7B in volume last year between Hipgnosis, Primary Wave, Round Hill, and private deals.  Film/TV/streaming rights add several more billions.

Private families are buying IP like farmland.

4. Royalty Yields Quietly Outperform

Typical stabilized royalty yields:

IP Category	Yield Range	Notes
Pharma/biotech patents	4% – 12%	De-risked post-Phase III
Industrial/semiconductor patents	6% – 15%	Licensing agreements sticky
Software licensing	8% – 18%	High-margin, recurring
Music catalogs	6% – 14%	Better if pre-2000 (evergreen)
Film/TV rights	7% – 20%	Highly variable

Compare that to:

• Cap rates in major U.S. markets: 3–6% • Net bond yields: 2–5% • Venture capital IRR: a prayer and a power-law fantasy

Royalties don’t need the Fed’s permission to pay you. They just.. pay.

BEHIND THE CURTAIN

Here’s what’s actually happening:

1. Royalty Streams Have Become “Shadow Bonds”

While everyone panic-buys Treasuries or speculates on Bitcoin ETF inflows, institutional allocators are quietly treating IP royalties as a private bond market.

• Predictable

• Contract-based

• Often insured

• Inflation-resistant

• Uncorrelated to equities

Music royalties spike when touring trends change.  Film royalties spike when a show gets picked up by a streamer.  Patent royalties spike when global adoption surges. No Jerome Powell monologues needed.

2. IP Cash Flow Is Global and Growing

Real estate is local.  Royalties?  Borderless.

A patent filed in the U.S., EU, and Japan can produce cash flow from:

• U.S. hospitals

• German manufacturers

• Japanese electronics companies

• Korean semiconductor fabs

• Indian outsourcing firms

Try doing that with an eight-unit in NYC.

3. Royalty Cash Flow Doesn’t Care About Rate Cycles

This is key: Most royalty agreements are based on gross sales, not interest rates.

If Pfizer sells more pills, you get paid.  If Sony streams more songs, you get paid. If a manufacturer uses a patented process, you get paid. It is capitalism’s purest dividend.

4. The Trade Is Still Undercrowded

Only a handful of funds dominate the market:

• Royalty Pharma (pharma/biotech)

• Hipgnosis / Primary Wave (music)

• HarbourView (entertainment)

• RPX / Acacia (patent monetization)

• Red Raven (software/IP transactions)

This is a trillion-dollar market with fewer participants than the average Miami nightclub during Art Basel.

5. The Respectable Press Doesn’t Understand It

Because IP royalties are neither sexy (like crypto) nor familiar (like real estate), most financial journalists treat them like exotic trivia. That’s where the advantage lies.

HOW SOPHISTICATED CAPITAL ACTUALLY ENTERS

(Disclaimer: This is not financial advice.)

Here are four real-world approaches:

1. The Small Ticket Play - The Royalty Slice

Minimums: $10K–$100K Platforms: Royalty Exchange, ANote Music, SongVest, etc.

You buy a fractional royalty from a music catalog or a small patent stream.

Best for:

• Solo LPs

• Allocators testing exposure

• Yield collectors

Risk: short duration, declining assets Upside: high yield, transparent

2. The Operator Partnership - The GP/LP Patent Syndicate

Minimums: $50K–$500K

Small GPs buy distressed patents, enforce rights, or license them out. Think of it as “BRRRR for patents” with lawyers instead of contractors.

Best for:

• GPs with legal networks

• Family offices with IP counsel

• People who love complexity

3. The Royalty Bond Structure

Minimums: $250K–$5M

Large patent or music catalogs securitize their royalty streams into bonds.

You buy tranches like a private MBS, except your collateral is a catalog, not a condo.

Best for:

• LPs wanting stability

• Pension-style allocation

• Predictable cash flow

4. The Acquisition Play - Buy the Entire Catalog

Minimums: $5M–$200M

You go full villain. You buy:

• A music catalog

• A film library

• A patent portfolio

• A software licensing business

Then you hire the best operator in the world to manage it. This is where the real wealth happens.nA single patent family can generate $10M–$50M per year for 8–12 years. A single music catalog can produce $1M–$5M per year. A software licensing engine can produce 15–40% EBITDA margins with no physical footprint.

It's real estate, but the tenants are consumers of culture and technology.

RISKS

• Royalty tails decline

• Enforcement costs money

• Monitoring usage is non-trivial

• Music trends shift

• Patent litigation is a knife fight

• Some catalogs go stale

• Efficiency matters

• Greater fools do not exist here

  
  

If I Were Allocating $10M Today

This is not advice - this is what I'd do if I were spending my own villain money.

Category	Allocation	Why
Pharma/biotech royalties	25%	Strongest durability
Semiconductor/industrial patents	20%	Macro-proof
Software licensing portfolios	20%	Highest margins
Music catalogs (pre-2000)	15%	Evergreen IP
Film/TV libraries	10%	Streaming tailwinds
Opportunistic IP litigation funds	10%	High-alpha

This gives cash flow + convexity. Call it:  The IP Income Barbell.

Read This Twice

Friends, most people spend their lives working for money. A smaller group makes money work for them. But a microscopic, annoyingly smug minority does something different: They own the rights to the ideas the entire world depends on.

Every pill swallowed. Every song streamed. Every line of code licensed. Every device manufactured. Every episode replayed. Every algorithm deployed. Every patented process used in a factory at 2AM on the other side of the world. They get paid.. while doing absolutely nothing. This memo is already longer than the lawyers want, and I’ve said more than I should.

So I’ll end it here..

If you want the operator knowledge, and Vault contributor insights that didn’t make it into this letter:

👉 mittchen.com/vault