Brian Dally: Well, yeah, and if you think about some of the concerns that private credit investors would have right now [00:02:00] about AI disrupting software company revenues, for example, in private credit. We've talked about that on this show in previous episodes. If you think about, even in real estate, where Groundfloor's been very active, and what's happening with interest rates and what is that going to mean for house prices. Fortunately, we're in the debt part of the capital stack, not the equity cap part of the capital stack, which is a good place to be in a time like that.

But I think as people look across public markets, they certainly see risk, they certainly see a lot of volatility, but then even in some private markets people are. So it's interesting to think about these specialty finance categories that don't have those problems. I assume where the Fed puts interest rates or what happens in the bond market isn't going to impact the cash flows coming from a song that's 4 [00:03:00] to 10 years old.

Jillian Murrish: And in my opinion, correct. We really have been in this up and to the right economy for quite a while. It's been a long run. When that correction is coming, I think flocking toward these types of assets is a great place to go.

But a really fun, random aside, you mentioned AI. This is another reason I love music right now. Music is art. Art is such a human experience, person to person. People want to know the artist behind the song, how they made it, what was the story behind the lyrics. You connect with other people around the music. The artist is a huge part of the song. And that's something that can't be taken away from AI. Even with the creativity that AI's had around literature, songwriting, people want to connect with who's creating art. And, even with the rise of NFTs, remember the whole, digital assets being created on computers instead of on paint and canvas? The NFTs that took [00:04:00] off, took off because of the story, the storytelling of who was behind it, who was the artist creating the digital art?

Brian Dally: Think of Beeple. That was the classic case, right? He was a real artist, a real person who had been making his art for a super long time, and the NFT was just a representation of that. And people love that story.

Jillian Murrish: Exactly. And so, perhaps there could be artists and people who create art using AI, but people still want to connect to that artist, and those rights are tied to a human that creates that art. To me, I think music is a great place to flock in the AI age of finding things that are AI-proof to invest in. This is a space that I run to.

Brian Dally: I don't know how AI is going to go on the road and perform and give a live show with a killer guitar solo. I don't know how that's going to happen.

Jillian Murrish: It just can't happen. It just can't. And these older songs...

Brian Dally: Show me the robot, I'll be impressed. I'm sure Elon's working on one right now.

Jillian Murrish: Yeah, exactly. And music is the soundtrack to your life. Certain songs remind you of certain seasons. Certain bands and artists are certain [00:05:00] seasons of your life. They got you through hard times, or they helped you celebrate the amazing times.

And those 4- to 10-year-old songs, 20-year-old songs, you're not going to stop listening to those because AI music is generated. It has been created as a fabric, a part of your human experience. I could talk about this for the whole podcast, but I will pause.

Brian Dally: Do you think consumer behavior changes in response to the economy with music? Is there more consumption, less consumption, less money for the consumption that's happening? Or is it just almost immune from cycles?

Jillian Murrish: Well, I think the most important metric to look at there on the growth of music is really actually around streaming penetration by population. So, if you think about it, there's a huge cohort of Americans who aren't on the streaming platform. So the older generations like 50, 60, 70, 80, aren't using those, and that segment of the population is adopting digital service providers at a very fast clip. So simply penetration [00:06:00] into existing music listeners already will lift streaming.

Goldman Sachs has a report out recently that everyone's citing about the 8% to 9% average growth that is expected year over year through 2035. And it comes from that. It comes from international adoption of digital service providers as well, so, into countries that just have lower penetration and adoption.

So I think the actual top-line effect on music growth is much more driven by streaming penetration and less driven by the blip in, are the existing streaming people using the platform more or less? That's just noise versus the actual heart of the growth.

Brian Dally: That's incredible data because you think of streaming, a lot of us just take that for granted now. That's very interesting to hear that the category's actually growing by bringing on new cohorts.

Jillian Murrish: Age and geography are driving that.

Brian Dally: But so when you do think about risk management, [00:07:00] is risk management limited to diversifying within the portfolio or across the portfolio with the right... What does diversification look?

Jillian Murrish: Sure. Within music, if I were comprising a portfolio, I think of it as genre, right? Like country has had a huge revival in the last two or three years, which has been interesting to see. And you see other sectors that are having a dip. Again, I'm not going to be a person who can predict whether Latin is going to have a rise versus rock versus rap. And so I say let's stay diversified across the genres.

Furthermore, just again, by song count, maybe there's an artist who experiences listenership loss for a number of reasons. Oddly and kind of sadly, even bad news, like negative news about an artist, generally increases streaming revenue. So if an artist goes to jail, that actually generally increases the revenue on that asset, which is a [00:08:00] strange one to talk about, but it's so counterintuitive. And so it's sometimes hard to conceive of those instances that create listenership loss when things you would think would create that have actually in past proved to have the opposite effect.

So, again, diversifying in case there is some sector that falls out of favor for some reason is good. And then just, as you do with any portfolio, it's like dollars into what deals, right? If you have a portfolio of stocks, you're not putting 90% in one stock and then spreading the 10% out among 50 stocks. You're trying to be a bit more deliberate with that deal count and exposure size.

Brian Dally: Yeah. It sounds to me like you guys think a lot about portfolio construction and how to build a portfolio that you can count on to perform across over time.

Jillian Murrish: And, something we didn't talk about is very nuanced. There are multiple types of royalty rights. You have streaming, you have performance, you have songwriting rights, and so [00:09:00] diversifying across these different royalty types also has value.

Brian Dally: Because I guess if you held performance rights during COVID, that would've been a because nobody was performing on the road, at least.

Jillian Murrish: Yes and no. That category actually encompasses other types of revenue that you wouldn't call... but yeah, so it's a little more nuanced in the definition, but yeah, that could be part of it. And so yeah, songwriting rights, for example, are fascinating intellectual property to research because songwriting rights are actually a set dollar rate that the songwriters are paid out per every play.

Whereas the performance rights, which is the actual performance of the song and the recorded version that gets sent out to the public, that performance royalties are actually a formula based on how the [00:10:00] song performs to other songs. So there's a lot of nuance in that, and being diversified across the rights types I think is important.

Brian Dally: Do you guys have an army of analysts? What's happening?

Jillian Murrish: Interesting. As we built our business, there are multiple ways that we deal with a deluge of deal flow. So, we actually have two analysts who do intake underwriting where they bring them in, review through an initial lens, and then there's some immediate obvious kickouts, and whatever may get fit through that initial filter gets sent to the deal team, and they're actually spending more time on the qualitative review and then stressing it further. But yeah, there's a whole process. We burn our calories for the deals we do, that's for sure.

Brian Dally: This is fascinating. So, if we think about the specialty finance market and how it might evolve, obviously you guys are working on more than just music. You guys are always looking [00:11:00] for new opportunities. How do you see things evolving over the next 5 to 10 years in specialty finance? Do you expect institutional demand to continue growing, and do you think we're going to continue to have this small deal space that's growing and providing more opportunity? Or do you see it stabilizing? What do you expect the future?

Jillian Murrish: As long as banks are regulated, there will always be opportunity in specialty finance. I don't think the opportunity ever goes away. It simply changes. Banks are too slow to meet borrowers and customers where they need to be. And so, it takes banks a while to enter an asset class, get comfortable with it, and as long as there's that lag time, there's an opportunity for the specialty finance ecosystem to come in and serve these parties.

Music, as one example that we've been talking about, has become much more institutional. There are securitizations of music portfolios to date, rated securitizations, [00:12:00] whereas five years ago, that was like early innings of this asset class.

And so, I think the opportunity for our firm and the way that we view our evolution over the next 20 years, is simply to stay at the forefront. Where are these inefficient markets that need capital that will be responsible stewards of the capital? How can we do it in these small deal sizes that just, it's not efficient for others to do it? We'll go burn the calories, and we're a boutique firm. We can actually do that profitably. And so just overall in the ecosystem, as long as banks are regulated, this space is going to continue to grow.

Brian Dally: I like the way you put that, in particular because I was struck when I moved into this realm, and our first category was fix and flip loans like you guys were doing at Patch. I really was blown away by the entrepreneurialism of the borrowers, the people who are putting the capital to work. And I feel like now that we're [00:13:00] expanding into new use cases within real estate and new investments outside real estate, I'm seeing that same thing. The vibrancy of entrepreneurship in finding these categories and then needing financing in order to grow. I meet a lot of originators who are good in the $10 to $20 million range, but really struggle to imagine what it would be to get to $100 or $200 million.

We crossed that, I don't know, through luck or good fortune, or I think because we had a retail investor platform integrated and on board that stood the test of time. But I think a lot of people struggle to get beyond that. And you mentioned securitizations, because that's the brass ring that's waiting at the end, right?

Once you can get a category to where it's securitized... Some people are like, "Oh no, that's going to take away the opportunity for the retail [00:14:00] investor." But far from it. It actually opens up more because you can participate in different parts of the capital stack, and there's more diversity, and it's better understood.

So I'm with you. I love the way you put it. As long as banks are regulated, entrepreneurs are going to need capital. They're going to need capital providers who can step into the breach and bring investors along. And I think there's unlimited opportunity.

Jillian Murrish: And to be able to do it efficiently and fast, and people will pay for speed. Even if the bank understands a segment, it doesn't mean they can move fast enough to serve that borrower in the way the borrower needs to be served. The institutional rigor that's required for an asset class to develop into a securitization asset is amazing across the board for all investor types. It's well understood. It's audited. There's best practices that, again, are having to be used across the board for all originators feeding [00:15:00] into these securitizations.

Brian Dally: We were 10 years old before we did our first securitization. We've now done three. Being SEC regulated was one bar we had to meet, and that was generative for the company. And then meeting the bar for the securitization markets was a whole nother step forward in terms of compliance, diligence, initial and ongoing. It's been great for the company to build muscle.

We always said it would be institutional grade product. We hoped that was true in the beginning. We worked our butts off to make it true, and it's nice that now the category and we as a company have met that bar. It's very, very interesting to see how these things evolve.

All right, so let's wrap up with rapid fire Q&A. You ready?

Jillian Murrish: Ooh, I am ready.

Brian Dally: Let's do it. All right. Try to answer in one sentence if you want. If you want to expound, [00:16:00] expound. What's the most misunderstood concept in investing?

Jillian Murrish: Liquidity. You undervalue it until you need it.

Brian Dally: Oh, I'm bookmarking that one. Yep. One market signal you never ignore.

Jillian Murrish: When capital is too plentiful. When there is too much capital, discipline starts disappearing. Too much capital chasing deals, like, bing, bing, bing. Calm down, pause.

Brian Dally: Got it. Biggest mistake you see investors making right now.

Jillian Murrish: Relying too much on historical data.

Brian Dally: Okay. A deal you passed on that you still think about.

Jillian Murrish: Ooh, lending against Rolex watches at scale. We didn't do it, and I still think about it.

Brian Dally: And didn't Rolex watches go through a huge spike in value around COVID?

Jillian Murrish: Oh, yeah. But the whole idea of [00:17:00] physical collateral...

Brian Dally: Plus if you foreclose on them, that's pretty cool.

Jillian Murrish: Right? A new watch. Hello.

Brian Dally: All right. And what's the most overhyped trend in finance?

Jillian Murrish: Calling every software business an AI company.

Brian Dally: Boom. You said it. You heard it here. And if you weren't in finance, what do you think you'd be doing?

Jillian Murrish: Oh, definitely full-time adventure blogger.

Brian Dally: Adventure blogger. Expound. What kind of adventure?

Jillian Murrish: I'd climb mountains, I'd blog about it. I would go explore fjords up in Norway. I would go try interesting food in the Amazonian rainforest. I would just get into all pockets of the world and blog about it.

Brian Dally: Look, when we started our companies 10, 12 years ago, I don't know if that was viable as a career, but I think it is now.

All right. And lastly, if you could leave listeners with one lesson about investing and risk, what would it be?

Jillian Murrish: Oh, this is so cliche, [00:18:00] but it's so true. There is no bad deal, just a bad price.

Brian Dally: Yep. I think that's a good one. I love that.

Jillian Murrish: And it may be you have to pay me to take the deal. You might have to pay me.

Brian Dally: That happened with oil. It's hard to imagine now, but it happened with oil during COVID. People were paying people to take the oil because they had to store it. They couldn't store it.

All right, so we'll wrap things up now. Jillian, thank you so much for taking time to join us. It was great having you on and sharing more about this asset class with music. Totally fascinating. The work you guys are doing is incredible.

For our audience, if you'd like to learn more about Pier Asset Management, we'll include links in the show notes along with Jillian's LinkedIn profile, and you can check out all of our podcast episodes at groundfloor.com/podcast. Thanks for tuning in to Beyond the Stock Market.