Is Private Equity Destroying Music Production?

Native Instruments was only the tip of the iceberg. Private equity is pervasive in the music production industry, tied up with hardware, software and music distribution companies. How is this affecting the music you make?

Unless you’re big into finance, the first time you heard about private equity was likely in reference to Native Instruments. The German company, which was born out of the Berlin electronic music scene in the 1990s, was taken over by private investment firm Francisco Partners in 2021, which also scooped up iZotope and Plugin Alliance. Earlier this year, it was revealed that NI had declared insolvency, having accrued £250 million in debt by 2023. 

How does one of the biggest music production companies, with top-tier products like Kontakt in its catalog, end up in such dire straits? The answer is entirely to do with the shocking business practices of private equity, a type of investment outfit that will swoop in on a struggling company and do whatever it can to wring a profit out of it – even if that means riding it into the ground.

And it’s not just Native Instruments either. Private equity firms own or are majority stakeholders in hardware companies such as Elektron and AlphaTheta, software outfits like Image-Line, digital distributors TuneCore and DistroKid, and even retailers Sweetwater and Reverb. They are everywhere.

Should we be worried?

What Is Private Equity?

Private equity operates differently than other types of investment firms. Unlike venture capital, where a person or entity makes investments in exchange for minority ownership, private equity firms generally purchase a company outright or leverage a hostile takeover through the purchase of majority shares. It does this with money pooled from a group of investors, who let the PE firms run the company on their behalf. The firm will then typically run the company for a set period of years, eventually either taking it public or selling it to another buyer.

Unlike venture capitalists, who want the company to succeed, the whole goal for the PE firm is to only generate profits for its investors. If taking the bought company to profitability will make them the most money, that’s what they’ll do. If, on the other hand, declaring insolvency or even closing up shop altogether is the more profitable path, then buckle up because it’s going to be a bumpy ride into the ground. 

“Private equity firms own companies for an average of seven years,” explains journalist Megan Greenwell in her book on the subject, Bad Company. “They’re trying to sell for a profit, not grow the business over the course of decades. Investing in research and development, improving products or services, ramping up sales strategies – these are all years-long processes. Cutting costs, on the other hand, pays off almost instantly.”

This can also mean borrowing heavily to bring the company to a state where the firm and investors can make their money. Conveniently for the PE firms – and disastrously for the company – money is borrowed entirely under the company’s name. “Even though the firm is the company’s sole owner,” explains Megan, “it is not legally responsible for paying the money back. The company and its employees shoulder the risk.”

Unlike venture capitalists, who want the company to succeed, the whole goal for the PE firm is to only generate profits for its investors

Deal With The Devil

In the best-case scenario, when private equity comes in, the company is given an infusion of cash, brought to profitability, and then made public or sold to a benevolent third party. Not every transaction with a private equity firm has to necessarily end in tragedy. 

“There can be multiple reasons,” answers Girts Ozolins, the head of Erica Synths, when asked what could make a company turn to a private equity firm for help. “The obvious one would be a need for financing, cash flow issues. There also can be other reasons, like a company’s management runs out of steam or ideas, for instance. They go for private equity to attract more money and also get some management infusion.”

In the case of a minority ownership situation, the PE’s involvement may be restricted to a seat on the board of directors. “Sometimes they install their CEO depending on what share the private equity is acquiring,” explains Girts. “It’s case by case. And, of course, it also depends on the company’s objective for going for private equity funding.”

While the outlay of cash may initially seem attractive, it can be what amounts to a Faustian bargain. Because you’re not only getting money, you’re often giving up control. “At its core, a private equity takeover … is a deal with the devil,” writes Dr Daniel Paull in an article https://doctorsonsocialmedia.com/why-private-equity-is-killing-the-soul-of-medicine/ about private equity involvement in health clinics (yes, health clinics). “The money looks good up front, but the cost is your independence, your integrity.”

At its worst, getting in bed with private equity – or worse yet, being a company on the losing side of a hostile takeover – will end with the company stripped of any and all profitable assets.

“For private equity,” writes Mary Greenwell, “the only definition of value is return on investment. The inevitable outcome… is that a disproportionate number of leveraged buyouts make wealthy finance executives wealthier at the expense of the places where the buyouts take place.”

a disproportionate number of leveraged buyouts make wealthy finance executives wealthier at the expense of the places where the buyouts take place

Investments Are Financial Decisions, Not Emotional Ones

Daniel Troberg is currently the VP of sales and marketing at Ashun Sound Machines, the company behind the Hydrasynth and Levaisynth. When asked what he thinks of when he hears the term private equity, he answers, “Opportunism.”

Investment firm Bonnier Capital currently holds a controlling stake in his former company, Elektron, with whom he was involved in various capacities for 20 years. “I was never personally involved in it financially,” he says about Elektron. “To be frank, my investment has been purely emotional, and it’s interesting to see that other people get emotional about Elektron, too. This is not the first time external investors have been involved with Elektron, but one important factor is how the ownership is divided. Who holds the majority? Because that party has the final say.” 

He continues: “It’s also important to understand why investors get involved in the first place, and the answer is that money needs to be added for some reason. That could be a warning sign, it could be an opportunity, or it could be anything in between.”

On whether private equity is a benefit or a detriment to the music production industry, he adds: “If the investor has a genuine interest in and understanding of what they’re investing in, it’s good. If not, it’s bad. To be honest, it’s very unlikely you’ll find an investor who cares deeply about anything beyond the numbers on a spreadsheet. One has to assume that investments are financial decisions, not emotional ones.”

Although we didn’t ask Daniel to comment on it, the fact that Elektron has recently banned all discussion on its Elektronauts message board about unofficial third-party mods really only proves his point. It’s hard to imagine a creativity-forward independent company like Erica Synths doing such a thing.

Profit Is the Enemy of Creativity

Erica Synths is fiercely independent, and will remain that way, according to Girts. “We make good instruments that we would love to play ourselves, and we contribute to future generations by having our educational projects, Bullfrog and the DIY series, which are not necessarily super profitable things,” Girts explains. “With a financially minded CEO, they would just discontinue those not-so-profitable product lines. But because I have a vision, it must be done.”

Would Erica Synths be tempted to take on investors should business ever go bad? “No,” he says immediately. “No. I hate vertical structures, which is the case with an overseeing entity. You can take more risks when you are not controlled by someone, because these are your personal risks rather than your need to report your quarterly profits or losses. Your business decisions start to be shaped by this profit and loss thinking, rather than what we can do better and what risks we can take in order to innovate.”

Ultimately, Girts says, “this profit-oriented approach to business destroys the spirit of creativity because it eliminates the uncertainty or quest for something.”

Girts cites Ableton as another company that has managed to stay true to itself and also be successful. “They did not sell out and they still follow their vision, and they are doing well,” he says. “That’s an indication that if you do things right and with a certain dose of luck, you can be an independent company.”

The Community Effect

Beyond the people immediately affected by private equity ownership and control of business, such as employees, there is its effect on the broader community. Mary Greenwell’s book mentions things like wage stagnation, increasing rent for office space, and less quantifiable knock-on effects on local businesses and the communities they serve. “Only private equity wins,” Megan says.

For music producers, the multipliers caused by PE in the industry are equally hard to quantify, and yet no less real. Had Native Instruments not been bought by inMusic and instead gone completely under, that would have left thousands of musicians and producers in the lurch with software that could no longer be updated. And then there’s the decline in innovation and creativity that Girts spoke of. The more that private equity takes over companies, the less risk-taking we’re likely to see in the industry. 

“When companies attract private equity,” says Girts, “then their best days are over. They stop genuine innovations because maybe stuff gets optimized and costs are cut. The brightest minds simply leave and start their own companies or join other companies.”

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