Tema ETFs (“Tema”) launches the actively managed Tema Global Royalties ETF (ROYA), the only ETF listed in the United States focused on royalties. ROYA seeks to provide long-term growth through investment in companies that primarily earn their revenue from royalty income. A royalty is a share of an asset’s future revenue in exchange for financing or investment. ROYA’s portfolio manager Chris Semenuk has over 30 years of investing experience.
“Royalty companies are truly differentiated businesses.” said Maurits Pot, Chief Executive Officer and founder of Tema, “For business operators, royalties offer a neat solution to finance growth that avoids equity dilution, particularly relevant in today’s high financing cost and low financing availability environment. For investors they offer structured exposure to difficultly accessible private assets, underlying commodities, and deliver equity-like returns with contractually supported income. These benefits are particularly evident in today’s high interest rate environment.”
By concentrating on sectors such as commodities, pharmaceuticals, entertainment, renewables and technology, royalties access unique private assets in sectors that have historically exhibited structural growth. Royalties could equally serve as an inflation hedge, yet we believe their equity-like growth drivers keep them relevant throughout the commodity cycle. The contractual nature of their business model means that the universe of royalty companies has historically enjoyed a higher dividend yield than broader indices such as the S&P 500. In an investor’s portfolio, the theme has the potential to act as a lower beta diversifier, filling both the commodities and equity sleeves, while retaining an attractive income profile.
Royalty companies tend to enjoy a particularly efficient and scalable business model. As a result, royalty companies have historically outperformed mining companies and underlying commodities. Royalties are also exposed to attractive attributes of their underlying assets while limiting the related risks. For example, their limited exposure to operating and capital costs significantly reduces operational risk, and they benefit from limited dilution risk given a revenue royalty will not be diluted if the underlying asset owner raises incremental equity.
Publicly listed royalty companies tend to have a competitive advantage due to their increased access to cheaper sources of capital such as investment-grade public debt. This lowers their cost of capital versus their private financing counterparts and underscores why the cost and scale of funding can be a barrier to entry for competitors. Public royalty firms also tend to benefit from more diversified portfolios, greater access to new royalty opportunities, and track records of deploying capital effectively.
“Royalties tend to serve as compelling alternative sources of financing due to their tailored and flexible nature.” said Chris Semenuk, portfolio manager of ROYA, “Royalties remain a nascent yet fast growing form of financing, which are becoming more relevant in the current high traditional cost of financing environment. We believe royalties will prove an important source of capital for the next stage of life sciences innovation, as well as funding commodity projects required to sustain global growth to avoid the inflationary supply side squeezes which we have witnessed in the past 24 months.”