Sep 4, 2025
The Quiet Compounding Machines
What They Are
Royalty companies are businesses built on an elegantly simple model: they collect a stream of revenue or production from an underlying asset without being responsible for operating it. In mining, a royalty might mean 2% of every ounce of gold sold. In oil and gas, it might mean a slice of every barrel pumped. In pharma, it could be a perpetual right to a percentage of drug sales. The operator does the hard work — digging, drilling, refining, distributing — while the royalty holder clips cash.
The beauty lies in the asymmetry: upside exposure without operational downside. The royalty company is not exposed to labor disputes, input cost spikes, equipment breakdowns, or capital-expenditure cycles. It benefits when prices rise or production grows, but when costs balloon or accidents happen, the royalty holder isn’t the one footing the bill.
Historical Context
The model isn’t new. During the California gold rush, the suppliers of picks, shovels, and jeans (Levi Strauss being the archetype) made fortunes while most miners went bust. In the 20th century, oil landowners in Texas and Oklahoma perfected the art of leasing mineral rights in exchange for royalties that compounded across generations. Mining finance in Canada gave rise to modern royalty companies like Franco-Nevada, Wheaton Precious Metals, and Royal Gold.
Outside natural resources, the royalty model has appeared in music (publishing rights), entertainment (film libraries), pharma (drug licensing), and technology (software IP royalties). In every case, the principle is the same: earn from the output, not from running the operation.
The Canadian resource industry deserves special mention. Facing capital-intensive projects and volatile prices, mining operators often needed financing. Rather than take on more debt or dilute equity, they sold royalties. Investors like Franco-Nevada pioneered the idea that buying streams of future production was often a better business than mining itself.
This model spread globally, and today royalty companies trade publicly, often enjoying premium valuations because of their cash flow predictability and low operating risk.
Why It Matters
Royalty companies fit perfectly into our Family Office ethos: preserve capital, seek asymmetry, and compound patiently.
Capital Preservation: By avoiding operational exposure, royalties limit catastrophic downside. Mines flood, rigs explode, drugs face recalls — yet royalties continue, provided there’s production.
Asymmetry: Royalties benefit from price increases and production growth. The upside can be exponential, especially with perpetual agreements.
Compounding Power: Because royalty companies have low costs and scalable portfolios, they can reinvest free cash flow into acquiring more royalties, creating a flywheel of growth.
Inflation Protection: Royalties typically scale with nominal prices. As inflation pushes up commodity prices, royalties often rise automatically, without additional investment.
In a world obsessed with technology multiples and momentum trades, royalty companies are boring by design — and that’s their edge.
Contrarian Curiosities
Where we diverge from conventional thinking:
Royalties are software before software. Everyone praises SaaS for recurring revenues and low marginal costs. Royalties did it first — and in many cases, better.
Boring is beautiful. Investors dismiss royalties as old-economy or niche. We see them as timeless. Energy demand may shift, but royalties clip income regardless of whether the narrative is “oil” or “renewables.”
Hidden in plain sight. Many royalties are embedded in legal contracts, estate transfers, or overlooked securities. They don’t get analyst coverage, yet they quietly pay for decades.
Sector expansion. The royalty concept is expanding into IP, pharma, and even fintech. It’s less a niche and more a universal structure.
Portfolio diversification. A basket of royalties across sectors could be one of the most resilient compounding strategies imaginable, but few institutions build them as a category.
Case Studies & Examples
Franco-Nevada (Gold Royalties): The flagship example. Instead of operating mines, Franco built a portfolio of royalties across dozens of projects. This diversification means a flood at one mine barely dents results. The company reinvests into new royalties, compounding growth.
Texas Mineral Rights: Families across Texas and Oklahoma still live off royalties from leases signed decades ago. These illustrate the intergenerational power of royalties: once signed, they often outlive operators and economic cycles.
Pharma Royalties: When a biotech company licenses its drug to a larger pharma for commercialization, the royalty structure creates cash flow without the biotech having to fund sales or distribution. For investors, buying into these streams is akin to owning a slice of intellectual property without running a salesforce.
Music Catalogues: Musicians like Bob Dylan and Bruce Springsteen have sold rights to their music libraries. Royalty holders now earn recurring cash from streaming, radio play, and licensing. Again, the theme is predictable income without the grind of touring or promotion.
Risks and Misconceptions
Of course, royalties are not risk-free.
Production Risk: If a mine shuts down, the royalty stream dries up. Diversification is essential.
Finite Duration: Some royalties expire. We prefer perpetual agreements.
Counterparty Risk: Royalties depend on the operator being solvent and honest. Contracts protect against abuse, but risks remain.
Valuation Risk: In today’s yield-starved world, royalties can be bid up to unsustainable valuations. We must be disciplined in entry.
Yet compared to operators, royalties consistently offer more attractive risk-adjusted returns. The mistake is not that royalties have risks — it’s that investors underestimate how much worse the risks are in capital-intensive operations.
How We Apply It
When we evaluate royalty opportunities, we focus on:
Coverage: Is production likely to sustain the royalty?
Duration: Perpetual royalties > finite royalties.
Diversification: A portfolio of streams reduces idiosyncratic risk.
Optionality: Can royalties expand with increased production or higher prices?
Governance: How airtight are the contracts?
We also ask broader questions:
Can the royalty model extend into non-traditional sectors (data, software, renewable infrastructure)?
Does owning royalties give us inflation protection at a time when many assets falter?
How does a royalty fit into our barbell — yield on one side, optionality on the other?
Our answer is usually the same: royalties belong in the durable compounding sleeve of our portfolio. They are ballast, but ballast with upside.
Closing Reflection
Royalty companies embody everything we value: durability, asymmetry, curiosity. They are quiet machines that grind out wealth, often ignored because they don’t fit into trendy narratives.
When we think generationally, royalties shine. They don’t require constant reinvention or capex. They simply collect streams of cash, decade after decade.
In an investing world dominated by noise, royalties whisper. But for those listening, they whisper the language of compounding.