Shares in Hipgnosis Songs (SONG ) have jumped over 7% after the company published a highly critical report on its fund manager and said it would announce the conclusions of its strategic review in a month’s time.

A due diligence report by adviser Shot Tower, auditor BDO and lawyers Reed Smith confirmed its preliminary finding that the portfolio’s valuation was 26% lower than reported at in the half-year results in December.

While it said the royalties portfolio assembled by Hipgnosis Songs Management was high quality, the fund manager’s financial policies ‘materially overstated revenue and ebitda’ or earnings.

As a result, Shot says the manager, founded and chaired by Merck Mercuriadis, had overpaid on 67 out of 105 catalogue acquisitions.

Among other findings, it said:

• HSM’s projections were ‘aggressive’, with 75% of catalogues missing growth forecasts by an average of 23% a year;
• the investment adviser’s financial analysis was below music industry standards, ‘often relying on statements of expectation in lieu of actual analysis’;
• legal acquisition documentation was incomplete in some cases and ‘failed to put in place post-acquisition structures to assure continued royalty collections’.

HSM said  it had only seen the report yesterday and had not had time to review it in detail.

‘However, there are aspects of the report that HSM strongly disagrees with and considers to be factually inaccurate and misleading. HSM will respond to the company’s board in due course,’  it said.

Among its objections are believed to be the report’s highlighting the high level of fees the previous board paid advisers to review the proposed asset sale to Blackstone, HSM’s parent company, which a source said had nothing to do with the fund manager.

Shareholders vetoed the sale and voted against the company’s continuation, prompting the launch of a strategic review under the present board chaired by Robert Naylor.  Conclusions from this will be announced by 26 April, the company said.

The leap in the shares suggests investors think the report makes a sale or wind-down of the company more likely, enabling them to exit at closer to asset value. Before today the shares stood on a 27% discount.