Art has traditionally been a tough alternative asset class for ordinary investors to access. When it comes to blue-chip paintings, transactions have typically involved billionaires purchasing artwork for private collections, leaving ordinary investors, who lack the spending power of the ultra-wealthy, out in the cold.
Meanwhile, as an asset class, art has significantly outperformed the S&P 500 over the past 28 years, appreciating 12.6% annually compared to 9% for the latter.
The Masterworks platform was the first to address this problem practically. Democratizing art investing isn’t a small task, and the startup has developed some innovative models to change the way art finance works and better serve ordinary investors.
Here’s how this innovative company is reshaping the art investing world.
Changing Models for Art Investments
Even if they couldn’t gain access to brokers’ private sales or high-profile auctions at Christie’s, ordinary investors have technically always had access to the art market. Mutual funds specializing in artwork have existed in some form or another for generations.
However, investing in these funds presented a few challenges. For starters, fund performance relied solely on the manager’s vision. This setup presented significant risks if the manager made an unwise decision, moved companies or retired from their position.
The second challenge was profiting from an individual piece of art’s price appreciation. Investment funds build a portfolio of artwork and sell fund units to investors. While a portfolio reduces risk, it also minimizes the contribution of a single investment. For instance, if a single piece of art appreciates significantly, its impact on the portfolio may be dampened due to other holdings’ performance shortcomings. Everyday investors have little freedom to direct their investments in such a setup.
Masterworks solves this problem in two ways. Firstly, it offers shares in individual works of art to investors, not a portfolio. This gives investors the chance to review and invest in a single work of art, without worrying about additional holdings dampening performance.
Secondly, Masterworks securitizes each painting and sells fractionalized shares in that security to investors. This gives investors the freedom to purchase as much of a painting as they’d like and sell shares on the secondary market if they wish to exit before Masterworks resells the painting.
Ordinary investors have complete flexibility in buying and selling artwork as a result and can self-direct their portfolios as they please.
Catering to All Corners of the Art World
Masterworks occupies a new position in the art world. It doesn’t hold artwork in its own portfolio but brings several stakeholders together, facilitating more interaction between everybody. The recently launched subsidiary, Level & Co., is a good example of how Masterworks brings together different corners of the art world.
Level & Co. is an art gallery in New York City’s Upper East Side that houses paintings purchased by Masterworks’ investors. It is a unique gallery in that none of its paintings are on consignment from dealers or individual collectors.
The gallery allows art dealers and wealthy independent collectors to view blue-chip paintings in person, helping to make connections between different types of stakeholders, building demand for its user base’s assets, and strengthening relationships that might eventually lead to a profitable exit for holdings – or future purchases of paintings to offer as fractionalized investments.
By giving art collectors and dealers easy access to its portfolio, Masterworks builds ties at each level of the art market. And by showcasing art physically, Level & Co. is another channel for Masterworks to facilitate a sale, reducing the risk of an unprofitable exit.
High-yield exits are common but never a given in the art world, especially given the lack of short-term liquidity. While individual collectors may be comfortable holding onto pieces of art for lengthy periods, ordinary investors might wish to cash out earlier, which makes Masterworks’ secondary market a highly valuable channel.
Greater Artist Portfolio Exposure
Identifying potentially great works of art with momentum is a significant challenge in art investing. While Masterworks solves this problem with rigorous data collection and proprietary analysis methods, the platform also offers investors another way to profit from an artist’s popularity.
Potential investors get a chance to interact physically with an artist’s work at Level & Co., increasing the probability of them inquiring about other pieces produced by the artist. As a result, while a single painting might receive huge acclaim and market interest, investors can ride that momentum by purchasing other works in an artist’s portfolio.
This arrangement gives investors more opportunities to grow their overall portfolio value, instead of concentrating on a few pieces that the whole world knows about. By expanding their investments into other works by an artist, investors can spread their risk evenly while increasing the probability that they’ll realize a profit.
Masterworks also increases the depth of the art market as a result. By publishing in-depth information about art sales and trends, ordinary investors receive an education that was once limited to art connoisseurs. As more investors come to view art as more than a monetary fling, the potential for more pieces to gain popularity increases, giving investors even more chances to make money.
Breaking Down Art Finance Barriers
Masterworks has faced more than a few challenges as it has sought to democratize the art world. However, by continuing to innovate, the company allows both ordinary and wealthy investors to benefit, and the future of art finance looks bright.
