Ordinary investors have always sought out lucrative investment vehicles in alternative assets. However, obtaining access has often been an issue. No investment class epitomizes this problem more than art. Art has outperformed the S&P 500 consistently since 1995, offering returns exceeding 12%, compared to the latter’s 9%.
However, everyday investors have largely sat out this upswing, due to art being enclosed behind privileged networking circles and private art dealer relationships. Blue-chip paintings, of course, often sell for millions of dollars, which also prices out the vast majority of retail investors. One company, Masterworks, is changing this picture rapidly.
Here’s how this innovative startup is simplifying art investing for everyday investors.
1. Finding in-demand art to buy
Art transactions have traditionally operated behind closed doors, making it tough for everyday investors to locate lucrative opportunities. Guarded by highly knowledgeable art experts and wealthy investors, the chances of an ordinary investor managing to evaluate an artwork’s investment credentials are low, even if they obtain access.
Masterworks has changed this picture by creating a platform anyone can access. The company features art vetted by its in-house experts, doing much of the heavy lifting for ordinary investors. For instance, Masterworks offers data-backed analyses of an offering’s investment prospects before launching it on its platform. While there’s no way to remove risk from an investment, this level of data scrutiny does help maximize the chances of superior performance.
Investors can review historical sales, sale dates, and overall price trends. This puts ordinary buyers on an equal footing with highly-informed collectors instantly, democratizing art purchases.
The introduction of data is critical to Masterworks’ utility, since it means that the platform doesn’t rely on any single art expert’s subjective views when offering a painting for sale. Investors can thus make their own informed decisions, without worrying about opinions falling short, or hidden agendas, as often occurs with stock market recommendations.
Masterworks acts as a meeting point for all stakeholders in the art market, connecting dealers, collectors, privileged investors, and ordinary buyers. By placing all these parties on the same level, the company is well-positioned to source lucrative opportunities and offer them to interested parties.
2. Solving affordability
Fine art is expensive. Ordinary investors looking at recent art sales will notice the tens of millions of dollars that popular artworks sell for. This lack of affordability has traditionally prevented ordinary investors from participating in art sales and has played a role in walling art away from everyday money.
Masterworks has pioneered a new trend in the art market by becoming the first company to offer fractional art investment opportunities to everyday investors. Much like a real estate investment platform that offers units in a large development, Masterworks helps investors purchase fractional shares of a single painting.
Behind this simplicity lies a complex process. Masterworks sources lucrative opportunities and once acquired, securitizes the painting by creating a limited liability company (LLC) tied to the painting’s value. Investors buy shares in the LLC, thus benefiting from exposure to changes in the painting’s value.
For instance, if the price rises, the share price of the LLC connected to the painting rises too, giving shareholders paper profits. Masterworks usually holds onto the painting for three or more years, as informed by its data models. Once the company resells the painting, investors receive profits, based on the sale price distributed equally across all shares.
Masterworks also handles another prickly issue in art investing. While buying a painting is expensive, storing, insuring and caring for it is also a considerable expense. Old artwork demands highly moderated conditions and security, given its value. The company handles all these issues on behalf of investors.
This means investors don’t receive just a painting, but also the assurance their investment is in safe hands for no additional cost beyond 1.5% of the investment value every year. All investors do is purchase LLC shares, and everything else is handled for them.
3. Solving liquidity
Art is a subjective field, and this creates some distinctive problems for investors. For one, a painting the investor believes is worth a lot might not be worth much to a prospective buyer.
The secondary art market boils down to peer-to-peer dynamics, where investors negotiate privately and often do not disclose sale values. Auction houses like Christie’s and Sotheby’s disclose prices but charge exorbitant fees for placing artwork on sale. Even in these auctions, sellers are rarely guaranteed competitive prices, since auctions depend on bidder sentiment.
Because art investments require patience over the course of years, art liquidity is low, and this can create significant price fluctuations. Low liquidity also makes for tough investment exits. Masterworks solves this problem for its investors by hosting its own secondary market.
Investors can sell their LLC shares to other Masterworks community members, removing the need to remain locked into any given position for a long time. While Masterworks recommends remaining invested for the entire term for maximum profits, the company doesn’t prescribe lock-in periods or restrict investor sales.
The result is a robust market for Masterworks’ art and easier exits for investors, should they decide to cash in early. In essence, Masterworks has turned art investing into a type of stock market investing by solving the liquidity issue.
Art investing for all
Masterworks has identified art democratization as one of its key goals, and the company is well on its way to solving it. By removing the biggest hurdles to art investing, Masterworks has opened opportunities for everyday investors to profit from a highly lucrative asset class.
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