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In times of uncertainty, many stock market investors start looking for alternative investments to diversify their risk. Often times this starts with bonds and cryptocurrencies as they’re just as easy to buy as stocks and have a lower correlation to the overall market.
However, with advances in the fintech space over the last decade, investors now have access to a much wider array of alternative assets. This includes things like crowdfunded real estate, investing in startups, and even fine art investing.
Believe it or not, there are actually dozens of platforms tailored specifically towards art investors (most of which we have written about) and for good reason. Masterworks is one of the most popular of these platforms and allows everyday investors to gain exposure to an asset class previously reserved for the untra-wealthy.
In this Masterworks review, we’ll provide an in-depth look at the Masterworks investment platform and determine whether it is an effective way to invest in contemporary art.
Masterworks Review: Platform Highlights
- The Masterworks platform buys multi-million dollar paintings and allows investors to buy fractional shares
- A secondary market exists for investors to sell their shares to other investors
- Masterworks purchases less than 2.2% of the artwork offered to them
- There is a $1,000 minimum investment and no accreditation requirement
- Masterworks charges a 1.5% asset management fee and a 20% carry on all investments
What is Masterworks?
Founded in 2017, Masterworks is an investment platform specializing in contemporary art. Investors can use the platform to buy fractional ownership in works of art from artists like Banksy and Basquiat that cost millions of dollars to buy outright.
This is a very attractive offer for investors that want to diversify their portfolios outside of the stock market, yet don’t have millions of dollars to build a fine art portfolio. By owning shares in many different pieces, investors are able to spread their risk and take advantage of superior returns.
Although they are still a relatively new company, Masterworks has already shown significant traction. Purchasing over $200 million in paintings they have already become a top buyer in the art market and have significant name recognition.
How Does Masterworks Work?
Approximately every 10 days, Masterworks offers a new painting to their users. These can range anywhere from $1 – $30 million, but typically fall around $5 million. When offered to investors, this painting is divided up into fractional ownership with each piece worth $20.
Each piece is held in a separate LLC and is registered with the SEC. By creating these offerings, Masterworks is essentially going through a similar process that any other company would in order to go public.
At this point, investors can purchase shares until there are no more remaining and the offering is complete. At this point, Masterworks insures and professionally stores the works to maintain their condition. Annually, they will have each piece appraised and decide whether to continue holding or sell it.
In the event of a sale, investors will receive a gain if Masterworks sells the painting for more than they bought it for.
Masterworks Price Database
When deciding whether or not to make an investment, having the right data is incredibly important. Masterworks has a team of researchers constantly looking for trends in the art market that they can capitalize on. One of the tools that these researchers use is Masterworks’s Price Database.
This is a collection of 70+ years of transaction data spanning a wide range of the art market. With over 60,000 data points, this proprietary data set is incredibly valuable to their research team.
As a Masterworks investor, you have access to this data set and are able to research past transactions in the art market to inform your buying decisions.
In general, fine art is an asset class that appreciates consistently over time. Since 1995, contemporary art has appreciated by an average of 14% per year. During the same timeframe, the S&P 500 grew by only 9.5% per year (accounting for dividends).
In addition to superior returns, contemporary art also typically serves as an effective hedge against inflation. When there is significant uncertainty in the market, many investors move to physical asset classes like fine art.
Masterworks has been able to take advantage of both of these trends, and to date has delivered impressive returns to their investors. Although there have been 60+ offerings on Masterworks, only 1 has made its way to completion. This is because Masterworks’ strategy involves buying a piece and holding onto it for anywhere from 3-10 years.
The piece that Masterworks sold was Banksy’s ‘Mona Lisa’. After 1 year of holding, Masterworks sold the piece and delivered a 32% return to investors. This return is net of all fees.
While this single investment certainly paid off, investors should not expect consistent 30%+ returns from the platform.
Masterworks Secondary Market
Unlike many other fine art investments, with Masterworks you do have the opportunity to sell your investments early. This is done through their secondary market.
Once you own shares in a piece listed on Masterworks, you can offer these shares on the secondary market. Or if you want to buy into an existing painting listed on the platform, you can submit a buy order for shares.
While there is no guarantee that their will be a buyer when you are hoping to sell, this is certainly an attractive feature for many investors.
The secondary market also provides price charts and data on past sales and transactions. This will give you a better idea for what a piece is worth at any given time.
The Masterworks business model is very similar to that of a venture capital or private equity fund. As a result, they make money in two different ways. By collecting a management fee, and by receiving a carry on all investments.
With Masterworks investments, investors pay a 1.5% asset management fee yearly. This goes towards the maintenance of the platform, salaries of employees, and legal costs associated with investments. This is lower than the typical private equity management fee of 2%, but may come as a shock to investors unaccostmed to alternative investment fees. It’s not cheap to research, buy, and store fine art.
Additionally, Masterworks collects a 20% carry on all investments. Essentially, this means that they participate in the profits when a piece sells for a gain. For example, if Masterworks buys a painting for $2 million and sells it for $3 million, there is a $1 million profit. Masterworks receives 20% of that profit, or $200,000, as their carry.
In general, these fees are on par with what investors should expect to pay when investing in fine art.
- Buy fractional shares in multi-million dollar paintings for as little as $20
- Free pricing database to identify trends in the market
- Secondary market to sell shares early
- Strong track record of acquiring paintings every 7-10 days
- 32% return on first painting sold
- Higher minimum investments for initial offerings
- 1.5% Asset management fee and a 20% carry may present some sticker shock
Masterworks Review: Final Thoughts
Within the last decade, investing in fine art has gone from totally out of reach to quite accessible to the everyday investor. Through platforms like Masterworks that fractionalize $10M+ paintings, retail investors can participate in the attractive returns that contemporary art has provided over the past 50+ years.
The additional resources Masterworks provides, including the Pricing Database and secondary market, serve to make the platform quite appealing for investors large and small. Plus, with new offerings every 7-10 days there is a constant stream of pieces to evaluate.
For some investors, the management fee and carry may come as a bit of a shock. However, when accounting for the cost of storing and insuring the paintings, as well as the administrative and legal costs of the platform, these fees are fairly standard.
Overall, Masterworks has paved the way for many other cultural investing platforms, and will likely continue to grow as more and more investors branch out into the asset class.