Deep Dive: Blue-chip art investing with Masterworks

I’ve been investing in startups for almost a decade now; however, last year I decided to turn my investing attention toward other alternative asset classes, specifically focusing on art investments.

Why art? In the backdrop of a 2022 to 2023 startup downturn, I realized I needed diversified exposure to other asset classes. Art notably has the potential to hold its value over time, acting as a hedge against inflation and displaying resilience during economic uncertainty, and this was never more clear to me then over the last few years. Unlike stocks, the value of investment-grade art tends to be independent of market fluctuations, making it a stable (and lucrative) investment against my portfolio of mostly stocks and private startup investments.

I ended up buying my first two pieces of art as investment pieces. While I’m very happy with the purchases, and excited about my future deep dives into the art asset class, if I had to do it all over, I would have opted against spending big on just two pieces, as it leaves me with a good deal of concentration. Instead I would have created a more diversified portfolio, investing in many pieces via fractional art ownership. This leads me to Masterworks.

For centuries, the high-end art market has been dominated by ultra-wealthy executives, hedge fund managers, and members of the royal family. Ordinary people could only dream about breaking into this potentially lucrative asset class. 

But that dynamic is starting to shift. 

Thanks to companies like Masterworks, an award-winning platform for investing in shares of multi-million dollar paintings. In just a few short years, Masterworks has emerged as the largest buyer in the contemporary art market, amassing over $940 million in assets under management. 

So how and why did this fintech platform rise to the top of this elite world? 

Let’s start with “the why.”

For starters, the opportunity is massive. Fine art is a $2.1 trillion dollar asset class, and with favorable tailwinds, as ultra-high-net-worth individuals allocate greater amounts to art and collectibles, Deloitte estimates it will grow to nearly $2.9 trillion by 2026.

Additionally, contemporary art displays favorable risk/return characteristics similar to popular alternative investments like private equity, hedge funds, and venture capital. 

From 1995 to 2022, contemporary art prices grew at a compound annual rate of 12.6%, easily outpacing the S&P 500’s 9.0% total return. In the same time frame, it registered very low correlation with traditional asset classes like Equities (.08), Real Estate (-.01), and Corporate Bonds (-.09). 

With such compelling characteristics, you might be wondering why everyone isn’t carving out some slice of their portfolio for art? It's simple: price. The highest quality works by world-renowned icons like Basquiat and Picasso can run you anywhere from $1 million to $100 million – out of reach for the vast majority of people.  

That brings us to “the how” of Masterworks. 

Masterworks is the first platform that, through securitization, has successfully enabled everyday people to invest in paintings with high price tags (and high historical appreciation). 

The first step in the securitization process is the acquisition of the assets. 

Masterworks’ acquisitions team has years of experience working in the art market at major auction houses, galleries, and banks. They utilize a database of art market returns and proprietary screening tools to identify artists with the most momentum. In total, the team acquires less than 3% of works it analyzes. 

Once an asset is targeted, the team will negotiate for the best price, and Masterworks will purchase it with its own balance sheet capital. Then Masterworks files an offering with the SEC so that anyone can purchase shares in the offering. 

After the offering is fully subscribed, Masterworks will hold the painting for between 3 to 10 years, looking for opportunistic moments to sell the work. Once the work is sold, Masterworks distributes the net proceeds to investors. 

So far, its exit strategy has been highly successful, with all 21 of its exits realizing a profit for investors. See below for the full list of realized exits. 

Over the next few years I plan to personally double down on art investing, putting a meaningful amount of investment into the art asset class. Masterworks will likely grab most of my art investment allocation given they’re doing the heavy lifting in finding high returning pieces, while allowing me to easily create a diversified portfolio as I do with equities and private investing. 

If you’re interested in discovering how an allocation to contemporary art can potentially improve your portfolio, Masterworks is offering Last Money In readers an exclusive link to skip the waitlist to join the platform. 

Past performance is not indicative of future returns. Investing involves risk. See Important disclosures at www.masterworks.com/cd

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✍️ Written by Zachary and Alex