The Largest Art Buyer in the World is Now...an Investing App?

The Largest Art Buyer in the World is Now...an Investing App?

Move over Medici. Masterworks is buying up blue-chip art—so they can slice it up and give you a taste.

Oct 12, 2021

The Largest Art Buyer in the World is Now...an Investing App?
Art

Art

Beginners

Beginners

Luxury Goods

Luxury Goods

When you picture art collectors, you probably think of uber-wealthy royalty like Queen Elizabeth II, socialites like Peggy Guggenheim, or rich executives like Charles Saatchi. Or maybe you think of rappers like Jay-Z, with that Picasso in his casa and the yellow Basquiat in his kitchen corner.

What you probably don't picture is yourself.

Investing platform Masterworks wants to change that by letting people buy shares in some of the world's most valuable works of art for as little as $20, the same way you would buy shares of a company in the stock market. And now, they might be the single largest art buyer in the world, meaning they're well on their way to turning every Joe Schmoe and Plain Jane into an art collector.

Now valued at over $1 billion, Masterworks claims to be the largest art buyer in the world

Fintech companies have been taking the startup world by storm for years now, but adding fine art to the mix sets Masterworks apart from most competitors. And as of early October, they're the first art-startup unicorn.

Masterworks managed to bootstrap its way to profitability, which is an impressive feat in itself. On October 5, 2021, the platform announced that it raised $110 million in a Series A funding at a valuation of more than $1 billion. For reference, popular robo-app Betterment just raised $60 million in a Series F round and is valued at $1.3 billion. This is an app that's been around since 2008 and has roughly 700,000 users.

On the other hand, Masterworks was just founded in 2017. And while over 200,000 people have signed up for the platform, only about 15,000 have actually invested. Still, with $200 million in assets under management, an expected $400 million in art acquisitions this year, and a projected $1 billion in 2022, Masterworks is on track to be the biggest art buyer in the world. 

What's more, the average investor on the platform invests a whopping $30,000, and the business model Masterworks employs is ripe for generating profit (which it's already achieved). The company charges an initial premium of 10% on all new artwork it buys and another 20% of profits when it sells artwork, plus a 1.5% management fee. That said, if you were to buy fine art at auction, the purchase fee alone is typically around 20%. Masterworks investors also don't have to worry about things like appraisal, restoration, framing, taxes on purchase, transportation, insurance, and storage—once you add those costs into the mix, the fee load on investing in fine art independently can reach up to 45%. As the largest art buyer in the world, Masterworks has the leverage to negotiate lenient payment terms on art sales that often allow it to make payment for artwork only after the company has securitized and sold shares of it. In other words, they can make back the cost of the artwork before they even pay for it.

But is it a good deal for investors? Is it worth it to invest in shares of blue-chip art?

Adding fine art to an investment portfolio comes with a range of benefits. It helps investors diversify their investments beyond stocks and bonds, which can protect their wealth in the event of a market downturn. Diversifying with fine art is particularly effective because it's an uncorrelated asset, which means its value moves independently of the stock market.

In fact, blue-chip art has outperformed the S&P 500 by over 250% since 2000, and it's often said to be less volatile than the stock market. While your chances of seeing a 100x return like you might be able to get from a riskier asset like crypto are slim, you're also unlikely to lose significant amounts of money by investing in the greatest paintings of all time—Van Gogh's Starry Night is never going to go out of style. As Masha Golovina, Director of Acquisitions at Masterworks, explains, "you're limiting your downside risk."

And these stable, well-known works of art by blue-chip artists are exactly what Masterworks looks for. Within these established artists' bodies of work, Golovina says, "We look for paintings that are really representative of what we consider their mature style—the one that they're most recognized for." By focusing on the paintings that make these famous artists "unique and important, historically speaking," Masterworks is able to target assets that will likely hold their value over time.

For example, the company acquired Banksy's iconic Mona Lisa in 2019 and put it up for Masterworks members at an initial offering price of $1,039,000. Just one year later, Masterworks sold the artwork for $1,500,000, netting investors an annualized return of 32%.

That said, the company typically aims to hold artworks for three to ten years, meaning investors should be willing to tie up their funds for that long. While it's possible to sell your shares to other users on their secondary marketplace, there's no guarantee that you'll find someone willing to buy your shares at the price you want to sell. Masterworks also requires that members have at least $5,000 to invest, so the platform isn't necessarily accessible to everyone.

masterworks

Masterworks

4.5

Collectibles

New investing platforms are using fractional ownership to change the way regular people invest

That said, Masterworks has certainly made investing in art significantly more accessible than it once was. And they're not alone in opening the doors on alternative assets to everyday investors. In the past decade, the US has seen an explosion in new investing apps, and many of them are using this concept of fractional ownership to lower the initial cost of investment on everything from iconic sneakers and vintage cars to legendary sports cards and rare wines.

In early 2021, a pair of Grammy-worn Nike Air Yeezy 1 Prototype sneakers sold at auction for $1.8 million, making them the most expensive pair of sneakers ever sold. The buyer? An investing app that uses the same concept of fractional ownership Masterworks employs. Rares securitized the sneakers and will soon let users invest in them for $15 per share. A similar platform, Otis, dubs itself the "stock market for culture," and investing app Collectable owns some of the most expensive sports cards in the world.

rares

Rares

Collectibles

In addition to letting folks invest in these assets with very little money, these apps also solve the problem of authenticating and storing them. Whether it's fine art or coveted sports cards, it's expensive to verify and safely store collectibles. Vintage wine is another example—improper storage can make even a $50,000 bottle of wine taste cheap. Of course, there's an app for that too. Vinovest acquires and stores investment-grade fine wines and lets you invest in them.

vinovest

Vinovest

5.0

Collectibles

As Golovina puts it, "All of these platforms are really democratizing [alternative] investments and making them available to a broader public." She stresses that if you're new to art or these other alternative assets, you should do your research and figure out how they can fit into your goals before diving in headfirst.

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