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How Masterworks Is Leading the Evolution of Finance for Blue Chip Art Transactions

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How Masterworks Is Leading the Evolution of Finance for Blue Chip Art Transactions

Art has long been used as an investment as well as a source of delight and contemplation. As an asset that can outperform inflation and is not correlated with other assets, art — particularly blue chip art — serves as an excellent hedge against economic turbulence. 

This has made it particularly attractive over the past few years of extreme uncertainty and turmoil, and will likely continue to do so for the next few years too. Records show that over the past quarter-century, contemporary art has driven average returns of 12.1% annually, 1.9x that of the S&P 500 over the same time period and with only negligible correlation to that index. 

Yet blue chip art was also long out of reach for many people. Finance served as a near-impenetrable barrier in a number of ways. Ordinary investors struggled to access the funds needed to buy blue chip artwork, were deterred by the difficulties liquidating those funds when necessary, and lacked the networks to help them to find buyers. Additionally, even art lovers weren’t confident that they could select paintings likely to appreciate over time.

A startup called Masterworks, and the investment platform that bears its name, were established some five years ago to change the way finance works for blue chip art, bringing down those barriers and removing obstacles that impeded cash flow around the art market. Since that time, it has gained momentum from the growing trend of democratizing finance, alongside approaches such as P2P lending, crowdfunding channels, and decentralized tokens, currencies, and finance platforms in general. 

The success of Masterworks is clear. Five years down the road, the platform has close to 400 individual painting investments totaling $1 billion in value under management, over 880,000 members, and no less noteworthy, it’s brought a breath of fresh air to finance pathways for blue chip art. Here’s a closer look at the ways that Masterworks has altered finance for art investments.

Lowering barriers to entry

Masterworks has successfully applied the fractionalized investment model to art. 

Each artwork that it offers is securitized with the SEC, which turns it into an LLC that is then divided into a number of shares. Those shares are offered for sale for as little as $20, making it far easier for investors to find the funds to invest in artwork. 

Typical art investors enjoy their art in their homes, but that’s not an option for fractionalized investors. Masterworks’s new gallery, Level & Co, lowers these barriers too, by exhibiting its art on an appointment basis for those who own or are interested in the artworks. This allows investors to view and interact with their art up close, unlike typical fractionalized purchases. 

Improved liquidity

As mentioned above, liquidity is a key concern for retail investors thinking about buying art. 

Masterworks has addressed this by setting up a secondary market where people can trade their shares in artworks whenever they like. This enables far faster access to liquidity than selling or auctioning your artwork. 

It can take months or years to find a private buyer, and auctions take time and effort to set up. Sellers need to arrange a meeting, agree on a reserve price, and may have to wait until the auction house has more items to present in a single event. You’d also need to pay for shipping, storage, evaluation costs, and more. 

Smoother paths to purchase

The art world typically functions like an exclusive club, with buyers and sellers finding each other through long-established and sometimes complex networks of relationships. This too serves to bar entry to retail investors. 

Masterworks opens up pathways to connect buyers and sellers, to ease the journey for art sales.

Level & Co plays a role here too. People who are not part of the traditional art world can visit the gallery to view the art, and meet art aficionados and financiers at the same time to expand their networks and forge those relationships. By exhibiting fractionally owned art, Masterworks also creates opportunities for high net-worth investors to view artworks and make an offer to buy, which is less likely to happen when the art is in a warehouse on the outskirts of town.

Support for purchase choices

Trends in demand for art styles and artists change frequently, so it is difficult even for an art lover to determine which pieces are most likely to increase in value and would therefore be suitable for investment. While there is data from auctions and public sales, it is not standardized or centralized, making it very difficult to assimilate into a solid prediction. Additionally, private sales data is kept private, so there’s no way to know the prices that many items changed hands for. 

Masterworks gathers data from auctions and auction catalogs, together with “repeat sales data,” namely the price paid for the same artwork at different times. It then analyzes the data to produce a price index that indicates which pieces are predicted to appreciate in value. The company also does the legwork in verifying the artwork’s provenance. Investors may not have the time or knowledge to do this, but it’s vital to prevent nasty surprises that could lower resale value.

It’s worth noting that this data-based approach has driven significant performance success to date. 2022 saw Masterworks pay returns totalling $25 million to its investors, and eight of the last nine sales it held resulted in 14% average annualized returns. Even the company’s worst-performing piece, by Andy Warhol, delivered 4.1% annual gains, and the highest-performing artworks are driving well over 100%, with a piece by Cecily Brown showing annualized net returns of 788.1%. 

Blue chip art finance models are receiving a facelift

Masterworks is spearheading a refreshing and more open approach to art investments that presents a disruptive model for fine art finance. While the traditional model of private sales, exclusive networks, and exclusive auctions is likely to continue for some time, it’s no longer the only option on the table. 

About Autor

Virginia Andrus is an independent Digital Marketing Consultant with 6+ years of marketing experience. Virginia is a chef by heart. In her free time, she is either writing marketing copies for brands and agencies or experimenting with new recipes at her home.