The Bottom Line: Get exposure to an uncommon asset class by purchasing shares in famous artwork with reasonable returns. Masterworks allows anyone to purchase and trade shares in iconic artworks, by artists like Monet, Warhol, and Picasso.
Have you ever walked through an art gallery and wondered at the investment potential of the art?
Maybe you’ve watched a popular art auction at Christie’s or Sotheby’s and wanted to get in on the action.
Good news: now you can. Masterworks is one of a few companies bringing fine art to the average investor.
What was once exclusively for wealthy investors is now available for as low as $20 per share. Masterworks lets you gain economic exposure to “blue-chip” art.
With financial tech (fintech) transforming investing, more and more investors are gaining access to unique investment opportunities.
Fine art is one of the latest investment products to go mainstream, driven by technological innovation and growing investor demand.
If you think this unusual, companies like Rally Road let you invest in classic cars for $50. What can’t we invest in?
The 2019 Art Basel Report notes that the global auction market for fine art was $29.1 billion in 2018 with sales at $67.4 billion, a 6% year-over-year growth rate from 2008 to 2018.
In a December 2019 article, CNBC reported that “contemporary art has returned an average of 7.5%, and the art market as a whole has averaged 5.3%.
During the same time frame investment-grade bonds from developed countries returned 6.5%, while global high yield bonds averaged 8.1%.”
While not the highest-yield investment, art continues to produce solid returns.
Investors interested in unique offerings or portfolio diversification may look to art as investment opportunities reach out of the auction houses.
Masterworks was created to give you the chance to invest in some of the most popular fine art pieces available.
Artists like Monet, Warhol, and Banksy are available through Masterworks.
Masterworks buys the artwork, lists it with the U.S. Securities and Exchange Commission (SEC), and offers you the chance to purchase a limited number of shares.
As of December 2019, the company operates a waitlist due to growing demand.
Min. Investment: $1000 @ $20 per share x 50 shares
Fees: 10% buy-in fee; 1.5% yearly management fee
Promotion: No current promos
What is Masterworks?
Masterworks joins the ranks of a recent group of companies trying to bring art investing to the masses.
Investing in fine art is no longer the providence of wealthy investors and art mavens.
With virtually no knowledge or expertise you too can invest in your favorite fine art pieces by famous arts, all with as little as $20 per share and a 1.5% yearly fee.
In order to buy shares in fine art, like Andy Warhol’s 1 Colored Marilyn, Masterworks buys the artwork through accredited intermediaries and registers it with the SEC.
Technically an initial public offering (IPO), investors purchase shares and the company holds the art for four or more years.
After this, the artwork appreciates and is sold for a profit. The profit is then distributed to all shareholders.
Importantly, a shareholder can sell shares or buy more shares in the secondary share market, operated by the company.
Masterworks makes money from share-trading and part of the profit of a sold artwork.
Founded in 2017, Masterworks.io is New York City-based with an office in Boulder.
The company was founded by Scott Lynn, the current CEO, to help democratize investing in fine art.
In a November 2019 U.S. News article, Scott talked about why the company was founded.
"Historically, investing in art is limited to the ultra-wealthy.
There has been around $68 billion in art sold so far in 2019, but it's mostly really wealthy people buying and selling art with each other."
He continued, “there isn't really a way for ordinary people to invest in art, we wanted to change that, so we came up with Masterworks.io.”
Masterworks isn’t the only company to open fine art investing to the broader investment universe.
Popular competitors include Arthena, Maecenas, and Artsy.
In order to give investors access to investing in fine art, Masterworks operates a somewhat complicated business structure.
The art is officially registered as an IPO and is purchased by a subsidiary of Masterworks.
Each artwork gets a separate subsidiary with an offering circular (example) available through the SEC.
Each subsidiary is managed by a cluster of other Masterworks affiliates meant to deal with the administrative, brokerage, and gallery holdings.
Invest in Fine Art. Purchase shares in your favorite fine artworks, from Claude Monet to Andy Warhol.
Investment Grade Artwork. Famous artworks appraised, verified, and purchased through licensed agents.
No Need to Be an Art Expert. Skip the art auctions and purchase as few or as many shares as you’d like.
SEC Regulated. An official IPO approved by the Securities and Exchange Commission.
Diversify Your Portfolio. This uncommon investment is a way to get exposure to unique investment products that may substantially diversify your portfolio.
Buy and Sell Shares. Buy shares in popular artwork and sell those shares later on the Masterworks-run secondary market.
Low Minimum Investment. Get started diversifying your portfolio with as little as $1000.
Own a Little or A Lot of Shares. Own just 50 shares or up to 5000 shares, 19.99% of famous artworks.
Put Your IRA to Work Investing in Art. Masterworks lets you invest your IRA earnings into their fine art.
Decent 30-year Returns. Contemporary art has returned 7.5% annualized returns since 1985.
Transfer Your Shares. Want to pass on shares to a family, friend, trust, or as a charitable gift? You can.
How Does Masterworks Work?
Masterworks is first and foremost a platform for buying and selling shares of popular artwork.
The company purchases fine art that is expected to appreciate in the coming years.
Many of these artists, such as Andy Warhol and George Condo, have seen a steady appreciation of their art.
Masterworks is in the business of democratizing art investing, so the average investor can get exposure to the world of fine art.
After purchasing art and listing the art as an IPO with the SEC, customers worldwide can purchase class A shares in the artwork.
These shares give investors the right to a portion of the profits when the artwork is sold.
The company expects to hold art for at least four years while prices appreciate, and investors will be able to buy and sell shares on the Masterworks share marketplace.
Here are a few of the artists available and their expected median annual returns, courtesy of Masterworks:
- Andy Warhol – 12.17%
- Jean-Michel Basquiat – 16.72%
- George Condo – 22.65%
- Zao Wou-Ki – 19.80%
- Alexander Calder – 12.70%
- Keith Haring – 12.60%
- Anges Martin – 13.00%
- Adolf Gottlieb – 8.00%
Now, let’s take a look at some of the artists, artwork, and the type of returns fine art has seen in the past.
Historical Return Examples
Masterworks started off by looking at the relatively inaccessible world of art investing. Historically, fine art was bought and sold by ultra-wealthy investors.
In a December 2019 article, CNBC reported that investing in art offered similar returns to fixed income assets from 1985 to 2018.
Below are a few select examples of the artwork and historical gains that Masterworks offers.
Claude Monet - The Pointe du Petit Ailly
- Purchase price - $48,376
- Sale price - $7,062,500
- Gross return - 145.99x over 46 years
Banksy - Submerged Phone Booth
- Purchase price - $75,053
- Sale price - $552,763
- Gross return - 7.36x over 7 years
Keith Haring - Sister Cities - For Tokyo
- Purchase price - $46,000
- Sale price - $4,455,000
- Gross return - 96.85x over 20 years
Costs and Requirements
While Masterworks is a great way to gain exposure to the world of fine art investing, it does come at a price.
The yearly management fee covers things such as insurance, storage, and transportation.
Below are the fees that Masterworks charges:
- Buy-in Fee: 10%
- Yearly Management Fee: 1.5%
- Profit Cut: 20%
Importantly, Masterworks takes 20% of the final sales price of the artwork, which is independent of the fees charged to investors.
This makes Masterworks an investor in the artwork they are buying and selling, which means that the company does not ultimately have a fiduciary duty to investors.
If the company receives a fair bid they can sell without investor approval, and the return may be lower due to the company’s cut.
- Share price (may change in the future): $20
- Minimum investment amount: $1000 @ $20 per share x 50 shares (minimum may be waived in some circumstances)
- Maximum investment amount - $100,000 @ $20 per share x 1000 shares (maximum may be waived in some circumstances)
Artwork IPO Background & Process
As this is a relatively new offering, let’s spend some time reviewing select details about how the investment works.
Let’s start with a recent example, Andy Warhol’s 1 Colored Marilyn, which Masterworks listed in August, and was purchased at $1,815,000 and closed at $1,996,500.
Masterworks starts by identifying artists and artwork that have a high potential to appreciate in the coming years.
After some significant analytical work, the artwork is bid on through accredited auction houses, such as Christie’s, Sotheby’s, and Philips.
In the case of this Warhol piece, the artwork was sold through Phillips, which provides a condition report.
Each artwork has a dedicated page with information.
Below is the information listed:
- Why Invest
- SEC Qualified
- Investment Grade
- Background information
- Reason for investing
- Deal terms
- Historical performance of similar works
- Auction house estimate
- Amount raised (by Masterworks)
- SEC offering statement
- Art condition report
- Provenance (where the art originated from)
- Further Reading (more information about the artwork, available for Andy Warhol at Phillips, a leading auction house for art and other items)
Masterworks then registers the artwork with the SEC as an IPO and creates a separate subsidiary to manage the investing and sale of the artwork.
After the SEC’s approval, an Offering Circular is released detailing the investment specifics. 1 Colored Marilyn was offered for public investing in August with 99,825 Class A ordinary shares and a maximum offering amount of $1,996,500.
The company owns 20% of the investment as Class B shares and maintains the exclusive rights as to when the art is sold.
After the art is purchased and the SEC approves the IPO, the art is listed on Masterworks. Eventually, the artwork will open up to investor investment.
When the artwork becomes available, investors can purchase shares by the following methods using dollars or foreign currencies:
- ACH debit transfer
- Wire transfer
- Credit card (some exceptions)
Masterworks is anticipating that early investors will look to sell shares as the artwork appreciates, creating a secondary market that offers liquidity to the investment.
This is an important component of the process. If a secondary market fails to develop in two years this is a bad sign and may force the sale of the artwork.
Other reasons the company may sell include:
- Masterworks is required to submit to the Securities Exchange Act of 1934
- Masterworks receives a bad legal judgment
- Masterworks dissolves.
Pros & Cons
Get exposure to an uncommon asset class by purchasing shares in famous artwork with reasonable returns. Masterworks allows anyone to purchase and trade shares in iconic artworks, by artists like Monet, Warhol, and Picasso.
Getting Started with Masterworks
At the time of writing, Masterworks requires a short membership application that places you on a waitlist.
For those interested in investing immediately, sign up for the membership and schedule a membership interview.
I was able to schedule an interview in under one week. The company will call to speak with you about your investment objectives, and will happily approve your membership if you are eager to invest.
After your membership is verified, you’ll have access to the Masterworks online portal, which lists all upcoming and future artists, artworks, and detailed information for each investment.
You’ll be notified when an investment begins. You’ll also continue to receive email updates for when new art becomes available.
Should You Invest in Artwork with Masterworks?
Masterworks is the first-of-its-kind to open the world of fine art investing to the majority of investors.
This is an uncommon asset class with strong historical appreciation rates. It is also offers a way to balance out portfolios with an asset class somewhat uncorrelated with more common asset classes.
This makes it a compelling investment option for those interested in taking a risk on something new and relatively untried.
While Masterworks is an exciting investment, it does have its share of risks. The company is new and has a somewhat untested business model.
Investors should be cautious when considering untried investments and new companies. For those able to take the risk, the low share price and low minimum buy-in may be a great way to get exposure to fine art.
Masterworks can also waive the minimum buy-in in some cases, meaning that technically, you could purchase a few shares of your favorite art for $20 each.
The most important concern will be the liquidity of this untested opportunity.
If a secondary market develops for each artwork, this could solve the problem, making the investment less risky.
Savvy investors willing to try something new may discover unexpected returns and an enjoyable process in selecting which art to invest in.