Masterworks has been in operation for a couple of years now (2019) but when the art-oriented investment crowdfunding platform raised a whopping $110 million at over a billion-dollar valuation, the world of online capital formation took notice.
The Series A was led by Left Lane Capital, along with Galaxy Interactive (a division of Galaxy Digital), Tru Arrow Partners, and more. At the time of the funding, Masterworks founder and CEO Scott Lynn explained that their investors “understood our market, business model mechanics, and drivers in a more nuanced way than anyone else.”
Lynn explained:
“Art is among the largest asset classes remaining that has never been securitized. There are more than 9,000 firms that help investors allocate to venture and private equity, but none other than Masterworks that facilitates fractional investment in art. Despite our strong traction, Masterworks is still in the very early innings of building out a seminal company seeking to provide outperforming and non-correlated art investment products to all types of investors.”
On its website, the investment platform reports a 15.8% historical return from September 2019 to the end of 2021. It is important to note that Masterworks operates a secondary market where you can trade your fractionalized shares in a Banksy or a Keith Haring. This means there is no need to hold onto shares in painting until a final sale – a time frame that is estimated to be multiple years.
Masterworks leverages the Reg A+ securities exemption so the offering is available to both accredited and non-accredited investors alike. Currently, Masterworks reports more than 300,000 registered users so clearly there is investor interest here.
Today, Masterwork promotions seem to be everywhere; be it display ads, social media, television, or popular podcasts. Obviously, Masterworks is putting at least part of its funding war chest to ramp up its unique investment marketplace as it builds awareness.
Last week, CI caught up with Masterworks Chief Investment Officer Allen Sukholitsky to get an update on the art investment platform and expectations for the coming year. Our discussion is shared below.
You recently raised $110 Million at a $1 billion + valuation, a pretty solid validation of your business model. How will you be using these new funds?
Allen Sukholitsky: We’ve been fortunate to have received so much interest in our platform from the self-directed investor community. In fact, we now have over 300k registered users. After last year’s $110M capital raise, our plan has been to broaden our distribution efforts to the intermediary and institutional investor channels. The case we make is simple: with decades of historical data on art as an asset class, we believe it is worth considering for an investment portfolio.
Scott has been an art collector for many years. When did you see an opportunity to create a retail market for fractional ownership of artwork? How vital was the advent of Reg A+ to enabling this model?
Allen Sukholitsky: The opportunity that Scott saw in the art market came in two stages. First, as an art collector himself, he noticed that his paintings were going up in value over time. As a result, he hired dozens of analysts to go through dusty old auction catalogues to digitize decades worth of buys/sells in the art market and determine if art, as an asset class (i.e. like “equities,” or “bonds,” or “commodities,” etc.), had historical price appreciation that would make it worth researching further.
The results confirmed his thesis: art could be an investment, assuming there were actually a way to make it accessible to most investors (i.e. individual paintings often sell for millions of dollars each). At that point, he began brainstorming accessibility.
The solution? Securitize each painting and sell shares in it. In fact, this is similar, conceptually, to how companies on the stock market go public by selling shares.
As a collector, who is deciding which works of art should be part of the platform? Are paintings purchased at auction? Once a painting is purchased, where is it held?
Allen Sukholitsky: We have a research team that collects and analyzes data on individual artists and individual paintings – similar to how traditional investment research teams analyze data on sectors and stocks. We also have an acquisition team that negotiates and purchases the paintings for the platform. The process is a combination of quantitative and qualitative evaluation for the specific purpose of investing. Some paintings are purchased at auction and others are purchased through private sales. Once the paintings are purchased, we store them at the Delaware Freeport, which is a state-of-the-art and climate-controlled storage facility. Scott oversees the process but it is definitely a team-based approach.
While Masterworks is fairly young, what type of returns are you generating? Last year a Banksy was sold generating an annualized return of 32%. Is this typical? How does Masterworks make its money?
Allen Sukholitsky: We were founded in 2017 and our anticipated holding period for each painting is 3 – 10 years, so the two paintings that we sold for net IRRs of 30%+ were definitely on the earlier side of that holding period.
We approach the art market from an investment perspective, so if our research indicates that we could sell a painting early for an attractive gain, then we will do so, but those scenarios should be interpreted more as the exception than the norm.
Our revenue comes from a management fee and a percent of profits on painting sales, along the lines of how the rest of the alternative investment community works.
In general, the management fee keeps the lights on and the percentage of profits represents what we earn for making good investment decisions.
Under the Reg A+ exemption, securities may immediately trade on an exchange or ATS. What are your plans for an art marketplace?
Allen Sukholitsky: We already offer a bulletin board where existing investors can buy/sell shares from each other. This is different from a formal exchange which has the ability to match buy/sell orders.
In contrast, we offer the bulletin board as a convenient source of liquidity for investors, but the responsibility is on the investors to transact with each other – we do not match buy/sell orders.
It’s also very important to emphasize on this topic that the bulletin board exists as a convenient option, but absolutely not because we intend, suggest, or encourage investors to regularly trade their shares. Investors should approach art investing with the understanding that the anticipated holding period is 3 – 10 years.
And what about NFTs or digital iterations of the paintings. Is this on your roadmap?
Allen Sukholitsky: At the end of the day, we’re a startup, so anything could be on the roadmap.
Regarding NFTs at this point in time, we consider them to be quite different from our business model. Masterworks is based on the idea that the art market has existed for centuries but hasn’t been investable, so we’re making it investable. In other words, it has had a long track record, but most investors were unaware of it.
NFTs are brand new. In fact, for context, cryptocurrencies are brand new and even they have a little over a decade of history.
From an investment perspective, it’s difficult to analyze how an investment has behaved in different environments if that investment has a very limited history. So for the time being, we’re focused specifically on bringing an investment – art – to the investor community that we believe should have been part of it a long time ago.
How many active investors are participating on your platform? Are they mainly accredited or non-accredited? What about international investors? Are most people art enthusiasts or are they looking for diversification?
Allen Sukholitsky: We don’t disclose our investor numbers but what we can say is that we have over 300k members who are at various stages of the investment process, including investors who have invested in multiple offerings.
Our investor base is also global, with investors from more than 100 countries and in all 50 states. They also range from 18 years old to 90 years old.
In terms of why investors come to our platform, the vast majority do so because they are interested in diversifying their portfolios. However, by the time they invest, we think they’re at least one step closer to becoming art enthusiasts.
A big part of what we offer on our platform is education on both the paintings and artists themselves. So while most individuals may come to us with an investor mindset, we think that we’re also contributing to the community of art enthusiasts.
This model can work with other collectible sectors. At some point in the future, do you anticipate expanding your offerings into other sectors?
Allen Sukholitsky: As mentioned before, since we’re a startup, anything could happen in the future. But one thing is for certain: we are early in the process of having art adopted by the broad investor community, so there’s plenty of work left to be done before even thinking about other sectors.
What are your expectations for 2022?
Allen Sukholitsky: With interest in art investing continuing to grow, we plan on tripling our purchases in 2022, relative to last year.
Investors are realizing that today’s expensive stock markets and low-interest rates have historically coincided with weaker future stock and bond returns, respectively. As a result, these investors are increasingly looking for alternative investments, like art, that have historically performed differently from the other investments already in their portfolios, which most of the time means stocks and bonds.
We’re excited to continue offering art to self-directed investors as well as to begin offering a diversified art portfolio to intermediaries and institutional investors.
Our goal is to redefine the art of investing.