Investing is often viewed as a dry, numbers-driven pursuit where passion has no place interfering with profit motives. And in truth, for traditional assets like stocks and bonds, it usually makes sense to set emotions aside when allocating capital.
But a concept called passion investing has been gaining traction recently – acquiring assets that inspire joy and a sense of personal identity, not just cold-hard returns. The model applies across the spectrum, whether it’s your love for rare baseball cards or antique cookie jars.
However, some passion asset categories have long remained walled gardens for the ultra-wealthy. Like the contemporary fine art market, where masterpieces frequently sell for 8 to 9 figures. As such, ownership of such lucrative assets has traditionally been confined to an elite circle, given the extreme capital needed to participate
Yet one innovative startup named Masterworks aims to disrupt this exclusivity. By introducing fractionalized shares in blue-chip paintings into the mix, Masterworks’ leaders believe they can democratize access for fine art, an asset class representing profound cultural cachet yet intensely prohibitive prices.
“Art collectors have a natural way to invest in the art market: they collect art,” notes Masterworks CFO Nigel Glenday in a recent interview. “Collecting is a passion, a lifestyle and can be a deeply engaging and rewarding endeavor for many art collectors. But, you need to be prepared to invest a huge amount of energy, time and money to be involved in purchasing art directly.”
So, can Masterworks’ novel financial model give regular art lovers a taste of those elusive aesthetic ideals and feelings of belonging? Let’s unpack the dynamics of the platform to see if it’s just another flash in the pan, or if it really does hold the keys that can unlock a beloved asset classes for everyday people.
The Democratization of a Billionaire’s Game
Fine art obviously carries immense financial value – evidenced by the astronomical hammer prices that masterpieces frequently command. But it’s the deeper cultural resonance of canonical artists and works that often drives demand from collectors. The significance of owning pieces that speak across generations. The longing to engage with timeless aesthetic ideals.
However, the operational intricacies of actually entering the art investment game have kept it an exclusive playground for only the financial elite. As Glenday describes it, “What we discovered was an enormous community of investors, both individual and professional, who share our conviction around the art market – its size, global nature, history of appreciation, low correlation profile – but have no interest or time to attend art fairs, get involved with auctions or figure out the ins and outs of how to do business in the art market.”
Whether it be the opaque auction process, byzantine regulations, information asymmetries, steep buy-in costs, or immense speculation risks, regular people are often scared away while only the most devoted and wealthy collectors remain. These barriers to entry fortify fine art ownership as a trophy for billionaires alone.
But Masterworks believes they can smash through the velvet ropes guarding this billionaires’ game. Their novel financial model aims to open up blue-chip art investing to any devoted art lovers, not just the uber-elite.
Alternative Assets: A Market Primed for Disruption
The “passion investing” trend shows no signs of slowing down. The latest Knight Frank Wealth Report reveals their basket of passion assets like art and collectible cars returned over 16% in 2022, easily pacing inflation and traditional asset categories.
Leading the way was fine art, which generated returns nearing 30% during the same period. And wealth managers expect continued outperformance, with demand for alternatives soaring among an influx of new Gen Z and millennial clients. In fact, 28% of financial advisers revealed that they have actively invested client funds in alternatives.
Clearly, low volatility and diversification benefits have become too appealing to ignore. With that said, hyper growth creates an identity crisis within exclusive bastions like the art world. Auction houses have focused solely on ultra high net worth “whales” rather than building on-ramps for novice enthusiasts.
Glenday thinks this leaves tons of potential locked away for companies that lead with tech as the new standard. “I think what we are doing at Masterworks is the tail wagging the dog of the art market, in that the approach we are taking to investing in the art market, our use of data, our operations, are setting a new standard,” he says. “Amidst all of this, the demand for art as an investment is poised to grow, and with it must come tools to understand, analyze and participate in the market from an investment standpoint.”
The Masterworks Fractionalized Investment Process
The barriers keeping most art lovers from participating in the market are immense. But Masterworks believes they’ve cracked the code to let anyone invest in iconic paintings from artists such as Picasso, Banksy, Basquiat, and Keith Haring. Here’s how their process aims to open the game:
Curating a Premier Portfolio – The Masterworks research team leverages data to identify promising artists, then acquisitions pros source works from galleries, auctions, and dealers. Less than 3% of artworks reportedly clear the diligence bar.
Securitizing the Asset – Once the ink is dry on a multimillion dollar purchase, Masterworks gets it ready for investment on the platform. They register the painting with the SEC and offer shares to investors. The shares typically sell for as little as $20 each, allowing buyers to get exposure to blue-chip art at an affordable rate.
Maximizing Flexibility – Investors then hold their shares for 3-10 years while Masterworks figures out the best profit-maximizing exit. But a trading market also provides liquidity if people want to cash out early.
When a painting is finally resold, shareholders receive payment proportionate to their equity stake, with Masterworks collecting fees as performance incentive. On paper, it’s really not a bad structure for democratizing access.
Questions Remain for a Maturing Model
While Masterworks has undoubtedly built impressive early momentum, periods of hypergrowth for any startup often spur some healthy skepticism as they aim to disrupt established spheres.
For example, some insiders question whether allowing floods of “everyday” capital could dilute the coveted aura of exclusivity that has historically fueled allure in the art world. Will blue-chip asset performance start to suffer if supply chains expand beyond the traditional billionaire circles?
There are also fair doubts about whether Masterworks’ early success is sustainable or just a temporary wave that often occurs in cyclical industries like art. Their first few years provided a favorable economic backdrop as we’ve emerged from the pandemic – is the model resilient enough now with markets normalizing? What about during a recession?
However, a 2022 Citi report revealed that correlations between blue-chip art and equities remain weakly positive. So fine art could still act as an inflation hedge, regardless of fluctuations on Wall Street.
Another argument is that if current exponential growth in “passion investing” persists, heightened regulatory scrutiny will likely follow. As occurred in other alternative asset classes presenting new risks, strict SEC limitations could significantly constrain Masterworks’ offerings. Despite the doubts, the quality of Masterworks’ acquisition teams and deep investor enthusiasm still seem to outweigh most critics for now.
In Summary
Masterworks has clearly tapped into previously dormant investor interest in the art market. But truly equalizing access to fine art ownership remains profoundly complex. Until more time passes, uncertainty lingers on whether the initial triumph reflects a temporary wave or permanent restoration of art to the people.