Within 5 years, Masterworks has become the biggest buyer in the contemporary art market — amassing a trove of almost $1 billion in art spread across more than 400 works. Their modus operandi is to split the ownership of high-end artworks into many smaller shares (called 'fractionalising'), enabling members to access the asset class at a much lower price point. In this article (which, to be clear, is not sponsored), I look at how Masterworks has performed since its inception. Is this the future of art investing? Or is this innovative platform gradually exposing why no one has tried it before.
How it works
Masterworks buys paintings and then sells shares in those works to the public. When the work is resold, the proceeds are distributed to the shareholders. According to Masterworks' marketing, it allows the public to invest in art that would otherwise be out of limit — they tend to purchase works valued at over $1 million, whereas Masterworks' minimum investment amount is around $20,000.
A trophy lot at the time: Banksy's 'Sunflowers from Petrol Station' was purchased by Masterworks for $14.6 million at Christie's auction in November 2021. It would be unlikely to sell for anywhere near that amount if auctioned today.
Masterworks facilitates this process by creating an independent company, listed with the US Securities Exchange Commission (SEC), to hold each individual work of art, and shares are sold in that company. Each company only holds one artwork. In this way, you can (as I did) search through all of the SEC filings for each of the more than 400 companies created by Masterworks to see the details of how and what they bought.
Masterworks makes money in three ways: it earns a 20% profit share after the sale of the artwork, plus a 1.5% annual management fee distributed in the form of equity when the painting is sold, and it recoups its expenses associated with sourcing, securitising and managing the works.
Take, for example, Masterworks 012, LLC, which is the 12th company set up by Masterworks to buy the Yayoi Kusama painting, 'Infinity Nets'. When it sold for $2.22 million in July 2023 (excluding the third-party advisor fee of $22,500), Masterworks earned $191,000 as its 20% profit share, plus $63,000 in management fees. Masterworks calculated an annualised net return of 17.6% for this work, which was held for a period of almost three years — put another way, each shareholder received $32.14 per share in return for their initial $20 share investment after about three years. And Masterworks made around $250,000 in profit.
The numbers
Masterworks provides a total of assets under management on its website – as of April 2024, this stood at $989,848,797. However, I went through every SEC filing made by a Masterworks company and could account for only around $922 million of assets across 407 paintings (as at April 2024). So I am missing around $70 million in art. (I won't get started on the difficulty in actually sifting through Masterworks' SEC filings – they have opted not to update their website recently, and have also starting buying multiple works under one company, making tracking individual works tricky.)
The top 10 most expensive paintings purchased by Masterworks.
Of the assets under management (aka the paintings they hold), and as of today's date, Masterworks has exited from $37.6 million of these assets by selling 22 paintings, for a total profit of $19 million. That is, Masterworks still holds almost $1 billion in art and has sold very little of it.
So what is being bought if you have infinite access to capital, as Masterworks seems to?
Their inventory is dominated by exposure to Jean-Michel Basquiat (holding about $156 million in 13 paintings, or 16.9% of the assets) and Yayoi Kusama (holding $83.4 million in 42 paintings, including 15 of her 'Pumpkin' paintings, accounting for 9.0% of Masterworks' assets). Also featuring prominently is Banksy (4.9%), George Condo (4.5%) and Gerhard Richter (3.6%).
The distribution of Masterworks' acquisitions by artist. 55% of their almost $1 billion in assets are from only 10 artists.
Around 100 of the works were purchased at auction (about 25%), whereas the rest were purchased privately. Masterworks provides limited information about whom the works are purchased from, noting only if it's a private collector or gallery (but not their identity). They buy all year around, although the works bought at auction congregate during the various London and New York auction seasons. Late 2021 was a particularly active period, with Masterworks purchasing five of their top 10 most expensive works and 62 paintings overall in Q4 2021.
Of the 22 sales completed by Masterworks, some works were held for as little as 29 days (for a Cecily Brown painting) and over 1000 days (for a Kusama painting), but most works tended to be sold within 1-2 years. This is still quite quick in the context of traditional art sales, although noting that only a small proportion of their works have been sold. Only three of these works were sold at auction, whereas the remaining 19 were sold privately.
Cecily Brown has been the best performing artist so far, with nine paintings purchased and four sold for annualised returns between 42 and 122%. Masterworks has had less luck with more established artists, including Claude Monet and Warhol (as I discuss further below).
Upsides and downsides
Fractionalised ownership enables individuals to gain exposure to the art world at a much lower investment threshold than with traditional ownership. Although their stated minimum investment is $20,000, allegedly (according to forums on the topic) they will lower this to even less than $1,000 for first-time investors. Because each investment relates to only one painting, investors can choose exactly which artist's market they want exposure to.
However, the downsides for this exposure are numerous.
Putting to one side the high management fees and commission, the whole process is opaque. Although Masterworks are required to provide disclosure in the form of SEC filings, this does not require identification of the participants in the buy- or sell-side transactions. Masterworks make it clear that they have full autonomy to buy the works at any price, fractionalise them, and proceed with a sale at any time and to any one they want. Cynically, there is no way of knowing if Masterworks is, indeed, selling to themselves or a related entity, or for a fair price or not. It's unsurprising that their first sales were overall profitable, given a clear self-interest in proving the concept of the business.
There is a downside to only holding one painting per company, as the performance of the investment depends entirely on market trends in relation to that artist and work. Where tastes change and the markets of artists rise and fall, as discussed further below, the lack of differentiation makes guaranteeing a return uncertain.
Finally, the works purchased by Masterworks disappear into a freeport for storage and to minimise tax implications. To put it another way, Masterworks have locked up more than 400 paintings that will not be viewed by anyone, any time soon.
Questioning the underlying premise
Fractionalised art ownership companies were set up on the premise that art, as an asset class, will forever increase in value and outpace more traditional investments like shares. However, even before the recent downturn, this assumption has not always proven true.
In late 2022, at the height of the market, the auction of the collection of the late Microsoft co-founder Paul Allen raised more than $1.6 billion at Christie's. Despite the headlining total value of the sale, an analysis of how the collection performed on an annualised basis showed that it may actually have underperformed the share market (S&P500) over the same period. The analysis from Axios (here) tracked the annualised growth rate on 11 of the highest value lots, giving a return of 6.2% per year — in contrast to the compound growth of the S&P500 of 8.9% over the same 18-year period. As Axios concludes, Allen would have made more money just buying an index fund.
The question of market timing is highlighted by the forthcoming auction of the collection of the late Miami-based philanthropist and art collector Rosa de la Cruz, taking place at Christie's in May 2024. Artnet estimated the value of the collection a decade ago at over $100 million, however, it now carries the more modest estimate of $30 million because of the recent under-performance of a number of star artists from her collection, including Dan Colen, Christopher Wool, Sterling Ruby and others. Katya Kazakina of Artnet cites the example of a Colen painting, which once sold for $450,000, selling for only $13,000 at a recent auction in March 2024.
Over 100 of Masterworks' collection was purchased at public auction and the majority of these at the height of the contemporary art boom in 2020-2022. For example, in November 2021, Masterworks purchased the Banksy painting 'Sunflowers from Petrol Station' for $14.6 million at Christie's. Given the downturn that has been observed in Banksy's market since then, it seems unlikely that Masterworks will be able to sell this work for a profit any time soon (or possibly ever).
This concern can be observed even in some of Masterworks own, very limited, sales. In June 2022, Masterworks sold the second painting it acquired, 'Coup du Vent' by Claude Monet, at auction for $8 million. It had purchased the painting four years earlier in June 2018 for around $6 million. This sale represents an annualised return of 6% per annum — although Masterworks lists it as 9%, because they calculate the annualised return timeframe from when the complete the sale of shares in the painting and not from when they actually purchase the painting. Under either calculation, however, the Monet transaction would have under-performed index funds over the same period.
Similarly lacklustre results were observed with the two Warhol 'Flowers' paintings that have been sold by Masterworks, which returned 4% and 10% according to Masterworks.
Conclusions
Masterworks is in a tricky position. They are accumulating art faster than they can sell it, for the purpose of guaranteeing returns for a class of investors that may not have the patience that buying and selling art demands. They also cannot make revenue unless they continue to sell this art, which requires impeccable timing — something that the recent auction downturn may not provide.
It will be interesting to continue tracking where they go from here.
George
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