Masterworks: How It Works and What To Know Before Investing

Investing in multimillion-dollar paintings usually requires having a sizable amount of capital. Privately-held startup Masterworks is set out to change that.

Masterworks is making the world of art a little less exclusive by offering everyday investors the chance to own a fraction of these high-priced investments with a much smaller amount of money.

Through the fine art investing platform, users can purchase (and trade) shares in what the company has defined as “blue-chip” art: masterpieces from artists like Pablo Picasso, Claude Monet, Andy Warhol, Banksy, Kaws, Jean-Michel Basquiat and more.

Scott Lynn, founder and CEO of Masterworks, tells Select that he started the company in 2017 after seeing the value of his own art collection appreciate and believing that it should be available for all types of investors. After all, not only is art a good way to add another asset class to your portfolio, contemporary art investments have also outperformed the S&P 500 over the last 25 years (offering a 14% annual return versus the S&P 500’s 9.5% annual return), according to the Citi Global Art Market chart, cited by Masterworks. Keep in mind, however, past performance does not guarantee future success.

The Masterworks platform today has over 250,000 investors signed up, with most looking for another way to diversify their portfolios. Below, Select breaks down Masterworks’ operation and what to know before joining.

Masterworks provides an affordable way to invest in art. What was once an option reserved exclusively for wealthy investors is now accessible to investors of all types. Here’s how the platform works:

Masterworks will purchase a painting and file it with the SEC as a public offering, or IPO, similar to how a company goes public. Shares of the painting are then made available for purchase on the Masterworks website for as little as $20 per share. The company says it launches about one new painting every four to five days.

The platform stands out especially for using propriety data to determine which artist markets have the most momentum, focusing on the very high-end segment of the art market that has predictable returns, the company says. Meanwhile, its research team works in the background to calculate appreciation rates, correlation and loss rates.

Masterworks even recently added a secondary market, too, where investors can trade shares in paintings. Plus, Masterworks lets you invest your IRA earnings into their fine art through its partnership with Alto IRA, an alternative asset investing platform.

Masterworks fees and how to get started

Masterworks investors are required to meet a minimum investment depending on the piece of art they are investing in. Individual investors are limited to owning no more than 10% of an individual work of art.

Masterworks charges a 1.5% annual management fee, plus the company takes 20% of any profits from an artwork’s sale. Other applicable fees may apply, which are detailed in the offering documentation that investors receive.

While the management fee and 20%-of-profit fee are in line with a hedge fund’s industry standard, these fees are relatively high when compared to investing in something like a market-tracking index fund. But like most alternative investments that carry high fees and higher risk, fine art can provide potentially higher returns than investing in traditional investment vehicles.

Once an investor’s account is enabled, they can pick and choose individual paintings to invest in, however, that may take some time as the company is currently operating on a waitlist. Those interested can visit the Masterworks website and apply for membership, which requires an interview call with the company’s membership team to talk about your art investing goals and risk tolerance.

Lynn warns that users should think of Masterworks’ art pieces as long-term investments, which is why the company doesn’t even accept those over age 70 to use the platform. Investors must wait until Masterworks sells the painting in order to see, hopefully, a gain. Or, the investor can seek to sell their shares of art on Masterworks’ secondary market before the company sells the painting.

Masterworks aims to hold its art pieces for three to 10 years, at which point it then sells the painting and distributes the proceeds among investors based on their number of shares.

While Masterworks’ business model is to focus on established artists and works that have a good track record, be mindful that just like any investment, art is still risky. Buyers’ tastes can change and art/artists can go in and out of style, which affects the works’ resale values. Masterworks pre-vets artists and artworks, but the art market overall operates in a much less regulated environment than the stock market.

Before you dive into the art investing world, first make sure you have met important financial goals such as paying off high-interest credit card debt, establishing an emergency fund and setting up a 401(k) or IRA that you continuously contribute to. Charles Schwab, Fidelity Investments and robo-advisor Betterment each offer traditional and Roth IRAs that help you maximize your retirement savings.

Once you have established a solid financial footing, it may then make sense to see what investing in some of the most iconic artworks can do for your long-term wealth.

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