Buying a Piece Of Art-Market Hype

Kokhba decided to invest because as an art lawyer representing galleries and artists, he loves art. “But if I didn’t have any of that, I’d still look at this because the numbers show blue-chip art typically continues to go up,” he says. 

That in a nutshell is the promise of fractional art, the chance to inhabit and profit from a world otherwise occupied only by the very wealthy. It’s a promise being made by an increasing number of companies, each in different ways, and one that should be considered with care.

“There has always been a strong financial aspect to art ownership, but that financial ownership aspect has been privileged to a few people,” says Anders Petterson, managing director
of London-based ArtTactic, an art analysis firm. “These new models are opening up an opportunity for others.”

Yet, Petterson says, “most of the industry itself is in a honeymoon period where investors are coming in and are excited, and at some point, there will be the reality of whether [the artworks] are more valuable than what they were bought for,” Petterson says. “It will be a few years down the line before we know how this will pan out.”

The attraction to owning slices of art is the access it provides to an alternative asset that can diversify and reduce risk in an investment portfolio because its returns aren’t in sync with traditional stock, bond, and commodities markets. Fractionalized platforms also give more people the chance to own top-quality art even if they can’t put it on their walls. 

“The contemporary segment [of the art market] has outperformed equities for the past 25 to 30 years, and lacks correlation to other asset classes, but the only way to invest in it is to buy a painting—which most people don’t,” argues Scott Lynn, Masterworks’ CEO. 

Accurate data that track how art has performed over time actually are scarce considering at least half of all transactions are private, and publicly available return data don’t account for the annual costs of owning art, says Drew Watson, head of art services at Bank of America Private Bank. Art is also illiquid, meaning there are fewer buyers and sellers for each individual work, and the sale of a few star paintings at outsize returns can easily skew results. 

“If you’re measuring risk by standard deviation from the average [of] annual returns, that’s going to be much greater for art, especially contemporary art, than it is for other financial assets, which are clearly way more liquid too,” Watson says. 

Nonetheless, several companies globally are joining Masterworks in the business of turning art into financial securities. In South Korea, the fractionalized art ownership market is “super vibrant,” with 20- to 30-year-olds snapping up shares in paintings by, for example, renowned Japanese artist Yayoi Kusama, for as little as $1 a share, Petterson says. 

There’s also U.S.-based Particle, co-founded by Loïc Gouzer, former co-chairman of Christie’s postwar and contemporary art department, which sells “particles” of single works minted on the blockchain as nonfungible tokens, or NFTs; and Mintus, a United Kingdom firm regulated by the U.K.’s Financial Conduct Authority that, similar to Masterworks, sells shares in paintings through a type of private-equity fund structure that charges management and performance fees. Mintus, which so far has sold works by Andy Warhol and George Condo, is advised by art world heavyweights such as LGDR gallery partner Brett Gorvy, a former top Christie’s executive.

A relatively new competitor is Liechtenstein-based Artex Group, which has created a regulated exchange for trading shares in artworks and includes Prince Wenceslas of Liechtenstein among its founders. Instead of utilizing a fund structure, Artex is launching initial public offerings of masterpiece works valued at $50 million or more for the euro equivalent of $100 a share, says Yassir Benjelloun-Touimi, the firm’s co-founder and CEO. 

In June, Artex began premarketing a secondary offering of 385,000 in Class B shares of a $55 million painting by Francis Bacon, Three Studies for a Portrait of George Dyer. The work, which is being sold by a collector who bought the painting in May 2017 at Christie’s for $51.8 million, was placed in a special-purpose vehicle that is listed on the Artex exchange and regulated by the Liechtenstein Financial Market Authority, allowing its value to be divided into liquid, tradable securities.

By offering masterpieces, Artex believes it will be easier to sell an art-based security to a broad array of investors beyond those who routinely engage in the close-knit art world. If Leonardo da Vinci’s Mona Lisa was up for auction at $3 billion, for example, maybe 10 or 15 people in the world could buy it, Benjelloun-Touimi says. But collectively, given the number of potential individual eligible investors in the world, “we can outbid any one of them,” he says. 

Artex plans to list an artwork each month, with the number of listings rising to one a week by 2025, Benjelloun-Touimi says. The company also aims to create an art index that will allow for the creation of an exchange-traded fund before the end of the year. 

Mintus, meanwhile, is planning to offer up to 30 works valued at about
£76 million by next March at a minimum ticket size of $3,000 to wealthy investors and institutions designated as “qualified” in the U.K. and “accredited” in the U.S., says Tamer Ozmen, founder and CEO, and former Microsoft executive.

The paintings will be sold through segregated portfolio companies, which, in some cases, may hold a themed grouping of works. It is also offering institutional funds (based in Luxembourg and the Cayman Islands) that can invest in several paintings, but require a minimum investment of $100,000. 

Ozmen’s Microsoft background shows up in an artificial intelligence platform Mintus has developed as an initial valuation tool to analyze a work’s potential trajectory, although he is quick to say the technology is in early stages. “It’s not going to tell you who is going to be the next [Jean-Michel] Basquiat,” he says. 

The Diversified Fund Approach

Aside from companies dividing art into investible shares, there are others creating more traditional mutual fund-style structures allowing individuals and institutions to invest in a portfolio of art. The concept isn’t new. Art investment funds have existed as far back as the early 1970s. 

Among the latest generation are several diversified art equity funds launched by Yieldstreet, a New York-based private-market alternative investing platform for retail investors, and a diversified fund for institutional and accredited retail investors from the Artory/Winston Art Fund.

Yieldstreet began acquiring art at what Rebecca Fine, the company’s managing director of art finance, says were discounted prices and offering shares to investors beginning in 2021 through a series of equity funds ranging in size from $10 million to $50 million. The minimum investment is $10,000 or $15,000 depending on the fund and return expectations are roughly “high teens to mid-20s conservatively,” depending on the artists in the fund, Fine says. 

Investors don’t know what specific works are in the funds, but they get an analysis of the artists whose pieces are included. 

Artory/Winston, a joint venture between Artory, which offers a blockchain registry of verified information on fine art and collectibles, and Winston Art Group, an independent art advisory and appraiser, experimented with selling stakes in an individual artwork, but is putting most of its effort into raising upwards of $100 million from accredited and institutional investors for a diversified fund.

The vehicle will own works by emerging, midcareer, and established blue-chip contemporary artists, and is expected to generate an internal rate of return of about 15% to 20%, says Nanne Dekking, Artory’s founder and CEO.

None of these platforms give investors direct access to the art, and in many cases, works are held in storage until they are sold. Artex pledges to be an exception by exhibiting all its art to the public, while Masterworks has a New York gallery where some works are shown. The funds don’t reveal most if any works they own. “An artwork can benefit from not being seen for a long time,” Dekking says. 

Waiting for Returns 

Fractional art ownership is relatively new and there aren’t a wide array of offerings, so individuals should be aware they need to rely on their own research to get comfortable with the legitimacy of whatever platform they consider, including the expertise of its staff and its access to quality art at good prices. 

There are also extra costs. Masterworks adds about 10% to its purchase price for a work before selling to
investors to cover expenses involved in buying and holding the painting, Lynn says. It also charges a 1.5% annual management fee and 20% of future profits; Mintus adds a 14% commission to its costs for acquiring an artwork, but Ozmen says it will return up to 5% of this cost to investors if a work is sold within four years. It charges a performance fee of 20% of profits when a work is sold, but no annual fee.

Growing pains are another factor given the market’s newness. Masterworks, which quickly has become by the far the largest player with 50,000 investors and about $800 million in assets under management, came under fire in ArtNews late last year for allegedly aggressive sales practices. The company has denied these charges, which it attributes to employees who were let go for cause. Prior to the article’s publication, Masterworks filed plans with the SEC to shift its sales to a registered investment advisor model from using outside brokers, a move that entails greater regulatory scrutiny and was approved in mid-March. Client portfolios at Masterworks average $100,000 to $300,000, Lynn says.

Masterworks had sold at least 15 artworks of more than 280 it had bought to fractionalize and sell to investors as of late May. 

Kokhba investigated, observed, and ultimately invested in Masterworks on his own once he became comfortable with the company’s analytics and research, and saw evidence of a successful sale. He also views art as an effective way to diversify his investments, although he didn’t consult outside financial advisors because he expected they wouldn’t understand the offering, and would likely not recommend a product they couldn’t manage or earn a fee from. 

Adriano Picinati di Torcello, the global art and finance coordinator at Deloitte Luxembourg, agrees that it’s “still the case that private bankers and wealth managers aren’t recommending any investments like this so far.”

Bank of America Private Bank, for instance, has a large art practice that includes a significant business in lending against client collections, but it doesn’t view or recommend art as a pure investment. “We consider it within the context of [a] client’s overall balance sheet,” Watson says. 

For fractional art ownership to become widely accepted, investors also will need to see a reliable track record of returns that counter worries over illiquidity and price uncertainty. 

So far, Kokhba is convinced. In late December 2022, he shared news from an email he received that another Brown painting he invested in, There is a Land of Pure Delight, 2011, was sold by Masterworks for a 35% return net of fees. Shares in the painting, priced at $899,000, had been offered to investors after Masterworks bought the work for $810,000 in September 2020, according to SEC filings. The painting was ultimately sold for $1.8 million, Masterworks said in the email. “35% annual return speaks volumes for me and I imagine most investors,” Kokhba said in an email.  

This story originally appeared in the June 2023 issue of Penta magazine.