Activating Investor Networks for SPVs
In a continuation of our effort to provide research into investor networks for SPV organizers, in this article we’ll look at network activation.2 min read
Mar 8, 2022 4:41:14 PM | Assure Analytics
This content is for informational purposes only and is not intended to be investing advice.
Hirst, Botticelli, Rothko, Bellows, Monet. Casteel, Ancart, Madani and Hollowell. Some of these names are world renowned; others are known to only a small roster of Art aficionados. They represent just an edge of the canvas comprising thousands of artists who drive the global Art investment market.
The appeal of Art transcends the investment portfolio. For most people, Art is seen principally as a source of enjoyment. Artists themselves strive for visceral reactions from the public. They look to capture an emotion or tell a story, hopefully while making a living. And potentially, adding something new to humanity’s incredible body of artistic heritage.
But for some, Art also means something more: potential monetary returns; a portable and physical store of value; an exciting component to a diversified investment portfolio.
This article is the first in a new Assure Analytics series that will examine various types of alternative assets, providing insights both to new investors and seasoned professionals. Our clients at Assure utilize our back office services to paper and administer investments across all kinds of assets in the private markets, including Art.
In this article, we look at fine art as a prospective investment. Specifically, we’ll cover:
Art is traditionally classified by wealth managers as a ‘collectible,’ a category of the expansive ‘alternative assets’ moniker. There are many asset classes within the broader collectibles category – from watches to luxury handbags to sports memorabilia. Each has its own market dynamics and appreciation profiles. But Art represents the largest share, at an estimated 74% of annual collectible sales volume. That makes art an estimated $50 billion to $70 billion market today.
Geographically, the U.S., U.K. and China account for 82% of sales across the global market. That said, bear in mind that particularly high-value artists tend to move through auction houses such as Christie’s and Sotheby’s (with large presences in New York and London), while the buyers and sellers live all over the world. By all means, Art is a truly global asset, with buyers, sellers and creators in every country.
Art is a broad term. For this article, we generally mean fine art and antiquities. The objects are usually physical in nature, sometimes with digital components, and range from paintings to drawings to sculptures to pottery to full-room immersive installations. Within Art, the cultural prominence of a work and its associated artistic movement matter: Old Masters have a market that differs from Contemporary. Impressionist pieces are valued differently from Pop Art works.
Art as a private investment is growing quickly, and is arguably one of the world’s oldest investable assets. Monarchs, merchants and aristocrats have commissioned, traded and sold works of Art for centuries. More recently, demand for Art has surged alongside the global increase in millionaires and billionaires. Owning specific pieces can bestow a form of prestige, while also generating investment returns. For some collectors, there is also an appeal to personal legacy – with prolific collections earning permanent wings in private and public museums.
Despite all this, the Art industry is an opaque market. Much of the knowledge and networks around the sale and speculation of art lie behind closed doors. And historically, the price points for in-demand artists were prohibitive to most investors. But all this is changing.
This article and those it cites are helping expand the knowledge and access around Art as an asset class to investors of all shapes and sizes.
Every asset class has people and entities that have notable influence in and around the asset. In the case of Art, key players to bear in mind include:
Artists: the originators of the investable asset. Artists may still be alive and adding to their portfolios, or dead, in which case their portfolios are static. While there are millions of working artists worldwide, only a small subset are generally viewed as ‘investable.’ That said, beauty is in the eye of the beholder, and any artist has the potential to deliver profound emotional returns to a passionate buyer. It’s also worth bearing in mind that some artists toil in obscurity during their lives, only for their cultural significance to surge after their death, with the investment value of their collection to follow.
Galleries: a core means of distribution for artists. Galleries facilitate the initial sale of works of art, and in some cases facilitate resale. Gallerists look to help artists generate an income while also building the artist’s reputation and legacy through the sale of pieces to museums and collectors of particular renown. One might view a gallerist as a ‘talent manager’ for an artist. With particularly en vogue artists, gallerists can play the role of arbiter – effectively interviewing and auditioning (aka “getting to know” a prospective buyer) in order to understand their intended use of a desired work of art. Galleries exist around the world, but tend to cluster in Art meccas such as New York, Miami, Hong Kong, London, etc. as well as artisan centers such as Santa Fe (Canyon Road).
Auction Houses: key facilitators of resale. Auction houses specialize in valuing Art and other collectibles, maintaining rolodexes of prospective buyers for a style or medium, and facilitating the actual auction / resale. The most commonly known auction houses of Sotheby's, Christie's and Phillips, oversaw “70% of the Contemporary Art market by turnover, from just 10% of the lots sold.” But over 600 auction houses exist around the world, with some specializing in other periods or styles beyond contemporary.
Museums: kingmakers in culture significance and purveyors of public awareness. Museums directly and indirectly influence the value of Art and artists through their curatorial process and promotional campaigns. If a work makes it into a museum exhibit or permanent collection, it can increase the reputation and value of the artist. Particular museums such as the Museum of Modern Art in New York, the Tate in London, the Pompidou in Paris, and others can bear outsized weight.
Advisors: experts who help investors and collectors navigate the Art world. Experts come from a range of backgrounds, and look to help buyers identify the right pieces, assess value, navigate relationships, bid at auctions, and transact, with varying degrees of success.
Collectors: basically, the buyers of Art (outside of museums). Collectors can be individuals, organizations or corporations. And they acquire Art for multiple reasons – from passion and interest, to stores of value, to speculation on long-term outsized returns.
Fractional Art Investors: new facilitators of Art investing. As the Art market modernizes, platforms and tools have appeared to bring technology to this historically offline asset class and democratize access to Art as an investment. Masterworks is an online investment platform that specializes in fractional ownership of contemporary art, making it possible for more investors than ever before to incorporate Art into their investment portfolios. Assure, in turns, provides back office services, helping Art investors to syndicate their acquisitions with their personal and professional networks.
* See below for an in-depth discussion of each aspect of the table
** Over a 25 year time horizon. Note that the annualized numbers reflect appreciation, and not necessarily total returns. Art carries variable costs such as insurance, storage, and other fees that are not captured in this metric.
Appreciation and Performance: The price changes of Art investments are highly dispersive, with a small roster of works driving the bulk of returns. This is similar to startup investing, where performance tends to map to a power law distribution – many deals go to zero, some deals return your principal or see modest multiples, and a few deals see large outsized returns on investment. Using the Case-Shiller Repeat Sale Pair Methodology across 300,000 public auctions since 1960, Masterworks built an art index that shows the average annual return for Art over the last twenty-five years is 9.1% (weighted) and 5.6% (unweighted).
Note: Past price trends are not indicative of future price trends and are not intended to be a proxy for historical or projected future performance of any specific artwork .
Sotheby’s Mei Moses All Art Index lists annualized performance at 8.4% per year, with specific segments of the Art market (ex: Latin American art vs Old Masters) ranging from 6.5% to 12.2% in annualized returns.
Bear in mind that while sub-$1 million Art transactions make up the bulk of the Art industry by number of transactions, the upper echelons of artists drive the bulk of sales by dollar value, with the ‘top 20 artists making up nearly 50% of the auction market for post-war and contemporary art.’ Blue-chip artists with well established brands may see less volatile and more consistent increases in value. And while sub-$1 million art can see incredible upside if a particular artist accrues cultural prominence or catapults into the zeitgeist, this segment of the Art market is more volatile and viewed as more speculative. These are all factors of risk, and again share similarities with venture and startup investing – where earlier stage investments have higher dispersion in performance but can see larger outsized appreciation than their late-stage counterparts. We’ll unpack these other assets in future articles.
As a final aside, it is critical to understand that only a certain subset of art is represented in the above performance data. These indices rely not only on public auction data, but also repeat sales (where the same work of art has sold publicly at least twice). The vast majority of Art and artists never show up in these datasets, meaning that there is a long-tail of Art that is not reflected here. Accordingly, investors should carefully consider the investment potential for a given artist or style.
Liquidity: Art is generally a very illiquid alternative asset. While the annual Art market is estimated to be $50 billion to $70 billion, the resale of an individual piece happens infrequently. Some pieces and artists have more robust markets, increasing their potential trading intervals. Art is effectively a highly fragmented, siloed investment experience: each period and style has its own market; within each style, each artist has their own market; and individual pieces and their stories bear influence on demand as well. This drives the potential liquidity of a piece.
Exits and transactions: With Art, an exit is realized through the sale of the work. Transactions rely on auction houses, gallerists and dealers, specialized brokers, online platforms, and those in the know. Artbasel and UBS estimate that 40-45% of Art is sold publicly; with the remaining 55-60% changing hands in private transactions.
While Art sales occur year round, historically, Art has tended to move more rapidly during ‘peak seasons’ with auction houses dominating May and November, and galleries convening around the triannual Art Basel and other festivals. This is changing as more auction houses and galleries move online (online-only auctions grew 70% between 2020 and 2021). The frequency and efficiency of Art transactions are increasing. In cases of fractional ownership, deals can close incredibly fast – with one recent Masterworks deal going from listing to fully subscribed in two hours.
In cases such as public auctions, buyers / investors also tend to bear the fees associated with the sale via the ‘buyers premium,’ which typically ranges from 15% to 25% of the auction price. Galleries are more likely to bake in their fees into the sticker price, though these commissions often approach 50%. There is, of course, no guarantee that a work sells via auction or private contingency; if a piece of Art receives no bids, it is ‘bought in’ and remains with the original owner.
Time Horizon: While select pieces may transact within just a few years, most Art is held much longer. Based on an analysis of publicly available auction data, Masterworks estimates that the median time horizon for resale of a piece is about 9 years. Of course, some Art has an indefinite time horizon – with owners choosing to either never sell, or there being no market for resale.
Fractional ownership of Art is changing this: platforms like Masterworks and Assure’s SPVs can shorten time horizons and increase liquidity. In such cases, an investor may more easily find a buyer due to the smaller ticket sizes for fractional shares (versus finding a buyer for an entire piece). By default, SPVs also have some aspect of a ‘mini-market’ within the SPV – other investors decided to invest in that specific piece of Art alongside you, and may be willing to purchase your shares via secondary resale / membership transfer. Sophisticated asset managers, like Masterworks, can position themselves to capitalize on buying and selling opportunities in the space, decreasing hold period from the historical average.
Non-fungible tokens (NFTs) tied to Art will be discussed in a future article as they have very different properties from the rest of the Art market, but they also are influencing liquidity and time horizons.
Relative Risk: As with many assets, but particularly with Art, investors should carefully consider what the ‘investable universe’ is for Art. Art investment performance is highly dispersive, with many artists having virtually no resale value.
For those that do resell, we can look at their historical performance and compare against other asset classes. Risk-adjusted performance, per Masterworks’ analysis of paired-sale public auction data, compares favorably with other asset classes.
There are, of course, a variety of risks unique to Art, some of which are discussed in this article. Depending on the investor, some risks can be seen as valuable characteristics that make art as an asset class particularly appealing.
Correlation: Art is generally uncorrelated to traditional investments such as stocks. Many art investors consider this to be a compelling attribute that influences Art’s role in portfolio construction.
“Fine art, particularly painting and sculpture that have been validated by strong secondary market track records, have long been considered a valuable asset class going as far back as the Renaissance. Traditionally only the very tip of the wealth pyramid had the information and access to be able to invest in fine art in a serious way. But now, thanks to the information technology revolution, more people are interested in fine art not only as an asset class, but also as a kind of investment that enhances the enjoyment of life. Blue chip art has consistently maintained its value over a very long time frame (hundreds of years) and has proven itself to be non-correlated to other types of investable asset classes.”
- Josh Rogers, Founder and CEO at Arete Wealth
Yield / cash flow: None. While it’s technically possible – in some rare cases – for Art to generate cash flow via paid experiences (think a ticketed popup exhibition for a very in-demand artist or rental revenue for loaning out a piece), investors can assume this will not happen. Art is effectively a negative yielding asset (such as Timber), with investors bearing ongoing maintenance costs (such as storage or insurance, see below) until they realize a sale.
Taxes: Every country’s tax code is different, and this article will not discuss taxes in detail. But in the United States, at the time of publication, Art is considered a ‘Collectible’ by the I.R.S. meaning that any long-term capital gains are taxed at 28%.
Minimum investment: The minimum ticket sizes for art investments are becoming increasingly accessible thanks to the rise of SPVs and platforms like Masterworks. Historically, high price points limited investor participation. Highly pursued works sold for $100,000, $1 million or in some cases $100 million. To purchase such pieces as an individual required significant personal net worth, an outsized exposure to the asset class, or both. Diversification within the asset class was very difficult. Even large family offices interested in ‘blue-chip’ Art at the $1 million-plus price points could struggle to effectively diversify and build a collection.
This is changing rapidly. Today, investors can add Art to their portfolio for as little as $1,000 via fractional ownership. At Assure, some of our clients regularly use SPVs to syndicate their Art investments with their networks. And Masterworks is enabling investors to add exposure to blue-chip contemporary artists to their portfolio. Collectively, we are democratizing access to Art as an asset class.
Art investments can be long-term stores of value that hedge against inflation, are uncorrelated with other assets, and, with the right artists, can deliver compelling returns.
Beyond this, Art – like other collectibles – can deliver ‘emotional returns’ to the owner. Its displayable nature is distinct from many other asset classes. You cannot put a hedge fund on your wall or gather around a distressed debt product in your living room (unless you translate those investments into some form of artistic representation). Even with fractional ownership, in which a piece cannot be displayed at one’s home, Art still lends itself to cocktail conversations and can – for some investors – instill a source of pride in participating in cultural significance. That said, pieces that approach millions in value are increasingly likely to be stored in a warehouse, away from eyes and environmental risks. This is not often appealing to artists, as it does not support their legacy nor does it allow others to participate in their work.
Every asset class has myriad opportunities and risks that are important to consider. We discuss these throughout this article, with this section highlighting some select characteristics that are more unique to art.
Valuation: New Art is notoriously difficult to value. Pricing a piece for primary or secondary sales requires extensive expertise in the state of the market, the artist's reputation, and what buyers will bear.
Counterfeits: Whereas in the venture capital industry investors must navigate risks of fraud (ex: Theranos), in the Art world the difficulty is in discerning counterfeit art. It’s unknown exactly what percentage of Art is fake, with estimates ranging widely (some British museums estimated 20%+ of their collections, with other estimates higher). As artists grow in prominence and value, the risk of forgeries increases. Non-living artists are also at higher risk, as they are no longer around to personally verify whether they painted a work themselves. The bottom line is that this risk is real, though consultants and services exist to help verify originality.
Storage and transport: As discussed here, Art is a physical good (NFTs and digital art, music and film finance, etc. are topics for future articles). This means you must store it somewhere – which is an annual cost that is borne by the investors. For pieces of particular worth or investment potential, extreme care must be taken with respect to temperature, light, humidity and other environmental factors. For those investing directly in Art, firms such as UOVO, Crozier, Delaware Freeport, or Atelier Storage can assist here. Investing via SPVs / fractional ownership can assist with these logistics (as your deal lead / platform partner may handle the details), though as an investor you will still incur this cost in some way.
“From end-to-end logistics to discrete viewing rooms, there is an endless nuance to safely owning and moving art that we help collectors think about. Storage is at its core, and starts at $195 where you can store artworks up to 70 cubic feet. But we know that every collector has their own unique needs — bespoke private rooms start as small as 50 square feet and are tailored to each client.” – Andrew Barron, Director of Marketing at UOVO
Information asymmetry: This exists to some degree for many alternative assets, but is of particular note in Art. In the Art industry, information can be held in very narrow social networks. Some Art transacts via private sales (versus public auction), where verifiable information is difficult to come by unless you (or your broker) are particularly well-connected. This can be both a pro and a con; for those with unique expertise or skill or access, the asymmetry can be a strength. Of course, companies like Masterworks are working to collect and verify data on the Art industry in order to make the asset class more accessible to more investors.
Insurance: Physical property is always at risk of some form of damage. Fire, floods, poor storage, accidental damage and theft can impact or destroy the value of a work of art. Accordingly, for works of Art of notable investment value, it's advised to take out insurance. When it comes to storage, your Art insurance agency may require you to store your art in a particular facility, as they look to spread their risk and avoid insuring too many pieces in one location.
Accreditation: Virtually anyone can be an Art investor. It is generally an asset that is accessible to non-accredited investors (controlling for check sizes), with options of buying/investing directly or engaging in fractional ownership via SPVs or online platforms.
Check Sizes: Typical investment check sizes range widely, from as little as $1,000 to $100 million or more, depending on your targeted style and acquisition strategy, with particularly highly-coveted pieces exchanging hands for tens of millions (a Picasso sold in 2021 for $103 million). That said, the bulk of the Art market transacts at lower price points, and the emergence of fractional ownership of Art pieces is democratizing access to the asset class by reducing minimum ticket sizes. Of course, theoretically, one could also ‘invest’ in a sub-$1,000 canvas they acquire directly from an artist; but given the incredibly dispersive nature of price performance, the odds that there is a resale market for such pieces approaches zero.
Patience: High. While Art is certainly an emerging asset class and an estimated 30 million to 40 million pieces are sold each year, individual pieces do not transact often. Hold periods can range from a few years to indefinitely, depending on the robustness of a particular artist’s market, and whether a buyer exists for a particular piece.
Different investors have different portfolio construction strategies geared towards their specific goals and needs. Whether Art is a part of an investment portfolio, and its specific allocations within a portfolio, is typically driven by an investor’s desire for diversification, exposure to uncorrelated assets, ability to bear illiquidity, and need for inflation hedges and total return.
Credit Suisse notes that its clients tend to have 2% to 5% of their net worth allocated to collectibles (including art), with some clients allocating closer to 10% (Oct 2020).
Below is a hypothetical investment portfolio for a family office, highlighting where art may exist.
But for additional context, some avid Art collectors allocate significantly more of their portfolio to their collections:
As discussed earlier, investable Art can be challenging to access. Broadly speaking, a buyer can acquire whole pieces by going direct via galleries, auction houses, or through a related intermediary. Or they can pursue fractional ownership via SPVs or online investment platforms.
Masterworks offers a novel path for any investor (including non-accredited investors) to incorporate Art into their portfolios. The online investment platform uses its data to identify which works to pursue, what prices to buy and sell at, and then acquires the works of Art and syndicates ownership to interested investors. Currently, the platform focuses on works from ‘blue-chip’ contemporary artists, where specific canvases sell for upwards of $5 million. Such works are historically inaccessible to all but the most affluent prospective buyers.
At Assure, some of our clients use SPVs to syndicate investments in fine art. Assure manages the legal container, capital calls from investors, ongoing accounting, and annual tax preparations to streamline the back office experience for Art investors. Each investor in the SPV owns part of the complete piece (or collection of works) that are held by the SPV. For those interested in acquiring specific works of Art and syndicating with their personal networks, Assure SPVs can provide a streamlined and affordable solution to your administration needs.
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