Fractional art investing has gone from a quirky alternative asset to a powerful trend. The returns that art investing platforms report comfortably outpace the S&P 500, and new opportunities pop up seemingly daily.
Founded in 2017, the Masterworks app is the pioneer that launched fractional art investing into mainstream consciousness. Today the company claims to have over $850 million in assets under management, having purchased 320 blue-chip paintings to date, onboarding some 780,000 users along the way. The fintech industry has clearly taken note, too, as several new fractional art investment platforms have started popping up in recent months.
The rising popularity of art investments has led to an interesting question for industry observers: Can Masterworks combat the rise of new competitors? Is the new wave of challengers ready to topple the pioneer? Let's take a look.
Just a fad, or in it for the long haul?
One of the dangers of new trends is the possibility of a fizzle-out. While art investing has been popular for decades, with wealthy investors buying and selling expensive works of art via private sales and auctions, fractional art investing is relatively new.
Masterworks' approach is easy to understand due to its simplicity. The company buys a work of art, securitizes it as an LLC, and issues shares in the LLC to investors. It charges a management fee and a profit fee upon sale. While investors on the platform can trade shares with each other before the painting is resold, if they’re going to see a true payday, they essentially need to sit tight for up to ten years. A portion of the new wave of challenger platforms is trying to differentiate themselves by tinkering with this model.
For instance, some new platforms point to blockchain and distributed ledger technology usage to investors as a critical reason to purchase art with them. The Rat, based out of the United Arab Emirates, is a good example of a platform combining multiple buzzwords into a single offer. Dubious naming aside, the platform doesn't offer any details of its approach or why a token is safer than shares in a physical LLC.
P2P trading has become popular thanks to cryptocurrencies, and the ARTEX Stock Exchange, based out of Liechtenstein, is apparently bent on leveraging this trend. The company helps investors purchase portions of works of art and promises a liquid market in which they can speculate on their investment's value.
These attempts to turn art into a speculative token are unlikely to topple Masterworks' entrenched business model. Masterworks' employment of industry-leading art experts further dispels the notion these new exchanges can draw market share away from it.
Online and physical presence
Mintus, a UK-based platform, offers a similar deal to Masterworks but with a lower investment minimum. Similar to Masterworks, Mintus employs a team of vetted art experts, securitizes its artwork, and offers investors the option to sell shares in the secondary market.
Given its lower entry barrier, Mintus seems poised to seriously damage Masterworks' market share. However, there's one barrier Mintus cannot overcome right now. Secondary market liquidity has long been a sticking point for fractional art investors, as sourcing liquidity can be challenging. In some cases, it is non-existent.
In such scenarios, a platform's active user count becomes important, since more users mean more potential liquidity. This gives Masterworks' investors a higher probability of cashing out their investments ahead of time instead of being forced to lock up their funds until the platform sells a given painting.
Marketing and advertising are critical too, since they directly contribute to user counts. Masterworks is an established name and has a competitive moat that is tough to overcome. It is a recognized-enough name in the art world that its recent Level & Co. gallery opening in Manhattan's Upper East Side drew significant attention.
Simply put, an established brand name and deeper pockets gives Masterworks an edge over platforms that follow similar operating models. While Mintus is highly credible, it is unlikely to overcome Masterworks' economic moat unless it changes its business model drastically.
Opportunities in narrower niches
The most credible challenge to Masterworks might come from platforms offering alternative takes on art investment. For instance, Rares specializes in offering investors fractional ownership of rare sneakers in a model similar to Masterworks.
Other platforms like Fractional help investors buy portions of NFTs and hold those units in their crypto wallets. These platforms operate in different art niches and complement investor appetites, along with Masterworks.
Yieldstreet is arguably Masterworks' biggest competitor at the moment. The platform covers a similar breadth of art as Masterworks does but operates a different business model, effectively creating a niche for itself. Unlike Masterworks, Yieldstreet does not offer shares in an LLC tied to a piece of art.
Instead, it operates as a mutual fund, selling investors units in a portfolio that an investment manager has purchased.
In effect, investors can diversify their investment in a portfolio instead of sinking all of their money into a single piece of art. While this approach is likely to appeal to risk-averse investors, the question is: Will risk-averse investors even consider alternative investments like art? Art and other alternative investments are often used as hedges to a primary portfolio.
Diversifying a primary portfolio makes sense since the bulk of investor funds will reside in it. Hedges are meant to generate outsized returns in a non-correlated manner and demand concentration. Diversifying a hedge will likely dampen yields, defeating the purpose of investing in a hedge.
For this reason, Yieldstreet may appeal only to investors seeking to invest a significant sum of their money in art, unlike the majority of investors who use it as a hedge.
Plenty of challenges but few headwinds
Masterworks has established a significant first-mover advantage in the fractional art investing world and has democratized investment opportunities. While the platform has significant and growing competition, it seems unlikely that any of these alternate platforms will overcome the advantage Masterworks has established.
While the future isn't certain, Masterworks seems set to remain the primary choice for fractional art investors in the near term.
