The big picture in fractional art investment
I invest in stocks to make money. But when investing in art, I want to open the door to a world that inspires me. I went in search of which fractional art investment platforms have the best business models for my emotional return on investment.
Fractional art investment promises to democratize the blue-chip art market by enabling anybody to buy shares in a work of art.
The downside is that it loses much of the traditional pleasure of owning art. I was curious if any of the fractional ownership platforms have been able to salvage or recreate that intrinsic value for the new wave of retail art investors they are beckoning into the art market.
This article is for people who share my interest in business model innovation, the art market, and the value proposition in fractional art investment. We’re briefly going to unpack what fractional art is, who it’s for, and why someone would want to buy ‘fractions’ of an artwork. Then we’re going to look at the battle of business models and see which platform has the purpose of vision that offers its clients more than just financial investment.
What the f is fractional art investment?
For the uninitiated, fractional art investment seems paradoxical — why would you buy art if you can’t enjoy the pleasure of possessing the work itself? It’s a valid point. But if you allow yourself to think about it in purely extrinsic investment terms (don’t worry, we’ll cover the intrinsic value later), it makes a lot more sense.
The likes of van Gogh or Picasso or Banksy are bought and sold at auctions for millions of dollars by the world’s ultra-rich. Fractional art investment is a way for anyone to invest in these high-value artworks without having to buy the entire piece. Typically, a platform acquires an artwork and divides its ownership into shares. These shares are bought by investors for anything from as little as a few hundred to a few thousand dollars and pay out the returns when the work is sold for a profit some years later. In the interim, these shares are managed with smart contracts on the blockchain and can (theoretically) be bought and sold by investors, much like a stock exchange.
The upside is enticing. First, it provides an opportunity for individuals to invest in high-value artworks, an asset class that has otherwise been unaffordable. Second, it allows for diversification in an art investment portfolio: instead of investing a large sum of money in a single artwork, investors now can spread their risk across multiple artworks. And third, art is often considered an excellent long-term investment vehicle and a hedge against market volatility and inflation (some art movements more than others).
On the flip side, it has its limitations. Besides the risks inherent in any investment, investors may have limited control over the artwork since decisions about its display, loaning, or selling are usually managed by the platform. This management accrues considerable management fees — much more than investing in traditional assets. Also, the secondary market for shares still needs to mature (there are not enough buyers and sellers to create a liquid market yet), which means that investors need to hold their shares for several years until the painting itself is sold to see their returns.
Artworld, meet the finance bro
Typically,?fractional art platforms target affluent clients?who are 30-something professionals (lawyers, bankers, startup veterans) with disposable income who are looking to diversify their investment portfolios beyond traditional assets like stocks, bonds, and money market instruments. They are retail investors with $100,000+ invested across various markets and recognize art as an alternative investment class with unique benefits.
They tend to be tech-savvy and comfortable in the alternative investment landscape, and they appreciate the convenience and access that fractional ownership platforms have created in the art market.
The fractional art piece of the pie
Fractional art investment has come storming out the gates. Over $625M worth of art has been sold fractionally since its inception in 2017 (as estimated by?ArtTactic), over a third of which was in 2022. This is still just a fraction of the overall global art sales, but with such a promising growth trajectory, they have reason to feel very good about the obtainable market share available to pursue.
The face of fractional
There are ±20 platforms, most of them relatively small startups in the USA, that have been established in the five years since 2017. Their founding teams seem to be made up of mostly finance and tech types. Many specialise in fine art investment, like?Masterworks, but some offer a range of alternative assets like vintage cars or stamps or wine, like?Yieldstreet.
Art vs The S&P 500
Of those specialising in fine art, Masterworks is by far the largest with ±250 staff and already boasting ±700,000 investors and?US$475+ million worth of art, some of which have already been sold for very good returns:
These were their exceptionally good investments. According to?Citi’s Global Art Market Report, contemporary art prices appreciated 14% annually from 1995 to 2020, which is less on average, but still well outpaces the 9.5% average return from the S&P 500 over the same period.
Money can’t buy you love
There is some controversy about how fractional ownership will affect the art market. The critical argument is that it turns art into a commodity and compromises the artist’s motivation for creating art. It becomes too much about the money and not enough about art and its intrinsic value: art as the aesthetic act of reaching for the sublime; art as the pioneering act of expanding our cultural richness; art as the revolutionary act of challenging our calcified social norms; or simply art for art’s sake.
The same can be said for the buyer’s motivation. Traditionally, the connection that a buyer has as a patron to the work and its artist is a deep and meaningful one — it is very much an emotional investment as much as a financial one.
There are many legendary stories in art’s history: take the Medici family during the Renaissance; Peggy Guggenheim who was the first to commission Jackson Pollock; or everyone’s?favourite story?of New York’s Dorothy and Herbert Vogel, librarian and postal clerk, who squirrelled away 5,000 works over their lifetime into one of the most famed collections of modern art, now worth many million dollars.
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This sentimental value causes patrons to be more reluctant to sell work and is one of the natural forces that preserves its value through scarcity.
If the fractional art platforms do not actively work to build a culture in their investment community that loves art for art’s sake, they run the risk of market saturation and investor speculation.
When markets are flush with cash, this could hinder the growth investors feel they have been promised, as?Tanya Baxter told Spear’s.
On the other hand, during a downturn, like the?end of 15 years of cheap money?we’re seeing today, we could see a mass retreat of fickle speculators from riskier alternative assets like fractional art investment. Selling only fractions is selling themselves short in the long run.
Bang on (more than just) the money business models
The commitment of financial investment primes us for an equivalent emotional investment, and few alternative assets have as much intrinsic value to enjoy as art.
Some platforms have turned away from this because they feel it’s too expensive to implement, but some have embraced it as a long-term investment in creating a sustainable client base, and baked it into their brand strategy and business model. Here’s an overview of the most interesting innovations:
Rubey is a fractional art platform with a strong purpose-driven vision — to strengthen the art collections of museums. Museums play a vital public role as the curators, caretakers, educators, and exhibitors of our most culturally significant works of art, but they often lack the means to acquire new masterpieces. Rubey gives its clients the opportunity to make an impact on this problem while their investment grows: all their work is purchased from a private collection and shared with the world by loaning it to a museum.
Particle is a fractional art platform with a strong emphasis on community and a keen understanding that a fractional investment is a key to unlocking the world of art to new collectors. They tap into web3 culture (the crypto/blockchain crowd) and organise their collectors on a DAO (a ‘decentralised autonomous organisation’ built on the blockchain). It gives collectors voting rights over the collection, such as which works to buy, where to display them, or when to sell.
They also work hard at nurturing their community and giving them added value. They have various active online channels (Twitter, Discord etc) and orchestrate immersive digital experiences and IRL (in-real-life) exclusive events, dedicated to the co-owners, to bring their collection to life.
Tessa focuses their intrinsic value on access. All artworks purchased by TESSA’s investors are exhibited in the TESSA Museum in Seoul. Fractional owners can visit the museum to view their collection in person and attend exclusive events and guided tours.
Malevich is not a fractional art investment platform but deserves an honourable mention as a fellow disruptor in the art market. They use blockchain tech to make it possible for their clients to invest in the production of museum-quality work of leading contemporary artists. Somewhere in the overlap between this and fractional art investment (perhaps a partnership), there is magic waiting to happen.
Masterworks?(US),?Mintus?(UK),?Maecenas?(Singapore)
These could be considered to be the big three of the fractional art sector. At face value, they seem to be exclusively focused on financial investment. As a brand strategist who has been found guilty at times of being overly idealistic, I can’t help thinking that emotional ROI has been ignored simply because it hasn’t been necessary during the bull market. Or that this is a way of purging Art of its soft "passion asset" perception and signalling to the finance bro that this investment is all about profit.
Seeing as they seem to be the most successful players in a tricky pioneering market, one can't fault them too much, but one can hope that one of these brands would see the big picture of fractional art investment and give its investors the complete art collector customer experience.
About the Author
I am interested in how innovative business models dovetail with brand strategy to create successful businesses. I work on the belief that this value is rooted in a clear, robust, purpose-driven vision. My knowledge for writing this article comes from working as a brand strategist in the fine art and fintech sectors. The advent of fractional art investment has allowed me to draw on both experiences to share a unique perspective.
Sources:
How to Own a Fraction of a Warhol, By David Stevenson for the Financial Times, 10 Aug 2022
What’s next for fractional art investment? By Katharine Swindells for Spear’s, May 8, 2023
Recession or Not, Finance Sector’s Ties with the Art World Are Getting Tighter, By Angelica Villa for ArtNews, April 26, 2023
Rising Startup Masterworks Beset by Internal Rifts, Alleged Recklessness, and Staff Cuts, By Angelica Villa for ArtNews, December 27, 2022
Originally posted on Medium
Chief Author Website Wizard at Rocket Expansion Author Website Design Agency
1 年Wow! Never would’ve imagined such a thing existed. But you learn something new every day I guess. Personally it feels like art as nothing but a stock commodity without any of what I love about art present. I’d love to own a Monet. But I can think of much better ways to grow my capital than buy and sell some of my Monet shares!