Fractional Ownership of Art: Can Regular People Own a Piece of the High End Art Market?


Katie and Steve speak with Evan Beard, currently Executive Vice President at Masterworks, about fractional ownership of art and new art securitization trends and initiatives, who the issuers and investors in this space are, and what they can achieve through these alternative investment structures.

Resources:

https://www.masterworks.io/

https://sec.report/CIK/0001738134

https://www.sec.gov/Archives/edgar/data/1738134/000149315218016661/partiiandiii.htm

https://www.businessinsider.com/personal-finance/masterworks-review

https://themillennialmoneywoman.com/masterworks-review/

https://news.artnet.com/news-pro/fractional-ownership-is-turning-art-into-stocks-but-not-everyone-stands-to-make-a-profit-2101458


Episode Transcription

Steve Schindler:  Hi, I’m Steve Schindler.

Katie Wilson-Milne:  I’m Katie Wilson-Milne.

Steve Schindler:  Welcome to the Art Law Podcast, a monthly podcast exploring the places where art intersects with and interferes with the law.

Katie Wilson-Milne:  The Art Law Podcast is sponsored by the law firm of Schindler Cohen and Hochman LLP, a premier litigation and art law boutique in New York City.

Steve Schindler:  Hi, Katie.

Katie Wilson-Milne:  Hey, Steve.

Steve Schindler:  It’s nice to be back in the studio again together.

Katie Wilson-Milne:  We’re in the studio. We have a full length episode. Things are looking good.

Steve Schindler:  Things are picking up. Well, and we’re really lucky today to be joined by Evan Beard. We’ve both known Evan who’s been kind of a constant presence in the art world, in the art market for as long as I can remember, but Evan has a new job. He’s just recently taken a job with Masterworks as their Executive Vice President, where he oversees private sales. Prior to joining Masterworks, he was Head of Art Services at Bank of America Private Bank, where he oversaw the end-to-end provision of services to clients in the art world, including art-secured lending, auction consignment, estate planning, and philanthropic services. Prior to joining Bank of America, Evan was a strategy manager at Deloitte Consulting ,where he worked with hedge funds, private banks, art-secured lending firms, and private clients. Prior to that, Evan served as a US Naval intelligence officer in Washington, DC, and the Middle East. He earned his undergraduate degree in economics from the US Naval Academy, a Master’s degree in Classics from St. John’s College in Annapolis, Maryland, and a Master’s degree from the University of Oxford, United Kingdom. Welcome to the podcast, Evan. 

Katie Wilson-Milne:  Hi, Evan.

Evan Beard:  Hey, good to see you.

Steve Schindler:  So Evan, you’ve just taken an important job with Masterworks, and why don’t you just start out by telling us what is Masterworks? What does it do?

Evan Beard:  Masterworks, we’re a four year old toddler that is just past our series A, and we are a company that’s trying to do something that maybe has been tried a few times, perhaps unsuccessfully, and that’s really to give access to an asset class that is controlled by a small number of ultra-high-net-worth individuals globally. And it’s an asset class that behaves in a very unique way.   It’s driven by cultural capital and status and unique economic forces. And it’s an asset class that just getting access to is not easy, even if you’re extravagantly wealthy. And this is of course talking about the high-end of the art market. So we’re trying to democratize ownership of art, and we’re doing it through a fun model where we actually acquire a work of art. We have an acquisitions team of about 12 or 13 that are in the market, both with collectors, dealing with dealers, we guarantee works at auction, and we’re trying to acquire works that meet a data threshold that we could talk a little bit about. And once we acquire it, we register these works with the SEC.  We put them in a special purpose vehicle, and we essentially take them public and let retail investors and institutional investors invest in these works, and then we sell them on the back end.

Katie Wilson-Milne:  So Evan, is Masterworks an art company or is it a finance company? We’ve talked about art finance on the podcast a lot, not exactly this model— which we can call fractional ownership of art— but I’m curious where masterwork sits in either the finance world or the art world.

Evan Beard:  It’s a really interesting question that we wrestle with, and there’s a couple of answers. Our most important fiduciary obligation is to our investors. And these folks are, of course, not from the art market in any way. These are investors who want a slice of their asset allocation model in an asset class, not unlike they would if they’re investing in timberland, farmland, hedge funds or private equity. 

So our most important fiduciary obligation is really to a retail and institutional investor base. So you could think of us as an alternative investment fund, but we have to operate in this very unique ecosystem of the art world. So we have to be players in a way where we can get access to good works of art, and we need to be able to sell these works of art back into this ecosystem. So of course we need the infrastructure to both acquire and sell works and operate within the art world. So we have to be both, and I think what we’re trying to structure here is a company that gives access to that retail investor to this strange world called the art market.

Katie Wilson-Milne:  And the retail investor— just for our listeners— is just the regular person who, we’ll talk about this, but meets some basic requirements using their excess capital to invest in any number of products.

Evan Beard:  Yes, it is the investor that has the 60/40 asset allocation model and they want to improve the efficient frontier of that model by putting a couple of percentage points of that model into an asset class that’s uncorrelated with other parts of that asset allocation model.

Steve Schindler:  And why, as an investor, why would they want to do that? I assume, when you use the phrase “60/40,” it’s that 60% of their investment are in equities of some sort, and 40% in bonds or fixed income. Is that what you mean?

Evan Beard:  Yes, exactly.

Steve Schindler:  And why would that typical investor want to invest in, say, a work of art, and one work of art in particular, right? So you— unlike some other alternative art investments, which are structured more as funds, you are offering individuals an opportunity to participate in a particular work that’s identified, right? And why would they want to do that?

Evan Beard:  The most important reason is that we’ve been able to demonstrate that art has low correlation to most major asset classes. We have taken every repeat sale, both in the secondary market— which all the major auction houses— but we’ve also been able to bolster that data set by a lot of private sales activity that we see and create a database that does a repeat sales regression. And then when we take the internal rate of return of contemporary art and compare it against US large-cap or munis, or even global rates or commodities or hedge funds or private equity, we find that art is either a correlation profile of zero or slightly below zero, meaning it behaves almost completely differently than these other asset classes. 

So the primary reason, if you’re constructing an asset allocation model, having a segment of your fund that behaves very differently from the rest of your portfolio enhances your risk-adjusted return and acts as a diversifier. And I think— the day we’re recording this is right after the Christie’s sales, and it’s the day after the Macklowe sale.

Katie Wilson-Milne:  At Sotheby’s, yeah.

Evan Beard:  Yeah, if you just look at the sales this season, they are happening in the midst of a 50% sell off in cryptocurrency. They’re happening as the NASDAQ is down about 27, 28% this year, and both the S&P and DOW are off by 15%. So when we look at the numbers this season, we’re going to say that this was a very robust and strong sales season, and great prices were made for many artists. And it runs completely in the face of how some of the broader economic asset classes are behaving, precisely because this is a market that is so unique. It’s a small number of ultra-high-net-worth individuals whose sentiment and decision-making is highly uncorrelated with what equity markets are doing.

Katie Wilson-Milne:  But that sounds so inherently risky to me when you put it that way. I’m like, why would I invest in something that’s determined by the whims of a handful of people who live in the clouds?

Evan Beard:  The reason is because you do not want to put your entire net worth in something like this. But what we’ve been able to demonstrate is that a small percentage of an overall portfolio allocated to this asset class does provide diversification, which could help your risk-adjusted returns. So in markets like this, art this year is acting as an uncorrelated risk mitigant and actually helping your portfolio. Last year when NASDAQ was up 20%, et cetera art made— so what we’re really selling is diversification and uncorrelation, and the ability to choose and play a market that up until now was completely inaccessible to even a large investor with a $50 million net worth. You cannot place a bet on Basquiat or Cecily Brown or Andy Warhol if you’re worth $50 million. It would take tens of millions to get access to some of these works.

Katie Wilson-Milne:  Right, we definitely want to talk about the structure in which these investments are offered. That will help illustrate why the Masterworks product is unique and is accessible in this way. But first, can you tell us what you’ve seen so far in terms of who your typical investor is? What’s the profile of this person or family?

Evan Beard:  Yeah, so we have over 40,000 investors that have invested in works or the fund. So we have two ways to invest. We have an overall fund where it’s a Regulation D product, a minimum is $100,000 investment, and you have to be a qualified investor with a certain net worth. And this is an attractive option for institutions and ultra high net worth individuals who want to place a bet on the overall contemporary art market within a broader asset allocation model.

Katie Wilson-Milne:  So it’s not anybody who can do this, you have to meet certain income or wealth thresholds.

Evan Beard:  Yes, for the fund. Now, for our individual Reg A offerings, so each individual work that we buy— and their value may be between 1,000,000 and 20 to 30 million at the high end— these investors are buying $15,000 to $30,000 slices of these works of art. And it allows you to play individual artist’s markets.  And the profile of this investor, we do have a group of very large investors at the high end, but the median net worth tends to be the 1 to $20 million net worth individual that has between 500K and $20 million in investible assets, and they are dipping their toe into this new asset class, or they have very firm ideas of how to construct a portfolio and they want broader diversification. So they have their small investment in crypto, they have their small investment in real estate, they have exposure to private equity. I’m sure they have their balanced equity large-cap small-cap components, and this becomes just the next vertical where they’re allocating an amount of capital. And everyone has to go through a suitability screening. So we make sure that, one, people understand the long-term lockup here. Be prepared to have really a 5 to 10 year horizon. Two, we’re making sure that folks understand that this should be an investment in the context of a broader asset allocation. And three, we’re making sure that both the net worth liquidity and the investible assets are there and nobody is betting the ranch on this.

Steve Schindler:  So how does this work then? I decide I’d like to invest in a slice of say a Banksy— I know that was one of your big offerings— what do I do? Do I go to a website? How does that work?

Evan Beard:  Yeah, so the process, you’d go to masterworks.io, you would click on the become a member link. You would then do a short interview, a suitability screening, with one of our investor representatives, and you would then have a list of offerings. Some of our offerings are full. We’ve floated works, and those works have been filled up. So at any time we may have 15 or so individual works that are not completely full, and these are individual offerings. Or you can invest, if you are a larger investor, in the overall fund. And as we sell works you will get dividend distributions from the sale of those works. And you can play individual artists markets. You can say let me select six artists that seem interesting to me, or I have strong feelings that the Basquiat market will continue to be strong, because art historically he’s probably the most important artist in the 1980s and he launched neo-expressionism and all the branches, from graffiti art to urban design that have come off the Basquiat tree, and we’re giving people the ability to invest in those offerings.

Katie Wilson-Milne:  And Evan, how do these investors hear about Masterworks? As you said, these are not really art loving people necessarily. These are just normal moderately wealthy individuals who want to diversify their portfolio. Like you said, it could be timber, it could be farmland, it could be something else. So how are they hearing about Masterworks?

Evan Beard:  There’s two primary channels. The first is our self-directed retail channel. We do quite a bit of marketing on YouTube and podcasts and online and through social media, and there’s lots of investment clubs and alternative investment clubs. We have a voice there. We also attract, I would say, an adventurous investor type that is looking for interesting alternative investments and are actively seeking us.  And then we have an institutional channel. We actually have a separate legal entity called Masterworks Capital where we produce research reports on art as an asset class with a diversified art portfolio. We deliver a lot of repeat sales data on certain markets and we let the institutional investor really gain insight into how this market actually functions and performs. 

And we do a lot of speaking at investment conferences, alternative investment forums. And if you’re a registered investment advisor with a group of clients and you’re looking to distinguish yourself or provide something a little different, we’re an interesting partner to them.

Katie Wilson-Milne:  You may have said this but remind us, what are the minimums for investment? We’ll talk a little bit more about the two products you’re offering, but let’s say with the Reg A, which we’re calling Reg A these sort of investments in individual works of art discreetly, what are the minimums there?

Evan Beard:  Yeah. Our minimum for the Reg A individual works of art is $15,000. The minimum for the fund is $100,000.

Katie Wilson-Milne:  And just to be clear, the fund is an exposure, a unified investment that exposes you to many, many works of art that are otherwise only investible in these little slices.

Evan Beard:  Exactly. One of our Reg A investments, a slice of those shares may be owned by the fund. And if you want access to the fund you’re essentially buying across a basket of individual offering.

Katie Wilson-Milne:  And the fund though is a— I would imagine, has more limited space for investors and the requirements for entry are more stringent.

Evan Beard:  Sort of a Reg A suitability of higher net worth. It tends to be more interesting to family offices and institutions or larger investors that have a longer time horizon as well.

Katie Wilson-Milne:  I think we need to now step back and explain to our listeners what we mean when we say Reg A or Reg D, and also use this opportunity to explain how you have structured Masterworks as an investment product. Because as I understand it, and as I think we’ve said, it’s not that anyone can go on E-Trade or Robinhood and buy stock in Masterworks. That’s not how it works. You’re selling membership interests in discreet SPV, special purpose vehicles, that are limited liability companies, that exist on one piece of art. So I or someone could buy 3% of the LLC ,which would represent sort of 3% of that work of art, but it’s only investible through screenings that you guys conduct, right?

Evan Beard:  You become a member, and you’re able to invest in the individual offering. We do have a secondary market for investors though. So you are able, after a 90 day period of your initial investment in an offering, to trade out of your shares, and these shares trade on a secondary market. And some works have very quick liquidity, and we match buyers and sellers, which is unique. We’ve had individuals who have ridden certain works over the last couple years as we’ve come out of COVID that have gone up in value, and their shares are more valuable and they’ve decided I’m not going to wait until we ultimately sell the work, but I’m going to trade out.  

So about 2% of the shares at any given time are being traded in and out. And we do have some very active traders that are buying and selling and placing bets on certain works of art. And as people are unloading their shares you’re trying to buy low. So this is a market that I think you’ll continue to see grow. We expect to see more liquidity, and it is a strategic objective of ours to really try and make a very liquid functioning secondary market for individual works of art.

Katie Wilson-Milne:  So when you say Regulation A and D, we’re referring to regulations of the US securities laws that allow for exemptions from registration, basically, with the SEC. So these aren’t registered securities, there’s some exceptions and one of them is called Regulation A, another one’s called Regulation D, which is the one your fund sits under. Can I ask you what Reg A is or would you prefer not to answer that?

Evan Beard:  I’ll leave the intricacies— I will say that for every offering we file quite an extensive filing with the Securities and Exchange Commission. And I would invite anyone to go on and read our prospectus for every single work of art. These are 180 page documents that go through the historical performance of the artist’s market, segments of the artist’s market. There’s a lot of interesting data in there. And it also goes in detail on both the obligations that we owe our investors and vice versa. So all of those are both on our site, and we’re the most active registrar at the SEC globally right now.

Katie Wilson-Milne:  Well, because you’re doing it for every single work of art you purchase. It’s its own investment

Steve Schindler:  And I’ve done it. I’ve actually gone on the site. I’m a member, and I’ve taken a look at these registration statements. And I think just from an art market observer, they’re a fount of information. It’s obvious that a lot of research has gone into these filings and just really interesting, at least to me, to take a look at— I haven’t looked at all of them, but a few of them just to see all of the data that you guys have collected. It’s really impressive.

Katie Wilson-Milne:  Yeah, and so the Regulation A offerings, very briefly, are an exemption to registering your securities with the SEC. And there’s two different tiers, but presumably Masterworks is operating under what’s called Tier 2, which is an exemption from federal and state registration if you meet certain requirements. One is definitely filing a, offering memorandum, which is what we were just talking about. And then an issuer like Masterworks can raise up to $50 million in a 12 month period under one of the Reg A options. And then there are requirements for who the investors can be. So you have to be either an accredited investor, or you’re limited in terms of how much of your total income you can invest. And those are screenings that Masterworks has to do to make sure that these investors meet that exemption. And then there’s a continuing filing that Masterworks would do under Reg A to continue to be exempt, especially if the securities are not ever going to be listed on a public exchange, which it sounds like is not in the cards here.

Steve Schindler:  I want to just focus again on the secondary market, because that seems important. When you buy an interest in one of these works and then you have to hold it for anywhere up to three to 10 years, and as an investor I don’t control that. Masterworks through its advisor system decides when the opportune time to sell would be. And it could be maybe as little as three, but maybe as many as 10 years, but somewhere along the line I find that I need the cash and I want to cash out. Who are the other players in the secondary market? Do they also have to be primary purchasers of works or can anyone come in and trade on the secondary market?

Evan Beard:  Right now the secondary market is comprised of those 40,000 investors or so. I think you’re going to see us evolve this very quickly, and I think you’re going to see us—I don’t want to get ahead of ourselves but this’ll be a big priority and you’re going to see this evolve into something very interesting over time where I think there will be a really interesting mechanism to come in and out of shares and get exposure to certain artists markets. And this I think will become appealing to very sophisticated collectors who are deep in certain artists markets, who follow the Basquiat market closely, or you name it, the Cecily Brown market, et cetera, who may want to say, “Look, I’m a buyer at this level and a seller at this level. I think there’s value here.” Collectors tend to be the most thoughtful observers of these artists markets. They understand the intricacies. 

And I think having a forum where we do have real price clearance can be interesting. And look, this is a fair market value that these things are trading at. That does not mean that is its value in the art world. There are things that trade at— if you’ve ever gotten an appraisal done for your works and then taken it to auction, sometimes it will sell two, three X at auction because at any given moment there may be two or three individuals that want to own this object. So the economics of owning the entire object is actually quite different than the economics of owning a share in something that we’re discovering. So this gets to the sell side. Some of the value we’re delivering both on the acquisition side and the sell side is as follows: on the acquisition side we’re unique in the sense that we have, not endless capital, but we can move very quickly if someone’s looking to sell a work of art in the multimillion dollars. We also have global access and we have scale, which allows us to negotiate pretty aggressively. So we’re giving our investors access to a world that it takes years to get real access. You’re getting a data analysis that we’re going through, we’re evaluating about 3,000 artists markets, we’re looking at buying in about 70. We evaluate about 100 works of art that are either for sale or could be for sale and we narrow in on one or two.

And that funnel we’re trying to find artist markets that are growing at an interesting enough clip, but also have catalytic events down the line where we think there’s more growth. Either an artist that is still being canonized that has future exhibitions that may— so we’re trying to get the right artist markets and then buying the right objects. And then on the sell side, again, through scale we’re able, we think, to negotiate commissions down, we’re going to have global client coverage. And selling works of art is not the easiest thing in the world for an individual collector, and it’s expensive. If you ever bring something to auction, you have sellers premiums, a very large buyer’s premium, oftentimes it takes quite a bit of time, a six-month consignment cycle. So that’s some of the value we’re trying to deliver here. 

Katie Wilson-Milne:  Evan, let me ask you a buy-side and a sell-side question. The buy-side—  you said you’ve basically unlimited capital. Where is that coming from?

Evan Beard:  Well, I wouldn’t say we have unlimited capital, but the way we buy, sometimes if we need to move very quickly we can balance sheet objects and then sell them to our retail investors. But oftentimes we will ask for, let’s say, 60-day terms. So we’ll buy the work of art, we’ll register it with the SEC, we’ll put it on our platform, and as the special purpose vehicle, as investment comes in, we will pay off the object. 

We feel that this is a $1.7 trillion asset class given the art in private hands, and a very small amount of it trades at any given time. So we actually think we’re introducing liquidity into the market, and we’re actually going to also hopefully introduce new buyers into this market. As people start out as investors, go on an interesting knowledge journey, and then who knows, maybe some of them become collectors in their own right.

Katie Wilson-Milne:  It’s interesting, Evan, that from the client or I guess investor perspective, maybe you look— Masterworks looks less like an art company, but internally it really is an art company, because when you think about the expertise that you would need to know when to sell a work of art in the art market— which, as we said, is opaque, is controlled by a handful of people and their personal tastes and preferences— that is very difficult analysis that even the greatest experts in the art world get wrong sometimes. So can you talk a little bit about that? There’s a three to 10 year time horizon on these investments and that should be the investor perspective, but what’s going on behind the scenes to make sure that these sales are happening at the right time?

Evan Beard:  No, it’s a good question. The reason we ask our investors to give us control of when to sell is to sell work at scale you have to be opportunistic. And some artist markets become frothy at interesting moments and no one quite understands the economic reasons why. There’s certain artist markets right now, leave aside the hot young emerging artists that you can’t get access to in the primary market so people are bidding these things up at auction in the secondary market— that’s an interesting economic structure that is born out of how gallerists try and control markets and sell to only the right collectors and institutions, which creates these warped incentives in the secondary market for these prices to really get out of hand. But looking at canonized works of art, we have to be opportunistic on the sell side because certain artists markets, maybe it’s a great exhibition or maybe there’s a catalytic event like an artist shifts galleries and the new gallery gives a bump to their market. Or a certain group of the most influential status driving collectors start to acquire the work and word gets around the art market. Or there’s a segment of money in the market, hedge fund, private equity that starts to buy certain artists like George Condo. And for whatever reason there’s a season or two where these artists markets balloon. We have to take advantage of that. So I would say at the moment we’re being opportunistic. Our cell signals tend to be where can we deliver maximum return? And then over time, you’re right, there’s going to be artist markets that don’t perform as well and we are still trying to figure out and develop what is the right sell side criteria.

Katie Wilson-Milne:  But how are you actually doing this? You have a team of experts monitoring the market for every single artist that you own or you’re running data constantly like—

Evan Beard:  Yes, so we have three teams. We have a team of PhDs that are evaluating, as I said, the repeat sales in the market to try and understand what segments of artists’ markets are actually growing and what artists’ markets are actually growing in interesting ways. We also have artist markets that are slightly out of favor right now. Christopher Wool, segments of the Richard Prince market, Damien Hirst, Jeff Koons. So we put an overlay on that of artist markets that we think are out of favor for whatever psychological or societal or cultural reason that we believe. So we track the number of institutional holdings, the number of historical retrospectives, and we actually give both an economic score but also a softer cultural significant score. 

And we have certain markets that we think are great buying opportunities, and we try and go in on those. The other thing we do is we’re going in depth on certain artists markets, not to control the market, but on the sell-side we are becoming known as a wholesaler of certain artists works. People have to come to us and almost compete to get access, and there’s over time pricing power there. And I think what you’ll see over time with our collection as it grows, you’re going to see us do a lot of interesting programming, lending works to institutions, putting these works in interesting context, working with partners all over the world on this.

Katie Wilson-Milne:  So is it fair to say that what you’re describing is both monitoring the market forces constantly but also shaping them through your own exposure to the works you own?

Evan Beard:  That’s right. And giving an investor the scale to both negotiate terms on the front-end and the back-end, as well as the scale to have ownership in a slice of a piece of art that could be lent to top museum shows. We have some of our Basquiats heading to a museum show in Europe this fall that we think will re-contextualize a couple of these works. And there’ll be new literature on the works as well. And that’s not to say it’s going to drive value. So we’re trying to acquire works at the right price by the right artists, by the right segment of their work, that we think is the most representative example of that artist’s work. And we’re very picky and we try and be very disciplined on how we do that, and then sell in the right way on the back-end.

Steve Schindler:  As I hear you talk about this, Evan, you guys sound like a dealer. More and more as you’re talking—

Katie Wilson-Milne:  Very data-focused dealer.

Steve Schindler:  A very data-focused dealer. But that you are doing the very things that an art dealer, gallery, would do in order to— 

Katie Wilson-Milne:  Increase the value. 

Steve Schindler:  Yeah, increase the value and the exposure of the works that they own.

Evan Beard:  It’s so interesting, because the art market is so unique in terms of an economic system. It’s so hyper-fragmented. So there’s maybe 600 collectors globally at any one time that are operating in the million plus realm, and this dealer has access to five or six of them, this art advisor has two or three of them. And to really gain exposure for a work of art, it’s very difficult unless you take it to auction to get a global audience. 

So I think we have to function as key partners to many of these organizations. They’re developing the artist market, they’re investing in some of these artists, they’re working with the estate, they’re putting on exhibitions. So we view ourself not as a competitor to any of these organizations, but key partners to both enhance the artist markets that we’re going deep in, but also trying to work with them very closely to place these works at the right time, the right collections.

Katie Wilson-Milne:  I want to talk a little bit more about the data part of Masterworks, because I do think that is unique and I think other players, even competitors in your field, to the extent there are real competitors, really do value the data analysis that Masterworks is generating, because it’s just at a scale that other parties haven’t been able to do. But have you noticed, as you’ve been operating, patterns in terms of which Reg A offerings, which individual works of art do the best or generate the most interest, is there a pattern? Are they all roughly equal in interest or is that informing what works you’re buying going forward? I’m just curious.

Evan Beard:  Well look, generally we have to buy works that are the most representative of the artist’s oeuvre, because our retail investors typically are less art historically driven. And you’re right, they’re more looking at exposure to a certain artist market, and yes, they are influenced on the historical growth and return of that artist market, I would definitely say that. But it’s very difficult to say. We will put a work on the platform that will sell out in hours, and then there’ll be a work that we think will be an absolute home run and it takes several days or weeks for it to completely sell out. So we’re still trying to get smart on the behavior of the self-directed retail investor. In terms of our data though, there are some interesting art market conventional wisdom insights that we’ve been able to ignore. One being you should always buy A+ examples of an artist’s work. The interesting thing is you’re usually paying a premium for that. And A+ examples, if you look at just an unemotional look at repeat sales data— both in the primary and secondary— the internal rate of return of the A+ works usually are not in any way different than the B- works. 

And if you take an artist like Picasso, the segment of his work that was most loathed by academics and critics and even collectors for decades was the late 1960s works. Well, that has been the segment of his market that has had the highest returns over the last 15 or so years. We’re looking for those kind of insights. We’re trying to understand when you look at the Calder market, does a white Calder, how does it perform versus a red Calder, if you have mix of colors, is there any—and we take a pure data analysis of it and then we provide the condition overlay, the connoisseurship overlay. We look at—every once in a while you’ll see a crazy price at auction, because just two people got into a bidding war, and we have to discount that as a data point and say, look, every once in a while, something that is uneconomic happens around these artist markets, and it becomes a philosophical bidding war of someone that just needs to own it. And we try and remove that from our data analysis. So it’s a lot.

Katie Wilson-Milne:  It seems, and I think you said this somewhat, there’s a team of people at Masterworks that just analyze the data. Is that right that that’s a core department, or how is it integrated into the work you guys are doing?

Evan Beard:  It’s completely integrated. So we have a research team, we have a data analytics team. So we have a macro data analytics team looking at broad segments of the market back testing 10 year periods, trying to understand what happened to Impressionist works as we transitioned from the 80s into the 90s, this rise of contemporary that’s been in this secular bull market. Or there are other examples historically where there may have been 20, 30 year cycles, so we don’t get caught up that— so we’re constantly evaluating historical data sets to try and understand what are some of the signals to look for, whether it’s interest rates or other asset markets that can presage a drop or a steep increase in the macro environment for art. The other thing we’re doing is individual artist markets.

We’re putting together deep data sets, we’re sending interns to every auction to try and really understand depth of bidding for each of these objects to try and understand, is there a real market here or is it controlled by maybe the gallery and maybe one other bidder that’s defending a segment of the work? That happens a lot of times in the hyper-Contemporary.You’ll get someone quietly buying a lot of an artist’s work and then sending something to auction, defending it, trying to get a good price, getting some attention on that artist, and that 25K works now worth 100K, and you start to sprinkle those in. So we’re trying to pay attention to markets that are being manipulated in certain ways. And then we have— what we do is we take the artist’s market and then we try and understand through a couple of proprietary data means that I won’t get into what makes it interesting to us, and we hone in on those artists markets and then we go deeper into this segment and we try and operate and get access and actually acquire works at a value that we think makes sense.

Steve Schindler:  One of the things that’s so interesting to me, and I alluded to it before is that the art market as we all know, and you above all know, has a reputation for being quite opaque. And so much of what you’re doing in terms of the research and the amount that’s now available filed with the SEC as public access information seems to move the needle quite significantly in that way. And that there’s just much more access now through what you’re doing to what was formally just secret information, particularly in the non-auction private sales market.

Evan Beard:  We have a belief that more transactions in this market is overall a good thing for the art world. And right now we have a structure where it’s really expensive to buy and sell work. So if you’re a collector and you put together a collection, even if you’re doing it for the most pure aesthetic reasons, paying 25% on the buy-side, and then if you want to trade out of something because your taste shifts or you just want to go in a different direction and having to pay a similar amount on the sell-side is just a really, really tough economic model.

Plus add all the taxes and the cost of keeping the work and ensuring it and storing it and the logistics of it, it becomes a huge headwind to actually get new collectors into this market. It becomes a huge headwind for people to go in new directions with their collecting. So it’s not that we’re trying to say everyone should be an investor. What we’re trying to say is we want to give people access so if they want to get exposure to these artists they can.And we think introducing liquidity into this market may overall get people to realize that lower transaction costs but a lot more transactions coming and going is probably good for everybody.

Katie Wilson-Milne:  But I think part of what Steve is saying, which I think is a really important point is that one of the valuable assets in the art market has always been this idea of proprietary information. Now, whether that’s true or not can be debated, and a lot of times it’s not true. But this idea that certain dealers or certain collectors knew something about the art market that no one else knew and then they would guard it very, very carefully so that that information didn’t get out to anyone else and that was how they controlled their return and their value is a little antithetical to this idea that we’re just going to crunch every piece of sales data, every exhibition, every time an article is written about an artist. We’re just going to blow open in a public way all the data that exists on this work so that anyone can see what the trends are— seems like a real departure from the way information was used in typical high-end art transactions.

Evan Beard:  Well, I think two things, I think the art market is full of right-brained people that don’t necessarily think in that way. And I would say it’s a both-and. Galleries function much as they did in the 19th century, and the proprietary data that they have—

Katie Wilson-Milne:  That’s true. 

Evan Beard:  —is they know where objects are. But the most important value they have are real long-lasting relationships that they’ve developed with curators and collectors, and that is the most important thing in this market and we still believe that will continue. So even as we develop certain data mechanisms, and we look at this market through an investment lens— something that we are doing every single day, and there’s a parade of art market individuals that are coming through Masterworks— is we’re sitting down and we’re trying to forge real partnerships and relationships within the art market. So you’re right, we operate as an investment product within the alternative investment universe, but we have to develop long lasting trusted relationships with dealers, galleries, collectors, institutions, because we have to operate within this sphere.

Steve Schindler:  So Evan, I want to just take you back one step. You talked about all the headwinds and the transaction costs involved in buying and selling art in the high-end market, and so that just brings me to the question of costs and how Masterworks both pays for those costs and how you guys are making money. Just on the street people who are familiar with securitization and fractionalization have said that they thought that the fees that Masterworks was charging were excessive potentially. So I want to give you an opportunity to just explain how it works and why you charge what you charge.

Katie Wilson-Milne:  And also why someone would pay those fees. Why it makes sense. 

Evan Beard:  Yeah. No, it’s a good question. First off our fee structure is when we buy a work of art we take a 10% placement fee, basically adding it to the value and float that work of art on our platform. We then take 1.5% assets under management fee that’s not real money but just sort of is value of the work that ultimately gets paid out when we exit the work with a small carry on the back end.

You could look at that and say, “well, wow, that seems pretty expensive.” But if you compare it in three different ways, it becomes, I think more reasonable and rational. The first is compare it to a general private equity fund. Similar type of placement fees, and we don’t do any of the hidden fees where management of the portfolio companies are constantly being charged fees. You also have usually a 2% assets under management fee with a 20% carry, et cetera. So you also usually have a more severe lockup. And unlike a work of art, companies oftentimes just don’t work out. So certainly in venture capital funds you have some zeros in there, just bankruptcies and companies that just go very flat. Where we can, I think, justify our fees is in three ways.

The first is access. So being able to buy either at or below fair market value for certain works and quickly move on things that may be needing to be sold for whatever stress reason, or just someone needs to get out of an object. We can provide investors access to get those opportunities, which are very difficult to find in this market. The second thing is because we have scale and because that we can write our own checks and move pretty quickly, the commission, we can say both on the front-end and ultimately on the back-end, is pretty significant. Both at auction as well as in the private market.I’ll give you an example, at auction, we are very active guarantors of works. And so in a season like this we’ll guarantee works well below the low estimate. And sometimes we’ll bid on those works, and if we’re successful we ultimately we’ll get a financing fee and our investors get ultimately a lower all-in price for that work than they would’ve been able to had they bought the work at auction. And when we float the shares, that discount is passed on to our investors. And then ultimately on the back-end, if you were a collector and wanted to go in and sell an individual work of art, well, you could consign it to one of the major galleries, you could take it to auction. 

What you have with us is the ability to bring global network of dealers who have the brand permission to sell this work, get their commission to a very reasonable level, set an aspirational net to us, or a global network of collectors that are giving us inbound interests on works, in some ways, completely eliminate that threshold. So we think we’re lowering the cost for our investors in transacting in this space significantly more than the fees structure they’re being changed. Now, if we’re not, the good thing about fees is they can be dialed— that’s a dial that we can control. So we have to operate in a new—

Katie Wilson-Milne:  Yeah. I think some people are like, “Dial down. That would be great.”

Evan Beard:  Well look, we have to operate in a competitive universe where our returns are interesting enough to attract investment. So it’s something that if we can’t deliver risk-adjusted return and the value of our saving and passing along these cost savings as we both give access and buy and sell in this very unique market, we can’t do that then look, we’re not going to be a very interesting investment.

But what I’ll say is our ambition here is not to deliver sure alpha. You don’t come to Masterworks because you’re going to get a 3x investment within a year or two. This is a fund that is giving access to a segment of the economy that’s completely closed off, and that behaves very differently in a very uncorrelated way. And we are going to be selling some things in the next couple months and the returns on those will be very interesting to our investors, and it’s going to be completely untethered to what the equity markets are doing this year.

Steve Schindler:  Actually, I had one other question about cost, Evan. You mentioned there was an administrative fee that you charge for the investment, and would that cover—because obviously owning an expensive work of art does have some inherent costs. You have to store it, you have insure it, if you are transporting it, lending it to exhibitions, et cetera, are those costs born or paid for through the administrative fee or is that some other that come out some other way.

Evan Beard:  Those costs are 100% borne by Masterworks. So if you think about—and I guess you could say are contained within the asset center management fee. So if you owned a collection in the hundreds of millions, you would have to insure it, you’d have to have it in storage, you’d have to have conservation experts. We clean and re-frame many of these objects. We’re lending them to exhibitions globally. We’re re-contextualizing them. We’re doing research reports on these artist markets, trying to help people understand how these artist markets perform. And then on the back-end you get a team with real art market relationships knowledge and preferred terms on the sell-side that is all being passed on to the investor. 

So if you wanted to sell a million dollar object and you were a retail investor and you owned a million dollar painting, all in you’d probably be looking at a small sell-side fee plus 25% at auction and buyers premium, which doesn’t really come from the buyer, it comes from the consigner. If you look at us we’re going to, if we go to auction, have pretty aggressive enhanced hammers.Then if we go through the private sale route, you’re going to know that we’re going to be very aggressive finding either the best absolute dealer who can place these objects in the right way for the investors, or we’re going to find a home for it and pass that savings onto our investors.

Katie Wilson-Milne:  And just to remind our listeners, an enhanced hammer just means that the fee the auction house charges the buyer, which can be 25%, the seller can sometimes negotiate getting a piece of that fee. So they actually get more of the total sale proceeds then than they would normally get.

Steve Schindler:  So Evan, I noticed looking at the website, you’ve got a lot of paintings, very traditional. I’m wondering if Masterworks is buying any other less traditional art, if you will, in other media, digital art. Are you buying NFTs? What’s the range of works that you’re looking at?

Evan Beard:  We will certainly look at sculpture. We’re not into installations, works on paper, or digital art at the moment. We really are primarily focused on fine art, flat art, paint on canvas. But look, I think we’re young and we’re growing and we’re evolving. I can see us doing various interesting segments beyond that. But that’s where our focus is at the moment.

Katie Wilson-Milne:  And Evan, as we wind down here I think we want to pick your brain on some big picture questions like Masterworks sits within this field we call art and finance, right? Which has a number of different components, including lending against art, creating true funds, which Masterworks does a little bit where you purchase numerous works of art and hold them for a handful of investors and sell them, and what you’re doing, which is really selling fractional interests in art. Where is this industry going right now? And where does this idea of fractional ownership sit in the mix of the art finance world?

Evan Beard:  Yeah. Look, that’s a good question. I think if you look historically from front-loaded mutual funds to stocks and bonds in the 1940s, these markets became more efficient over time. They became further financialized and the exchanges for these objects grew. So art, we believe, is the largest asset class that has not really been securitized for the retail investor. So we think there’s going to be more competition in this space, and not just for art, but securitizing lots of things, from farmland to timberland, to NFTs, to collectibles, to sports memorabilia, because the mechanisms are there to give people access to these objects. Look at Stockx in sneakers, you name it. I think you’re going to see more interest in some of these objects over time.And it’s not an absolute return interest. It’s getting access to exposure to the asset class, because it performs differently than other asset classes you have exposure to. So we’ve seen some new launches of these funds recently. We are a little different though. We are the buy and hold art fund where you buy a bunch of work, you hold it, you hope you made the right decision, and then you try and sell it and deliver that return. 

That’s been a challenged model historically, from the British Rail Pension Fund, to some of the art funds that launched in the early 2000s, that has been a tough road. It tends to work best when your limited partners are really interested in the art you’re buying. And we’re trying to buy really interesting, great works of art that we can acquire at the right price and then giving the retail investor access to this.And that has not been tried before. We think we can build real scale here. And I think it’ll be good for the art market, I think it’ll be good for the investment universe, because what we didn’t talk about today is how interesting this market is if you take a step back and look at its history. This is a market that has 500 years of academic infrastructure— curators, academics, critics, historians that for whatever philosophical reason have spent careers trying to understand these artists and these objects. It’s also a market that has two of the oldest companies in the entire world still operating much as they did in the late 18th century when they were launched, Christie’s and Sotheby’s.

And for whatever reason, ultra-high-net-worth individuals, high-net-worth-individuals, have wanted to own the great objects of their time. And art has always been expensive all the way back to the Medici. And that supply demand dynamic, I can’t think of any other asset class— farmland’s not—maybe I guess you could say it’s disappearing a little bit. Stocks— certainly the supply—but this idea of really great works the supply is going down, and it performs well in an inflationary environment and it behaves very differently, because the buyer base behaves very differently. It is not tethered to traditional economics. It makes for a very interesting asset class. It’s not always going to outperform everything and there’s going to be—we’re going to be buying in soft markets and buying in high markets, but one or 2% exposure your asset allocation model and going on a knowledge journey like this is very interesting.

Katie Wilson-Milne:  Evan, do you have any competitors right now doing what you’re doing? Can we talk about them?

Evan Beard:  Yeah, I’m not going to name names, but there’s certainly folks testing these waters. That’s a signal to us that you’re in the right market. If you ever have a startup in an industry where you’re not inviting any competition, that means you’re not capturing people’s imaginations and people don’t think, for whatever reason, what you’re doing has any real economic merit. So we view some recent launches in this space as in some ways a signifier that there’s economic merit to what we’re doing.

Katie Wilson-Milne:  Yeah, that maybe we’re about to see more securitization of art in a way we haven’t before. Maybe more accessible to more investors, too.

Evan Beard:  Agree. And look, this is an area where scale matters. Being big and operating at scale is important for this space, because everything we talked about in terms of reducing the cost on the acquisition and the sell-side— scale matters there. Everything about the cost of ownership, everything about collection enhancement and having a big collection that you could do interesting things with, having depth in certain artists markets so you can have a voice on how those markets function.— scale really does matter. So I think this will be a space where the winners will need to have scale. It’s hard to do this in a very small way.

Steve Schindler:  As always, Evan, your insights are incredibly valuable, and we look forward to watching this market develop and to seeing what you all do at Masterworks and elsewhere.

Katie Wilson-Milne:  Yep. Thanks so much, Evan.

Evan Beard:  And look, I would say thank you to you all as well. This is also— this strange ecosystem requires law firms that want to understand how the collector base operates, how the auction houses operate, how the art functions. And having done deals with you all and have watched your law firm perform over time, it’s good to have trustworthy people in this space.

Katie Wilson-Milne:  We’ll definitely keep that in the podcast. 

Steve Schindler:  Yeah. We thank you for that, Evan. 

Katie Wilson-Milne:  We don’t usually talk about our work, but that’s great. 

Steve Schindler:  Thank you. 

Katie Wilson-Milne:  Thank you.

Steve Schindler:  And that’s it for today’s podcast. Please subscribe to us wherever you get your podcasts and send us feedback at podcast@schlaw.com. And if you like what you hear, give us a five star rating. We are also featuring the original music of Chris Thompson, and finally, we want to thank our fabulous producer, Jackie Santos, for making us sound so good

Katie Wilson-Milne:  Until next time, I’m Katie Wilson-Milne.

Steve Schindler:  And I’m Steve Schindler, bringing you the Art Law Podcast, the podcast exploring the places where art intersects with and interferes with the law.

Katie Wilson-Milne:  The information provided in this podcast is not intended to be a source of legal advice. You should not consider the information provided to be an invitation for an attorney-client relationship, should not rely on the information as legal advice for any purpose, and should always seek the legal advice of competent counsel in the relevant jurisdiction.


Music by Chris Thompson. Produced by Jackie Santos.