•  Art & Collectibles

Masterworks -- Fractional investing in Fine Art

Masterworks offers fractional investments in fine art from prominent painters like Banksy and Andy Warhol. Notably Masterworks also offers a secondary market, potentially offerings some liquidity to investors prior to the expected 3-10 year hold time. The website and investor resources are excellent, though prospective investors should note the substantial fees that may reduce their return.

Masterworks

  • Founded: 2017
  • Investment Types: Art & Collectibles
  • Sectors: Fine Art
  • Minimum Investment: $10,000
  • Open to all investors
 Pros
  • Open to all investors
  • Low market correlation
  • Secondary market
 Cons
  • Short track record
  • Opaque fee structure

Overview

This Masterworks Review will help you learn more about Masterworks's investment offerings, including how the alternative investments on Masterworks are structured, and what your potential returns might be. You can read more about the criteria we use to review investment platforms here.

Masterworks offers fractional investments in fine art, often from well-known painters like Andy Warhol and Banksy. Masterworks was founded in 2017 by Scott W. Lynn, previously the founder and chairman of Payability. According to Masterworks:

[Lynn] has been an active collector of postwar and contemporary art for more than fifteen years and has built an internationally-recognized collection of Abstract Expressionism that has included works by Clyfford Still, Barnett Newman, Mark Rothko, Willem de Kooning, and more.

Fine Art has long been a popular alternative investment among the wealthy, and as with many other asset classes, is now much more accessible to everyday investors.

As is common with many private investment funds, Masterworks (specifically the network of related entities owned and controlled by Mr. Lynn), is entitled to substantial fees (some tied to performance, some not) associated with investment on Masterworks. Before investing, you will need to decide whether those fees are reasonable compensation for strong performance. Put another way: if you trust Mr. Lynn and his team to acquire paintings that will appreciate by more than enough to cover the sizable fees and still deliver a strong return, then Masterworks may be a good option for adding fine art to your portfolio.

Is Masterworks legit?

Yes, Masterworks is “legit” in the sense that it is a legitimate US business offering a legitimate alternative investment option to any investor. Fine art is a legitimate alternative investment asset class, and there is ample historical price and performance data available.

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Types of investments Masterworks offers

When you invest on Masterworks, you’re investing in fractional ownership of a specific work of art. According to Masterworks they intend to hold the art works for 3-10 years and then resell at a profit, though they also offer their own secondary market where you can buy and sell individual shares.

Masterworks has offered paintings from well-known artists such as Andy Warhol, Banksy, Monet, and Jean-Michel Basquiat.

What do you get when investing with Masterworks?

When you invest in an offering on Masterworks, you’re investing in fractional ownership of a specific collectible or work of art. As an investor, you receive a membership interest in an LLC, which is what actually owns the underlying art work.

How does Masterworks make money?

There are no direct fees charged to investors on Masterworks. That said, under the hood Masterworks is a complex web of interrelated entities, many of which earn compensation from others. For example, “Masterworks Gallery LLC” is paid 11% of the purchase price of any artwork, “Masterworks Administrative Services, LLC” receives the equivalent of 1.5% of the shares in the LLC annually (with existing shareholders diluted accordingly), and Masterworks itself also earns 20% of the profits when a painting is sold. Notably all of these entities are owned and controlled by one person, Masterworks founder Scott Lynn.

Prospective investors should review the details of the specific offering (here’s one example) to be sure they understand all of the fees associated with the offering.

Potential returns and cashflow

There is no ongoing cashflow on investments made with Masterworks. Investors receive a return (if any) when the painting is sold, which according to Masterworks is expected after a 3-10 year hold period.

Masterworks publishes a proprietary price database showing performance for a number of artists, and their home page references contemporary art appreciation of 14% compared with 9.5% for the S&P 500 for the period from 1995-2020.

Breadth of offerings on Masterworks

As of this writing, there are 3 current offerings available on Masterworks, and they have previously offered 52 paintings. The “price appreciation for similar works” for the current offerings ranges from 17-22%.

Investors should note that their actual return will likely be quite a bit lower than the raw appreciation of the painting at auction because of various fees and expenses paid to Masterworks entities, as well as the 20% profit share that Masterworks earns when a painting is sold.

Regulatory framework and due diligence expectations

According to Masterworks, “Year to date, less than 2.2% of artworks we reviewed passed our diligence process.” Art selection is heavily driven by the founder, Scott W. Lynn, including “various outside consultants and advisors that Mr. Lynn has worked with in his personal collecting”.

Investments on Masterworks are offered through SEC Regulation A+, “Tier 2”. Reg A+ offerings must be registered with the SEC, including detailed offering circulars, and offering firms are subject to a number of financial disclosure requirements.


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