By: Patrick Paulsen

One of the few universal features of human cultures is that of artistic expression. To express something creatively and aesthetically is fundamental. Just as fundamental perhaps, is the drive to bring such enterprises into the economic sphere. Of course, while some mediums of expression have long been intertwined with finance (such as plays, films, music), this blog seeks to explore the growing nexus between investing and markets for singular works of art, such as paintings, photographs, and sculptures.

Works of fine art are prohibitively expensive. With price tags reaching well over $100 million (for works by Van Gogh and Cézanne), and resales fetching anywhere from 3% to 86% net returns (for works by Warhol and Gilliam), the finances behind fine art sales have caught the eye of financiers, wealth managers, and retail investors. While scholarly conjecturing about the applicability of securities law to art sales have existed for decades, the rise of NFTs and fractional ownership services have increased the availability of, and conversation around, fine art as an investment tool.

Painting the Picture

Of all the ways to make money, why invest in fine art? While owning a masterpiece is something persons and corporations with vast resources may be interested in merely for extravagance, some reports indicate up to two thirds of fine art purchasers do so “solely as an investment to grow wealth.” Some industry insiders have even revealed that some clients “buy museum quality art, hold it in storage, and sell it for a significant profit, all without ever seeing the picture.” If fine art purchasers are missing the picture, then what is it they are seeing?

Despite major accounting firms, such as Deloitte, summarizing the characteristics of art investment as high-risk, illiquid, opaque, unregulated, with high transaction costs, at the mercy of erratic public taste and short-lived trends, 85% of wealth managers believe art and collectibles should be among those securities offered to clients (as of 2022, up from 53% in 2014).

There are several reasons why art and similar collectible classes are beneficial from an investment management perspective. First, fine art serves as excellent collateral for loan servicing. Due to their ability to be stored in centralized management facilities and high public value, art pieces provide wealth managers and high net worth individuals with appreciable assets which can be loaned against without even having to move the painting. Second, art pieces can serve as a diversification tool due to the art markets low correlation with that of stocks and bonds. This means that when traditional securities have volatile fluctuations in pricing, art collections maintain stability. And third, industry reports suggest that investing in fine art can serve a plethora of other purposes, including:

• Hedging against inflation and currency devaluation
• Little risk of principal loss (assuming proper due diligence)
• Favorable tax treatment
• Easy transfer and movement of the asset
• Potential for revenues through exhibition loans.

Certain commentators have treated art investment as analogous to that of real estate. Noting that because paintings are physical objects, their price can be computed per square inch or square centimeter and compared to high end real estate. However, this exercise serves to emphasize the expense attached to painted “real estate.” Compare the works of Picasso, which can fetch on average $350, $1,300, and $2,000 per centimeter squared (depending on the muse) with a luxury co-op on Manhattan’s Upper East Side, priced at “only” $1.2 per centimeter squared).

Given the seemingly high barriers to entry, why would a typical retail investor care about auction prices at Sotheby’s?

Framing the Future

In the past, access to fine art investing was limited only to very rich individuals and firms, before becoming more available through boutique art collection funds. Nowadays, several companies are offering services which seek to make fine art investing available for ordinary individuals through the practice of selling fractional shares.

Masterworks, a pioneer in the field of expanding availability of investment in art, makes its portfolio of over 200 pieces (valued at over $700 million) available for individual purchase via the selling of fractional shares. Masterworks and similar firms create fractional shares by purchasing individual pieces worth millions, transferring the ownership of the asset into an LLC, and then selling individual shares of the LLC through offering registered with the SEC.

One example of this can be seen in MASTERWORKS 001, LLC, whose form 1-K on file with the SEC notes that its business purpose is to “facilitate investment in a single work of art created in 1979 by Andy Warhol.” The artwork in question, “1 Colored Marilyn (Reversal Series),” initially was securitized into 99,825 shares at an initial offering price of $20 a share. Masterworks is not alone. Other entrants into the field range from ARTSPLIT, based in Nigeria, which sells share in African art and music, to London-based Showpiece, which sell shares in fine art and collectibles.

While some see “these new investment models as a democratization of an otherwise hard-to-access market place,” both the financial sector and art world have reservations. On the one hand, the financial insiders, while increasingly hospitable, have worried about the lack of regulation and subjective pricing methods. Art as a market presents many legal concerns which ought to be addressed given its growing prominence. There are difficulties in classifying fine art as commodities or securities for regulators and state agencies. Further, due to the unique nature of the items involved, questions of forgery, title, and cultural consideration suggest that a more encapsulating legal regime is necessary going forward.

Art insiders, on the other hand, are concerned with the intrinsic conflict between art and money, as they believe entangling the two risks the incommensurable value of art once it is standardized and transformed into speculative objects. Of particular importance to lawyers, is how the sale and alienation of art pieces from given cultural heritage, interact with existing laws governing cultural and artifacts.

Final Touches

Works of cultural, historical, and aesthetic merit are increasingly being utilized as financial objects to achieve investment goals. While this process has been criticized by both the financial world and many within the art community, its growth has not been stunted. This is expected to continue, as the global art market continues to grow, and as more opportunities for individual investors to get in on the action arise. And while art financialization continues to be debated within the conversations surrounding the democratization of art, at least some benefits previously confined to the monied few, are now available to almost anyone.