Tapping Into Growing Thirst For Fine Art Investments With Masterworks

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Tapping Into Growing Thirst For Fine Art Investments With Masterworks

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A veteran of the banking and art finance world, Nigel Glenday has served as the CFO at the Masterworks investing platform since back when it first launched. Over the course of his involvement, Masterworks has attracted attention largely because it’s allowed everyday investors to include blue-chip art, a high-performance “alternative asset class,” in their portfolios.

The company accomplishes this by using proprietary data analysis methods to identify paintings by in-demand artists like Warhol, Condo and Banksy that are most likely to appreciate in value. Masterworks then acquires these paintings, offers thousands of securitized fractional shares in each piece to its user base and then resells the paintings, usually after a multi-year holding period, distributing the profits proportionately to investors.

While all investment mechanisms do come with risk, all of Masterwork’s exits to date have performed extremely well, having paid out over $25 million to its investors last year. Glenday has a lot to say about the confluence of finance, data, alternative asset management and the fine art world.

How did your involvement with Masterworks come to be?

I’ve been fortunate to have had two paths in my career so far. First, as an investment banker working with a range of financial institutions, mostly specialty finance business, in a series of really interesting projects around the world, many resulting from the great financial crisis in 2008-2009. Then, after nearly a decade, I had an opportunity to help build an upstart art finance business.

Art finance, the business of lending to collectors and other borrowers using high-value art as a business, is a lucrative but little-known niche that has been the purview largely of private banks, a handful of small lenders and, notably, Sotheby’s, who had built an attractive financing arm over 20-plus years. While helping grow that business, I was fortunate to develop many rewarding relationships among those in and around the art market. One of them happened to be Scott Lynn, the founder of Masterworks.

Masterworks simply turned out to be this fascinating intersection of the two paths my career had taken, across capital markets and the art market. The vision behind Masterworks quickly became evident: to make art investible for the global investor community.

It’s an enormous addressable market. Art, of course, had all the ingredients to be a strategic allocation in any investment portfolio – the capacity for appreciation in excess of inflation, lack of correlation to other assets, and a reflection of macroeconomic forces. All that was missing was the “how” – investors were missing a way to practically invest in art the way they would invest in anything else, be it stocks, bonds, etc.

Why do you think investors are paying more attention nowadays to alternative assets?

Private equity – and now, increasingly, private credit – have been the bedrock of alternatives, but the emerging space of alternative real assets is so interesting right now.

Overall, we are at a real inflection point for alternatives. Masterworks is part of the massive and growing demand for alternative assets across the investment landscape, particularly individual investors and wealth advisors. Many large wealth management firms now have ambitious targets for allocations to alternatives across their clients’ portfolios. Equally, private wealth and RIA channels are becoming a major focus among alternative asset managers.

There are several trends behind this: a muted outlook for public equities, underperformance of traditional 60/40 allocation models, the decades long trend of enterprise value creation within the private markets, among others. As a result, alternatives, broadly defined, have quickly become an essential allocation to nearly any portfolio, something that institutional investors realized long ago.

Where investors have a long term investment horizon, especially in an IRA, 401(k) and similar tax-advantage retirement account, allocations to alternatives make so much sense. Part of the challenge historically is, the process of allocating to alternatives for an individual is so cumbersome relative to nearly anything else they invest in. That’s why we have spent so much time at Masterworks addressing these pain points, allowing investors to learn about, research and invest in art, much as they would other asset classes.

Aside from Masterworks, what companies in the art investment space are you keeping an eye on that are doing interesting things?

We are incredibly proud to be the clear leader in providing art as an investment. It’s a testament to the five-plus years of dedication our team has put in to execute across a variety of disciplines to make this business operate, something that is hard to appreciate from the outside looking in.

But, I love all businesses that are contributing to the enhancement of business practices, transparency and sophistication of the art market – all elements of an asset that is very much an investment for art collectors. I don’t care who you are, if you are spending $1 million-plus, it’s an investment.

Art lending businesses have always been interesting, and there is so much opportunity there as the market grows. Likewise, businesses that are enhancing data transparency within the market or facilitating transparency around provenance, are important and incredibly interesting.

What factors do you see as most important to Masterworks’ success?

Ultimately, we are focused on availing our investors with the highest-quality portfolio of art investments. We want to offer investments that meet our criteria and are able to deliver attractive returns that are consistent with the art market. If we stay laser focused on that, in a way, the rest of the business takes care of itself.

Of course, a lot goes into making that all happen. The art market might be a centuries old market, but it is a new asset class for many from an investment standpoint, even for those who are well versed in other alternative asset classes. So educating our users is incredibly important.

How do you measure aggregate art market performance? How has it performed relative to other asset classes? How should I think about this in the context of my overall portfolio and investment objectives? These are the types of questions we love engaging with our investors about, to help them understand art as an investment as they would their other investments.

What are the biggest ways in which art investments for professional collectors differ from art investments for the masses?

Art collectors have a natural way to invest in the art market: they collect art. Collecting is a passion, a lifestyle and can be a deeply engaging and rewarding endeavor for many art collectors. But, you need to be prepared to invest a huge amount of energy, time and money to be involved in purchasing art directly.

What we discovered was an enormous community of investors, both individual and professional, who share our conviction around the art market – its size, global nature, history of appreciation, low correlation profile – but have no interest or time to attend art fairs, get involved with auctions or figure out the ins and outs of how to do business in the art market. This was the opportunity for Masterworks, to serve this massive community – multiples larger than the art collector community – in creating a means to access art in an investable format.

I’d also add that whether you are purely an investor or an art collector, either way, the art market is very much an investment (especially at price points of $500,000 to $1 million and beyond) for which understanding price appreciation, liquidity and risk profile are essential.

How would you describe this moment in art finance?

The great part is that the art market is not a new enterprise. The combination of creative and commercial energy underpinning this market has evolved over centuries. Sotheby’s is the oldest company on the New York Stock Exchange, predating the exchange itself.

Today, we’ve arrived at an incredibly interesting moment for the art market. A massive generational transfer of wealth is underway, fueling interest in the market from new collectors and bringing incredible artwork to market for the first time in decades (if ever); the pipeline of new museum openings globally is bolstering demand for top-quality artwork; global macroeconomic uncertainty, currency devaluation is positioning artwork as a highly attractive mobile store of wealth.

Amidst all of this, the demand for art as an investment is poised to grow, and with it must come tools to understand, analyze and participate in the market from an investment standpoint. I think what we are doing at Masterworks is the tail wagging the dog of the art market, in that the approach we are taking to investing in the art market, our use of data, our operations, are setting a new standard.

What does it mean that the art market has relatively low correlation with other asset classes?

Art’s low correlation profile makes it an attractive risk diversifier. Low correlation means performance tends not to be related to other asset classes. We’ve found that art just behaves differently.

There are several forces behind this. Demand is being fueled by wealth creation among the global ultra-high-net-worth community, a trend that has been underway for decades. That wave of demand is chasing a scarce group of assets, and the global mobility of the asset that allows it to be transacted anywhere – bought in New York, sold in Hong Kong, and so on.

Non-correlated sources of return are a key component in building an investment portfolio and can help lower the overall risk profile of an investment portfolio.

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Tapping Into Growing Thirst For Fine Art Investments With Masterworks

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