Investing in art offers a dynamic way to diversify and grow your wealth. Don’t miss this week’s episode of Bob Fraser & Ben Fraser, where they explore the world of art investments with Masterworks’ Chief Investment Officer, Allen Sukholitsky! Allen talks about democratizing art investment and why he believes it has zero correlation to any other asset classes. He also discussed how historical performances of impacts the value they play in portfolios, syndicating pieces of art for an even greater return potential. Tune-in now for valuable insights from one of the leading voices in modern investment strategies! Get started and download your free economic report today at https://aspenfunds.us/report
Get started and download your free economic report today at https://aspenfunds.us/report
Connect with Allen on LinkedIn – https://www.linkedin.com/services/page/0000543078b25bb247/ Learn more about Masterworks – https://www.masterworks.com/
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Investing in Art
Ben Fraser
Hello, future billionaires. Welcome back to another exciting episode today. We had a really fun interview and, uh, I felt we’re gonna love this. Yeah, we went for about an hour.
I thought we could have gone for another couple hours with this gentleman Allen, with Masterworks and Goldman Sachs guy. So this guy is incredible, traditional, very, very brainy, but is, but, Basically
Bob Fraser
democratizing art in investments. So art is the one thing course billionaires do play in and art has actually been a great investment.
Ben Fraser
Yeah, he talks about how it has pretty much a zero correlation to any other asset class, which is a very remarkable statement, and he dives into what that means. Talks about historical performance of art, um, kind of its place in portfolio and what drives the value and kind of how they’ve created this pretty incredible database that, uh, is, is was shocking to me actually that it’s never been done before.
Uh, tracking all the transactions for the past 30 to 50 years of, um, art. And, uh, so it’s really cool that they’ve done, that’s, that’s
Bob Fraser
coolest thing too, is they’re syndicating single pieces. Which I, which I love. So, okay, this is a, this is, you
Ben Fraser
gotta hear this, gotta listen. And before you do, we have to give, you know the disclaimers we always do on, uh, episodes.
We bring on a individual of someone, a company that is raising capital or is offering securities. We are not giving any advice, we’re not promoting them. We have no relationship. Uh, to them and you have to do your own due diligence. So, uh, this is not a, uh, a proxy for that. You have to do your own due diligence.
Um, so be sure to do that if you’re interested. And if you have not checked out yet, we have a brand new website for this podcast. It’s called the billionaire podcast.com. You can click and join the newsletter to be notified of um, all the episodes you can leave review. You can even join our investor club right from there and you can ask us anything.
So we have our, a fun top of mind series that you can, not, that we can answer anything. Not that we . There may be questions that you ask, we don’t answer, but, uh, we will try and, uh, appreciate you all listening. So here’s the dive in.
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Welcome back to the Invest Like a Billionaire podcast. I am your co-host, Ben Fraser joined by fellow co-host Bob Fraser Today we have a special guest, Alan Sukholitsky, who is the Chief Investment Officer at Masterworks and uh, so we’re very excited to be talking with him today. If you are not familiar with Masterworks, they’re a leading art investment platform and I believe they have a reggae plus offering, which is open to non-accredited investors.
We’ll get into all that, but, uh, really cool because it’s an asset class and a niche that we haven’t really talked about at everyday, people
Bob Fraser
can invest in art. Right, right.
Ben Fraser
And really democratizing the access to fine art, which is, you know, a preferred asset class of the ultra wealthy.
Bob Fraser
So this is a way for us to pretend we’re billion.
Exactly. So that’s the idea.
Ben Fraser
Alan, thank you so much for, for joining and uh, give us a little bit of background on you cause you have had a very, um, uh, exciting career and you’re now the Chief Investment Officer at Masterworks, which is obviously an exciting company. But give us a little background on you, how you, uh, you know, ended up where you are today.
Allen Sukholitsky
It might not seem like a natural progression that, uh, somebody who spent the entirety of their career in traditional investment management, so researching, publishing, and speaking about. Stocks, bonds, commodities, currencies, hedge funds, venture capital, private, literally all of the asset classes that everyone knows about.
It’s not a natural progression, I guess, that somebody who did that for a very long time would end up as the CIO of a company that’s making art investible. But the interesting thing is, it’s precisely all of my background that actually led me to join Masterworks. And so the way that it happened, I spent many years, as I kind of just mentioned, I was researching, publishing, traveling around the country and talking about, you know, what asset class I thought at a particular point in time was more attractive than another, uh, giving forecasts for the s and p 500, so on and so forth.
And there kind of came a point after you do that for long enough where you sort of assume, well, since I’ve been doing this for so long, I’ve probably seen everything under the sun, at least as far as investment opportunities go. And what ended up happening, uh, you know, call it a year or two ago, is I came across this company called Masterworks and I kind of glanced at it.
I saw that it seemed like they were investing in art and I had a little bit of. It was, it was sort of a light bulb moment. I felt like my mind had exploded momentarily because I thought to myself, wait a minute. Art is nothing obscure. It’s not new. It’s existed forever. I’ve been researching what I thought was every investment opportunity in existence for my entire career, and I completely overlooked the fact that there’s something called art out there all around us that’s existed for centuries and not once that had crossed my mind that maybe you could invest in it.
So it was a series of light bulbs that started going off in my head where I started thinking to myself, Let’s start doing a little initial research, see if the asset class is actually, uh, interesting from an investment perspective, if it has merit for investors to consider it. And one thing sort of led to the next, and I ended up joining a company that it’s extraordinary that it’s the first company to actually be doing what it is doing, which is making art investible.
Because one of the things I often tell investors, honestly, Art frankly should have been a component of investors’ portfolios many, many, many decades ago. And if it had been, and we were having this conversation today, I’m willing to bet that if I asked you, gimme one good reason why Art should not be in the portfolio, you probably would not have been able to do it.
It’s just that it only recently became investible because nobody figured out a way until Masterworks came about of how to make it investible.
Bob Fraser
Wow. So, so you, your background, I mean, you were with Goldman Sachs as kind of the golds. Standard of traditional investments and the, the, the 800 pound gorilla of investment banks in, in big New York.
So you, so, so just draw the contrast here. What, what is so great about art? What, what is it as an purely from an investor point of view, what, what is to love about art?
Allen Sukholitsky
There are two things that I think are most attractive about investing in art. The one that is most attractive for me is not necessarily the one that is most attractive for investors.
Uh, and, and that’s because I come from an asset allocation background. So returns are not always the thing I think about first and foremost. Arts returns of course, are attractive, but, um, for me the most attractive, uh, aspect of art is actually its correlation profile and be specific. So what does that mean?
Yeah. So, um, like I said, I spent my whole career researching every other asset class. And the thing about, uh, when you look at all the other major asset classes, so stocks and bonds and hedge funds and private equity and all the rest of them, international equities, small caps, large caps emerging, everything.
The thing about them that you realize, uh, when you’re in the investment management industry long enough is that most asset classes have at least a moderate level of correlation to each other.
Each right. That was, that, that’s pretty, that’s pretty much standard. It was
Bob Fraser
famous during the 2008 crisis, right? The, the, the phrase was, yes,
Allen Sukholitsky
correlations all went to one.
Correlations go to one. And what’s that meant is that’s, bonds were
Bob Fraser
supposed to be totally different than stocks. Totally different than, than, than oil and gas, or, than, than gold. And everything went down at the same, at the same degree. And, and it was like, what’s the point of diversification when everything goes down?
So you’re an expert in asset allocation. Yeah. Which means correlations. Yeah. And how to diversify. And you’re saying art is really uncorrelated.
Allen Sukholitsky
I’ll explain the extent to which it’s uncorrelated. So the way that it works with most asset classes and, and I’m, right now I’m literally putting on my old asset allocation hat that I used to wear
So the way that it works with every asset class, usually the best correlation profile you could. Is that the asset class you’re looking at is gonna have a low correlation to some things, but inevitably a higher correlation to other things, meaning it’s always gonna be a mixed bag no matter which asset class you look at.
Now, I’m not knocking on most asset classes. This is just sort of a statement effect. This is how most asset classes are. So large caps are gonna have low correlation to bonds usually, but large caps are gonna have a high correlation to, uh, small caps. So basically it’s a mixed bag. What is so unique about the correlation profile of art.
Is that it actually has a close to zero correlation consistently, no matter what asset class you measure it up against. So if you look at large caps, small caps, international, emerging, real estate, private equity, hedge funds, commodities venture. I’m, I’m doing all of this for memory. I know I’ve missed a few, but you compare art to any of them.
Correlation profiles close to zero. What does that mean at the end of the day. It actually does not matter what might already be in your portfolio. If you add an allocation to art into your portfolio, that art allocation is not gonna act like anything else you already own, which is exactly what you want from a diversification stand,
Bob Fraser
which is unique.
And it’s nice when everything is going down to have one thing that isn’t right.
Ben Fraser
. Now I, I’m,
I might push back on this a little bit, but the, the art market, I mean, from my understanding, you know, prior to Masterworks or other platforms that is trying to democratize it, I mean, there’s not a very active market that’s trading.
Art, right? Or, or is, is there Well, there’s regular auctions though. I mean like on, you know, on the exchanges you can’t go and buy an art etf, at least from my understanding. So what was the way, the mechanism that was, you know, trading these assets and if, if it’s not, you know, publicly traded, then there would be obviously a
lower what’s pricing
mechanism?
Yeah. Yeah.
Allen Sukholitsky
So the, I I feel like the, your question is kind of revolving around this concept of liquidity probably. Yeah. Um, art is not a liquid market along the lines of how private equity and venture capital and real estate are not liquid markets. Right. Um, there are some nuances obviously that make them different, but in general, the idea that they don’t trade regularly like stocks, that is entirely.
Um, so the way that it works with, with pricing and transactions, and, and actually this is gonna lead me into a topic I was hoping I’d be able to talk about. Um, so the way that it works with, uh, with pricing. So in the art market you have appraisers, individuals who are basically certified to look at works of art and be able to give accurate valuations for what those pieces of art should be worth.
So it’s the same way that you might have an appraiser, you know, look at a property that you might be interested in buying. They might give you an appraised value for that. Ultimately though, you also have the data point, which would be the transaction for that property that you might have been looking at.
So you have appraised values. You also have the transaction data,
Ben Fraser
meaning the historical times is traded prior to it being appraised now.
Allen Sukholitsky
Yep.
Bob Fraser
You have comparable. So it’s very similar to real estate. It’s like you have comparables. Yes, you have, you have, you know, transaction history.
Yep. And appraisals
Allen Sukholitsky
Appraisal process is very much driven by comparables. Um, but the topic that I was, uh, hoping to take this is the historical transaction data. And this is something that makes Masterworks even more unique than it probably sounds like it is already in the sense. So I come from, again, I’ve said this a few times, I think I came from traditional investment management. I knew throughout my career that if I needed data for anything, I went to a data provider. Everyone in financial services as a data provider that they use, whether it’s Bloomberg or Affinitive, they’re a whole slew of them nowadays.
That’s where you get your data. When you use it, you don’t even think about where it actually came from. It’s always just there for you. Right? So believe it or. Nothing like that has ever existed in the art market. So the first project that Masterworks had, and this is usually where people get kind of wide-eyed when they hear this.
The first project was we hired 30 some odd analysts who had one job for two years, and that one job was to go through thousands of paper catalogs that we bought from all over the world, representing what we believe to be the most comprehensive source of transaction data in existence. And they put all of those data points into a database.
Now, the difference between, yeah, the difference between, uh, you know, let’s say what Bloomberg has and what we have is that Bloomberg makes their money by licensing out their data. Everybody can get access to it as long as they pay for it. With us this extraordinary data set that we put together is entirely proprietary.
Nobody has access to it. We don’t sell licenses. It’s entirely proprietary, and we analyze that data, which then helps inform our own investment decisions in the art market. Not that different honestly, from how an equity analyst might go to Bloomberg to pull a whole bunch of equity data out of Bloomberg and create models and determine where to invest and how.
And why. We’re basically doing the same thing except we’re doing it for the art market with a data set that is truly proprietary. Nobody else has this except us.
Bob Fraser
Cool. So talk about masterworks. And so what is it? Like what, what do they do and why is it so cool?
Allen Sukholitsky
I think the most exciting part for me is to actually work at a company where, you know, let’s call it half the people here are art market experts.
And I wouldn’t say that I should be so careful how I’m gonna word this so I don’t offend anyone. Um, they’re art market experts and they’re not necessarily data scientists. And then on the other side, we have a whole lot of data scientists who are not necessarily art market experts. And the way that these two groups within the company work together, it’s, it’s actually extraordinary and frankly, quite beautiful to watch because what the data scientists are doing is they’re going into that extraordinary database that we put together with 70 years worth of data and millions of data points in it.
They are going through all of the data in there. There are about 7,000 artists that we track, and they are building models and they are determining what artists we should be investing in. What maybe particular series that an artist painted we should invest in. Or even what individual specific paintings that an artist, uh, uh, painted should we be investing in.
Ooh, they are doing kind of that initial cut in a sense.
Bob Fraser
So this is like, What a stock analyst would do, right, is your analyst Exactly. Asset. Goldman would go and look at, hey, where’s the, where’s the best places, best industries to be investing in the best CEOs and jockeys we want to be investing in and best place to stick our money.
So you’ve got that all going. The advantage is you got a proprietary database they’re working from.
That’s exactly right. And so the data scientists kind of do that initial cut, think of it almost like, like a buy list I guess, in investment terms. Um, and then our acquisitions team, which is the other half of the process, they’re the ones that have all of the art market expertise that you would think someone involved in the art market should have.
So they come from the auction houses, the galleries, their dealers, the the, they spent their whole career in the art business. And what they do, once they have an understanding of what areas of the art market we should be investing in, they go into their global network, which by the way, is probably the most extensive global network that any institution has.
They go into their global network to source the particular works of art that we’re interested in buying. They’ll enter into a negotiation process and, and ultimately buy those works of art to make them an, uh, investible for our investors.
And then don’t tell me they stick them in a dark warehouse somewhere.
Allen Sukholitsky
Most of the time our art lives at the Delaware Freeport, which is a state of the art storage facility.
Oh, you, that’s a crime against, wait. No, but hold on, hold on, hold on. Here’s the good news. Here’s the good news. The good news is, uh, number one, we built a beautiful gallery right next to our office. Oh, okay. And we rotate. We rotate five to 10 works of art in that gallery every three to four weeks or so. So we’re rotating art there.
That’s one part. The other part is that we actually also lend our art to, uh, to museums. Uh, we actually don’t monetize that. Just to be clear, there’s no monetary component to that. We do it as a measure of goodwill. And for people who want to be able to see these beautiful works of art, to be able to actually see them.
Very cool. So we do do those things.
Ben Fraser
So, so I’m kind of curious, kind of taking a step back, you know, prior to Masterworks jumping on the scene and um, you know, an investor wanted to buy art. What, what was the best way to do that? I mean, cause to me it’s, you go to
Bob Fraser
auctions, you go to auctions, right? Yeah. And you bid and they take it home and stick it on wall.
The hard part of the whole process is when you’re talking about the blue chip segment of the art market, right? The paintings are gonna be selling easily for millions of dollars each, right? And so if you wanted to buy art, you either needed to work with an intermediary who could hopefully find the particular painting that you might be interested in buying, or you could go to an auction no matter how you slice or dice it, you’re gonna be paying millions of dollars if you want to quote unquote “invest in art”.
Um, Ultimately buying one painting for millions of dollars. I would imagine that that might represent sort of an outsized proportion. but there
weren’t really, right. Yeah. Talking about it from an allocations perspective, which is
right, but, but there weren’t. I guess the point is there weren’t a lot of securities that, uh, around art.
Right. You couldn’t go buy. Yeah. There, there were, there Weren
Allen Sukholitsky
Securities, which is so cool. There were literally no securities. Ma Masterworks is the first company, which is to securitize a painting that we were literally the first ones to securitize back in September, 2017. Yeah.
Bob Fraser
Okay, so, so I was, the next question is, you guys have been around for five years, so 2017, is that right?
Yep. All right, so that’s been a good time for art. You have one fund, is that right? And it just owns all these pieces of art and then your investors in that fund are, are shareholders of that, of that role?
Allen Sukholitsky
If you go to the masterworks.io website, I mean the, the way that most investors are accessing our art investments is actually at the individual painting level.
So the way that we do this is we buy a painting with balance sheet capital. So we, we didn’t go through this process, so we buy a painting with balance sheet capital, we buy the whole painting. We create an LLC, so that LLC owns one asset, which is the painting. We file the LLC with the SEC and we take that LLC public. So when investors are buying shares in that llc, which owns one painting, they are effectively buying shares in the painting. And so every single one of the paintings that we buy sits in its own llc, its own vehicle.
In fact, if you go to the SEC’s website and you type in Masterworks, you will very quickly see that we are probably the biggest filer of offerings with the SEC cause every one of our paintings has its own vehicle and that allows us to fractionalize the art. That’s how investors can buy shares.
Bob Fraser
Wow. So, and then are, so you also get a listing, a public listing. So these are, these are tradable on the, on the stock exchange.
Allen Sukholitsky
Not on the stock exchange. So they are public vehicles. Any investor is able to come to our website, sign up for an account, and buy shares in these paintings.
Bob Fraser
Gotcha. So they’re not But they’re not listed.
Allen Sukholitsky
They’re they’re not listed on an exchange. That’s right. However, however, this is an important, however, uh, we actually, when we started the business, we also created our own secondary. Which means that for investors, now, let me, let me caveat this. Every investor that we talk to, we make very clear that the expected time horizon for any one of these paintings that they’re going to invest in is three to ten years.
When an average of, let’s say, five to six years, that’s the expected time horizon. However, for investors who want to sell earlier than that, for one reason or another, they actually are able to list their shares on the secondary market that we created. And ultimately the, uh, buyers and sellers, if they find each other, they can transact with each other.
Bob Fraser
Okay, so that was something that we started
nada exchange there, sort of, which probably has pretty wide bid ask spread, right? Or so, or no, no bid
and no ask,
Allen Sukholitsky
no, no. So, so if you, you can actually go on the website and you can take a look at the secondary market yourself. You, you don’t need to have special access.
You could look at it. I, I would say that the, uh, the bid ask spreads are much less wide than you might think, but wider than you would have on, let’s say, a popular exchange, a stock mar, whatever.
Ben Fraser
So, so do you guys strike a nav at a certain time period? Or how do you value, you know, in the,
Allen Sukholitsky
We value all of our paintings on a quarterly basis.
Um, in fact, the, the approach that we take to valuing our assets, Really the same approach that other institutional investors take with the assets that they’re involved in, at least on, on the private marketing liquid side. So we mark our assets every, uh, quarter and so to what investors get sort of an updated mark to, uh, to their holdings, to what?
Bob Fraser
How do you, how do you market is you’re not doing it? Oh, so, so yeah.
Allen Sukholitsky
So we have, we have a team, uh, in-house of certified appraisers. I, I think I mentioned this before, you need to have a proper certification in order to be an appraiser in the art market in the first place. So we have a team of appraisers that help us to value the assets on a quarterly basis.
Gotcha. Uh, and then on top of that, we also have external parties value the assets as well. So, so it’s, it’s a mix of internal as well as external third parties. Yeah.
Bob Fraser
So your bid ask, where does it sit? Where does the nav sit between your bid ask right now
We don’t have an overall, uh, spread
do they trade right at nav or near nav typically?
Allen Sukholitsky
Some of them trade farther from nav than others. Um, I mean, the one thing I’ll point out, despite us having this secondary market, we actually don’t monetize it in any way. Um, there are a lot of investors that we talk to and, and they ask us, oh, okay, so you have sort of your main business where you’re making art investible, but you’re also obviously monetizing the secondary market.
And I immediately have to cut them off and say, no, no. There’s literally no financial, there’s no revenue benefit for us. It’s been a bulletin board since we started the business. Okay. Which basically, Buyers list what they want, sellers list what they have and they have to find each other in order to transact.
Ben Fraser
Monetizing the, the transactional side of it, you know, all these platforms like Nasdaq and the N Y S E. They are charging a small premium between, between the bid ask, and that’s how they make money. And so you guys are not doing that.
You’re not charging, you’re not charging a premium based on what the seller wants say,
Bob Fraser
but the question remains. So are we you seeing a discount or premium to nav typically being traded?
Allen Sukholitsky
It actually depends on whether you’re a buyer. If, if you wanna buy shares in a painting, the amount that you’re gonna offer to buy shares in that painting are gonna be lower than the nav.
If you’re a seller, you’re typically gonna be trying to, uh, uh, to sell your shares at higher than nav. And it’s one of, it’s one of the things you would expect for a market where buyers and sellers have to find each other there. There is actually, there’s no automated matching. However, here’s the thing.
Here’s the big, this is sort of exciting news. Uh, in the coming weeks, we are actually going to be transitioning over to an ATS system, which is going to. Uh, much more efficiently and seamlessly match buy and sell orders. So we expect that the amount of trading that’s gonna happen on our secondary market is probably gonna go up significantly.
Bob Fraser
Okay. And, and I bring this up because, you know, one of, one of the points we are making, right, as we, we do a lot of real estate investments is you buy a public REIT. Right? Mm-hmm. , you’re, you’re paying, let’s say seven times book value, which is net asset value, right? For a piece of real estate. So you, for your $7 investment, you’re buying a dollar worth of real estate.
So I’m just, I’m just curious where this, where this art is trading relative to nav, but you know, so you’re saying it’s pretty close to nav generally?
Allen Sukholitsky
You will see some outliers for sure. I, I can, I can actually give you an example of where you will see an outlier. We’ve noticed this trend, so since our paintings actually have been known to sell out, in less than 15 minutes, and I’m actually not exaggerating, in the last two months we had three multimillion dollar paintings that were fully allocated in, two of them were 14 minutes, and I believe one of them was 13 minutes. That’s because that has been happening. What some investors have started to do is to do everything they can to make sure they get an initial allocation to that painting, knowing that it’s probably gonna sell out
quick.
Bob Fraser
Scalp it in the secondary market, you
Allen Sukholitsky
know, people are smart, right?
That’s never been different. That does happen. That happens. So I
Bob Fraser
see how the LLCs are created. I see how UQ create some liquidity, you know? Uh, but then how does an LLC end? What’s your desired exit for these and how does.
Allen Sukholitsky
For the desired exit, I, I can’t help but mention that, uh, we hired a gentleman by the name of Evan Beard a few months ago.
Uh, Evan spent pretty much his entire career at Bank of America. He was the head of their art services business. Uh, if you’re not aware, the art services business at Bank of America is by far the largest in the country. Uh, so we hired Evan. To head up our dispositions, process, dispositions, fancy term for saying, selling the paintings at the end.
Um, and you can imagine that given the role that he was in for so many years, he has an extraordinarily extensive network globally of intermediaries, collectors, basically anyone who has anything to do with the art market, he knows them all. Um, and so ultimately after we buy the painting, which like I said, we expect to hold three to ten years, an average of five to six.
Evan starts to think through, okay, for this particular painting that we own, who are the collectors or who are the intermediaries that I know who are probably gonna be quite interested in owning this work? You start having those initial conversations with them. You talk about whether they would be interested in it.
If they’re interested in rounding out their collection, maybe they want to add one more piece. All of these types of conversations that is Evan’s, uh, expertise.
Bob Fraser
So they’re actively marketed basically over this. You, you’re targeted three to 10 year period. You begin actively marketing this painting to try and figure out a good exit for it.
Allen Sukholitsky
So we don’t actively begin marketing at the outset, and so that there’s good reason for it. Now remember, my background is actually not the art market. So everything I’m telling you is, is what I’ve learned, uh, since joining Masterworks. Um, if you end up marketing, uh, painting for an extended period of time and you start to notice that it’s, it’s not selling after you’ve been marketing for an extended period of.
You actually might end up with an unattractive result at the tail end, right? So what you have to be careful about. Is picking the paintings that you wanna market at a point in time where you think it’s not going to necessarily take that long to sell it. Gotcha. And that is all of the, it’s all of those types of things that Evan thinks about because ultimately what he’s been doing since he joined, he’s been going through our portfolio, which at this point has about a hundred 40 paintings in it.
And he’s been trying to sort out. Which are the paintings that have been trending favorably in, let’s say Hong Kong as opposed to another part of the world? Maybe these are the ones I should think about discussing with intermediaries in Hong Kong. We’re collectors in Hong Kong, which are the paintings that we probably still have some more runway on.
I’ll start exploring selling those in maybe a year or two or three years from now. Those will go in a separate category. The point is his job is to kind of go through the portfolio, so to speak. And determine what to start thinking about selling at what point in time.
Bob Fraser
So from an investor’s point of view, it’s you buy it, you hold it, and, and just trust that at some point, masterworks is gonna liquidate this at the time, then they’re gonna try and optimize the exit.
Uh,
Allen Sukholitsky
We’ve sold, uh, a number of paintings already. Um, I would say that if I gave a range for the net IRR that we’ve generated for those sales, it would be 20 to 40%. That’s on a net basis after a fees and whatever else. That’s good. Um, so the, yeah, the performance has been very good. The realized returns, I, I think last I checked, realized returns have been 29, 30% net.
Um, and then for our, uh, our portfolio, so to speak, overall across all of the investments that we’ve made since we started, that’s been at a 15.3% net irr.
Ben Fraser
That’s awesome. So you guys have been doing it for, that’s lever too.
Allen Sukholitsky
Thank you for bringing that up. That is entirely unlevered and that is also through this June.
And the reason why I emphasized through this June is because there are, I won’t name names, but there are other private market asset classes that have not been particularly excited about marking their holdings as of this June. That’s why I emphasize that that 15.3% annualized net. That is since we started through June.
Ben Fraser
Yeah. That’s great. Some other markets, uh, in the world aren’t doing so hot. Yeah. So talk about, I mean, you guys have been doing this since 2017. Um, you know, what’s been the historical performance of art? You know, I mean there’s, you know, there’s been a great. All asset classes have risen, uh, because of this, you know, quantitative, you know, EAs and, and easy monetary policy.
It’s, it’s, it’s very, very beneficial for assets. So, what’s really
Bob Fraser
hot auctions? I mean, since 2019, I don’t know what that’s all about. Right? But you know, what’s going on and, and so yeah, what’s the historical, what do you, you know, what, what do you, how, how long have you seen the, been, you know, you’ve got a lot of data, right?
So what does, what does your data say? And that’s
Allen Sukholitsky
exactly it, you know, and what, what, what causes
Bob Fraser
recessions in art price. And is the session to be concerned about.
Allen Sukholitsky
I’ll take those two separately. So the first part about historical performance. So we, we break out the, the universe, so to speak, of art, uh, investments into several categories.
Uh, one category would be post-war contemporary art. That’s basically everything after 1945, more or less. Then you’ve got impressionist and modern art. That’s another category. And then you have old masters, uh, old masters paintings along the lines of, you know, Rembrandt da Vinci, those that painted hundreds of years ago.
So what, what we found when we started analyzing that extraordinary data set that, uh, that we put together is you might expect you would analyze that if you had it. So what we learned is that old Master’s painting. Typically appreciate at about two to 3% on an annualized basis over time, impress per year in modern art per year.
Okay? Yep. Impressionist in modern art is about seven and a half percent annualized a year. and post-war and contemporary is about 14% annualized. And so we, we spent a lot of time obviously thinking through, okay, why? Why are these different segments appreciating at these different points? Uh, at these different rates?
But it doesn’t actually take long before you think through what those particular segments are before you start to realize what the answer is. Old masters paintings, those are the ones that were painted hundreds of years ago. They have the weakest appreciation. Impressionist and modern art that was painted more recently than that, that has a stronger appreciation rate post-war contemporary.
That’s the most recent type of art that’s got the strongest appreciation rate. So what it all basically means, and, and I, I love the way our founder puts it, he always describes it this way to understand why different segments of the art market appreciate at different rates. Just remember, The art that you like is not the art that your grandparents liked and the art that they liked is not the art that their grandparents like.
And so that starts to give you an idea about why these different segments of the art market appreciated these, uh, at these different rates.
Bob Fraser
Yeah. The hotter markets are later. You know, it also goes to compounding, you know, if you go back, if you’re compounding something for 500 years, it’s gonna have to be at one or 2%, or it’s gonna be worth trillions of dollars.
So, it does make sense, you know, actually. Yep.
Ben Fraser
Um, so yeah. So, so what are some of the, the drivers of value, right? In real estate, you know, when you have an appraisal, you have kind of the. The, the comparison approach where you’re looking at, you know, recent, you know, sales comps, right? And you also have an income approach because real estate generally creates income and you can value that income at a certain capitalization rate and creative value, you know, the, the difference is art generally doesn’t have an income stream unless you are monetizing it through, you know, leasing it to, um, different museums, which you’re not.
So, you know, talk about drivers of value. What, what’s really driving that appreciation?
Allen Sukholitsky
I hesitate to say it, it’s, it’s exactly like, but it is quite similar to commodities. Commodity prices are ultimately driven by supply and demand. Um, commodities typically don’t generate cash flow either.
Mm-hmm. , um, so they’re very much supply demand driven markets. Now, the one thing that I will tell you about art, so the demand side of the equation for art, um, it is not, it’s somewhat unique, but not too unique. The supply part is the one that I’ll, I’ll spend a little more time on. So on the demand side, If you think about who it was historically that was even able to buy multimillion dollar works of art in the first place, you’re obviously talking about the ultra high net worth segment of the global population.
So from the demand side, the best way to understand what the future might look like for art prices is to actually focus on, well, do we expect that over the next five to 10 years, we’re gonna be minting more ultra high net worth individuals around the world? If you do, that’s probably gonna be supportive of art prices.
If you don’t, it’s probably not gonna be supportive of art prices.
Um, pool.
Bob Fraser
Right, exactly. Exactly. Buyer shrinking buyer pool. Yeah. That’s it. And
Allen Sukholitsky
in fact, we, we occasionally refer to, uh, art investing as somewhat of a call option on the ultra wealthy. I mean, that, that is effectively what it is.
Cool. Cool Concept.
It’s, it’s a good line, right? Yeah, it’s a good. . Wow.
So that’s the, so the demand side is, it’s somewhat unique in, in that the individuals who buy art typically have to be ultra high net worth investors. But so that, so that’s in somewhat interesting. But the supply side, that’s where I think this asset class is so extraordinarily unique.
So when, when I, and again, I’m putting that old strategist hat I used to wear in my prior life, if you think about oil, you think about gold and the supply of those. It’s very simple to understand what is the best way to increase the supply of gold or increase the supply of oil. If you could magically, overnight double the price of each of those commodities, I can guarantee you gold miners would start mining for more gold and oil companies would start drilling for more oil.
It’s a natural reaction to an increase in price. This is sort of basic economics, but think about how different that must be for the art market because. Here’s the example
Bob Fraser
Inelastic to give any inelastic supply, basically.
Allen Sukholitsky
Bingo. Bingo.
Let’s say the price of Picasso paintings goes up enormous amount. I can guarantee you Picasso’s not painting anymore.
Picassos. , right? So it’s a truly unique market
in that the supply really is so inelastic and, and by the way, On top of everything I just said. Every year a certain amount of, uh, works of art get donated to museums and given to permanent collections. A lot of people don’t know this, but when art ends up in a museum or a permanent collection, well, permanent collection gives it away that art is never gonna come out.
Oh, wow. Which means that it effectively, Is taken out of circulation, which means that, you know, I’m gonna use hypothetical numbers here. Let’s say you’re a big name artist and you had a hundred paintings that you painted throughout your career before you passed. Every year there is a chance that one or two of them might end up in a museum.
Which means it is going to further increase the value of all the remaining paintings in circulation. And so a lot of these supply dynamics in the art market are actually very unique and, and I sort of struggle to find another asset class that has similar dynamics like that.
Bob Fraser
Yeah, that’s really fancy. So you’re, you’re professional investor, you’re a New Yorker.
We’ve been a hundred percent bullish here. Come on. What’s the downside and when do these things go down? I mean, I, I do know there have been seasons where, where auction prices have gone down. I, I, I’m no expert, but I, I know there have been some, you know, when should we be cautious? How much does recession play in And come on.
What’s, what’s, what’s the risk profile of these and volatility?
Allen Sukholitsky
I don’t have answers that you’re gonna love, um, mostly because you’re, you’re, you’re looking for the, I’ll tell you what I think the
biggest risk is. No. And, and here’s the thing I’m gonna, I’m gonna go
through every one of the points you brought up.
I’m gonna show you that you’re not gonna love the answers. So on in terms of the, uh, the risk profile. Um, so I actually did this, uh, I looked at the volatility of arts specifically. Uh, because I put on my old strategist hat and I wanted to show a lot of invest. Well, I’ll, I’ll tell you, I’ll tell you because a lot
of there were investors I was talking to who would tell me, okay, I understand what you’re saying.
The asset class has existed for a long time. Seems like you have data for it. But I’m having a hard time wrapping my mind around whether it really is an asset class the way that I think about every other asset class. So I said, okay, let’s do. Let’s think about what is the most defining characteristic of any asset class.
And the answer is it’s volatility profile. Mm-hmm. . So I started thinking about that a little more and I said, okay, well what is art in a nutshell? If it had to be an asset class, what type would it be? The answer is, well, it’s a private market asset class, the same way that private equity is a private market asset class.
Venture capital is a private market asset class. And what I did is I started researching what has been the trend in volatility in the art. Compared to the trend in volatility in private equity and the trend in volatility in venture capital, and the trend for all three of those was almost identical.
Several decades ago, those asset classes were a lot more volatile. In recent history, those asset classes have become less volatile and interestingly, Arts volatility profile is almost right on top of private equities in the sense that over the last decade, that level of volatility has been about 10%. I think for private equity it might be 11, 12%.
For art, it’s about 9%, but on,
Bob Fraser
so what does 9% volatility mean that you can expect on an annual basis? A 9% fluctuation up or down? Is that, is that right? Yeah,
Allen Sukholitsky
That’s the idea. It’s, it’s, it’s the standard. Think of it as the standard deviation. So the same way that investors look at standard deviation or volatility for other asset classes, it’s the same thing.
So, so that’s one answer you probably didn’t love, because, uh, that doesn’t tell you that art is extraordinarily risky. How I, I thought you might have been insinuating that. So that’s one part. Um, and then I, what, what were the other questions? Remind me
so, recession, recession, uh, recession, right?
If you take a look at the years when, when a recession, uh, has happened in, uh, at least in the US you go back about 20 years or so. The years in which a recession has taken place, the art market has been up on average. I think it’s, I’m doing this from memory. I think it’s about 6%.
The art market was up onary.
It
Bob Fraser
kinda makes sense. Okay. But so what causes, what, what is a down market in the art? What, what does it correlate to? Is it, you know? You know, so, Raising taxes on the ultra wealthy
Allen Sukholitsky
or, you know, , so that
that could have somewhat of an impact. Um, several decades ago, um, the Asian market, or, or actually Japan, frankly in particular, um, was caught up in a frenzy of art buying for a period of time.
And what ended up happening is that bid up prices in the art market consider. And of course what happens when the price of anything gets bit up considerably. Eventually that price is going to come down when all of those people realize that there’s no one else they can sell to. So that has taken place.
You know, you, you brought up, uh, QE and sort of the, uh, uh, very, um, uh, ex extensive monetary policy, I’ll call it. We’ve had, we’ve had for some time now, the interesting thing is this, so the s and p 500 as of the end of last year just finished its strongest decade in, I believe, more than 30 years, if I’m not mistaken.
Undoubtedly, much of that was fueled by QE. But here’s where it gets interesting. You might think that had, that, that had to be somewhat of a similar case for the art market, and the answer is not exactly the best decade for the art market. And, and this is gonna surprise you. The best decade, decade for the art market was as of 2008, starting 2008 or ending in two.
Ending, ending. Interesting. Interesting you, so, so
what this basically goes to is a lot of that correlation profile I was talking about earlier in our conversation, the art market, it just moves to the beat of its own drum. And if you, and he, I mean this, you know, the, I don’t, I don’t know if this’ll be interesting.
I, I always find this interesting. The art market has this, it’s got this. Sort of psychological and emotional component for all of the people that are involved in it, in, in the sense that, you know, I, I always love to give this example. It usually gets a chuckle. You’re not gonna meet a lot of equity investors who will tell you with a straight face that they are absolutely in love with their equity
portfolio, , right?
That that doesn’t happen. people. People buy equities
because they wanna make money off of them. It’s a financial investment the same way they make any other financial investment. Art, on the other hand, is a very special beast because with the art market, you have plenty of collectors and individuals all over the world who absolutely are in love with their paintings.
Yeah. And the best part about our business from, from, uh, an investor’s perspective, Is there’s a little bit of what I like to call emotional arbitrage that we can play because ultimately, if we are buying high, highest quality paintings by blue chip artists, and we have a good enough network to know who are the types of collectors and individuals who would want to buy those several years from now.
We can ultimately go to those individuals and collectors and start to show them pieces that they are very likely to fall in love
with and frankly, it gets even better. I love it gets even better than,
better than that when you have multiple collectors or institutions that have decided they all have fallen in love with your one painting and now they have to.
They
Bob Fraser
have,
they have to have it. Yeah. We, we, we could probably get our wives interested in investing for the first time ever. Oh, I’m sure. I’m sure.
Ben Fraser
So, okay. My last question, and this is, I’m gonna ask you to reveal a secret sauce, though. I know you won’t. But if you had to break down, what are the key drivers of your, kind of all the data points that you’ve tracked, what, what makes kind of the unicorn.
You know, investment from an art piece. So you say you’re tracking, you know, emerging artists, you’re tracking different, different paintings that they’re doing, and this is kind of in real time. What, what are gonna be the things that are gonna be, you know, have, have the, the red alerts of, hey, this is something that we need to move on.
Um, and what are those, you know, without giving all the secret sauce away, but what, what are, you know, the things you are tracking to, to, to find the, the drivers of, of future value may be higher than those average appreciation.
Allen Sukholitsky
I’ll save two things along those lines without giving away too much.
One is, um, we track a lot of bitter oriented information. Um, I’m not gonna give too much detail, but I will say that, um, we’ve collected an extraordinary amount of data along the lines of. Uh, for all of the places around the world where art oriented fairs, auctions, anything, sort of a venue where art transactions take place, um, what we’ve collected for years now is data on how many individuals are bidding for all the different works that are going up.
Comparing that to how many individuals might actually be in attendance. Uh, who are ultimately bidding on these different works. And when you start to do that for every single work that goes up at every single one of these venues, you can build a time series over time that begins to give you borderline real time pricing in terms of where does it seem the art market seems to be trending more favorably?
Where does it seem to be trending less favorably? So that’s quite a bit of information that we have. Um, the other. Uh, that I, that I often like to add is, you know, in terms of that database there, there’s, uh, there’s another data set that, uh, that we collect, which is now that we’ve become one of the biggest buyers in the art market.
And, and a lot of, not surprisingly, a lot of individuals and institutions globally know this, um, when they come to us because maybe they have a particular piece that they’re interested in selling. When they come to us, even though we’re really selective, we only buy about two to 3% of the art that we’re.
Every time they come to us, we now know who owns the piece, what the piece is, and how much they were willing to sell it to us for. So you take that data point and you multiply for every single other person in institution that comes to you wanting to sell you something. All of that data you can add to your database and continue to use it as real time pricing to inform where does it seem the market seems to be getting hotter?
Where is it getting less hot, and what are the different areas that we should be investing in? And all of that is not even addressing. The models that our data scientists are building, using all of the transaction data that we put together.
Bob Fraser
It’s not, I’m not even touching fair. It’s not, it’s not fair as a, as a computer scientist, my background and a data guy.
Yeah. I covet your data. . I pro. If I had that database, I promise you I could bid some money. So that’s, that’s their, that’s, that’s more valuable than everything else they have. Yeah. So having access to that data. So alls you have to look at is trends for increasing demand, right? Where you see, see the bidding pool since supply is fixed.
Right. You, you, you look at demand side. Yeah. So is demand growing? Is it accelerating? Is it, you know, so it’d be very easy to put some metrics and analyze all that and mint money and with a proprietary database. That’s a pretty cool model. Honestly. That’s, that’s a, that’s amazing. Um, Yeah. What, what are your fees?
Allen Sukholitsky
Our management fee and, and, uh, percent of profits is pretty standard, I think for alternative investments. It’s one and a half percent and 20%, um, one and half alternative
Bob Fraser
per year. And then, and then, and then 20% of the profits. So you’re only making money if your investors are making money, one and a half percent fee and no acquisition.
Allen Sukholitsky
The one thing I should
mention, which I didn’t mention, the management fee is actually charged in equity. Um, it’s not charged in cash. Ooh. And, uh, which, which, honest, that’s nice. We think should be, should be more interesting for investors because ultimately it tells, tells investors two things.
You’re, you’re, I’ve got skin in the game. Yeah, you don’t have to pay cash every year. And we have even more skin in the game because it’s not just the 20% that’s giving us the compensation, it’s the, it’s the management fee as well.
Ben Fraser
How, how is, how is, uh, Masterworks as an operating company capitalized you?
Venture capital, is it, um, private equity? What’s the Yeah,
Allen Sukholitsky
we had, uh, we had a series A last year. Okay. Uh, led by Left Lane Capital. We raised 110 million. So we were valued at just north of a billion
dollars. Very cool.
Bob Fraser
Why didn’t you call us? Why didn’t you call us ? Well, Allen
Ben Fraser
this has been, this has been very enlightening.
I, I, uh, feel like I got a whole new education in, in our investing is really awesome. Thank you. Like 10 more questions, but I know we’re kind of way past the time we normally go, so this is, this has been great. Very interesting. Excellent. Appreciate you coming on and, uh, you know, maybe we’ll have you back on as you guys continue to evolve the platform, and I’m sure you had lots of things cooking, uh, in, in the hopper, so we’d love to bring you back on down the road and hear how it’s going.
Allen Sukholitsky
More than happy to. Thank you.
