I HAD THE OPPORTUNITY to view Gustav Klimt’s most famous work of art, The Kiss, while visiting Vienna a few years back. It depicts a couple locked in an intimate embrace. It’s an oil painting with a significant amount of gold leaf—quite distinctive.
A few weeks later, I had an opportunity to buy a Klimt. I was in a gallery in Salzburg and came across a drawing of his which was titled Stehender Rückenakt – 1913. I can’t remember the exact price. But since I didn’t buy it, it most likely cost a little more than I thought it was worth—or more than I currently had in my wallet. Still, I’ve always wondered what it would look like in both my living room and my portfolio.
This pleasant memory all came back to me recently when a friend emailed me a link offering me a second chance to add artwork to my portfolio. I must admit I was a little leery when I first clicked on it and the newly opened web page allowed me “to skip the waitlist!” It announced that I was now “invited to join an exclusive community investing in blue-chip art.”
The link also informed me that Masterworks is a company that buys multi-million dollar works of art, creates a Delaware limited liability company to own each one and sells shares in that company to the public. It resells the art a few years later, presumably at a higher price, and then disburses the proceeds to shareholders. Masterworks enables the fractional ownership of art—basically art for the little people.
I accepted the offer and opened an account. Before I could start investing, I needed to make an appointment with Masterworks’ registered financial advisor so he could learn more about me and answer any questions I might have. I also now had the ability to review the four works of art that Masterworks is currently securitizing.
I immediately started to imagine telling people at cocktail parties—or grocery store lines—that I owned a Picasso. Specifically, Homme a la Pipe, which is, of course, one of a series of Pablo Picasso’s important later works that feature the subject of the Musketeer. These are easily identifiable by the Musketeer’s colorful regalia and various accouterments, such as pipes, knives and swords.
Well, Evan the advisor called a few days later and explained, among other things, that the fee structure was 1.5% per year and 20% of the future profit. The management structure: Masterworks, via its B shares, determines when to sell the artwork and for how much. Where my Picasso would be stored: in the Delaware Freeport in Newark, Delaware, though it might sometimes be on display in Masterworks’ New York City office for my personal appreciation.
For those of you not in the know, the Delaware Freeport is a newly opened 36,000-square-foot, state-of-the-art temperature- and humidity-controlled warehouse. It offers various storage services to art investors, with the most important being avoiding New York City’s 8.875% sales tax.
Evan failed to mention that Masterworks takes an 11% “true-up” fee off the front end to facilitate a “reasonable compensation for Masterworks’ services, capital commitment and outlay in sourcing and acquiring” my Picasso. It was mentioned in the prospectus. But to read it required a measure of squinting that would make Clint Eastwood proud.
I also learned Masterworks wouldn’t be a part owner of my Picasso. If it had some skin in the game, that would keep our interests better aligned. But as things stand, Masterworks might view my Picasso a little less as an investment and a little more as a wallet adorned with colorful regalia and various accouterments, in this specific case a pipe.
Evan also recommended that I diversify and buy some shares in a painting called Ripe by Ed Ruscha. That artwork is far more decipherable than the Masterworks’ fee schedule as it has the word “Ripe” written in pomegranate juice on a 59-inch by 55-inch yellow canvas. I thought, much as you might, “I’ll stick with my Picasso, thank you very much… as who in the hell is Ed Ruscha?” By the way, you philistines, it’s pronounced roo-SHAY.
My Picasso would be insured against damage or theft, but not against competing ownership claims. Evan said that Masterworks only purchases paintings with impeccable provenance, so this shouldn’t be an issue. Still, I was a little concerned. If, in this day and age, my mortgage company requires me to obtain title insurance for my $500,000 house, you’d think the same coverage might be nice for my $17 million painting.
I also take issue with the risk of this type of investment. When I invest in stocks or bonds, I know that their prices may drop, but—in the end—there’s some underlying value. This is not necessarily true of works of art like Ripe. Tastes change. On top of that, there’s the added risk that my investment might be stolen, damaged or counterfeited, and therefore tied up in insurance claims and litigation.
Despite what I’ve written, I think there may be something to investing in art. I just returned from a visit to Crystal Bridges Museum of American Art in Bentonville, Arkansas, where Sam Walton’s daughter spent hundreds of millions of dollars to create a museum from scratch. It appears that the filthy rich’s appetite for money is only exceeded by their appetite for ridiculously expensive works of art.
By investing in paintings, it just may be possible to separate rich art dilettantes from a small portion of their money. I just don’t like the structure and fee schedule of this particular investment—not to mention I know almost nothing about art. On the other hand, if there was a way to invest in ridiculously expensive casks of bourbon….
Michael Flack blogs at AfterActionReport.info. He’s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.
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The fee structure sounds like a Frankenstein combination of annuities and a hedge fund: a serious haircut upfront, followed by an annual fee plus 20% of the (you hope!) profit when the painting sells. This arrangement reminds me of our my favorite country-western song line “She got the goldmine, I got the shaft.”
UofODuck, thanks for reading, your comments, and most importantly the Jerry Reed reference!
The first warning sign was “skip the waitlist.” If the offer is so great, and folks are lined up to invest, then why is it necessary to offer the “skip” incentive? Maybe there is no waitlist….
I am also wary of crowdfunding in general, new money introduced into an existing market will likely inflate prices. And, as in this case, the company offering the investment has no skin in the game.
Great story Michael. I was in Bentonville last month to visit friends on a houseboat – I wish I had taken the time to investigate the area and learn about Crystal Bridges. Next time.
Rick Connor, please click on the above Crystal Bridges link, it could be invaluable the next time you visit. Thanks for the kind words.
Rather than buy an individual work of art, Humble readers will call their brokerage, seeking to dollar cost average into an art index fund.
M Plate, I like the idea. Then I could own a whole portfolio of art.
Well stated Michael, nice write-up. I’m sure your interest and appreciation of roo-SHAY’s work “riy PAY” would very much be met with the approval from one Mrs. Bucket– that’s “bou-KAY” , don’t you know (sorry I just couldn’t help myself).
wtfwjtd, don’t worry, that’s “o-KAY”.
Gustav Klimt’s “The Kiss” was unavoidable at the Belvedere. I’d never heard of it but Vienna sure promotes it.
James McGlynn CFA RICP, that’s not the only thing Vienna has going for it:
“The platz contains equestrian statues of two Austrian heroes: The Archduke Charles of Austria and Prince Eugene of Savoy³ (pronounced: Prince “oy-gen”, with a hard ‘g’).”
interestingly enough, Prince Eugene of Savoy was well respected by several countries, including both Italy and Germany (during their fascist period). The Nazi Kriegsmarine actually named a cruiser after him.
Tens of thousands of paintings are sold every month at hundreds of auction houses throughout the country. Most of them are under $5000. I suggest buying what appeals to you, and hanging it on your wall.
Ormode, thanks for the advice, though I’m a DIY kind of guy.
Crystal Bridges is one of the hidden gems out there. You walk in thinking “how in the world could something like this be located here?”
But, upon reflection, you realize that it makes sense and the growth in NW Arkansas is largely due to Walmart and associated vendors.
Nate Allen, it is amazing what a billion dollars or two can do.