Investing in Art feat. Allen Sukholitsky

Hello, future billionaires. Welcome back to another exciting episode. Today we had a really fun interview and, uh, I felt like you're gonna love this. Yeah, we went for about an hour. I felt like we could have gone for another couple hours, uh, with this gentleman, Alan, with Masterworks and Goldman Sachs guy.

So this incredible traditional, very, very brainy, but he is basically democratizing art investment. So art is the one thing billionaires do play in. And art has actually been a great investment.

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, kind of its place in a portfolio and what drives the value and kind of how they've created this pretty incredible database that is, is, was shocking to me actually that it's never been done before. Tracking all the transactions for the past 30 to 50 years of art. And so it's really cool what they've done.

The coolest thing too is they're syndicating single pieces of art.

Yeah.

Which I love. So, okay, this is it. This is, you gotta hear this.

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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 Sokolitsky, who is the Chief Investment Officer at Masterworks. And 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 Reg A+ offering, which is open to non-accredited investors. We'll get into all that, but really cool because it's an asset class and a niche that we haven't really talked about at all.

Every day people can invest in art, right?

Right. And really democratizing the access to fine art, which is, you know, a preferred asset class of the ultra wealthy.

So this is a way for us to pretend we're billionaires.

Exactly.

So that's the idea.

Alan, thank you so much for joining and give us a little bit of background on you because you have had a very 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, you ended up where you are today?

It might not seem like a natural progression that 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, probably 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 is 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, giving forecasts for the S&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, 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 a, 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. It's existed for centuries. And not once did it cross 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, okay, let's start doing a little initial research, see if the asset class is actually 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 is art frankly should've 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, give me 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.

Wow. So, so your, your background, I mean, you were with Goldman Sachs is kind of the gold standard of traditional investments and the, the, the, the 800-pound gorilla of investment banks in big New York. So, 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?

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. And that's because I come from an asset allocation background. So returns are not always the thing I think about first and foremost. Art's returns, of course, are attractive, but For me, the most attractive aspect of art is actually its correlation profile.

Be specific. So what does that mean?

Yeah. Yeah. So like I said, I spent my whole career researching every other asset class. And the thing about 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 equity, 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, right? That's pretty, that's pretty much standard.

It was famous during the 2008 crisis, right? The, the phrase was, yes, correlations all went to one.

Correlations go to one.

And what's that meant is that bonds were supposed to be totally different than stocks, totally different than, than oil and gas, or then, then gold, and everything went down at the same, 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, which means correlations.

Yeah.

And how to diversify. And you're saying art is really uncorrelated.

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 get is that the asset class you're looking at is going to have a low correlation to some things, but inevitably a higher correlation to other things, meaning it's always going to 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 of fact. This is how most asset classes are. So large caps are going to have low correlation to bonds usually, but large caps are going to have a high correlation to 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 doing all of this from memory. I know I've missed a few, but if you compare art to any of them, correlation profile is 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 going to act like anything else you already own, which is exactly what you want from a diversification.

Which is unique. And it's nice when everything is going down to have one thing that isn't, right?

Now I might push back on this a little bit, but 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 is there?

Well, there's regular auctions though.

But I mean, like, you know, on the exchanges, you can't go and buy an art ETF, at least from my understanding. Like, so what was the way, the mechanism that was you know, trading these assets. And it, if it's not, you know, publicly traded, then there would be obviously a lower correlation.

Look for a pricing mechanism.

Yeah.

Yeah. So the, I, I feel like that your question is kind of revolving around this concept of liquidity, probably.

Yeah.

Art is not a liquid market along the lines of how private equity and venture capital and real estate are not liquid markets.

Right.

There are some nuances obviously that make make them different, but in general, the idea that they don't trade regularly like stocks, that is entirely accurate. So the way that it works with pricing and transactions, and actually this is going to lead me into a topic I was hoping I'd be able to talk about. So the way that it works 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 property. Ultimately though, you also have the data point, which would be the transaction for that property that you might've been looking at. So you have appraised values, you also have the transaction data.

Meaning the historical times it's traded prior to it being appraised now.

Yep.

You have comparables. So it's very similar to real estate.

Yes.

It's like you have comparables.

Yes.

You have you have transaction history and appraisals.

Appraisal process is very much driven by comparables. But the topic that I was 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 that, 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 has a data provider that they use, whether it's Bloomberg or Refinitiv. There are 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. So believe it or not, 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 the The first project was we hired 30-some-odd analysts who had one job for 2 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, 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 dataset 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 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 dataset that is truly proprietary. Nobody else has this except us. Cool.

So talk about Masterworks. And so what is it like? What, what do they do? And Why is it so cool?

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 going to word this so I don't offend anyone. There are 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 painted should we be investing in. They're doing kind of that initial cut in a sense.

So this is like almost what a stock analyst would do, right? Is your asset— Goldman would go and look at, hey, where is the, where's the best places, best industries to be investing in, the best. Yep. 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. 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 the, 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 investible for our investors.

Don't tell me they stick 'em in a dark warehouse somewhere.

Most of the time our art lives at the Delaware Freeport, which is a state-of-the-art storage facility.

Oh, that's a crime against the art.

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 rot— we rotate 5 to 10 works of art in that gallery every 3 to 4 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 museums. 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. So we do do those things.

So I'm kind of curious, kind of taking a step back, you know, prior to Masterworks jumping on the scene and an investor wanted to buy art, what was the best way to do that? I mean, 'cause to me it seems—

You go to auctions. You go to auctions, right? And you bid and they take it home and stick it on the wall.

Yeah, I mean, hard part of the whole process is when you're talking about the blue chip segment of the art market, the paintings are gonna be selling easily for millions of dollars each. 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 going to be paying millions of dollars if you want to quote unquote invest in art. But ultimately buying one painting for millions of dollars, I would imagine that that might represent sort of an asset.

But there weren't really, right? Yeah.

I'm talking about it from an allocations perspective.

This is a whiff, right? But there weren't, I mean, I guess the point is there weren't a lot of securities that around art, right? You couldn't go buy— There weren't, there weren't, no, there weren't those securities.

Yeah.

Which is so cool. There were literally no securities.

Masterworks artworks is the first company, which is to securitize a painting, that we were literally the first ones to securitize it back in September 2017.

Yeah.

Okay, so, so I was— the next question is, you guys have been around for 5 years, so 2017, is that right? 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 Well, 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, because every one of our paintings has its own vehicle, and that allows us to fractionalize the art. That's how investors can buy shares.

So, and then are you, so you also get a listing, a public listing. So these are, these are tradable on the, on the stock exchange?

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.

Gotcha.

So they're not, but they're not listed.

They're not listed on an exchange. That's right. However, however, this is an important however, we actually, when we started the business, we also created our own secondary market, which means that for investors, now 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 3 to 10 years with an average of, let's say, 5 to 6 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 buyers and sellers, if they find each other, they can transact with each other.

Okay.

So that was something that we started very early on.

So you created your own little NASDAQ exchange there.

Sort of.

Which probably has pretty wide bid-ask spread, right? Or no bid and no ask?

No. So if you, you can actually go on the website and you can take a look at the secondary market yourself. You don't need to have special access. You could look at it. I would say that 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 market, whatever.

So do you guys strike a nav at a certain time period or how do you value it?

We value all of our paintings on a quarterly basis. In fact, the approach that we take to valuing our assets is really the same approach that other institutional investors take with the assets that they're involved in, at least on the private market illiquid side. So we mark our assets every quarter. And so to what investors get sort of an updated mark to their holdings.

To what?

How do you mark it? Is you're not doing it?

Oh, so yeah. So we have a team in-house of certified appraisers. Like I think I mentioned this before, you need to have a proper certified 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.

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. Okay. Yeah.

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 spread.

Well, do they trade right at NAV or near NAV typically?

Some of them trade farther from NAV than others. I mean, the one thing I'll point out, despite us having this secondary market, we actually don't monetize it in any way. There are a lot of investors that we talk to and they ask us, oh, okay, so you have sort of your main business where you're making Art Investable, 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, which basically means buyers list what they want, sellers list what they have, and they have to find each other in order to transact.

Monetizing the transactional side of it, you know, all these platforms like NASDAQ and NYSE, they're charging a small premium between the bid-ask, and that's how they make money. And so you guys are not doing that. You're not charging a premium based on what the sellers want to sell.

But the question remains, so, Are we, you seeing a discount or a premium to NAV typically being traded?

It actually depends on whether you're a buyer. If you want to buy shares in a painting, the amount that you're going to offer to buy shares in that painting are going to be lower than the NAV. If you're a seller, you're typically going to be trying to sell your shares at higher than NAV. And 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 that there's no automated matching. However, here's the thing, here's the big, this is sort of exciting news. In the coming weeks, we are actually going to be transitioning over to an ATS system, which is going to much more efficiently and seamlessly match buy and sell orders. So we expect that the amount of trading that's going to happen on our secondary market is probably going to go up significantly.

Okay.

And, and I bring this up because, you know, one of, one of the points we are making, right, is that 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, 7 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.

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 2 months we had 3 multimillion dollar paintings that were fully allocated in, 2 of them were 14 minutes and I believe one of them was 13 minutes.

Nice.

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 going to sell out quick.

Scalp it in the secondary market. You know, people are smart, right?

That's never been different. That does happen. That happens.

So I see how the LLCs are created. I see how you create some liquidity, you know, but then how does an SLE end? What's your desired exit for these and how does that work?

For the desired exit, I can't help but mention that 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. And so ultimately after we buy the painting, which like I said, we expect to hold 3 to 10 years, an average of 5 to 6, 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 going to 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 expertise.

So they're being actively marketed basically over this— you're targeted 3 to 10-year period. You begin actively marketing this painting to try and figure out a good exit for it.

So we don't actively begin marketing at the outset. And so 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 since joining Masterworks. If you end up marketing a painting for an extended period of time and you start to notice that it's not selling after you've been marketing for an extended period of time, 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 want to 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, all 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 140 paintings in it, and he's been trying to sort out, okay, 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 or 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'll 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.

So from an investor's point of view, it's you buy it, you hold it, and, and just trust at some point Masterworks is going to liquidate this at a time. Then they're going to try and optimize the exit.

We've sold a number of paintings already. 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 fees and whatever else. That's good. So yeah, the performance has been very good. The realized returns, I think last I checked, realized returns have been 29, 30% net. And then for 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. That's awesome.

So you guys have been doing it for, that's unlevered too, right?

Thank you for bringing that up. That is entirely unlevered and that is also through this June. And the reason why I emphasize 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.

Yeah, that, that, that's great. Some other markets in the world aren't doing so hot recently. So, yeah. So talk, talk about, I mean, you guys have been doing this since 2017. You know, what's been the historical performance of art?

Yeah.

I mean, there's, you know, there's been a great, all asset classes have risen because of this quantitative easing and easy monetary policy. It's very, very beneficial for assets. So what's—

Really hot auctions, I mean, since 2019. I don't know what that's all about, right? But what's going on? And so yeah, what's the historical, what do you, how long have you seen there been, you've got a lot of data, right? So what does your data say?

And that's exactly it.

And what causes recessions in art prices? And is it a session to be concerned about?

I'll take those two separately. So the first part about historical performance. So we break out the universe, so to speak, of art investments into several categories. One category would be postwar and 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, 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 we put together, as you might expect, you would analyze that if you had it. So what we learned is that old masters paintings typically appreciate at about 2 to 3% on an annualized basis over time. Impressions of modern art. Per year.

Okay.

Yep.

Impressionist and modern art is about 7.5% annualized a year. And postwar 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 rate. Impressionists and modern art, that was painted more recently than that. That has a stronger appreciation rate. Postmodern 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 this: 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 liked. And so that starts to give you an idea about why these different segments of the art market appreciate at these, uh, at these different rates.

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, you know, it's going to have to be at 1 or 2%, or it's going to be worth trillions of dollars. So It does make sense, you know, actually.

So what are some of the drivers of value, right? In real estate, you know, when you have an appraisal, you have kind of 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 create a value. You know, the difference is art, generally doesn't have an income stream unless you are monetizing it through, you know, leasing it to different museums, which you're not. So, you know, talk about drivers of value. What's really driving that appreciation?

I hesitate to say it's exactly like, but it is quite similar to commodities. Commodity prices are ultimately driven by supply and demand. Commodities typically don't generate cash flow either. 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, 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 5 to 10 years we're going to be minting more ultra-high-net-worth individuals around the world? If you do, that's probably going to be supportive of art prices. If you don't, it's probably not going to be supportive of art prices.

So on the demand side, you're looking at buyer pool basically, right?

Exactly.

Standing buyer pool or shrinking buyer pool.

Yeah, that's it. And in fact, we occasionally refer to art investing as somewhat of a call option on the ultra-wealthy. I mean, that is effectively what it is.

That's a cool concept.

It's a good line, right?

Yeah.

It's a good line.

Wow.

So that's the, so the demand side is it's somewhat unique in that the individuals who buy art typically have to be ultra high net worth investors. But so that's somewhat interesting. But the supply side, that's where I think this asset class is so extraordinarily unique. So 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 two. 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 I love to give.

Inelastic supply, basically.

Bingo. Bingo. Let's say the price of Picasso paintings goes up enormous amount. I can guarantee you Picasso's not painting any more 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 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 permanent collection, well, permanent collection gives it away. That art is never going to come out. Oh, wow. Which means that it effectively is taken out of circulation. Which means that, you know, I'm going to use hypothetical numbers here. Let's say you're a big name artist and you had 100 paintings that you painted throughout your career before you passed. Every year there is a chance that 1 or 2 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 Yeah.

Okay.

So you're, you're professional investor, you're a New Yorker. We've been 100% bullish here. Come on. What's the downside? And when do these things go down? I mean, I do know there have been seasons where, where auction prices have gone down. I'm no expert, but 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 profile?

I don't have answers that you're going to love. Mostly because you're looking for the— I'll tell you what I think the biggest risk is. No, and here's the thing. I'm going to go through every one of the points you brought up. I'm going to show you that you're not going to love the answers. So in terms of the risk profile, so I actually did this. I looked at the volatility of art specifically because I put on my old strategist hat and I wanted to show a lot of Yes. 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. It 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 this. Let's think about what is the most defining characteristic of any asset class? And the answer is its volatility profile. 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 market compared to the trend in volatility in private equity and the trend in volatility in venture capital. And the trend for all 3 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, art's 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 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, that's, 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 here. So, so that's one answer you probably didn't love because 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. And then what were the other questions? Remind me.

Recession. Recession.

Ah, recession, right. If you take a look at the years when a recession has happened in, 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.

Okay.

It kind of makes sense. Okay. But so what causes, what? What is a down market in the art? What does it correlate to? Is it, you know, so raising taxes on the ultra wealthy or, you know?

So that could have somewhat of an impact. Several decades ago, the Asian market, or actually Japan frankly in particular, 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 considerably. And of course, what happens when the price of anything gets bid 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 QE and sort of the very 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&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 this is going to surprise you. The best decade for the art market was as of 2008.

Starting in 2008 or ending in 2008?

Ending.

Interesting.

Huh.

Interesting.

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 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. And in the sense that, you know, I always love to give this example, it usually gets a chuckle. You're not going to meet a lot of equity investors who will tell you with a straight face that they are absolutely in love with their equity portfolio. That doesn't happen. People buy equities because they want to 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 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.

It gets even 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 sort of bid against it.

They have to have it. Yeah. We could probably get our wives interested in investing for the first time ever.

I'm sure. I'm sure. So, okay. My last question, and this is, I'm going to 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 makes kind of the unicorn, you know, investment from an art piece? So you said you're tracking, you know, emerging artists, you're tracking different paintings that they're doing, and this is kind of in real time. What are gonna be the things that are gonna be, you know, have the red alerts of, hey, this is something that we need to move on, and what are those without giving all the secret sauce away, but what are the things you are tracking to find the drivers of future value, maybe higher than those average appreciation numbers?

I'll say two things along those lines without giving away too much. One is we track a lot of bidder-oriented information. I'm not going to give too much detail, but I will say that we've collected an extraordinary amount of data along the lines of for all of the places around the world where art-oriented fairs, auctions, anything sort of a venue where art transactions take place. 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 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. The other piece that I, that I often like to add is You know, in terms of that database, there, there's, there's another dataset that, 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 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 2 to 3% of the art that we're offered. 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 and 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's 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. It's not fair. I'm not even touching it.

It's not, it's not fair. As a, as a computer scientist, my background, my data guy, 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 all you have to look at is trends for increasing demand, right? Where you see, see the bidding pool, the— since supply is fixed, right? You, you, you look at demand side. 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 are your fees?

Our management fee and percent of profits is pretty standard, I think, for alternative investments. It's 1.5% and 20%.

So 1.5% per year and then, and then, and then 20% of the profits. So you're only making money if your investors are making money. Yeah.

I don't know.

But 1.5% fee and no acquisition fees.

The one thing I should mention, which I didn't mention, the management fee is actually charged in equity. It's not charged in cash.

Ooh.

And which, which honestly, 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 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.

How, how is, how is Masterworks as an operating company capitalized? Are you venture capital? Is it, Um, private equity. What's the, yeah.

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.

Wow.

Very cool. Why didn't you call us? Why didn't you call us?

Well, Al, this has been, this has been very enlightening. I, I, uh, feel like I got a whole new education in, in, uh, art investing. This is really, Awesome. Thank you. I have like 10 more questions, but I know we're kind of way past the time we normally go.

So this has been great. Super 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 have lots of things cooking, uh, in the hopper. So we'd love to bring you back on down the road and hear how it's going.

More than happy to. Thank you.