Masterworks is a company that buys paintings and securitizes them, selling off partial ownership to individual investors. It was valued this week at more than $1 billion — which is more than the aggregate value of all the art it has ever bought.
Why it matters: The value of Masterworks itself is growing much more quickly than the value of any of the art it's investing in. As a result, there's a strong case that Scott Lynn, its CEO, has created the most lucrative art-dealing business model of all time.
The big picture: Once Masterworks has acquired a painting, it is normally securitized within a few months. That means the company will have raised back the full cost of buying the artwork, plus a 10% "true-up" payment. Only then, in most cases, will Masterworks actually pay the seller for the work.
- The power of monopsony: Masterworks is now the biggest spender on artworks in the world, expecting to buy nearly $400 million of art this year and closer to $1 billion in 2022. The company has a relatively short list of artists it's interested in, and anybody selling a painting by one of those artists is going to approach Masterworks first.
- As the biggest buyer in the market, Masterworks gets to set its payment terms, especially since sellers want to remain on good terms with a company they're going to want to sell to in the future. That's how Lynn manages to pay for art only after he's already sold it.
What's next: As the Masterworks portfolio grows in value, the company will start to capture an ever-greater proportion of the total value of that portfolio. Like a hedge fund, Masterworks charges 1.5% of assets annually plus 20% of profits, payable when the art is sold. Those charges come on top of the initial 10% premium payable to Masterworks.
The bottom line: While art tends to appreciate slowly if at all, Masterworks has perfected a business model that allows it to flip art at a 10% gross profit every time it buys — and to still retain 20% of the upside on the art, plus a management fee, on the art it has already sold. Lynn says the company is already profitable.
- That would explain its billion-dollar valuation — just so long as the current FOMO/YOLO investing environment sticks around for a few more years.