297: Scott Lynn On The Argument For Investing In Fine Art

Scott Lynn is the Founder of Masterworks, which allows anyone to purchase and trade shares in iconic artworks. In this conversation, Scott and Anthony discuss what the private art market is, how big of a business it is, why art has outperformed the S&P 500 since 2000, and how Masterworks is democratizing access to this growing asset class. Learn more about Masterworks here: https://bit.ly/2LyECQC =============================== Pomp writes a daily letter to over 50,000 investors about business, technology, and finance. He breaks down complex topics into easy to understand language, while sharing opinions on various aspects of each industry. You can subscribe at www.pompletter.com

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Anthony Pompliano?

  This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off.

• 0:11Anthony Pompliano?

  Scott Lynn is the founder of Masterworks, which allows anyone to purchase and trade shares in iconic artwork. In this conversation, we discuss what the private art market is, how big of a business it is, why art has outperformed the S and P 500 since 2000, and how Masterworks is democratizing access to this growing asset class. I really enjoyed this conversation. I learned a ton, and I hope you do as well. Before we get into the episode, though, I want to quickly talk about our sponsors. The first is BlockFi. They allow you to keep your crypto, use it as collateral, and receive a US dollar loan or an interest-bearing account, all from one single platform, BlockFi. I'm a huge fan of the company. I'm an investor and a user. To me, the most interesting part is you can take crypto or a digital dollar,

• 0:56Anthony Pompliano?

  like GUSD and USDC, deposit it into an interest-bearing account and get very high rates of return compared to the legacy financial world. Bitcoin right now is about 6% APY, and the stable coins are 8.6% APY, unheard of rates in the legacy system. Head on over to blockfi.com/pomp, and you can learn more, understand the risks, and get started today. Again, blockfi.com/pomp. And then lastly, don't forget that I write a daily letter to over 50,000 investors about business, technology, and finance. I break down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at pompletter.com. Again, pompletter.com. We're going to the description

• 1:40Anthony Pompliano?

  of this podcast, and you'll be able to click on the link there. All right, let's get into this episode with Scott. I hope you guys enjoy this one. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

• 2:15Speaker 01

  All right, guys. Bang, bang. Super excited to have Scott here. Thanks for doing this, man.

• 2:21Speaker 02

  Yeah, thanks for having me.

• 2:23Speaker 01

  Let's just jump right into your background before we get into all the fun art stuff. What have you done?

• 2:30Speaker 02

  Yeah, so my background really is in technology. So starting different technology companies originally beginning with casual gaming, moving into online advertising, fintech, and then recently founding Masterworks. But maybe as interestingly for your viewers is throughout that entire period over the past 20 years, I've also been collecting art. So to me, historically, art's just been a passion. But I think over the years, really realized that it's this interesting asset class, which for me personally has outperformed other asset classes.

• 3:04Speaker 02

  And has been a core part of my portfolio. So really, the genesis of my Masterworks was how do I take this asset class that I love or this market that I think is really interesting and just democratize it and make it available to everyone?

• 3:18Speaker 01

  Yeah. And what was like the fascination with art? Or how did you originally get into just maybe not even buying art, but just being interested in it?

• 3:27Speaker 02

  Yeah, you know, it's like that question all the time. So, you know, the real answer is that my mom was just an amateur artist and I grew up with art books. You know, just had it as a kid and started collecting. I think I bought my first, you know, real painting when I was 19 years old. Kind of after I made some early money for the first company that I started. So it really started as a passion. And in the late 90s at that point, it wasn't, you know, it wasn't the asset class that it is today, which is, you know, this year, last year, $68 billion in art sold. It's this, you know, large industry. Back then, I would say it was,

• 4:08Speaker 02

  it was big, but it was really more of a, kind of this really passionate group of small collectors that were really,

• 4:18Speaker 02

  you know, focused on cultural significance of artists and kind of the history of art more so than the market dynamics today.

• 4:26Speaker 01

  Got it. So I got to ask then, you are in New York. What is your favorite art gallery or museum then?

• 4:34Speaker 02

  You know, it's also a funny question. So I always tell people who are out at My favorite museum and it's been my favorite museum for, you know, ever is is the Frick Collection. Uh, which I don't know if you've been to it or not, but on on Fifth Avenue, I think Seventy First Street. Uh, but just a, you know, it's a really great museum and that you can go and you can see how someone lived. Uh, you know, the the beginning of the twentieth century and uh, and really incredible art collection as well. So. I I think that's a great experience. You know, I don't know if it's necessarily my favorite collection in the world, but I think it's, I think it's a great experience.

• 5:10Speaker 01

  Yeah, that that is a fantastic one. Have you ever been to uh, the JP Morgan Library?

• 5:14Speaker 02

  Yeah. Yeah, also.

• 5:17Speaker 01

  Yeah, that one's probably for me, but very similar type of uh, type of thing. Um, all right. So, uh, let's first talk maybe about your your art collection and kind of how you've built it. And was there uh, rhyme and reason and strategy, or was it more of, let me just go and collect the art that I actually enjoy looking at and and like?

• 5:37Speaker 02

  Yeah. So, you know, I I think, I mean, obviously that's evolved throughout the years. Uh, so I started collecting, uh, what I would consider kind of brand name household artists like, uh, like Picasso. Um, but but more, you know, B or C example, Picasso was younger and then kind of gravitating to uh, uh, to color field painting, uh, minimalism. Then actually moved back to abstract expressionism, like this is a John Chamberlain sculpture behind me. Um, which which was was really the first time in American history that artists started painting in a non-figurative way. So artists like Jackson Pollock, uh, Rothko, Clifford Still, Arnaud Newman.

• 6:17Speaker 02

  Lee Kreiser, Alan Franken Tyler, uh, those those are a lot of the people that exist in my personal collection. Um, although those aren't aren't necessarily the artists that we focus on for masterworks, but that is, that is, uh, what I've been collecting personally for a number of years.

• 6:33Speaker 01

  Got it. And then I guess part of my interest in this entire market is, this is gonna be a week, I haven't even told you this yet. I was reading the book about Steve Cohen. I think it's called Gray Matter, Black Matter, whatever, or Black Edge, I think is what it's called. And in it, he's basically buying a piece of art that's, you know, tens of millions of dollars, and it gets damaged as it's getting delivered to him. And it really kind of set me off on this path of like, wait a minute, there's pieces of art that are literally trading at, you know, tens of millions of dollars. These are incredibly rare and obviously sought after pieces. And I started just Googling around, and I was blown away by not only, one, how big the market is,

• 7:15Speaker 01

  but also, two, how many people that you don't know participate in it actually are either large art collectors, either from an investment standpoint, or just they enjoy it themselves.

• 7:25Speaker 02

  Yeah, I mean, so to me, the big opportunity around Masterworks is just you have this massive asset class. Deloitte estimates that the total value of the asset class is 1.7 trillion dollars. Now, you compare that to gold, $5 trillion, public equities in the US, I think, are $30 trillion. It's this massive asset class, and there historically has been no way to invest in it. So, most people aren't aware that it exists, simply because it costs millions of dollars to buy a painting. So, it's really limited to the ultra wealthy at this point.

• 7:59Speaker 01

  Yeah, so maybe let's talk just through, it seems like there's two groups of people. The people who do it as a hobby, right, and they're doing it, they're collecting what they like. And then there's kind of the professional investor. How do you, now that you've been collecting for a while and actually building a business in the space, how do you decipher between those two? And kind of, do you try to look at those as actually one group of just art collectors? Or is it pretty separated in the way that they approach actually buying pieces?

• 8:29Speaker 02

  Yeah, I guess the way I would think about it is, you know, it certainly, I guess your approach to the art market matters and certainly, obviously, determines returns, but it's not necessarily a requirement. Like if you, if you look at data published by a company called ArtPrice, ArtPrice has basically constructed this index on the top 100 artists for the past 20 years. And that index alone, just every single painting created by every top 100 artist has slightly outperformed, or probably today materially outperformed, the S and P over that period of time. So, so the art market in general is just, is just really taken off, probably because ArtPrice is, or we believe that, that ArtPrice is

• 9:13Speaker 02

  are most likely correlated to global ultra wealth creation. So if you believe that wealthier, you're getting wealthier, then you, you tend to believe that ArtPrice is growing up all the time.

• 9:23Speaker 01

  Yeah, I mean, I guess that's intuitive when you think of it through that lens, right? And obviously, that, that is definitely happening in the world. It's pretty compelling data on that front. Help me understand, how does the legacy art market, so before Masterwork enters the, the kind of landscape, how do these pieces of art go from an artist creating them to actually some sort of initial purchase? And then the secondary and, you know, and third order transactions that actually make the market of art?

• 9:51Speaker 02

  Yeah, so you, you use the, the correct words. There's, there's two, two different segments of the art market to think about. One is the primary market, and that just very simply means paintings that, that are selling for their first time. And then the, the other is the secondary market, which means paintings that are selling multiple times. So typically, an artist is represented by a gallery. The artist makes a painting, goes to a gallery, sells for the first time to a collector. And then that, that painting gets resold thereafter, particularly as the, as the artist market grows, or as that artist becomes more popular. We generally, we, we really, Masterwork's only focused on the secondary market today. You know, there's, there's lots of amazing artists in, in primary market. There's lots of important artists that are definitely investment grade.

• 10:36Speaker 02

  We haven't focused on it as much, just because there's not as much data behind it. So it's difficult for our research team to understand returns.

• 10:46Speaker 02

  But yeah, that's that's sort of think about the market broadly.

• 10:50Speaker 01

  Got it. And is there segments of it in terms of, you know, I can go to a local store and buy a 20 pieces, a $20 piece of art and kind of put a frame on it, hang it up and that's nice. Then there's obviously the, you know, 50, $100 million pieces of art, that's a pretty big delta there. How do you actually segment kind of the size and maybe sophistication of the various pieces or buyers?

• 11:13Speaker 02

  Yeah, so this is an interesting stat. If you if you look at just the top 100 artists, the top 100 artists constitute 62% of the overall art market, which is $68 billion a year. So if you just think about, you know, this from a total probability perspective on being an artist, right? There's, I don't know, probably billions of artists that have existed historically. And there's really a very, very, very few number of people that wind up kind of commanding the art market overall. So today, when we when we talk about the 68 billion billion dollar market, we're really talking about hundreds of artists that are that are the vast majority of that.

• 11:54Speaker 01

  And then I guess what puts somebody in that top 100, right? Is it the value of the individual pieces of art? Is it something that is less quantitative and more kind of the story behind the art? How does that get determined?

• 12:09Speaker 02

  In today's world, it's probably different than historically. Historically, I would like to think, and I think a lot of people in the art market would like to think, that value is correlated to what we call cultural significance. Cultural significance can broadly be defined by, you know, artists that institutions collect, artists that appear in other important collectors' collections, artists that that appear at shows, other important artists. There's different ways to measure cultural significance. But, you know, in today's world, a lot of a lot of values are just driven by commercial dynamics. They're driven by kind of mega galleries that have a lot of money, promote artists heavily, that generate awareness.

• 12:54Speaker 02

  And, you know, the other thing that's really interesting about the asset class, I think this is probably unique to art. I've I haven't thought of other asset classes that are like this. But an artist lives and creates so much work, right? So many paintings and then eventually they pass away. And then those paintings get donated to Institutions over time. So it's one of the few asset classes which declines um in terms of of volume or supply. And that inherently drives up returns because of scarcity. So that's a that's a really unique characteristic about art that I think isn't totally appreciated by most people. And we see that we see that with a lot of major artists, and if you take an artist from Jackson Pollock.

• 13:36Speaker 02

  I think today there's there's something like twenty three drip paintings in private collections. Um, most of those paintings are not even what what anyone would consider A paintings, right? They're B paintings or C paintings. But they still sell for thirty million dollars because there's nothing else left. Uh, so that that's really, that's a really unique characteristic about the asset class.

• 13:59Speaker 01

  And do those not get replaced over time? Like those artists get replaced by new artists? Like, like, how does that mechanism of uh as an artist kind of ages out of the market, basically? And and they've got now a finite set of work. Uh, is there not um an increasing demand because there's just more artists? Or is it just that individual artist uh is finite and that's what drives the value of that specific collection?

• 14:22Speaker 02

  This is one of the first questions that our that our research team studied a couple of years ago. And I and I think it's a it's a critical um it's a critical thing to understand about the art market. So the example that I I like to use with new collectors is if you buy a Rembrandt today, do you think that will appreciate faster or slower than buying, you know, an artist like Picasso? Um, and the thing you see in the data on the art market, which is is uh is interesting is that

• 14:54Speaker 02

  appreciation tends to follow recency, but in very wide increments. Meaning art created in the seventies and eighties, for example, is appreciating at much faster rates than art created post-World War Two. And art created in the nineteenth century or or artists like Rembrandt is now appreciation is totally stopped. Uh, meaning that if you buy a Rembrandt for ten million dollars today, you sell it twenty years from now, you'll probably sell it for ten million dollars plus inflation. Uh, so it it is important to collect artists. You know, in today's world, I would say artists that that are post-World War Two um are most most compelling and most most interesting. There's there's some exceptions to that.

• 15:35Speaker 02

  But generally speaking, you know, the artists artists in the last sixty years um are are probably the the most investable.

• 15:45Speaker 01

  Got it. And then how does an artist, you know, let's say, take one of the top 100 artists, they create a piece of work, how does that original price, in that primary sale, where does that price get set? Do they go out to kind of a small group of investors or purchasers that they know? And there's a price determined there. Is the artist at kind of so much demand that they can just set their price and just take it or leave it?

• 16:10Speaker 02

  Yeah, in those early days, it's really determined by the gallery. So the gallery sets the price. And oftentimes, that price is even the same for any work by the artist, independent of the painting. It's $100,000 a painting or whatever the number is.

• 16:25Speaker 01

  Yeah, it's super interesting. And then I guess the secondary market is more kind of market dynamics, where it's just where do buyer and sellers meet?

• 16:33Speaker 02

  Yeah, that's right. And the way to think about the secondary market is you have three auction houses in the US, Christie's, Sotheby's, and Phillips. And those auction houses, you know, have been around forever. Like Sotheby's, until recently going private, was the oldest company on the New York Stock Exchange, at 275 years old. Right? So this is an asset class, which literally has been traded publicly at auction for hundreds of years. So one of the things that fascinates us about it is you have one of the oldest data sets on performance of an asset class there is, which gives our research team the ability to really analyze data from long periods of time, by different segments of the market, periods, et cetera.

• 17:18Speaker 01

  It's super fascinating. And then I guess, is there any data that you guys have seen in terms of that legacy art market, because it's been hard for individuals who are not ultra wealthy to participate, especially at the higher end of the art market? Is it one of these things where, you know, the top 1% of art collectors or investors own 90% of the art or 20%? Like, how do you think about that?

• 17:44Speaker 02

  Yeah, there's definitely a small number of collectors that, you know, that I guess, quote unquote, control the art market. You know, whether the number is 1,000 or 2,000, I don't really know. But there's a small number of people that have $100 million plus collections that are actively trading paintings in and out of the art market.

• 18:07Speaker 02

  Yeah, no, you know, there's several ways to think about that, too. Like, a lot of people think about that and say, oh, you know, there's a thousand people that control a $68 billion market. It's one way to look at it. The other way to look at it is there's a thousand people that are sort of like mini companies on their own that are buying and trading these paintings at scale, so.

• 18:25Speaker 01

  I'm assuming that the thousand top people are incredibly sophisticated. Do they have teams and they're like very data-driven on this? Or is it a, I walk in, I see a piece I like, you tell me it's 30 million, I do a little negotiating and we settle on a price?

• 18:41Speaker 02

  Yeah, I mean, incredibly sophisticated are people like you mentioned, like Steve Cohen, right? Like, they're very smart, successful people generally because they have to be in order to buy art like this. But I would say that data and generally art market has really suffered historically. When we started Masterworks, one of the very first things we did was we went out and we purchased auction catalogs from, I think, the 1960s through present, and we had a team of 25 interns actually digitize individual paintings, what they're purchased for, and then sold for publicly, and post that data on our website so investors can access it.

• 19:23Speaker 02

  And it's just shocking to me that you have a market this big where something has never been digitized, like everything in our world is digitized, but the art market is just, you know, kind of behind everything else, I would say.

• 19:36Speaker 01

  For sure. And then, as you kind of got into art and got more sophisticated about it, at what point did you have the idea for Masterworks? And kind of what was that original idea of the genesis to, hey, I actually want to go build a company here?

• 19:50Speaker 02

  Yeah, I would say that was really, that was really at the time that blockchain stuff was hot and, you know, we were thinking about different blockchain ideas. I think we didn't, you know, then we didn't totally, fully appreciate the regulatory dynamics with what we're doing today. You know, we've now wound up with 53, 54,000 people on the platform, you know, every offering is filed with the SEC, our sales team is regulated by FINRA, you know, we're a highly regulated business. So we initially thought of the concept as kind of quick and dirty startup idea, which evolved into something more complicated, but that was the genesis.

• 20:31Speaker 01

  Got it. And then kind of explain today what that value proposition is. So I come in, I create an account. What can I do and why would I do that?

• 20:40Speaker 02

  Yeah, you can come to the Masterworks website today, create an account, you have a call through membership team. We like to speak to every single investor that is interested in investing on the platform. And then basically, our offerings, our investment vehicles, our single painting vehicles. We show you a particular painting, we tell you what the historical returns are of that particular painting. We have a risk rating associated with the painting. You can read a full offering circular on the painting, very similar to how you can read an S1 for a company going public like Uber. You can read an S1 equivalent, what's called a 1A, for a painting going public or being securitized with us. So we give you lots of information on the artist,

• 21:24Speaker 02

  the market, the returns, the risk, and you can make a case by case decision on whether you want to invest in those offerings. And then just recently, we were really excited about a trading platform that we announced, I think roughly a month ago. So it's in beta. We have one painting on it. In the next few weeks, we're rolling out more and more paintings so people can start trading securities and paintings. So we've really taken an asset class, which historically is, you know, the only way to allocate to it is if you have $10 million to buy a painting, and we've securitized it, so anyone can invest in these paintings and trade securities in these paintings.

• 22:03Speaker 01

  So I guess there's a whole bunch of questions in here, but when I buy into an offering, right? So just say it's a Picasso, it's $10 million. I put in some amount of money. How do you determine how much money is like the minimum buying? And then is there a maximum in terms of how much of that $10 million piece I can own?

• 22:24Speaker 02

  Yes, we don't really have minimums or maximums. I guess that's not really how we think about it. One of the reasons we like to talk to our investors is to get them to understand how they're investing today, what their risk tolerances are, kind of educate them on different segments of the art market, different risk profiles, and then try to figure out what the right allocation is for them to an overall portfolio. And that's the approach we've taken, mainly because we just very quickly learned that Obviously, nobody knows how to think about investing in art. Um, so we we try to provide some some advice through through that process.

• 23:00Speaker 01

  Got it. And then, um, obviously, if I buy, uh, let's call it a hundred thousand dollars worth of a ten million dollar Picasso, I don't get to hang the Picasso in my house. Uh, where where is that piece kind of stored and and kind of, um, you know, is there any other components there that people should should think through?

• 23:17Speaker 02

  Today, those paintings are stored in art stores. There's lots of high-end art storage facilities through throughout the world, but, uh, you know, we're working with artist foundations now in the States to collaborate with them and kind of have them dictate where they would like the paintings to be uh, displayed long term. So whether that's retrospective, uh, one of the offerings we did, we're we're getting, uh, the artist working in the retrospective or just, you know, a local institution that the artist cares about. Um, ideally, we would we would hang these paintings throughout the world where members of Masterworks can go and see them and, uh, you know, we don't have to keep it in storage.

• 23:57Speaker 01

  Got it. And and then at any point, would you actually, um, like, put them into some sort of art gallery and and there's like a cash flow component to, um, lending it out to these people? Or is it really just the appreciation of uh, the value of the piece of art is where the return is driven from?

• 24:15Speaker 02

  Yeah, we we do have a gallery in Soho that we we operate where, uh, investors can come to paintings. We do events there. Obviously, in today's world, that's not happening right now, but, uh, hopefully it'll happen to consume. Um, but but the way I would think about investing in art is it's really just capital appreciation. There's theoretical ideas on how you can rent paintings out and do different things to generate income, but but the majority of the money is just just made from principal appreciation.

• 24:44Speaker 01

  Got it. And then you mentioned kind of the secondary trading function of the actual shares. So if I buy kind of a fractional ownership of a piece of art, I'm assuming that historically, because there hasn't been the fractional ownership, there hasn't really been kind of any sort of market there. It sounds like you guys are actually building that now and the hope is that that'll be a liquid market where people can go ahead and actually get liquidity after some holding period, maybe?

• 25:12Speaker 02

  Yeah, so we have, we have trading now that's active for one painting. Next week, we're rolling out other paintings. So we're definitely seeing a ton of interest around investors setting up trading accounts and really trading shares between each other. It's early, so we don't, you know, we don't exactly know how to think about it long term, but we fundamentally believe that from a product perspective, we need to build out the trading platform to give people interim liquidity because, you know, for most investors, waiting three to seven years for a painting to sell is just a longer, a longer allocation. So yeah, I think it's a part of the business.

• 25:54Speaker 01

  Got it. And then I guess part of the mechanism here is if I'm buying fractional ownership into a piece of art, are you guys going and buying the piece of art and then turn around and securitizing it? Or do you kind of pseudo securitize it, almost like an SPV to then go acquire it? Like, what's the sequential mechanism there?

• 26:15Speaker 02

  Yeah, so we, you know, based on how the art market works, to really get quality, I guess, quality paintings that we think have potential for good returns, we really had to buy those paintings with balance sheet capital. So we go out, we buy the painting with our own money, we turn around, and we, you know, we put it into an LLC, file it with the SEC, and then we start selling shares on it. And our management fees are similar to a hedge fund in that we earn one and a half percent per year, plus 20% of profit when a painting sells. So that's how we earn our fees.

• 26:52Speaker 01

  Got it. And then how do you think about art? I know that it's outperformed the S and P since 2000, which is pretty impressive, right? Kind of a two decade type, you know, data set there. But how does it perform differ in the good times versus the bad times? We're kind of in this economic crisis or liquidity crisis right now. Do you guys see better or worse, or maybe just the same type of performance in these economic downturns?

• 27:19Speaker 02

  Yeah, so we did, we did a research study with Citigroup at the end of 2019 of correlation. So correlation between art and other asset classes. Most investors really care about the correlation between art and the S and P. Generally speaking, art is an uncorrelated asset class. So it's close to zero for all other asset classes. And part of the reason is take a step back and think about that is because it's this global asset class, which is not country specific. You can carry a painting across borders. It's really owned by the ultra wealthy. And there's the scarcity dynamic where important artists, bodies of work are constantly declining for the reasons we talked about before.

• 28:03Speaker 02

  So that just, that just causes it to behave differently than most other asset classes. So the correlation factor specifically between art and the S and P is, I think we concluded is 0.13. So basically zero. And then if you pressure test that during different financial crises, sort of what you see is during 2000, the art market increased in value. 2008, 2009, it had the highest correlation ever to the S and P, which was roughly 0.4, 0.5, meaning it declined half as much as the S and P declined. Interestingly, in 2016, the art market declined when the S and P increased in value.

• 28:45Speaker 02

  Our best guess, our best guess as to why that was is most likely Brexit, capital controls going into place in China.

• 28:54Speaker 02

  And then now, you know, it's too early to tell, but we think during the current, the current Corona crisis, it will likely be uncorrelated. So it just, it just behaves differently.

• 29:05Speaker 01

  Yeah, and I guess, is there a geographic difference? Like, do you see maybe kind of price arbitrage based on geographies? Or you mentioned capital controls, obviously, would definitely affect it. Like, anything else you see on a geography by geography basis?

• 29:19Speaker 02

  And we definitely see, you know, when you think about the art market over the last 20 years, you definitely see this influx of, I guess what I would say is sort of like ultra wealthy countries coming into the art market, right? China today is a huge player in the art market, roughly quarterly the market overall, whereas 10 years ago, it was close to zero. You know, Russia came in in a big way, now it's kind of gone with sort of the oligarch dynamic. And so you do, you know, as countries build up, there's populations of people that are ultra wealthy, you do sort of see that impact the art market overall. The US is now roughly 25% of the market.

• 29:59Speaker 01

  Got it. And then I guess, like, how much of the platform you guys have built, right? So take somebody like me, who probably has much more interest in art than expertise in art. Obviously, you mentioned kind of having a team be able to talk to the customers or the users of the platform and kind of get educated. But there's nothing like that experience. Is there other things that you either see users on the platform doing or things that you guys are doing in terms of just helping people, I guess, get up kind of the learning curve and really just avoid, you know, the classic mistakes in the market?

• 30:36Speaker 02

  Yeah, so we have a, we have a feature on the website, which is unlocked as soon as someone invests, called our price database. And that, that basically gives you all of our return data by artist market that our research team uses to, to, I guess, inform our purchasing decisions. So we have roughly 40 artists that we're focused on this year purchasing. And all of that, that decision was driven by data from our research team on which artist markets are accelerating most quickly. So we expose that data to investors to learn about the market. I think fundamentally, we believe the more data we give people, the more training we give people, the more engaged they become.

• 31:18Speaker 02

  So that is, that is part of, I guess, how we think about this process.

• 31:22Speaker 01

  Yeah, and you mentioned earlier, kind of, the digitization of art, and I think you were specifically talking about a lot of the data and the information, right, but the art still being physical and either a painting, a sculpture, whatever. Have you guys seen any interest from the legacy art market in kind of digital art, so actual, not physical art, but it being represented digitally in any way?

• 31:49Speaker 02

  Yeah, there's lots of artists experimenting with that today. I think from a commercial perspective, we still haven't really seen it take off. But there's obviously lots of people focused on that.

• 32:00Speaker 01

  Yeah, because it feels to me like part of the beauty, like the sculpture, you know, you have behind you, like, being able to physically see it in full three dimensions and walk around it is a big piece of the value. Rather than, you know, you can, I guess, somehow make it 3D on a screen, but it's just not the same thing as being able to, you know, actually enjoy it.

• 32:20Speaker 02

  Yeah, I mean, I personally believe that, you know, it's, I mean, I can change generationally, right? Like, I think 20 years from now, we may be the old ones saying that, but, yeah, I agree with that.

• 32:33Speaker 01

  Got it. And then I guess, what are the lessons learned that you've had since you started the platform, right? So you kind of go into it, you've got this idea of, hey, we're going to create more access for people, democratize access to this market. You obviously came at it with a ton of expertise and experience. Anything that either one surprised you as you've gone down this path, or lessons learned?

• 32:54Speaker 02

  I think we, I think we expected there to be more demand from our investors, on whatever we call household brand name, blue chip artists, artists like Picasso. And what we've really seen is there's, there's actually a pretty strong demand from our investor base for, you know, what we would define as mid to late career living artists. So, you know, probably half of our acquisitions now are really focused on artists like Banksy, or Koz, or Cecily Brown, or, you know, Alex Katz, some of these people that are, that are really well-known names in the art market, but maybe aren't necessarily a Picasso.

• 33:36Speaker 01

  And I guess just thinking out loud, is some of that driven, so take Banksy for example, one, the type of art that's done, right, I think is very attractive to kind of maybe younger people or a certain generation. Two, a lot of the ways I think people come across Banksy is through the virality online, right, whether it's the stunt type stuff or just pictures being taken and being shared online. And then I'm assuming that there's a certain demographic that's naturally drawn to a technology product that you guys have built. Do you think that is kind of driving that interest in a very certain subset of the artists? Or do you think it's an overgeneralization?

• 34:13Speaker 02

  You know, I think it's probably a little bit of an overgeneralization. So we can, when you look at a particular offering from us, we give you two things that you focus on. One is historical return, and then two is risk category. So for a lot of these blue chip artists that are legacy artists like Picasso, we would risk rate that artist an A, meaning our lowest risk rating. But the returns would probably be 10% historical returns. Whereas someone like a Banksy, these aren't exact numbers, but we would risk rate a B, and his historical return might be 15 or 16%. So I think what we've seen

• 34:56Speaker 02

  is just people are more naturally gravitated to those higher returns and willing to take more risks to achieve them.

• 35:04Speaker 01

  Got it. And I guess like artists like that, how many of them, in your experience, are aware of maybe the financialization of the market versus they're just making things that they think are cool, they want to make, and are more kind of creative and expressive?

• 35:20Speaker 02

  Yeah, I mean, we've definitely, you know, I'm friends with a lot of these artists. Some of them are aware of masterworks, and I would say they follow the two different camps. And they're, you know, one camp doesn't like the idea of art being viewed as this financial asset class. The other camp likes the idea of art being democratized, so they don't only have to sell paintings to the ultra wealthy. So, you know, the reaction is different depending on the person.

• 35:51Speaker 01

  I could definitely see that with artists.

• 35:55Speaker 01

  Without a doubt. And then I guess from a technology standpoint, you mentioned initially kind of looking at blockchain ideas and technology. Today, the platform has some of that still incorporated? Or have you been kind of gravitated towards a non-blockchain technology stack? And then kind of a more traditional regulatory type framework?

• 36:18Speaker 02

  Yeah, we really, just because of the, you know, the, I guess, the the regulatory overhead for the business, we really had to move away from blockchain for the time being, just because it you know, we haven't frankly seen acceptance by the SEC, a lot of this blockchain concepts. We were actually, if you look at our very first SEC filing,

• 36:41Speaker 02

  I guess it'd be two years ago now, I think we were the very first company ever to have some blockchain concepts qualified in our offering. But you know, the regulatory, I think, environment has gotten more and more difficult rather than less and less difficult. So we haven't, we haven't focused on it.

• 37:04Speaker 01

  I think that is a fairly popular viewpoint that you have. But I mean, look, part of it too is there's learning, right? Like they have an incredibly difficult job already. And then you start throwing new technology and kind of all these different things. And I think it makes sense. But it sounds like you guys have been able to navigate that without having to use the blockchain technology and can, you know, kind of offer that liquidity people.

• 37:27Speaker 02

  Yeah. And I do think that art is an asset class, which historically has been viewed as

• 37:33Speaker 02

  you know, a little bit of an insider's game. And I do think kind of SEC qualification of these offerings has added just a little bit of transparency or trust to massive class that people are otherwise skeptical of.

• 37:47Speaker 01

  For sure. And the last question on the art side is just

• 37:53Speaker 01

  the legacy art market change? Or how do you think it will change as things like fractional ownership? And kind of the digitization of the data and some of the market? What does that impact look like on kind of that legacy art market?

• 38:08Speaker 02

  You know, we talked to a lot of institutions that have this thesis that, you know, A lot of these illiquid asset classes are inherently undervalued just because they're illiquid. They don't have access to institutional capital, etc.

• 38:24Speaker 02

  We tend to share that. So, you know, I fundamentally believe that if you can allocate 3% of every investment portfolio to art, it's a game changer, right? I mean, you're dumping trillions and trillions of dollars into the art market. So we, we think this is a really interesting opportunity to take an asset class, which historically has been limited to the ultra wealthy, which historically hasn't been investable, but has outperformed other asset classes, is uncorrelated, and therefore could diversify or attain a portfolio and make it investable by everyone. So everyone can, can own part of it. That's, that's just really exciting. So, you know, in, in that scenario, you, you could see a world where asset prices increases just because there's more, there's more capital inflows to the market overall.

• 39:09Speaker 01

  Yeah, it, it's really interesting, I think, to kind of think through, almost in some way, that digitization makes it a more market expanding, you know, there's market expansion. And I guess, would you then say it's not only an increase in accessibility for a kind of socioeconomics basis, but also on a geographic basis? Like, like now I don't have to actually have physical access to the piece. I can be anywhere in the world and, and gain financial exposure.

• 39:37Speaker 02

  Totally. And I think it's also really interesting for artists, right? Because now you have all these artists, which historically, being an artist is a really, I mean, it's tough, right? That's a difficult career path.

• 39:48Speaker 02

  And, and I do think that, that adding more capital to the market makes it easier to support more artists at every stage of their career.

• 39:56Speaker 01

  Yeah, super interesting. I end each interview asking people what their favorite book is, or the most important book you've ever read. What would that be for you?

• 40:06Speaker 02

  Well, I mean, for me, from a business perspective, it's an easy answer. And everyone that's worked for me always knows this. It's a, it's a very traditional book, but it's Michael competitors competitive strategy. That's, that's one book that I've taken every business I've ever had and tried to run it through the five forces framework. So that's definitely been the most influential.

• 40:27Speaker 01

  Why does that one stick out to you?

• 40:30Speaker 02

  You know, I think, I think I started my career really focusing mainly on execution, right? So working really hard.

• 40:39Speaker 02

  You know, trying to, to get things done, you know, the fastest first to market, et cetera. And I think what, what unfortunately took me years to realize is that, you know, if you're working really hard at the wrong thing, it doesn't matter.

• 40:54Speaker 02

  So, you know, you, you want to, you want to choose the right thing to work really, really hard at first and then work really hard at it. So, uh, yeah, I mean, that, that is just a, a great framework for thinking about differentiation, right? How do you differentiate a business and make it as easy as possible to avoid competition and capture market share over time. And I think a lot of our, you know, a lot of the businesses I started, a lot of businesses that have worked with have really benefited from that.

• 41:24Speaker 01

  That's awesome. I, I definitely agree. If you're working on the wrong thing, that's probably not a good idea. Where can people go find you online or find out more about Masterworks?

• 41:34Speaker 02

  Yeah, you can learn about the team, the business at www.masterworks.io. You know, just create an account, sign up for membership, talk to our membership team and we can, we can get, get you started investing in art.

• 41:46Speaker 01

  Awesome, man. Listen, I appreciate you giving us the crash course. I feel like, uh, art is one of these things that a lot of people appreciate looking at, but they've got no clue about the business behind it. So, uh, I, I learned some today and hopefully everyone else does as well.

• 41:59Speaker 02

  Yeah, thanks for having me.

• 42:03Anthony Pompliano?

  All right, guys. Thanks for listening to that episode. I hope you enjoyed it just as much as I did. My goal is to educate as many people with these conversations as possible. So please go subscribe on your favorite podcast channel, leave a five star rating and a review. These things really help the podcast get higher up on popularity charts, which ultimately brings more people to learn. Also, don't forget you can go to YouTube to watch each conversation in video format as well. Just search my name, Anthony Pompliano, on YouTube and you'll find our channel with hundreds of awesome and informative videos. Thanks again for listening to this one and I'll see you for the next one.