Interest in art, in general, is heating up! And with growing talk about art as an asset class, more people are looking at fractional investing to start their art investing journey.
We break down the considerations for anyone thinking about fractional investing in art.
What is fractional investing in art?
Fractional investing was popularised for shares on the stock markets because well-known companies had very high prices for a single share. Some companies split their shares, but some don’t, given the administrative burden involved. Quite famously, Berkshire Hathaway (the investment holding company that billionaire Warren Buffet co-founded) has never split its shares. Berkshire Hathaway was valued at over US$414,000 per share on 16 September 2022. That’s the cost of a small apartment in mid-town Manhattan, NY, in the US or a 4-bedroom house in a gated estate in the affluent suburb of Sandhurst, Johannesburg, South Africa – the wealthiest suburb on the African continent.
Several investment analogies can be applied to art. You can think of an artist’s body of work as a VC fund; then, all their artworks are their portfolio companies. The VC fund can perform in aggregate, but each portfolio company might not perform to the same degree. Either way, fractional investing can be analogous to owning a share in one of the portfolio companies, albeit through an intermediary.
Group buying of artworks as a consortium is not new, but that tends to be groups of two to twelve people. We know of at least one such stokvel in South Africa of like-minded friends who joined to buy artworks. Whereas with fractional investing, the number of shareholders can run into the thousands and potentially 100,000.
How it works
The platform buys an artwork – it could be a painting, sculpture, or other categories of artwork (although we have yet to see tapestry and sculpture generally). They then decide how many shares in the artwork to offer and then list it – the technical details depend on in which jurisdiction the platform is based.
The platform then keeps an artwork for a specified period. It opens up secondary market trading of the shares in the artwork. Once the platform is ready to sell the artwork, it will close secondary trading and then sell the artwork. All the shareholders at that point will receive the proceeds after the platform has taken its fees.
Pros to fractional investing in art
The fractional investing platform does all the research to ensure you’ve got a good investment. Whereas as an art collector, you might not have access to the time or resources to research an artist and their portfolio before settling on which one to buy. And key is having enough time and resources to buy an artwork which has the potential to grow in value.
Fractional investing also caters to a range of price points, making it more inclusive. This is especially true for people just starting out in their art collecting journey. The average price of an artist’s artwork might be R40,000. Instead, you can buy fractional shares from a range of artists for maybe one-tenth of that. The prevailing price of a portion of the artwork from the Pumpkin series by Yayoi Kusama is $23 (R391), according to one platform.
The platform also often provides access to well-known artists selling artworks at a very high value at auction. Artists such as El Anatsui, Jean-Michel Basquiat, Kaws, Picasso and Yayoi Kusama are usually only accessible to successful rappers, financiers and others with mega-wealth.
The platforms also provide secondary market trading. So you can potentially exit the shareholding in the painting, before the platform sells the artwork, and realise a return. The additional benefit is seeing how deep the market is for buying or selling the painting in the secondary market.
Cons to fractional investing in art
Art collector purists will lump you into the art investor category instead of being a patron of the arts – and emphasise the difference. Getting into fractional investing means, you are getting into it to expect a return on your investment. That is quite different from being a collector who supports an artist’s practice and appreciates their portfolio of work or their statement about their body of work and how that reflects the world around them. It means you’re primarily in front of a computer instead of at a gallery or an art fair. But it probably is an unfair assessment. Someone can buy physical art and be an art patron – diversifying their art collection and getting fractions of expensive artworks by famous artists.
Another disadvantage is that you’re stuck in the investment until the provider sells the artwork. This is because some platforms only allow secondary trading of fractions if you are based in the US. That can mean you’re stuck in the investment for 3 to 10 years. Whereas if you purchased an artwork of similar value, you could liquidate it whenever it suits you. And this is especially true if you track the value using a platform like Capital Art.
A general misconception is that art is expensive. So fractional investing seems to be the only avenue to “get into art”. The reason for that is headlines about R52m Irma Stern auction- and $69m NFT sales.
There are many ways to banish that notion. Visit art fairs where there might be less pressure to engage than in a gallery. The prices at an art fair are displayed, whereas, in a gallery, prices might only be provided on an on-request basis.
Fractional investing in art may also be an ideal entry point for someone who is risk averse. Such a collector doesn’t want to buy an artwork if there is no prospect of having the artwork grow in value. Established collectors will tell you that the very definition of being a patron is helping the popularise the artist and their work once you have bought it. And that work as patron helps ensure growth in value over time. So newer artists miss out on such patron opportunities if new entrants to art collecting focus only on fractional investing.
Where to from here?
Fractional investing in art gets one firmly into thinking about art as a traded asset. That means considering the investment risks more deliberately. Those considerations include the mechanism through which the fractions are created and the platform on which the fractions are accessed. That said, there is undoubtedly a place for fractional art investment to own, albeit a piece, of that coveted artist’s work – because dreams do come true.