The notion of selling shares in an artwork has been around for over a decade but, in recent years, a increasingly large number of initiatives have taken the concept of fractionalisation to new horizons. Each company is attempting to unlock liquidity from the US$3.3 trillion asset class that is art; in the hands of both private collections and public institutions. Fractionalized art ownership has undergone significant development since its initial emergence between 2009 and 2012, driven by the then-leading Chinese art market. Government policies accelerating the Chinese cultural industry laid fertile ground for what were known as Art and Cultural Exchanges, most of which were closed after the government implemented restrictions on such exchanges in 2012.
What might be understood as the second market cycle of fractionalised art ownership took place around 2017, coinciding with the major cryptocurrency boom. Mintus, Weng Art Invest, Artemundi and Masterworks are a few of the companies working this space, with the latter claiming to have over $850 million in assets under management today, and over 750,000 users. Particle Collection also offers a fractionalisation service, although the fractionalised artworks are displayed globally as part of the Particle Foundation collection.
Fractionalisation companies have faced scepticism, however, not least given the associated costs with fractionalisation investment options. Annual management fees are often around 1.5% and some companies charge profit commissions of up to 20% upon the sale of a fractionalised artwork.
In the Great Recession, the critical issue was that ‘independent’ rating agencies were paid by bankers that were selling mortgage-backed securities. This conflict of interest, which meant that the referees and the sellers were essentially the same, meant that risky securities were ‘authenticated’, or rated AAA investments. Bankers were forced by regulators to modify and eliminate conflicts of interest. The art market has not followed suit. There is a parallel in this dynamic that could be argued to exist in the art world, where the companies that benefit from the sale and exchange of artworks are precisely those that yield the power to ‘authenticate’. Fractionalised art businesses are no exception, with one established fractionalisation company known to conduct less than 10% of its buying and selling at public auction house sales.
As discussed in our recent insights article, a lack of standards in due diligence of authenticity typifies the private secondary art market, a notion that becomes even more extreme in the context of what might be termed the ‘tertiary art market’; the private, peer-to-peer trading of artworks. This lack of a standard in due diligence is a especially problematic when that artwork is then to become the underlying asset of a securitised financial product.
In a recent Art Newspaper article, Georgina Adam spoke with the art lawyer Pierre Valentin about fractionalisation and its legal implications, to which Valentin asked the question: "who does the due diligence and provenance research?". This is a question that assumes particular significance when the artwork that is fractionalised is not acquired at public sale, as was the case with Artex IPO's Francis Bacon triptych which was bought for US$52m in 2017 at Christie’s. There is an ever-increasing number of companies offering fractionalised art investment services yet, as typical for much of the art market, the language used to describe due diligence processes is often ambiguous.
As we see authenticity continue to come the fore in the cultural and commercial sectors and art to be increasingly treated by collectors and wealth managers as an alternative asset, we believe that a standard of due diligence is vital for the development of the sector. Hephaestus' authentication protocol, protected by the world's first authenticity insurance product, offers a powerful solution to eliminate the risk of forgery and misattribution for collectors and answer the question as to what a standard of due diligence might look like in the fractionalisation market.
