Paintings by the Numbers

This article first appeared in The Assetizer, GenTwo's thought leadership platform.

Art has been an extremely well-performing and highly uncorrelated asset class for decades now. But the art market is opaque and hard to access. That’s changing with retail investment fund platforms like Masterworks and blue-chip tokenization projects like Artfi. But these involve either massive overhead or a blockchain-savvy investor base. The AMC offers an interesting alternative means to democratize art investing.

Recently I interviewed Pascal Schneidinger, founder and CEO of Partasio, a Swiss investment boutique with an interesting approach to art investment.

Partasio creates small portfolios of 4-6 blue-chip contemporary paintings, which it acquires through off-market transactions. The company then securitizes the portfolio (using our platform at GenTwo) and distributes the fully-bankable notes to independent asset managers, family offices and other professionals.

What makes it special is the minimum ticket size of CHF 30,000. That's a lot more affordable for most investors than the USD 10-20 million Pascal says many blue-chip contemporary works command.

Here is the interview.

Pascal's secret sauce is insider access to the art market, which he gets through his two highly connected art historian partners.

But his secret weapon is the actively managed certificate (AMC).

For those unfamiliar with them, AMCs are investment vehicles that combine features of structured products and actively managed funds. Think of them as standardized wrappers that can turn any asset or investment strategy into a bankable security.

We'll have plenty to say about AMCs in future posts, so I won't go into the details here.

But my chat with Pascal got me thinking about the various approaches to democratizing the art market - and more generally, about different ways to fractionalize high-value assets. The AMC might be the least well known of these approaches, but for many use cases, it could be the most effective.

Here's what I mean.

Tokenize all the Things

I first encountered the concept of fractionalization when I got involved in the blockchain world back in 2016. Back then the mantra was "tokenize all the things" - whether gold, cars, or coffee beans. Art was naturally a part of this.

The idea of tokenizing art is fairly simple. You create a smart contract that represents ownership rights to a work of art. This contract can then mint tokens, each representing a fraction of those rights. These tokens can be sold directly or traded on decentralized exchanges at affordable prices. In theory, this would make art ownership both divisible and liquid.

While this concept is different from NFTs (which represent whole digital assets), both approaches use smart contracts to establish tradable ownership rights. And both were seen as ways to democratize art investment - though through different mechanisms.

Back in 2016-17 I can remember seeing countless startups looking to tokenize art. Eight years later the practice is becoming fairly commonplace. To take some examples: Our friends at Sygnum tokenized a classic Picasso painting. Platforms like Artfi, that bring tokenized art to normal investors, are pushing the idea into the mainstream.

I think that's great. A crypto-token has many advantages as a tool for fractionalization, and it may well evolve into the wrapper of choice for securities of all kinds.

The catch is that all this happens on a blockchain. And today, that means you're limited to an investor base of people who are comfortable handling digital assets. Unfortunately that’s still a fairly high barrier to entry.

Build it Big and They Will Come

You don't need tokens to fractionalize, of course. There are plenty of traditional tools that can do the job just fine. Like a fund, which is essentially a vehicle for pooling assets among many investors which can then be used to buy something expensive with the idea of sharing in any value appreciation.

This approach is being taken to the art world too. The most prominent example here may be Masterworks, a highly successful private-market fund focused on blue-chip art and geared towards retail investors. (You can think of it as very fancy crowdfunding.)

Masterworks' secret sauce is scale. With over one million investors and more than a billion dollars invested, they can afford those 10-20 million price tags for blue-chip paintings Pascal mentioned. (In fact, they say they can go up to 30 million if needed.) That makes them a major player at auctions.

The catch, at least as I see it, is the overhead. Funds are expensive to set up and manage. Masterworks has 125 employees (Partasio has three). Since it caters to retail investors, it has all the compliance costs associated with an SEC filing. And so on.

This isn't a business model suitable for every asset manager.

The Middle Way
 

This brings us back to Pascal's approach with the AMCs.

What makes AMCs interesting is how they combine the best aspects of other solutions while avoiding their main drawbacks.

Like tokens, they make art easily divisible and tradable. But instead of using blockchain, they work through the traditional banking system - no crypto wallet required.

Like funds, they allow for asset pooling with an investment objective. But they typically have lower regulatory requirements than traditional funds. They also allow for real-time strategy adjustments to market conditions, so are very flexible.

The AMC can be a compelling tool for creating innovative investment products. I like to think of it as a kind of DIY fund structure.

Like tokens or funds, it’s just a wrapper. While it solves the fractionalization challenge elegantly, it doesn't give you Pascal's art market expertise or his network of dealers and galleries.

The AMC's job is to make things bankable and investible. What you put in it - that's up to you. Maybe it's art. Maybe it's vintage cars. Maybe it's a portfolio of private equity investments. As long as you can own it, you can probably put it in an AMC.

For independent asset managers, this flexibility has particular appeal. Unlike platforms that require clients to move assets elsewhere, AMCs let you keep investments within your existing banking relationships. You can create custom portfolios tailored to specific client interests. And you maintain full visibility and control over these assets.

As mentioned, we’ll be deep diving into AMCs in future editions.

Tom Lyons, Head of Content, GenTwo