Crunching The Data Behind Masterworks’s Recent Basquiat Offering
Fractional art investing app Masterworks is offering its user community a chance to purchase units of Jean Michel Basquiat’s (Untitled) Pollo Frito. Given the platform’s success in democratizing art investment and outsized historical returns, investors are naturally curious about the prospects this piece of art offers.
The team at Masterworks claims that it’s their proprietary system of art industry data collection and analysis that makes the platform a grand success. The question is, what are they seeing specifically in Pollo Frito, the highest-priced painting to ever be offered for fractional investment?
Here are a few data-backed insights from Masterworks’s experts to help prospective investors evaluate this opportunity.
Scarcity
Pollo Frito has seen high demand on Masterworks since shares became available in July. Masterworks also highlights that Pollo Frito is the most valuable piece of art to be offered to retail investors at a price of $36,689,000. It was originally purchased for $5,000 by an art collector in 1982.
Basquiat’s art tends to perform well in the art world overall. The second-most-expensive piece of art Masterworks sold was also a Basquiat, indicating the scarcity and high demand for the artist’s works.
Masterworks experts point out that previous prices establish a baseline for future sales since art valuation can be highly subjective. Investors can therefore rely on historical records, since the industry considers past pricing data significant.
Basquiat’s Case
In Basquiat’s case, the relatively small size of his portfolio works in favor of price appreciation. The artist died young, and his meteoric rise to fame in the late 1980s ensured his work was highly coveted. His Untitled sold for $110M in 2017 at Sotheby’s New York.
In 2021, his In This Case sold for $93M at Christie’s, and in 2022, Untitled (Devil) sold for $85M. That last painting experienced a 53% rise in value over six years before its resale last year. When combined with the relatively small size of Basquiat’s portfolio, the data suggests that Pollo Frito‘s future valuation prospects are bright indeed.
Wide Appeal
Artwork valuation also depends highly on an artist’s popularity and mass appeal. For instance, work appealing to an esoteric audience will likely fetch lower prices than work by an artist with a wide range of admirers. Basquiat firmly falls into the latter category, given his strong reputation amongst high art enthusiasts and street art admirers.
This large audience, Masterworks believes, is key to the valuations Basquiat’s works have fetched historically. His work is easier to sell, too, given this large audience, making it relatively straightforward for buyers to enter and exit investments.
Lucrative Returns Banking On Mass Appeal
One reason Masterworks highlights Pollo Frito‘s unique opportunity is the lucrative returns of similar work by artists with mass appeal. The platform projects a compounded annual growth rate (CAGR) of 22.1% based on sales and price appreciation of similar works in its database.
Masterworks’s data shows a 33.1% rise in prices of similar works of art and an 18.6% median repeat in the sale pairs appreciation. This metric refers to the median of the rate of annualized price appreciation in all artifacts made by the artist that have sold at least twice at a public auction. It is a useful measure of the rise in valuation an artist’s works have experienced over time.
These data are based on 109 repeat Basquiat sales, beginning from the first purchase date to the artist’s earliest repeat sales pair. The bottom line is that historical pricing data for works similar to Basquiat’s Pollo Frito suggest this artwork will experience significant price increases.
High Risk-Adjusted Returns
While absolute returns on Basquiat’s portfolio are impressive, experienced investors will understand that risk-adjusted returns are the true measure of an asset’s performance. Masterworks’s experts are of a similar view, pointing out that absolute returns in the art world mean little since sale timelines tend to be lengthy.
Risk-adjusted returns measure an asset’s performance compared to a relatively risk-free option. For instance, an alternative asset like artwork that returns 10% annually is a great investment if relatively risk-free investments like US Treasury Bonds (T-bonds) return 1%. However, if the risk-free option returns 5%, risking money for an additional 5% in returns is often not justifiable from an investor’s perspective.
Use Of Sharpe Ratio
Alternative investments like art are far more illiquid and risky than T-bonds. Investors will want a premium on the return in exchange for absorbing more risk. The Sharpe Ratio is a metric that compares the risk inherent in an investment and compares it to a risk-free alternative.
Expressed as a number, a Sharpe Ratio greater than 1 indicates an especially promising investment, with most lucrative alternative investments commonly receiving values between 1 and 2. Masterworks’s experts tag Pollo Frito with a 1.55 Sharpe Ratio, indicating that this artwork is a relatively low-risk opportunity.
Examining Basquiat’s historical sales, his artwork has appreciated at significantly high enough premiums over risk-free rates of return to justify an investment. More importantly, the team at Masterworks apparently believes this historical track record ensures lower volatility, painting a positive picture for investors concerned about this factor.
An Exciting Opportunity
Setting aside Basquiat’s appeal amongst art collectors, the data behind Basquiat’s portfolio suggests a unique opportunity for everyday investors more concerned with returns. Historical sales, sales of similar pieces of art, and volatility suggest Pollo Frito will appreciate significantly.
Investors interested in purchasing units will be well-served by examining these datasets and estimating their prospects of a lucrative return.
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