Hi! Itâs George from Investorama.
Thank you for joining me in the exploration of the future of investing. In this newsletter, Iâll be looking at alternative assets, defi, investment technology and trends - without the hype.
In the previous newsletter, we looked at historical data for alts and art in particular. We were looking backwards, and it was abstract. Itâs now time to get real, look forward and consider what happens in practice if we invest in đ¨Art, đˇWine, or đ°Private Equity (PE).
They are alternative, illiquid assets that have recently become much easier to access via startups, like Masterworks, Vinovest or Moonfare. But they are selected because their differences make the comparison enlightening.
If youâre interested in these asset classes, but theyâre new to you, this should offer a solid overview. However, the goal is to build a framework that can be useful for assessing any new asset class.
If youâre used to professional due diligence, this is not it. Instead, itâs a DIY, light version adapted to investing through platforms with thousands $ rather than millions, and streamlined into three steps:
Asset appreciation
Liquidity events
Platform-specific Risks and Costs
For each step, we will look at the asset class through a platform: Art - Masterworks; Wine - Vinovest; PE - Moonfare.
Asset appreciation
You can appreciate some assets: like wine and art, and they go well together. That might be the right approach, instead here weâre only looking at why they could increase in value over the long term.
Hereâs a quick overview of the rationale and what type of access each platform provides.
Wine
Wine price appreciates with age because wine appreciates with age:
Wine tastes better with age because of a complex chemical reaction occurring among sugars, acids and substances known as phenolic compounds. In time, this chemical reaction can affect the taste of wine in a way that gives it a pleasing flavor.
It works only for premium wines, and they need to be stored and transported in specific conditions. Most wineries that interest investors are in France's Bordeaux and Bourgogne regions and only about 1% of the total supply is considered fine wine.
Another dynamic is that global consumption tends to increase (think China), and the supply is limited. Investors account for only 20-25% of the market, so fine wine is both an asset class and a consumable (with potential tax implications).
Investing via Vinovest
Vinovest builds a wine portfolio for you. You own the bottles. They offer an all-in-one solution: select the wine, store it, sell it. There are different options, including the recently-introduced wine trading, but itâs mainly about building a diversified portfolio and holding it for many years.
Our master sommeliers join forces with our quantitative investment models that analyze thousands of decisive data points
đI think of wine investing as âharvestingâ. The investor keeps the wine bottles until they reach optimal maturity.
đAlthough speculative, itâs also a âserviceâ to consumers who like aged wine but donât want to buy it, transport it, store it themselves.
Art
There are two main arguments for art appreciation.
The first one is scarcity. Artists can only create a finite amount of artwork during their life. In addition, many collectors donate to museums, thus placing them out of the market.
The second is that fine art is indexing the high net worth population. We know this group tends to become larger and more prosperous, no matter what happens to the rest of the economy.
The value also varies based on the life of the painting. It will increase faster if it is featured in many exhibitions. Itâs also path-dependent; the previous owner's identity can affect its price.
Investing via Masterworks
Masterworks create IPOs of individual paintings from âcontemporary artistsâ, a group selected by Masterworks. They buy a piece of art, usually from top auction houses like Christieâs or Sothebyâs. Add an 11% mark up and divide the result into $20 shares before offering it to investors. Thereâs no portfolio or fund option.
Weâve compiled what we believe to be the most complete price database of paintings that have been purchased and resold throughout history. This allows us to identify which artist markets are gaining momentum. (emphasis mine)
đTo the uninitiated, it feels there are a lot of subtle parameters that can have a significant price impact on artwork.
đThe methodology is equivalent to a momentum strategy in equities. This is quite the opposite from a passive investment to acces art as an asset class.
Private equity
Unlike wine and art, which are speculative assets, equities produce cash flows, making them productive assets even though for PE investors the only source of return is an exit..
The case for private equity is more documented, I will summarize briefly:
Use of leverage to boost returns
Management skills: restructuring of underperforming companies and potential synergies
The ability of the PE firm to find buyers or to market an IPO
It will also depend on how equity markets perform and, in particular, smaller companies
Investing via Moonfare
Is only for qualified investors with a $100,000 / ÂŁ50,000 minimum amount, but weâre not considering that here.
Invest in top tier funds from some of the worldâs most legendary firms. All with minimums from GBP 50,000.
The funds are pre-selected by the Moonfare team, and itâs worth noting that they donât get any commission from the fund manager. You can invest in individual funds or portfolios to become a limited partner (LP) in a fund (General Partner or GP) with a smaller amount and greater ease than before.
đUnlike the other two, this is a access to active strategies where the manager transforms its âmaterial.â
đYou may consider whether youâre betting on an asset class or a PE firm, as the skills and brand, and size of the PE firm (or GP) may have a considerable impact
Liquidity Events
All the platforms are offering in-house secondary market, but they are unproven and are unlikely to provide true liquidity for large amounts. Weâll skip this here.
Wine
Wine is initially sourced from the producer in boxes of twelve bottles. Then, later in their life, theyâre sold via private sales or at auctions. The auction houses can be the world famous ones, like Sothebyâs. But there are also numerous smaller auction houses or marketplaces specialized in wine. The difference will be the fees (>20% for Sothebyâs; usually around 10%-5% for the rest).
The range of potential buyers includes:
Wine retailers
Hotel and restaurant groups
Cult and rare wine enthusiasts
Private equity funds
Blue-chip investors
Buyers focused on some region, grape varietal, or winery
Alternative asset managers
Vinovestâs role:
Vinovest buys and holds the wine for you, and it seems like there are no costs involved. Itâs part of your annual fees. You can sell the wine yourself, or they also sell the wine on your behalf, but Iâm not sure how much theyâd charge for it.
Iâve asked Vinovest but didnât get a response at the time of posting.
đIf they sell on your behalf with a reasonable commission, the proposal becomes more attractive. Broking servicess can sell your wine for a 10% fee, but they need to store it first.
Art
Fine art auctions can be significant events. They come with a considerable amount of work to restore, secure ownership and authorship and market the lots. However, if you have a $450 million painting to sell, there arenât many buyers on earth.
Just like for wine, there can be private sales or auctions, but the three big auction houses: Sothebyâs, Christie's, Philips is, where the action takes place. And that comes with significant fees.
Masterworksâ role:
Masterworks is responsible for selling each painting, and they intend to sell them within ten years and primarily through auction houses.
đSo far, they bought many paintings but sold only one. The circumstances are a bit oddâsold one year exactly after it was bought and not through auction, for a price of exactly $1.5m. It looks a bit too neat to be a relevant example of a sale and makes me wonder if itâs not triggered by marketing.
đCompared to wine, it feels less liquid. You can probably offload your wine collection by the box (or individually), and there are a few potential buyers, but you need to find one millionaire to sell the whole painting. (NB: there are fascinating attempts at creating a market for each fraction, or particle, of a painting).
Private Equity
There are two liquidity events for private equity: an IPO or the company is acquired by a strategic buyer.
IPO costs are considerable (ranging from 7% to 3.5% of the deal value, or millions of dollars) but they are generally a happy event, at a valuation significantly higher than the acquisition price, so the associated costs matter little.
Moonfareâs role:
There is no involvement - once youâve started the process, you are a regular LP in the fund. They are introducing a secondary market through the platform.
Platform-specific Risks and Costs
Risks
There could be many risks involved when trusting a relatively young startup with your money, even a well funded one. I just pick one here: credit.
Imagine investing for the long term through a startup that doesnât live a long life. Even more infuriating: imagine your investment looks successful, but you canât enjoy the full returns because the platform has run into trouble before redemption.
Here is an evaluation of the risk for each platform.
Vinovest talks about specific measures to protect investors against bankruptcy.
Masterworks launches an IPO of every painting. The investors own A shares without voting rights. Masterworks owns B shares with full voting rights. The B shares decide when to sell and at what price. Itâs not clear how (and if) the investor is protected. My guess is if Masterworks ever failed, it would be a huge mess.
Moonfare acts as an intermediary between a fund manager (or General Partner) and investors (or Limited Partners). As weâre dealing with an established asset class, we can assume a well-oiled custody model.
Costs
Vinovest charges a 2.85% annual fee (decreasing to 2.25% for balances over $250,000)
Masterworks charge 11% upfront, then a 1.5% management fee and 20% carried interest. You can watch how these costs and fees add up (itâs đą).
Moonfare charges a 1% one-off fee, plus an annual management charge of 0.5% on top of the fees set by each fund in which users choose to invest in. The typical fund will charge 2% management fees, and 20% carried interest.
Summary
Hereâs a snapshot where Iâve added Rally Rd, a collectable startup - with some blanks to show how this framework could work for other asset classes and platforms.
Here are some questions to ask yourself on top of assessing the investment itself:
đGet the complete picture of the fees (from the platform and from the underlying itself)
đThink of liquidity: what does it take to offload the assets?
đIf itâs a long-term investment, what are the long-term risks? credit, but also maybe governance, custody
Next time, Iâm planning to leave illiquid alts and plunge into DeFi instead - let me know what questions youâd like me to answer.