Ryan Ortega, a 39-year-old financial advisor based in Los Angeles has a thing about fancy cars. So when he saw a 1976 Porsche Turbo Carrera listed at $189,900, he immediately decided to buy it — but just a fraction of it.
As someone who has experimented with securitization in alternative assets quite a bit, Ortega bought shares of the Porsche valued at $63.30 a piece. The shares were being issued through the fractional ownership collectibles site Rally, which issued 3,000 shares for the car in March 2019.
“I thought it was a good idea,” Ortega said. “They can slice it up and sell it in these tiny little shares, making it accessible for the average person.”
Ortega said a lot of his younger and middle class clients, with average assets under management of about $100,000, are also interested in the space.
“Young people are turned off by the traditional kind of investment industry, as the 2008 financial crisis made them disenfranchised when they saw their parents lose money in their retirement account,” he said.
From cars to fine wines, sneakers and artwork, the market for alternative assets is expected to reach $15.6 trillion by 2024, according to a report conducted by wine investment company Cult Wines. Eight in 10 ultrahigh net worth investors currently invest in one form of alternative, the research found. Like Rally, a wave of startups has burst onto the scene to turn iconic items like a historic Babe Ruth rookie card, the Declaration of Independence and Andy Warhol’s artwork into items that fans, collectors and everyday people can invest in for as little as $5 a share.
These collectible securitization platforms often have official registration with the SEC and can issue shares through the limited liability company facilitating the investment.
“Democratization is the big thing for a reason,” Sam Spike, co-founder of NFT community JPG, wrote in the Cult Wine investment report. “People have been excluded from traditional investing for so long that they want to invest in these new spaces that haven't yet been colonized and monopolized in the same way.”
A study from Lloyds Banking Group shows that one in six investors viewed their investment in alternative assets as a hobby. Wine in particular is popular, with around one-third of Generation Z investors claiming they have a personal interest in wine as an asset, according to a
Anthony Zhang, co-founder and CEO of Vinovest, a wine investing brokerage and advisory platform, said he had passion for fine wine but didn’t know much about it before starting his company. Collecting and investing in wine used to be more of a leisure activity for wealthy people in their 50s or 60s, not for the 27-year-old entrepreneur who spent two years working for Blockfolio (now FTX), a cryptocurrency exchange.
But there are a lot of similarities between crypto and wine investing, he said. Both have a fixed supply, while wine goes one step further by allowing people to actually consume it. Each year, the number of collectible wine bottles available on the market shrinks, according to Vinovest. That makes the remaining supply more valuable.
Investors on Vinovest can not only build a portfolio of wines with an annual management fee ranging from 2.25% to 2.85% via desktop or a mobile app, they can buy and sell ownership of individual bottles of wine with other investors through a secondary exchange.
Two years after its initial launch, the company is gaining some momentum among investors between 20 and 35, many of whom just started investing. Vinovest’s 10,000 investors now have more than 250,000 bottles of investment-grade wine in their portfolios.
Besides pure fun or social media frenzy, those young wine investors seem to be serious about their holding strategies. Less than 1% of Vinovest users actually liquidate their portfolio holdings to drink the wines, according to the company.
Companies like Vinovest claim that besides passion, it can offer diversification and the potential for significant returns. In 2021, the company said the average return among client portfolios allocated to wine is 19.3%, only slightly lower than the 21.4% gain of the Nasdaq Composite during the bull market.
While these collectible investment platforms provided a simple and accessible way into wine investing, the company’s relatively high management fees made some financial advisors hesitant. When acting as a brokerage, Vinovest charges a 2.5% buy side trading fee, 1% sell side fee and 1.5% yearly storage fee. Its managed portfolio charges an annual management fee ranging from 2.25% to 2.85%. Artbnk, an artwork investment platform that offers shares in arts, looks up to the hedge fund model and charges a 10% commission fee. Masterwork, another SEC-registered art securitization platform, charges 1.5% AUM fee and 20% on investment profit.
Those fees are much higher than the average annual 1% AUM model in the financial advisory industry and create “a near-insurmountable fee drag on investor’s returns,” said Nathan Bender, lead planner and principal at Black Bishop Financial Group.
The reason behind relatively high fees, those behind the collectible platforms argue, is high maintenance costs for managing the physical collectibles. Unlike stock and bond holders, Vinovest said it helps investors store wines in warehouses around the world, and it also takes care of the insurance and appraisal for the wines.
Some competitors are trying to change that fee structure as a way to scramble for the $300 billion wine market that is traditionally opaque and inefficient to retail investors.
Vint, a wine investment platform with $1.75 million AUM, is taking a different approach. The platform offers fractional ownership of wine collections to investors charging an upfront sourcing fee of 6% to 8% during the initial offering, with no ongoing fees. Individuals are also able to invest in Vint collections via their self-directed IRAs, according to the company.
Vint also follows a securitization model ownership broken into shares that investors can buy and sell under the scrutiny of the SEC. For a collection of five different wines with 42 bottles, for example, the platform issues 1,990 shares at $50 per share. The platform creates LLCs around each collection offering.
For Vint’s investors, who are on average 40 years old, the idea of not only investing in wines, but also in SEC-qualified shares, provides another option in their retirement portfolios.
When Victoria Rickham, 45, heard that Vint started selling shares for wine investment, she immediately encouraged her father, a physical wine collector, to invest.
“Wine seems to be pretty steady for the most part. It’s not like equity or something that I need to liquify in the short term,” Rickham said. “It’s more of a retirement investment to me, something I wouldn’t bother to cash out for another 10 years.”
While it might be novel to wine investors, securitization ownership is nothing new in many other collectibles, like cars and artwork. As part of the JOBS Act in 2012, President Obama created a new legal structure that has helped accelerate the fractional market for the purpose of expanding and easing methods of raising capital. It allowed private companies to issue securities to the public via crowdfunding.
However, this securitization model also drew some critics who prefer the physical collectible rather than a fractional share.
“Honestly, I feel like if I tell my friends I own one of 100 Lamborghini shares, I would probably get laughed at.” Bender said. “I love cars, but I don't know if I want to own one of 100 LaFerrari shares because I would want to drive that LaFerrari. I wouldn't want it to be sitting in the showroom.”
While the new wave of investors claims that investment tastes with collectibles are tied less to financial reward and more to cultural identity, some financial advisors remain doubtful as they don’t believe investing and fun should coincide.
“If you want to have fun, go to Vegas,” Bender said. “But if you want to invest, don't fool yourself into thinking that you are outsmarting all the other investors because you're buying a fraction of an Andy Warhol or a LaFerrari.”
Unlike stocks and bonds, alternative assets like wine, cars and artwork do not produce cash flows and could be purely speculative as investors simply bet on asset appreciation.
“You're basically just hoping someone is going to pay a lot more for it later on.” Bender said, “They have celebrity endorsements, but people's tastes change, too. Maybe the next generations are going to favor a different brand and your investment will go out of favor. ”
Bender also warned that the current collectibles hype is helped by low interest rates and expectations of low returns in normal financial investments, which could be temporary as the Federal Reserve is set to continue interest rate hikes to combat inflation.
“Everybody is flush with money. They are looking for a place to invest their money, so it goes to wines, arts and collectibles,” Bender said. “With more restraints from the Central Bank, buying Andy Warhol's dollar sign will probably not be as popular as an investment.”
Liquidity risk can be another issue, as not every platform has a secondary trading market for investors to buy and sell the shares of collectibles among each other.
Vint, for example, stipulates that investors must put their money on the platform for at least three years before they can sell their wine collections. And there’s currently no secondary market, which means it could be a huge bet to invest capital into something that lacks historical performance data and can’t be cashed out for a long time.
Despite skepticism, Ortega is still holding on to his Porsche Turbo Carrera investment. Three years after initial offering, his shares on Rally are down from $63.30 to $60 a share, a 5% slump. But Ortega is not worried about it because he only has a small percentage of his portfolio in collectibles. He recommends his clients do the same and have a well-diversified "normal" portfolio of stocks and bonds.
“Definitely do your research, come to the platforms with a clear understanding of different asset classes and make sure the platform you're investing on is legitimate and regulated,” he said.
