How to invest in a fraction of a diamond

A new fractional ownership marketplace allows investors to buy a sliver of the pricy gemstones

The idea is that special diamonds, which have been steadily gaining value, will offer potential returns as investments to retail investors. Getty / Nick Donaldson
Beta V.1.0 - Powered by automated translation

A new fractional ownership business centred on fancy coloured diamonds will offer retail investors a rare chance to begin investing in the pricy gemstones.

Luxus, founded by hedge fund expert Dana Auslander and fashion journalist Gretchen Gunlocke Fenton, made its debut recently with a first offering of a .54 carat fancy pink diamond.

The company aims to give retail investors the chance to buy a sliver of the stone, starting at 0.1 per cent, with the opportunity to participate in a market normally out of reach for those who do not have millions to invest.

The idea is that the special diamonds, which have been steadily gaining value, will offer potential returns as investments. But, as with many such fractional ownership enterprises, retail investors will have no access to the stone or influence over how or when it might be resold — and returns realised.

Today, fancy pink diamonds remain among the world’s priciest diamonds. The largest, most exceptional stones sell from $1 million to $1.2m a carat at retail.

The most expensive diamond of any colour sold was the Pink Star, a 59.6 carat internally flawless fancy vivid pink diamond that sold for $71m in 2017 at a Sotheby’s auction, or just under $1.2m a carat.

Fancy coloured diamonds have typically gained 9 per cent to 12 per cent annually in recent years, according to the Fancy Colour Diamond Index (FCDI), which tracks the wholesale prices.

From the start of 2005 through to the first quarter of this year, prices for fancy vivid pink diamonds, a high grade, achieved 427.8 per cent growth.

Not all pink diamonds are created equal, but even lower-quality colours gained in price. Fancy pink diamonds, a lower grade, gained 325.6 per cent in price and fancy intense pink diamonds 382.6 per cent.

In comparison, the price of gold gained 300 per cent over that period — the S&P, 384 per cent.

How do you get in on the game?

Unless you have millions of dollars to invest, you’d be unable to acquire any of those gems, and smaller stones and colourless diamonds don’t achieve comparable price gains.

With the growth of alternative investment platforms, including for art, sports memorabilia and cryptocurrencies, it was only a matter of time before someone created a platform for gemstones.

The first offering users can buy into is a .54 carat fancy vivid purplish pink diamond from the legendary (now closed) Argyle Diamond Mine in Australia, which was the source of 90 per cent of the world’s pink diamonds.

Luxus sourced the diamond from Kwiat, a family-owned diamond company founded in 1907 that acquired the diamond as an investment at the Argyle Tender, a sealed-bid sales event, in 2016.

Ms Auslander, Luxus’s chief executive, spent years structuring and developing products for hedge funds and working in asset management at companies including Blackstone Alternative Asset Management and Harbinger Capital Partners before co-founding the platform.

Ms Gunlocke Fenton, who worked in public relations for Chanel and was a fashion editor at Vogue, Town & Country and Glamour, brings knowledge and connections in the jewellery industry.

Luxus, founded by hedge fund expert Dana Auslander and fashion journalist Gretchen Gunlocke Fenton, made its debut recently with a first offering of a .54 carat fancy pink diamond. Photo: Luxus

In July 2021, they decided to launch Luxus and raised $2.5m in pre-seed funding from investors including fashion designer Veronica M Beard.

This year is to be a testing period with the rollout of Luxus’s first product, the pink diamond. If the planned full launch next year is successful, Luxus will expand to other fancy coloured diamonds, including blues and yellows. The founders hope to expand into rare watches.

How will it work?

Luxus will offer 2,000 shares in the pink stone at $200 each, valuing the diamond at $400,000. The company says pricing for this stone — and future products — is set below retail prices and above wholesale, as determined by market data and assessments by independent third parties, including the International Gemological Institute.

An independent advisory board, which is currently being assembled, will assign pricing after the full launch of Luxus in 2023, the company says.

The offered price is a good measure of the trade market value, says Greg Kwiat, chief executive of Kwiat.

“One of the most important things that we bring to this is that the pricing to [retail] investors needs to reflect fair market value that positions them for upside, which by definition means not buying it at the highest price anyone could imagine paying for it, and not a retail price.”

After 12 months, Kwiat will work to sell the diamond for Luxus.

“When it sells, that’s how the [retail] investors will participate in upside. All the while, we’ll be making sure to sell it for a price that reflects the full current market value,” Mr Kwiat says.

“I think we’ll sell it in a similar manner to how we sell all of our important assets: showing it privately to the best potential buyers of the assets.”

He is excited about Kwiat being the first jewellery company to participate in this offering, which he sees as part of the future of the industry.

“We need to be forward-looking. You know, I think this is one of the most exciting things I’ve worked on in 20 years of my career so far in jewellery,” he says.

What should potential shareholders look for?

Neither Kwiat nor Luxus will disclose the stone’s initial purchase price, so potential retail investors cannot see its price history and must trust that it is properly priced for them to make a profit.

This is a potential cause for concern, says Martin Rapaport, founder of the Rapaport Diamond Report, which tracks diamond prices and markets globally, and RapNet, an electronic diamond trading network with 930,000 diamonds.

If it were offered by an unknown company and “you don’t have transparency about what the actual cost of the diamond is, run away fast”, Mr Rapaport says.

“Investors are at a distinct disadvantage when they don’t know the actual cost of the item.”

The world's largest fancy vivid blue diamond at Sotheby's Dubai — in pictures

Traditionally, dealers don’t discuss what they paid for a stone, something that may need to change in the era of fractional ownership.

Looking at his databases, Mr Rapaport would value a similar diamond at a dealer price of $300,000 to $400,000 per carat, which could potentially retail at double the price.

As the stone is roughly half a carat, this estimate would mean fractional investors are buying the stone at somewhere around the current retail price.

It’s impossible to find an exact comparison because every stone is unique, he says.

“It’s difficult to compare something so rare,” he says. Only more transparency from Luxus could let retail investors know if they’re getting good value or overpaying.

Fees and sale

One of the downsides of alternative investments can be high fees that eat into retail investors' returns.

While Luxus does take fees, Ms Auslander says she intends to keep them as low as possible to entice retail investors.

“I come from a world where you have to be really mindful of what investors end up paying for,” she says.

That includes Luxus absorbing the start-up costs, filing fees and broker fees; having the company store the diamond and maintain insurance (which she says will not be added later as a cost); and including an undisclosed listing fee — which Luxus maintains is lower than those of auction houses — in the offering price, so no surprises will accompany a sale.

Any sourcing fee, which can reach 10 per cent or more for Luxus, is included in the initial price. Luxus charges an annual management fee from 0.5 per cent and 1 per cent, to be paid out at the sale.

The company estimates it will hold assets from 18 months to three years, but in practice the period could run from as little as 12 months to as long as eight years.

There are to be no transaction or trading fees if shares in an asset are sold on Luxus’s secondary trading platform before the stone is sold.

In addition, a stone’s vendor must sign a commitment to purchase a minimum share of the asset — in Kwiat’s case, at least 10 per cent — and Luxus says it will also purchase shares to ensure that its interests align with those of retail investors.

Ms Auslander describes the prospective sale of a diamond as “a capital market transaction on the way in and a private equity exit on the way out”.

Luxus uses a waterfall distribution method, so once the fees are paid to it and initial capital investments are returned to all shareholders, retail investors will receive 8 per cent preferred returns of the profit.

Whomever then sells the asset — Luxus or the stone’s vendor, such as Kwiat — will receive 20 per cent of the remaining profit; the final 80 per cent is to be distributed to the shareholders.

The fees are lower than those of Masterworks, a fine art fractional ownership platform, Ms Auslander says.

Masterworks charges a 1.5 per cent annual fee and expects to hold onto the artworks from three to 10 years, as well as a 10 per cent sourcing fee, 20 per cent of future profits (with no preferred returns), and some undisclosed potential expenses and fees.

Luxus plans to add additional source partners next year.

Updated: June 10, 2022, 5:00 AM
EDITOR'S PICKS
NEWSLETTERS
MORE FROM THE NATIONAL