An art finance advisory firm examines the recent move by a large Swiss private bank and a private equity house to move into the art space.
Yesterday evening, your correspondent was taken on a tour of London’s Frieze Art Fair by its principal sponsor, Deutsche Bank. All manner of paintings and sculptures were on display – and on sale. Regardless of one’s views of the pieces on show, the fair is certainly testimony to the subjectivist notion of prices in a free market economy: something is worth what people are willing to pay for it, no more, no less. Some recent auctions have set records, such as the $300 million paid for the “When Will You Marry?” by Paul Gaugin this year, and many will remember the Vase With Fifteen Sunflowers painting by Van Gogh sold back in 1987 (the year that also saw equity markets crash). A report recently by Deloitte said the global art investment market now stands at $1.3 billion. But there are some flies in the ointment: the Mei Moses Fine Art index, the tracker of art auction sales, has reported a negative performance from 2012 to 2013, a period when good old boring equities rose. From 2003 to 2013 – straddling the biggest financial crisis since the 1930s - the annual compound return on the index was 7 per cent. The sharp deceleration of the Chinese economy and struggles for Russia may take some of the big buyers out of the field. Falling oil revenues may also crimp some Middle East spending. So there is no certainty of a straight-line rise in investment values. But art investment can, in certain periods, deliver decent returns, although this is an illiquid asset class, requiring expertise and patience, and a genuine passion by the investor for the subject at hand.
A recent development – the involvement by one of the world’s largest private equity houses and a Swiss private bank in art – may be the harbinger of a bubble or possibly just another step in the development of a global art investment market. Harco van den Oever, managing director of Overstone Art Services, an art finance advisory firm, gives his views about what this development means. We welcome readers to respond with their own views.
A new player in any market rarely marks a major shift but rather an evolutionary step towards a future equilibrium.
In a way, this is also the case with the announcement last week of the arrival of Athena Art Finance, a joint effort between Swiss private bank Pictet and US private equity specialist Carlyle Group looking to offer its clients loans collateralised by high-value works of art as security. However something else is also taking place here.
Using art as collateral is nothing new and has been offered by the likes of Sotheby’s and some private banks for more than 15 years. In one case, it is mostly used by the auction house to generate future consignments, whilst in the other the bank is looking to attract or retain clients and only does this on a recourse basis. What has been changing over the past 18 months is the fact that art backed lending has seen unprecedented growth and is starting to be seen as a proper stand-alone business opportunity.
According to its annual report, Sotheby’s Finance for instance had, as of March 2015, an average portfolio of $678 million, an increase of 41 per cent from the previous period. In addition, earlier this year, Sotheby’s secured a credit line of more than $1 billion to make such loans from a consortium including General Electric Capital Corp.
As a lender, Falcon Fine Art, the art financing division of Falcon Group, announced that it allocated around $200 million to Falcon Fine Art and believes that it can build a $500 million art loan portfolio within five years. All of this is happening in parallel to specialist lender Emigrant bank, hedge funds and family offices lending more or less proactively using art as collateral.
One of the things that is clearly happening here is a massive amount of liquidity chasing yield. With interest rates at rock bottom, debt funds are finding it very difficult to attain the returns they need for their investors. A new opportunity offering attractive internal rates of return is therefore clearly interesting and no doubt we will see more players entering the market.
All of this is very good news for art collectors seeking additional liquidity. As more lenders enter the market, margins are bound to come down as more choices are made available. Will auction houses continue to insist on an exclusivity in case of a future sale of the collateral? Will most private banks continue to shy away from the opportunity? How many other funds will start to compete for borrowers? Each lender is now taking a slightly different approach. Athena Arta Finance for instance focuses on a limited number of key artists whilst others take a wider view, often expecting a higher return.
One challenge for these new lenders is the fact that some may forget that art is not an easy, standard asset. For borrowers, their collections are often emotionally important, and they expect their counterparts to appreciate and understand that. Collections also tend to be fluid in nature and therefore change during the life of a facility. In other terms, one size definitely does not fit all. In addition other assets such as classic cars, wine or even race horses can be considered for collateral.
One thing is for sure, the arrival of Carlyle heralds a watershed moment in the art-backed lending business if not quite a revolutionary one.