(This is part of a series of features and interviews about the intersection of fine art and wealth management.)

As many as a third of art collectors keep their works in storage and out of view, suggesting that a sizeable chunk of the $1.74 trillion privately held art could be lent against and used to drive liquidity in the market, a European specialist firm argues.

London-based Overstone Art Services, a firm providing risk scores for family offices, private banks and wealth managers, reckons that the current arena for lending and borrowing art does not go much further than scratching the surface of what is potentially achievable. 

“We think this market is going to [to be worth] $100 billion in the next four to five years,” Harco van den Oever, Overstone’s founder and chief executive, told this publication in a recent call. The business was formed in 2012. 

Overstone helps to help identify the financial risk and opportunity of an artwork or a collection so that UHNWs can use art as an asset. The business works with wealth managers to help them leverage art for their UHNW clients to use as collateral for loans.

The market in which Overstone works has been obviously affected by the COVID-19 pandemic – there has been an accelerated shift to digital auctions and online “viewing rooms” as happened in the Hong Kong Art Basel fair at the start of the year, to give just one example. A few players have sought to blend investment banking savvy with art to capture value, with mixed results. In 2019, for example, New York-based investment platform YieldStreet bought Athena Art Finance from its owners, Carlyle Group and Pictet for far less than what was originally pumped into it. That transaction raised questions of how deep and liquid the fine art market is and how applicable investment banking models are to the space.

There are plenty of reasons to understand why private banks and other advisory firms like the art market. While small compared with the US equity market, for instance - estimated at more than $30 trillion - the art market’s size at around $64 billion (source: UBS, Art Basel, report on 2019, issued here) is not to be sneezed at. (There is a need to tread carefully, as this article explains.)

Van den Oever has plenty of experience in finance and art. He served for 12 years at Christie’s as Continental European head and global managing director of the Impressionist and Modern Art Department prior to founding Overstone. With 12 years in debt capital markets under his belt at Paribas, Bankers Trust, and Credit Suisse First Boston, Van den Oever also founded Fredfinds.com, the UK's first online mortgage brokerage business, acquired in 2001 by Netwindfall. Van den Oever has an MBA from the University of Hartford and is an INSEAD alumnus.

Van den Oever said that his firm often works with family offices, and one reason for starting Overstone was a sense that the market potential was not being fulfilled: “There were not many offers in terms of [art] lenders and we found there was something fundamentally wrong with the market,” he said. “We were approached by one of the big global private banks to right its art lending policy.”

Out of the total $1.74 trillion art market in private hands, about $24 billion is lent against. That is a relatively tiny amount of leveraged art buying compared with other asset classes, he said.

Van den Oever said that firms had been reluctant initially because of the risks involved, but his business has developed analytical tools and algorithms to map and track art investment/lending risk more precisely, and remove some of the mental blockages associated with it. Overstone has created data-driven risk metrics.

Art comes with a variety of drawbacks: works can deteriorate, be of questionable provenance/authenticity, and might be offered fraudulently. In addition, there are other considerations  to take into account such as pricing, valuation and liquidity. Navigating the reefs and shoals of such a space requires experts.

“We don’t lend ourselves but provide information to lenders,” Van den Oever said. “We charge a fixed fee for our digital art valuation and risk assessment, a fixed fee for full due diligence services, and a monthly service fee for our SaaS delivery.”

So what are the main segments of the market?

Within the current art-based lending market, about 80 to 90 per cent of it is done through private banks, with firms such as JP Morgan, Citigroup, UBS, etc); such lending comes typically at around LIBOR+ 1.5-3.5 per cent, Van den Oever said. “That market is growing massively.” 

There are specialised asset-backed lenders, such as Athena and the Fine Art Fund. The capital provided comes from a private equity-style model where the aim is to make returns more in the region of LIBOR+10 per cent or thereabouts. The reason why this margin is bigger for banks than these specialists is that they are set up specifically for the purpose of this market, while banks are offering the lending levels as part of an add-on to other services and often as a way to tie in a client and win their wider business. 

The auction houses such as Sotheby’s and Christie’s are a third type of player who will offer lending services to clients; this is asset-backed and tends to be relatively expensive. Family offices and private equity shops tend to be relatively opportunistic in this space.

The art market has been fairly opaque in the past and not widely or deeply regulated, although change has come with the EU’s Fifth Anti-Money Laundering directive, among other changes, Van den Oever said. 

Moving pictures
Banks are moving out of investment banking and looking for new ways to add value; data services and transparency are improving. Organisations such as Artnet provide more data on transactions and pricing so that the situation is less opaque than before. However, there is still some way to go before reaching a fully accepted, international yardstick of the art market. 

One statistic stood out when Van den Oever mentioned how much art often does not see the light of day – not even appearing on an owner’s wall. Citing figures from UBS this year, he noted that just over 30 per cent of collections are in storage, and out of sight. Van den Oever and colleagues reckon the share might be even larger than that.

Art investment and advice on it is a complex field, and not everyone has been able to make the business catch fire as much as hoped, but what is clear is that this market has more room at the top, particularly as and when the global economy bounces back.