Social impact

Investing directly in art also provides a greater opportunity for collecting families to maximise social impact. The line between for-profit businesses and philanthropy has been blurring as social impact investments have shown that a financially sustainable business model can achieve far greater impact than charity, given its ability to scale.  Today, the private collections of ultra high net worth families can rival those of major art institutions and by joining forces an extended family unit can make a significant social impact.   Private museums are being created at an outstanding rate, and for many collecting families giving has become synonymous with investing as families seek to give back to their communities by sharing their passion for art with the public. 

Families with exceptional art wealth are moving toward an increased focus on using their collections and their wealth to realise what they define as a richer life and to achieve a greater sense of fulfilment for themselves and for their community.  With their collections as their core, and with their missions of civic responsibility and building community, collecting families can make a meaningful contribution to the preservation of cultural heritage and diversity. 

Professional development 

Direct investment in art and art related businesses can provide opportunities for professional development and knowledge of the global art market for family members and to pass down an understanding of the family collection that future generations can benefit from. Dealing professionally with art requires time and considerable knowledge. Obtaining recognition as an art expert generally requires intense study whether theoretical, academic or practical. Even the most experienced collecting families can benefit from professional guidance in today's fast paced and complex art market.

Scope for unmatched financial returns in the art market

Finally, and certainly not least, direct investments in art and art related businesses allow scope for unmatched financial return.  For the already well-established, this economic motivation is clearly rooted in the desire to achieve family wealth sustainability.  For example, family offices can obtain high potential returns by responding to the shortage of capital in the art market, and actively deploying capital in art financing transactions. 

Family offices can provide art dealers, auction houses, and other market entities with the resources necessary to make timely investments where traditional banks, unfamiliar with art world practices and dynamics, impose prohibitive terms. In exchange for providing financing to these groups, family offices can enjoy a share of the financial upside of these transactions. In the future we may expect to see more family offices invest in art-related businesses, commission works of art, or provide backing for commissions in conjunction with galleries, dealers, and institutions and the artists themselves, in exchange for participation in future profits from sales.

Co-investment

Family offices with particular expertise in sectors of the art market are also increasingly seeking to collaborate with others to leverage the investment opportunities they identify. The attraction of co-investment opportunities include the fact that the family office typically has significant “skin in the game,” a demonstrated expertise, and the ability to add value beyond capital (eg, via business skills, art expertise, proprietary deal flow, or art market intelligence).

We foresee a steady rise in shared due diligence and co-investments in art among family offices, facilitated by increasingly formalised structures that will fall into two broad categories. 

Buying art works in partnership with art dealers

While a family office will generally acquire direct ownership of an art work, in certain circumstances it may own an art work in partnership with an art dealer. A family office may also enter into arrangements with selected dealers to share in the potential upside of a painting by receiving remuneration at such time the painting is sold.  The family office may also seek to take advantage of current market conditions and perceived inefficiencies by purchasing and selling certain art works within short periods of time.

Co-investment with Auction Houses

Family offices may also seek higher returns by selectively deploying capital to the auction houses and by participating in guarantees extended by the auction houses to a select number of important sellers of art works on pre-agreed terms and conditions. In exchange for participating in guarantees with auction houses family offices will enjoy a share of the financial upside or downside of these transactions.

Conclusion

Direct investment is a documented trend among family offices that is picking up traction and may be ready to emerge full-force in the art market in the near term.  Due to the nature of family offices, this is particularly interesting for a market actively seeking to raise capital.  Unlike private equity firms, family offices can be very quick on their feet, are flexible, and that flexibility can translate to opportunistic investment in art and art-related businesses. 

While the growing interest in direct deals from family investors is understandable, we would also counsel caution. Those wishing to invest directly in art should consider whether they really have the expertise and the proprietary deal flow to compete effectively in the global art market.