Art prices have been hitting record highs in recent years, helped in part by dealers and financially savvy collectors making use of financing techniques more commonly seen at investment banks, such as futures trading and asset-backed lending.
“We are seeing the increasing ‘financialisation’ of the art world,” said Phillip Ashley Klein, executive director of fine art and collectibles at consultant Capco. More exotic financial products such as equity syndication to buy minority shares in artworks and even securitisation of art loan portfolios are being considered.
Adriano Picinati di Torcello, director at Deloitte, said the globalisation of the art market over the last 15 to 20 years was a key factor. “This has been transformative with new collectors becoming involved at the same time as people have become more willing to borrow against their art to develop collections.”
Sotheby’s has been a pioneering force. Since 2014 the NYSE-listed auctioneer has had a dedicated finance unit that has made loans secured against over US$2bn of art. Last year the division made US$32m, or a fifth of group pre-tax profits.
The auction company has hired a number of former investment bankers and others with finance backgrounds. For instance, former Goldman Sachs partner Valentino Carlotti joined as global head of business development last October.
Many of Sotheby’s loans are made to potential sellers, effectively giving them an advance ahead of the work’s auction.
GUARANTEED PRICES
Another weapon in auction houses’ armoury to secure inventory is to offer guaranteed prices to sellers upfront. This usually involves finding guarantors who agree to buy the work at that price if it fails to sell in the auction above that level. The guarantors can also share in any upside achieved above the minimum.
Guarantors are often major art dealers or clients of the auction house, but financial investors are increasingly being approached. Many, such as Steve Cohen, who set up hedge fund SAC, are major art collectors in their own right.
Auction house Christie’s is believed to have arranged a US$100m guarantee for the Leonardo da Vinci painting, Salvator Mundi, it auctioned last November. The guarantors enjoyed a spectacular payout, as the piece ended up going for a staggering US$450m, smashing the previous record price of US$179.4m for a work of art, paid in 2015 for Picasso’s Les Femmes d’Alger (version O).
Christie’s is also believed to have secured guarantees of up to US$700m for its forthcoming sale of the Rockefeller collection next month in New York. That means the sale will likely raise over US$1bn, making it the biggest ever art sale. Christie’s declined to comment. “Auction houses are fighting to get consignments and offering guarantees is a way of securing business from clients,” said Klein.
SECURED LOANS
Auction houses will also lend short-term to dealers looking to sell on art to clients. Asian buyers in particular are keen to use leverage to build their collections. Major collectors in the US have long borrowed to part finance purchases but in Europe buyers have traditionally used cash to pay for artworks.
But attitudes are changing and other non-bank lenders are emerging to provide financing, both to art dealers, to finance their stock purchases and wider business requirements, as well as to collectors looking to build their collections using debt secured against works they have purchased.
One of these non-bank lenders is Athena Art Finance, founded in 2015 by Andrea Danese, a former derivatives banker at JP Morgan and Deutsche Bank, with backing from private equity firm Carlyle and Swiss investment house Pictet.
“We saw a market that was very inefficient, mainly being financed by straight equity purchases, but with appetite for debt financing using art as collateral alone,” Danese said.
“We thought initially our product would mainly be for collectors but 50% of our business is now from dealers and 20% from auction houses. We are acting as a merchant bank for the art world. Dealers are relying on inventory loans which is better than using equity to purchase stock.”
Fine Art Group, originally set up by former Christie’s employees to run art investment funds, has also found dealers are keen users of its new lending product.
“We will look at all a dealer’s finances: its real estate, cashflow as well as their stock before agreeing a facility,” said Freya Stewart, chief operating officer, who used to be a lawyer at Barclays and Linklaters.
SECURITISATIONS AHEAD?
Such has been the demand that Athena is now considering securitising the loans it has made into CLOs to sell on and expand further. “We are in talks with a number of investment banks about securitising our portfolio,” said Danese. “To launch this would require us to reach US$350m of volume over the next 12 to 18 months.”
Potential investors who want to buy exposure to art directly, rather than through loans, will be able to do so later this year through Maecenas, which will sell shares, via a special purpose vehicle, in two artworks valued at US$5m and US$10m respectively.
In the US, much art financing is longer term in nature. Unlike in Europe, where bankers, like pawnbrokers, are loath to lend against art without taking possession of the collateral, in the US this is less of a problem since encumbered collateral must legally be registered. That makes it easier to monitor.
The majority of lending in the US is still done on a recourse basis by banks such as JP Morgan and Citigroup, with art making up part of a wider credit assessment of the borrower. Overall accountancy firm Deloitte estimates the total value of outstanding art-related loans as up to US$20bn.
Some in London, such as Falcon Fine Art, are prepared, though, to allow collectors borrowing on a non-recourse basis to retain their art, rather than insisting it is locked it in a vault.
“All our transactions are bespoke. At the end of the day it is a matter of trust with your client,” said Tim Hunter, vice president at Falcon Fine Art. “Valuing art is an art and not a science.”
Several firms will allow borrowers to let their works be loaned to galleries for exhibitions too. The risks and complexities behind this means such non-recourse loans are expensive, at around 600bp over Libor, and only up to a maximum of half the value of a piece or collection.
