More and more wealthy art collectors are taking advantage of low interest rates to borrow against their Picassos and Basquiats, increasing the risk of a leverage boom and bankruptcy in the art market.
Fine Art Group, an art advisory and finance firm, announced that loan applications were up 30% in 2020 compared to 2019 as collectors tried to borrow against their collections to invest in more art or other businesses. Bank of America, a leading art lender, saw its art lending business grow 30% over the past year, while JPMorgan and Goldman Sachs also saw strong growth, according to industry executives.
“Many of our clients are entrepreneurs and leverage leverage in their business and personally,” said Freya Stewart, CEO, art finance, The Fine Art Group. “They have a lot of valuable capital tied up in their art collections and want to release this capital for other purposes.”
While the big banks dominate art distribution due to lower interest rates, art finance companies and auction houses are increasingly expanding their lending business to attract more customers.
A woman visits the exhibition “Jean-Michel Basquiat” at the Mudec Museum in Milan on October 27, 2016, a retrospective on Jean-Michel Basquiat’s career from graffiti in New York to more complex works.
Giuseppe Cacace | AFP | Getty Images
Banks typically charge 2% to 5% for art loans, depending on the client’s other assets and businesses, while art rentals and auction houses often charge 6% to 9%. An art-secured loan is typically one year long, and owners can typically borrow up to half the estimated value of a work of art. This means that an owner of a $ 10 million Pablo Picasso plant, for example, could typically get a $ 5 million loan.
A $ 400 billion market
Sotheby’s is making the biggest boost among non-banks. The auction house recently partnered with former hedge fund manager Alex Klabin to expand its lending business and develop alternative financing structures.
Klabin is now Executive Chairman of the auction house’s financial arm, Sotheby’s Financial Services. He was previously a co-founder of the Blackstone Group-backed Senator Investment Group and parted ways with the multi-billion dollar hedge fund about a year ago.
Privately owned art is worth more than $ 2 trillion, Klabin said, but the art rental business is worth only about $ 20 billion. He estimates that the potential art loan market could easily exceed $ 400 billion.
“We believe we have tremendous growth opportunities ahead of us,” said Klabin.
Charles Stewart, CEO of Sotheby’s, said the rise of younger collectors, who view art more as a short-term good, is also driving the growth in art loans.
“It’s not the same attitude as ‘you’ll own something forever,’” said Stewart. “There’s a view that you’re buying something, and then when you want something else or you’re done with it, sell it and offer it again. Things take on more of an investment mindset. So that creates opportunity for some of these financial services . “
Reselling Art Loans
Lenders say the big opportunity – and the new risk – is to resell art loans to investors.
Yieldstreet, an online investment platform, has added a $ 11 million junior loan share to its Diversified Art Fund 1, which pools art loans from Andy Warhol, Roy Lichtenstein, and other top artists. The fund, based on research by the company’s Athena Art Finance division, has sold nearly $ 40 million in loans to investors with a target net return of 9.5%.
Cynthia Sachs, executive director at Yieldstreet and CEO of Athena Art Finance, said the company is considering launching a second art fund as demand from borrowers and investors grows.
“We’re really creating a credit market for art,” said Sachs. “People talk about art as an asset class. But without a credit market, you can’t have an asset class.”
Sotheby’s said it was still in the early stages of its expansion. However, industry experts assume that the auction house could also set up its own fund or its own securitization structure in order to package art loans as an investment opportunity for other customers or external investors.
“We will look at all kinds of ways to lower our cost of capital and build a sophisticated financial framework,” said Klabin.
A notoriously capricious market
The question is whether investors are aware of the risks of using art – a notoriously illiquid, opaque, and volatile market – as collateral and as an investment product. Artists who can be hot one year can flop the next. Borrowers, no matter how rich they are perceived to be, can have their own blasts.
Mr. Jho Low, CEO of Honoree and Capital Limited, attends the 2014 Angel Ball on October 20, 2014 at Cipriani Wall Street in New York City.
J. Countess | Getty Images
Sotheby’s was known to loan around $ 100 million to Jho Low, a refugee Malaysian businessman who agreed to forfeit $ 700 million in assets after he was accused of running a multi-billion dollar fraud by the Malaysian sovereign wealth fund 1MDB caused. The loan was repaid, thanks in part to a strong market for the works of art that Sotheby’s held as collateral.
Sotheby’s says its art valuation expertise and deep knowledge of its clients reduce the risk of art loan defaults.
“We really think we have a real advantage because we’re so set on the auction and private market here that it’s really no one else,” said Stewart. “If at any point additional collateral needs to be added or something needs to be sold, we know how to do it quickly and effectively.”
Yieldstreet’s Sachs added that there is a “giant pillow” in case of failure as the loans are only for half the value of a work of art or even less. The fund also makes loans to works by artists that are easiest to sell.
“We focus on the most liquid and least volatile part of the market,” said Sachs. “We structure the business with all these risks in mind.”