There are more and more wealthy art collectors who charge low interest rates to borrow from their Picassos and Basquiats, which adds to the risk of a leveraged boom and a boom in the stock market. art.
The Fine Art Group, an arts consulting and finance company, said loan applications increased by 30% in 2020 compared to 2019, as collectors tried to borrow against their collectors. Lessons to invest in more art or other businesses. Bank of America, a leading art lender, saw its art lending business grow by 30% last year, while JPMorgan and Goldman Sachs also experienced strong growth, according to industry executives.
“Many of our clients are enterprising and use leverage in their businesses and personally,” said Freya Stewart, CEO of artistic finance at The Fine Art Group. “They have a lot of valuable capital tied to their art collections and they want to release it for other uses.”
While large banks dominate lending for art due to lower rates, art financing companies and auction houses are increasingly expanding their lending business to attract more customers.
A woman visits the “Jean-Michel Basquiat” exhibition, a retrospective on Jean-Michel Basquiats ’career from graffiti in New York to more complex works, on October 27, 2016 at the Mudec Museum in Milan.
Giuseppe Cacace | AFP | Getty Images
Banks typically charge between 2% and 5% of art loans, depending on the client’s other assets and businesses, while art loan companies and auction houses typically charge between 6% and 9%. The term of a loan with artistic support is usually one year and homeowners usually ask for up to half the appraised value of a work of art. This means that the owner of a $ 10 million work by Pablo Picasso, for example, could typically get a loan of up to $ 5 million.
A $ 400 billion market
Sotheby’s is making the biggest push among non-banks. The auction house recently formed a partnership with former hedge fund manager Alex Klabin to grow its lending business and develop alternative financing structures.
Klabin is now executive chairman of the auction house’s financial group, Sotheby’s Financial Services. He previously co-founded Senator Investment Group, with the support of Blackstone Group, separating from the multimillion-dollar hedge fund about a year ago.
The value of private art is more than $ 2 trillion, Klabin said, though the art loan business is only valued at about $ 20 billion. He estimates that the potential market for art loans could easily exceed $ 400 billion.
“We think we have a huge opportunity for growth left,” Klabin said.
Sotheby’s general manager Charles Stewart said the rise in younger collectors, who tend to see art as a more short-term asset, is also driving growth in loans for art.
“It’s not the same mindset that‘ you’re going to have something forever, ’” Stewart said, “There’s the vision that you buy something, and then when you want something else or end up with it, you sell it and re-offer it. Things take on more of an investment mentality. Therefore, this creates opportunities for some of these financial services. “
Resale of art loans
Lenders say the big opportunity – and the new risk – is in the business of reselling art loans to investors.
Yieldstreet, an online investment platform, has just added a $ 11 million junior loan stake to its Diversified Art Fund 1, which brings together art loans backed by Andy Warhol, Roy Lichtenstein and other top artists line. The fund, driven by analysts at the company’s Athena Art Finance unit, has sold nearly $ 40 million in loans to investors, with a target net return of 9.5%.
Cynthia Sachs, CEO of 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 around art,” Sachs said. “People talk about art as an asset class. But you can’t have an asset class without a credit market.”
Sotheby’s said it is still in the early stages of its expansion. But industry experts expect the auction house to also be able to launch its own fund or securitization structure, packing art loans as an investment opportunity for other clients or outside investors.
“We’re going to look at all sorts of ways to reduce our capital costs and build a sophisticated financing framework,” Klabin said.
A notoriously fickle market
The question is whether investors are fully aware of the risks of using art (a remarkably illiquid, opaque and fickle market) as a loan guarantee and investment product. Artists who may be hot one year may fail the next. Borrowers, no matter how rich they are perceived, may have their own explosions.
Jho Low, President of Honoree and Capital Limited, attends Angel Ball 2014 at Cipriani Wall Street on October 20, 2014 in New York City.
J. Comtessa | Getty Images
Sotheby’s famously lent about $ 100 million to Jho Low, a fugitive Malaysian businessman who agreed to lose $ 700 million in assets following allegations that he helped design a multimillion-dollar fraud from Malaysia’s 1MDB sovereign wealth fund . The loan was repaid, thanks in part to a strong market for artwork that Sotheby’s had as collateral.
Sotheby’s claims that its experience in art valuations and its deep knowledge of its clients reduce the risks of defaulting on art loans.
“We really believe we have a real advantage because we’re so in tune with the auction and the private market here in a way that really no one is,” Stewart said. “If at some point you need to add additional guarantees or sell something, we know how to do it quickly and effectively.”
Sachs of Yieldstreet added that since loans are only half the value of a work of art, or even less, there is a “huge cushion” in case of default. The fund also lends itself against works by artists that are easier to sell.
“We focus on the more liquid and less volatile part of the market,” Sachs said. “We structure the offers taking into account all these risks.”