More and more wealthy art collectors are profiting from low interest rates to borrow against their Picassos and Basquiats, increasing the risks of a boom and leveraged break in the art market.
The Fine Art Group, an art finance and consulting company, said loan applications increased by 30% in 2020 compared to 2019, as collectors sought to borrow from their collections to invest in more art or other businesses. Bank of America, a major art financier, saw its art loan business grow by 30% last year, while JPMorgan and Goldman Sachs also saw strong growth, according to industry executives.
“Many of our customers are entrepreneurs and use leverage in their business and personally,” said Freya Stewart, CEO of art finance at The Fine Art Group. “They have a lot of valuable capital allocated to their art collections and they want to release that capital for other uses.”
While large banks dominate art lending because of lower rates, art finance firms and auction houses are increasingly expanding their lending businesses to attract more customers.
A woman visits the exhibition “Jean-Michel Basquiat”, a retrospective on Jean-Michel Basquiat’s trajectory 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 2% to 5% on loans for works of art, depending on the client’s other assets and businesses, while lending firms for works of art and auction houses usually charge 6% to 9%. The term of an art-secured loan is typically one year, and homeowners can usually borrow up to half the appraisal value of an artwork. This means that the owner of a $ 10 million work by Pablo Picasso, for example, could normally obtain a loan of up to $ 5 million.
A $ 400 billion market
Sotheby’s is making the biggest push among non-banking institutions. The auction house recently formed a partnership with former hedge fund manager Alex Klabin to expand its credit business and develop alternative financing structures.
Klabin is now executive chairman of the auction house’s financial arm, Sotheby’s Financial Services. Previously, he co-founded the Senator Investment Group, supported by the Blackstone Group, from the multi-billion dollar hedge fund about a year ago.
The value of private art is more than $ 2 trillion, Klabin said, but the art loan business is valued at just about $ 20 billion. He estimates that the potential market for art loans could easily reach $ 400 billion.
“We believe that there is a tremendous opportunity for growth ahead,” said Klabin.
Sotheby’s CEO, Charles Stewart, said the rise of younger collectors, who tend to see art as a short-term asset, is also driving the growth of art loans.
“It’s not the same ‘you’re going to have something forever’ mentality,” said Stewart. “There is a view that you buy something and then, when you want something different or end it, you sell and offer again. Things take on a more investment mindset. This creates opportunities for some of these financial services.”
Art loan resale
Lenders say the big opportunity – and the new risk – is in the business of reselling art loans to investors.
Yieldstreet, an online investment platform, 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 leading artists. The fund, driven by analysis from the company’s Athena Art Finance unit, sold almost $ 40 million in loans to investors, with a desired net return of 9.5%.
Cynthia Sachs, managing director 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 are really creating a credit market around art,” said Sachs. “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 expansion. But industry experts hope the auction house will also be able to launch its own securitization fund or structure, packing loans for works of art as an investment opportunity for other clients or outside investors.
“We are going to look at all kinds of ways to reduce our capital costs and build a sophisticated financing structure,” said Klabin.
A notoriously unstable market
The question is whether investors are fully aware of the risks of using art – a notoriously illiquid, opaque and fickle market – as a loan guarantee and investment product. Artists who can be hot in one year may fail in the next. Borrowers, however wealthy they may be, can have their own extensions.
Capital Limited Honoree and CEO, Mr. Jho Low, attended Angel Ball 2014 at Cipriani Wall Street on October 20, 2014 in New York City.
J. Countess | Getty Images
Famous Sotheby’s lent about $ 100 million to Jho Low, a Malaysian businessman who became a fugitive who agreed to lose $ 700 million in assets after accusations that he helped engineer a multi-billion dollar fraud of Malaysia’s 1MDB sovereign wealth fund. The loan was repaid, thanks in part to a strong market for the works of art that Sotheby’s maintained as collateral.
Sotheby’s says that its experience in art appraisals and its in-depth knowledge of its customers reduce any risk of default on art loans.
“We really think we have a real advantage because we are very attuned to the auction and the private market here in a way that no one else is,” said Stewart. “If there is ever a need to add additional guarantees or to sell something, we know how to do it quickly and effectively.”
Yieldstreet’s Sachs added that as loans cost only half the value of a work of art, or even less, there is a “big cushion” in the event of default. The fund also lends against works by artists that are easier to sell.
“We focus on the most liquid and least volatile part of the market,” said Sachs. “We structured the business with all these risks in mind.”