The rich borrow billions against their art collections

More and more wealthy art collectors are taking advantage of low interest rates to borrow against their Picassos and Basquiats, increasing the risks of an art market boom and bust.

The Fine Art Group, an art consultancy and finance firm, said loan applications jumped 30% in 2020 from 2019 as collectors sought to borrow from their collections to invest in more art or other companies. Bank of America, a leading art lender, saw its art lending business increase 30% last year, while JPMorgan and Goldman Sachs also saw strong growth, according to the industry leaders.

“Many of our clients are entrepreneurs, and they use leverage in their businesses and personally,” said Freya Stewart, CEO of Art Funding at The Fine Art Group. “They have a lot of valuable capital tied up in their art collections and they want to free that capital up for other uses.”

As the big banks dominate art lending due to lower rates, art finance 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 Basquiat’s career from graffiti in New York to more complex works, October 27, 2016 at the Mudec Museum in Milan.

Giuseppe Cacace | AFP | Getty Images

Banks typically charge 2% to 5% on art loans, depending on the client’s other assets and activities, while art lending companies and auction houses often charge 6% to 9%. The term of an artwork-backed loan is typically one year, and owners can typically borrow up to half of an artwork’s appraised value. This means that an owner of a $10 million work by Pablo Picasso, for example, could typically obtain a loan of up to $5 million.

A $400 billion market

Sotheby’s makes the biggest push among non-banks. The auction house recently formed a partnership with former hedge fund manager Alex Klabin to expand its lending business and develop alternative funding 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, backed by Blackstone Group, separates with the multi-billion dollar hedge fund about a year ago.

The value of private art is over $2 trillion, Klabin said, but the art lending industry is only valued at around $20 billion. He estimates that the potential market for art loans could easily exceed $400 billion.

“We believe there is a tremendous growth opportunity ahead of us,” Klabin said.

Sotheby’s CEO Charles Stewart said the rise of young collectors, who tend to view art as a short-term asset, is also driving the growth of art loans.

“It’s not the same mindset as, ‘you’re going to own something forever,'” Stewart said. “There’s a view that you buy something and then when you want something else or you’re done with it, you sell it and re-offer it. Things take on more of an investment mindset. So that creates opportunities for some of these financial services.”

Resell Art Loans

Lenders say the big opportunity – and new risk – lies in reselling art loans to investors.

Yieldstreet, an online investment platform, has just added an $11 million junior loan stake to its Diversified Art Fund 1, which includes art loans backed by Andy Warhol, Roy Lichtenstein and other artists renowned. The fund, driven by analytics from the firm’s Athena Art Finance unit, sold nearly $40 million in loans to investors, with a targeted 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 increases from borrowers and investors.

“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 was still in the early stages of its expansion. But industry experts expect the auction house could also launch its own fund or securitization structure, presenting art loans as an investment opportunity for other clients or investors. exteriors.

“We’re going to look at all kinds of ways to reduce our capital costs and put in place a sophisticated financing framework,” Klabin said.

A notoriously unstable market

The question is whether investors are fully aware of the risks of using art – a notoriously illiquid, opaque and unstable market – as loan collateral and an investment product. Artists who may be hot one year may fail the next. Borrowers, no matter how wealthy they are perceived to be, can have their own blowouts.

Capital Limited Honoree and CEO Mr. Jho Low attends Angel Ball 2014 at Cipriani Wall Street on October 20, 2014 in New York City.

J. Countess | Getty Images

Sotheby’s loaned around $100 million to Jho Low, a Malaysian businessman turned fugitive who agreed to confiscate $700 million in assets after being accused of helping organize a multi-billion dollar fraud from the Malaysian sovereign wealth fund 1MDB. The loan was repaid, thanks in part to a strong market for the artworks Sotheby’s held as collateral.

Sotheby’s says its expertise in art valuations and in-depth knowledge of its clients reduces any risk of default on art loans.

“We really think we have a real advantage because we’re so tuned into the auction and the private market here in a way that no one else really is,” Stewart said. “If at any time it is necessary to add additional guarantees or sell something, we know how to do it quickly and efficiently.”

Yieldstreet’s Sachs added that since loans are only half the value of an artwork, or even less, there is a “huge cushion” in the event of default. The fund also lends against works by artists who are the easiest to sell.

“We focus on the most liquid and least volatile part of the market,” Sachs said. “We structure transactions taking into account all of these risks.”