Long before Leonardo Da Vinci’s Salvator Mundi was brought onto the Christie’s auction floor, the controversial work was smashing records. An anonymous bidder pledged a guaranteed $100 million bid, not only passing the record for an old master at auction by about $25 million, but making the work one of a dozen pieces to be sold for more than $100 million.
A bidding war broke out amongst five potential buyers, sending gasps and applause from a captive audience before being sold for a record-shattering $450.3 million. Its sale dwarfed the previous high, Pablo Picasso’s “Women of Algiers”, which raked in $179.4 million at Christie’s in May 2015. It likewise far surpassed the record holder for most valuable private sale, which was $300 million for Willem de Kooning’s Interchange.
The landmark Christie’s auction is an anomaly even amongst the world of powerful billionaire art collectors, but represents a tidal shift in art finance. According to the recently published annual art and finance report conducted by Deloitte and ArtTactic, art and finance continue to become increasingly intertwined.
An important finding of the study is the motivations of art collectors. Of the nearly 300 art professionals, estate offices and art collectors surveyed, a significant majority of respondents reported that the emotional value of collecting artwork was an important motivator. But just as important as a work’s intrinsic value is its investment potential. 64 percent of art collectors reported that a work’s value as a potential for return or opportunity to diversity liquid assets was a strong motivator—up from just 44 percent the previous year.
The observation coincides with a trend that Deloitte and ArtTactic have been closely following since their inaugural 2011 report. The report’s authors note that “a major change over these years has been a shift in the primary focus on art investment toward issues around the management of art-related wealth, including art-secured lending, estate planning, art advisory, and risk management.”
A whopping 88 percent of wealth managers affirmed that the acquisition of art should be part of a holistic approach to wealth management. In 2014, that number was significantly smaller, at just 55 percent. With an estimated $1.62 trillion dollars wrapped up in art and collectibles amongst the world’s ultra-rich and a 66 percent increase expected over the following ten years, the change in tune makes perfect sense. In the first half of 2016 alone, the study tracked an average 30 percent growth in the world’s two art capitals, New York and London, with auction sales reaching $5.7 billion across the globe in the first half of 2017.
Art-Secured Lending is a Desirable Option for High Net Worth Collectors
But financial lenders are still slow to catch up with the demand from clients to provide comprehensive art-secured lending services. An art-backed loan allows investors to access capital against the value of their art collection which can be used to invest in a business opportunity, refinance debt or expand their existing art collection. For a collector, betting against a work of art to free up liquid assets offers a number of advantages over selling. Particularly, high transaction costs paired with significant capital gains tax, state and local taxes can drastically deflate the overall gain from the sale of a high-value work.
“Our founders understood the opportunity to create an independent platform to professionalize and scale asset-based lending secured by fine art for private collections and art market professionals,” explains Nigel Glenday, Vice President of Strategy at Athena Art Finance Corp, an independent finance company that specializes in asset-based lending secured exclusively by high-value fine art for high net worth clients. “Many collectors have a significant portion of their net worth tied up in art, which can often be the least-efficiently owned asset on their balance sheet from a financial perspective. Art-secured financing provides our clients with a parallel path to liquidity or to generate incremental investible capital, alongside an outright sale.”
Officially launched in late 2015, Athena Art Finance offers art secured lending opportunities to collectors. Loans are valued at up to 50% of the lowest appraised value of the proposed art collateral, with loans beginning at $1 million. These loans are paid back between six months and seven years at a 7-9% interest rate.
Catering to high net worth individuals, the company only deals with blue-chip art, or works of great value that are considered low risk and reliably profitable despite unforeseeable fluctuations in the global economy. Glenday estimates the “value of art in private hands is in the order of $1 trillion, of which $100 billion is suitable for financing.”
Glenday notes that the company has developed a lending policy that encourages market players by swimming against the tide. Both traditional banking institutions, as well as art world non-bank lenders like Sotheby’s, depend on full-recourse loans, which tie up art-backed loans to other assets. Athena Art Finance is, according to Glenday, the leading independent financing firm that has professionalized access to art-secured lending to access investible capital on top of their other financial assets. Clients are able to access the value of their art collections rather than going the traditional route, an outright sale of the work, which is precisely what many collectors do not want to do.
Art Finance Models Extend to Lower-Priced Objects
High-end art collectors aren’t the only people getting in on the art finance game. A handful of other web-based services allow ‘all collectors’ of art and luxury goods to take out credit against their heirlooms. Digital pawnbroker Borro provides short and long-term loans with funds wired within 24 hours after the approval of a market value appraisal and no credit check. Los Angeles-based Levart has a similar proposition to Athena, providing non-recourse loans for collectors with works of considerably lesser value. A ‘two-minute application process’ could result in the financing of work valued at a minimum of $5,000 within half a day. Loans are paid back in monthly installments, with no minimum terms and a sizable 4% interest rate.
An Art Finance Company Offering Zero-Interest Loans to Acquire Work
Australian-based Art Money flips the coin. Rather than providing art-secured loans, the lending service offers interest-free loans used exclusively to buy works of art. Collectors are able to purchase from a set of partnered galleries. The original set of participating galleries in Sydney has grown into a network of 500 art spaces as far-flung as Mexico, Chile, Iran, and Japan. The company provides loans ranging from $1,000 to $50,000.
The startup is cashing in on an underpublicized trend. Although it is the Christie’s sales that get big press, according to a 2016 report by TEFAF, 27.1% of global art sales were of works of art valued between $1,000 and $5,000.
In order to qualify for an Art Money loan, buyers go through a quick credit check; if approved, they pay off the total with a 10% deposit and nine subsequent monthly installments of equal value. The company’s business model functions as a hybrid of a commission-based art dealer and small non-bank lender. Art Money negotiates an undisclosed ‘discount’ with galleries, pocketing the deduction and charging the full list price to the collector. Rather than the gallery taking the risk of selling an artwork on a payment plan, placing both the gallery owner and artist at risk of delayed or non-payment, Art Money pays the gallery within a few weeks and accepts the risk of a default.
Art Money’s branding runs counter to the large art-secured lending services. In a promotional video, a satisfied collector proclaims, “don’t buy art for investment, buy art for love.” Whatever the motivation may be, the art secured lending market is opening up to a growing art industry making the ability to build a starter collection accessible across market segments, to an increased opportunity to borrow money against your most prized works of art, it’s clear that art finance is a niche industry to follow.