Art Secured Lending
Leveraging collectibles and luxury items as collateral towards loans is not new to the finance world. Recently, however, there has been a surge of art secured loans taking place all over the globe. The Deloitte Art and Finance team estimates the value of current outstanding art backed loans at $18.5 billion, nearly double the market size that the team reported in 2014. The growth of art secured lending speaks to the dependability that many investors realize in the art market. Big name banks including, Goldman Sachs, U.S. Trust, Citibank, and Deutsche Bank have caught on and taken over the art-lending business. This has transformative effects within the art market, but also for family offices.
Art lending allows collectors and investors to access cash against the value of their art collection that often goes towards the heavy costs of keeping up with utilities or new acquisitions. However, this seemingly easy line of credit is anything but faultless.
There are only a handful of artists and works that maintain a precise value, not rising or falling dramatically with the market. In order to cope with the volatility of the art market, many financial institutions only offer these loans contingent on yearly appraisals of the collateral. A sudden decrease in value can leave the borrower having to pay back parts of the loan short-term. This drawback plays out further when the lender is forced to collect the art but is unable to achieve an appropriate amount to refund the debt. If Sotheby’s Financial Services is faced with this issue, resources are available to store the art for long periods of time and experts are on staff to predict the best time to sell. In the first nine months of 2015, Sotheby’s Financial Services reported $31.3 million pre-tax earnings, up nearly $5 million from the year before. Much of this growth came from art back lending. Many art finance players argue that Sotheby’s intentions for art backed lending are to sign more commissions, a strategy that other auction houses have caught on to. When a consigner needs cash before the sale of the work, loans are often made from auction house financial services.
Financial institutions do not have the resources that auction houses have readily available, so lending terms and qualifications become much more convoluted in order to lower risk. For example, many banks will only accept art as collateral from either ultra high-net-worth clients or when the art is extremely well documented, with excellent provenance and sales history. Private banks can typically offer loans ranging from $1 million to $10 million, generally not exceeding 50% of the appraised value of the art. A majority of the loans that are less than $300,000 come with sky-high interest rates. In one remarkable instance, the ultra high-net-worth, top hedge fund manager Steven A. Cohen was able to put his estimated $1 billion collection up for a multi-million dollar loan that came with interests rates as low as 2.5%. This is certainly not the norm.
Despite the high interest rates, art-based financing has recently gained wide adoption in reaction to the strengthening structural trends within the art market. A less opaque market means outsiders can forecast future growth with more confidence. Impressively, Skate’s Global Art-Loans Report predicts that the art lending market could be as big as $100 billion. The exponential global growth in the art market is certainly at the root of the financial products that finance firms have started to offer. As the global art market grows and continues to out preform the S&P 500, art backed loans and other financial instruments that cater to fine art will too continue to grow.
Whether you have a large enough art collection to qualify for an art backed loan or not, the growth of the art finance industry and participation by the top financial institutions offers critical insight from Wall Street that now is the time to invest. Arthena has designed and built a statistically rigorous model that estimates the value of artwork over time. We identify groups of work that are similar to each other and calculate the expected ROI and estimated volatility based on the distribution of gains. Using historical auction results to simulate the performance of our funds, we leverage Monte Carlo analysis to determine annualized returns and sharpe ratios. To learn more about investing in the art market sign up for Arthena’s Art Investment 101 e-mail series.
