freeing up money while keeping your monet

You are a hedge fund manager, your fund is compounding 25 per cent annualised, you would like to get more of the action for yourself as well as your clients, but your money is tied up in paintings. You’re the executor for an estate, with just nine months to pay estate taxes, but you want to avoid any fire-sale that would force down bids for the antique furniture. You’re retired, in need of a reverse mortgage, and your choking bonds portfolio is spoiling your enjoyment of the sculpture collection you have been putting together for 50 years. Or maybe you have seen your neo-nihonga portfolio appreciate 5,000 per cent in five years and are desperate for liquidity to get your hands on the latest Fuyuko Matsui. The solution in each case is to use the assets as collateral for a loan, rather than selling them. “Most people don’t realise that the capital gains tax on art sales in the US is almost twice what it is for stocks, bonds and real estate,” says Andy Augenblick, founder of Fine Art Capital, which can lend you between $500,000 (e360,600) and $100m, from six months to 20 years, secured against paintings, drawings, sculpture, furniture or decorative arts. Mr Augenblick, a retired real-estate mogul and experienced collector in his own right, balked at paying that 40 per cent tax on top of the 20-30 per cent in auction costs, which would have left him with just half the value of his asset. “There had to be a better way to monetise illiquid asset classes. We do it all the time with real estate in the form of mortgages. So I started with that thesis that there could be a broad market for financing.” Auction houses have provided bridge loans for decades – when a collector wants to cash-in today but the next scheduled auction is months away. Mitchell Zuckerman, president of Sotheby’s Financial Services, has worked on bridge loans at the auction house for more than 30 years, but it was 1988 before he set up the full finance subsidiary to offer plain-vanilla term loans as well. Sotheby’s offers the market’s standard advance rate of up to 50 per cent of the low auction value estimate, and in general it will not lend less than $500,000 for a term loan. Lenders’ rates are usually 3-5 per cent above local Libor. “There is very little incremental cost to exploiting our intellectual capital, which is what our art experts know about values and markets, or our operating infrastructure to write contracts, handle art, store it and sell it,” says Mr Zuckerman. “If you’re not an auction house, to do any of those things involves cost.” Advance loans As an asset-based lender, Sotheby’s can advance loans regardless of borrowers’ creditworthiness and accept objects for auction as principal or interest payment. That makes the service uniquely “unbureaucratic, rapid and global,” claims Mr Zuckerman. The downside is that in nearly all cases you have to hand the artwork over – which does not help if the reason you want to avoid selling is so you can continue to look at it. In this case, it could pay to try your private bank. It almost certainly will not have ranks of expert curators on hand to value paintings, but some are getting help from external experts – including Sotheby’s – particularly if they already have specialised lending departments collateralising yachts or other luxuries. “There is a strong, growing interest among private banks in providing this service, given the substantial amount of equity that has built up in some of private collections,” says Randall Willette of Fine Art Wealth Management, which provides curatorial expertise for wealth managers looking to secure approval from credit policy departments. “It helps build relationships with important clients with significant other assets. Some lenders may request that some portion of the loan be invested with the institution in another portfolio – which is both a separate revenue stream for the bank and a way of assisting clients in diversifying their investments. However, at this stage very few have publicly come out and said that they will lend against art.” Most – even UBS Wealth Management, whose sophisticated Art Banking division Mr Willette used to head – will only arrange art collateral on a case-by-case basis with favoured clients. Bank of America does a fair amount of business in the US. But by far the most significant player is Citigroup Art Advisory, which has been in the market for 25 years and will offer an advance rate of 50 per cent on a diversified portfolio of four or more objects worth at least $10m (each individual piece must be worth $200,000 or more). “Other banks don’t have formalised programmes as we do,” says art finance director Suzanne Gyorgy at Citigroup. “My understanding is that if the banks don’t have the in-house expertise in the art market then risk departments are pretty wary about doing it – whereas we have a long history of multi-departmental understanding of the art market. “Right now our curatorial team numbers 11 specialists in different areas, so we can cover most things in-house. That’s a big differentiator for us: privacy is important, so the fact that we don’t have to go to an auction house or other firm for a valuation is an important aspect of the service.” The in-house expertise means that Citigroup, like Sotheby’s, can lend against contemporary or more esoteric artists’ work (although the bank draws the line at tribal art, collectibles, jewelry, gems, coins, cars and guns), while most non-expert lenders remain fairly conservative. For good reason – valuing collateral requires more than the latest auction catalogue and Art History 101. “There are good Picassos and bad Picassos,” as Mr Willette puts it. “You have to look beyond the artists, at the particular work, the quality, the condition, the provenance.” Or “the parade of horrors,” as Mr Augenblick of Fine Art Capital, which also retains in-house curators, puts it: is the work a fake or forgery; an illegal import; damaged by humidity, temperature or sunlight; or not even owned by the borrower? “This is a market where there is really no title insurance,” he says. “Many transactions are done by handshake.” However, trends suggest that this market will have to evolve beyond a couple of big players servicing major collectors into something more commoditised. “The landscape will completely change,” predicts Bijan Khezri, CEO of the Artists Pension Trust (APT). “More and more wealthy people collect art, and it’s a good marketing platform for creating a wealth-management brand. You will see a lot of emerging players coming through – it’s already happening, but it’s in the very early stages.” The art market is booming, but it has also seen significant demographic changes since the millennium. A growing number of borrowers are young entrepreneurs, asset-rich but cash poor, who are used to using leverage but are not looking for mega loans and have not been collecting big-name artists for five decades. Private banks and independent businesses like Fine Art Capital, Art Capital Group and Art Finance Partners are trying to find a niche in these smaller deals – usually at higher lending rates – rather than attempting to compete with Citigroup or Sotheby’s. New client base “Traditionally art lending has been to extremely wealthy people with longstanding relationships and assets invested with the banks, to whom they would lend funds anyway,” says Mr Augenblick of Fine Art Capital. “That’s really changing now as institutions start to look at underwriting the value of the asset as much as the borrower credit. That means our borrowers have a net worth of as little as $7m-$10m, and our minimum loan size is $1m, and it’s enabled us to go from the traditional one-year rolling loans, to 20-year loans; and from borrowing against a very limited type of art to a broad market including paintings, drawings, furniture, sculpture, coins, stringed instruments, silver and stamps.” Mr Khezri envisages a similar client base for a new art-collateralisation business based around APT. At its core, APT is a long-term investment programme into which around 250 artist participants, selected by a 50-strong, region-specific curatorial committee, will invest, instead of cash, 20 works of art over a 20-year period. The trust stores, leases for exhibition and eventually sells these works, with 40 per cent of profits going back to the individual artist, 32 per cent going to the collective participants and 28 per cent going to APT itself. Initially, the focus is on APT’s core clientbase – the young artists themselves. Let’s add another scenario: you are just establishing yourself in the right galleries with your trademark installations – but the costs of the media stand in the way of your next great idea. Financing is impossible to come by outside of the galleries themselves, which are inefficient, do not specialise in financial services and want a stake in the resulting masterpiece. Meanwhile you sit on an increasingly valuable back catalogue. The idea of pooling assets – and default risk – meets with scepticism. “I think it’s an interesting idea,” says Ms Gyorgy, offering the most positive response of the people PWM spoke with. “But the reason I’m laughing is that I’m imagining our risk managers trying to work that one out.” But Mr Khezri insists that “pooling is critical for opening up that banking service” and points to APT’s core business as its foundation. “If you take 10 young artists with similar profiles, selling in the same price range, you can bring them together and they will be willing to share the risk,” he says. �

Sotheby’s offers loans regardless of clients’ creditworthiness and also offers advice to financial institutions