Evaluating the Current Art Market – Part 5 of 5

As Oscar Wilde is known to be quoted, “When bankers get together for dinner, they discuss Art. When artists get together for dinner, they discuss money,” but what happens when the two worlds meet? Art Finance, or Art Secured Lending, as it is also known as, is quickly growing as a preferred route to attain liquidity amongst collectors of fine objects, and this is demonstrated with a number of new lenders having entered the market over the last five years. However, the current questions in this area still remain: Do advisors know how to effectively recommend art finance as an alternative liquidity source and do collectors know they can even use such a service?

Art as a Wealth Management Tool

Historically, Wealth Managers have been able to offer a variety of tools to provide their high net worth clients with liquidity. Particularly with margin loans, providing funds in less than 24 hours against one’s liquid portfolio of stocks, bonds, etc. has been a relatively straightforward task. The process becomes much less transparent when a financial advisor is looking to manage ones art collection, particularly when leverage is concerned. According to Deloitte’s 2014 Art and Finance report, High Net Worth Individuals (HNWIs) on average are keeping 9% of their assets in Art and Collectibles. This can represent a large portion of wealth when looking at a portfolio of an Ultra High Net Worth Individual (UHNWI), with a net worth over $30million. Thus, having access to leverage on these assets and knowledge of the Art Finance market is crucial to keep up with the client’s demands and stay ahead of the ever competitive financial world.

Similarly, the fast paced Art world has not had a chance to fully understand Art Financing. In a market that has barely changed over the last few centuries, dealers’ primary way to offer collector liquidity is to sell a piece from their collection. In instances where a client has an emotional attachment to a painting and doesn’t want to lose it or only needs funds to bridge a gap, an art loan may be the better option.

Choosing the Right Art Finance Service

Art Financing comes in a variety of structures as The Wall Street Journal recently documented. The first component to look at when seeking an Art Loan is where to go. Typically, Art Financing services are offered by three types of lender:

Private BankHighLowRecourse
Boutique LenderMediumMediumVariable
Non-Recourse LenderLowHighNon-Recourse

The table above shows a basic view of the types of loans available, and the needs of the client will determine which lender is the best fit. If timing is not an issue and a low cost-of-funds is required a Private Bank may be the best option although, the client will need to have excellent credit as well as liquid assets and a longstanding history with the bank. If the client requires funds but doesn’t have a portfolio history required for a private bank to issue a loan, a boutique lender would be the option. Lastly if the borrower needs quick access to funds to bridge a gap, with no prepayment penalties, a non-recourse lender would be the best option there. In all cases, the costs associated with each loan are typically offered on a case by case basis depending on the liquidity of the collateral, the size of the loan and other individual determining factors.

Offering a Holistic Service

As the value of collectors assets grow and as the availability of information surrounding those assets becomes more widely accessible, the requirements for servicing such clients becomes more sophisticated. In the same vein, as industries get more competitive, recommending services to clients without fully understanding the process carries an element of risk. Wealth Managers and Art Professionals still see Art Financing as a secondary tool, if they know about those services at all. Relationships with lenders and an understanding of Art Financing are key for Advisors to offer a more holistic service to their clients, and for lenders to have a better understanding of clients overall needs.

About the Author:

Joe wrote about fine art trends for Borro Private Finance.