A behind the scenes glimpse into art financing, an oft-invisible art market machination employed by the ultra-wealthy, especially during these turbulent times.

TEXT: Reena Devi
INTERVIEW: Denise Tsui
IMAGES: Courtesy of The Fine Art Group

In January this year, when Brexit was the major development setting the art market on edge, wealthy art collectors were reportedly most concerned about whether they could still move their art, what paperwork would be required, and would there be additional taxes or duties if they wanted to move art from the UK to Europe after the end of 2020.

Then in March, it became clear COVID-19 was not a seasonal or regional virus but a global pandemic that required social distancing and shelter-in-place measures. During this time, the economy began taking a considerable hit.

That same month, Bloomberg reported a two-fold increase in inquiries from über-wealthy art collectors raising money from their collections, either to free up cash for investment opportunities or to offset the cost of margin calls on portfolios. (Margin calls are essentially the demand for additional capital or securities when equity of an account falls below a certain level.) According to the Financial Times, UBS Group AG and Credit Suisse Group AG were among the banks asking clients to provide additional collateral. Known as art-secured financing, the business of providing credit against artworks is not a new one, but it is definitely on the rise during these turbulent times.

Speaking with CoBo Social via the phone from London, Freya Stewart, CEO of the art financing division at The Fine Art Group—a global art investment and advisory firm with offices in London, Hong Kong, New York, Geneva, Zurich and Dubai—explained the reasons for this ongoing phenomenon.

“Lots of people believe that in times of uncertainty, you’re in a good position if you’ve got cash. You may want to have cash either because you need it or because you want to take advantage of some opportunities that might arise in a dislocated market, or simply because in times of uncertainty, people want that confidence of just having cash and knowing that they’ve got cash if they need it,” she said.

“I have a very high degree of entrepreneurial client base, and they’re collectors. They think about using their high-value art collection to provide them with some liquidity, just as they do for their property or other assets, their investment portfolios,” she added.

Stewart went on to share the nuts and bolts of art financing, an apparently essential cog in the art market machinations of the ultra-rich.

“If you have a US$10 million Picasso, and it’s valued at US$10 million by our art expert, which is essentially low-auction estimate or reserve pricing, we will lend US$5 million for initially up to two years. We can extend it. We take possession of that painting, that Picasso, into our warehouse. It might be in Hong Kong, Singapore, London, New York, and the borrower pays us interest every quarter. At the end of the loan, the borrower repays the full loan amount, and we return the painting,” she said.

Stewart described this process as highly simple and straightforward, even attributing this characteristic as the reason for its popularity. “If you have genuine, high-quality works of art, you don’t actually have to do very much. You simply give it to us to put in our warehouse, and we do all the logistics, and we give you the money.”

According to Stewart, compared to art financing, going to the bank to raise a similar amount of money against one’s portfolio could be an intense and complicated process.

However, art financing has also become attractive to banks and its clients because the valuations do not tie with equities. What does this mean? For example, when the equity and debt market took a drastic dip in March, Bank of America Corp. reportedly received inquiries from art collectors “looking to shift debt tied to assets that price daily, such as securities, to art as a way to lower margin call risk.”

Banks use the client’s total assets to determine the credit line and typically lend as much as 50 per cent of the entire value. They also let their ultra-high-net worth customers keep the art and offer rates as low as 1 per cent. In contrast, boutique lenders tend to provide faster turnaround but charge more expensive rates.

There is also the fact that art financing tends to focus solely on art by established artists. The key thing for specialist art lenders like Stewart is knowing they can sell the art and there is a market for the artwork in the long-term, so they only lend against artists “that have a proven auction track record.”

“I’m not going to lend against artists that have suddenly popped up and that are kind of just fresh out the primary market. They may have been tested in auction once, so they don’t have that track record. Because me as a lender, I don’t know in two years if there’s going to be a market for that art. I’ve got to know at the point at which I’m lending the money, that there is a well-established market, and there’s a well-established international group of buyers for a painting,” said Stewart.

For example, with regards to Chinese contemporary art, she has a list of 10 to 15 artists her company would consider but these are artists who sold very well and fairly consistently at Sotheby’s and Christie’s Evening Sale in New York or London. “If an artist only sells in Hong Kong and it only has a local market, we wouldn’t lend against it, and that applies for, let’s say, Latin American art. If it only sells in Latin America to a local market, we’re not going to lend against it.”

The primary reason this emphasis on international market appeal is so crucial for specialist art lenders is because they want to ensure the art is not subject to the risk of a relatively small market or a very specific, localized market having a problem.

Even so, this seemingly low risk choice to focus on established and brand name art, does not mean art lenders are not adversely impacted by the current global economic volatility. According to Asher Edelman, from a New York-based company that offers maximum 40 per cent loan-to-value ratio on art financing with possession of the works, lenders are appraising art at lower values. He indicated an estimated decline of 20 per cent to 30 per cent on initial and final appraisals from February to March this year, citing the fact that clients are requesting loans of one to four million dollars.

It is also worth noting that not everyone who is requesting such loans are doing so to fortify their pandemic hit portfolio or businesses. The wealthy still have their high spending ease, even in these times. This is especially evident in this example of the diverse uses of art financing.

“Another example is we’re financing against a collection of Impressionist paintings. A US$3 million loan against a couple of Impressionist paintings, and that collector was using that money to buy a Fabergé collection, so it’s a slightly more indirect way, but you’re still providing finance against a collector’s artwork for him to buy more collectables. We definitely see that in one way or another quite frequently,” said Stewart.

This month alone, fortunes of American billionaires rose by US$434 billion during the nation’s lockdown between mid-March and mid-May. It is safe to say the ultra-wealthy in other parts of the world are no different. For better or worse, art financing is clearly a useful tool, not merely for the wealthy but also for the rest of us to take a closer look at how the rich get richer even in these times.