The rich are borrowing billions of dollars against their art collections, and lenders are reselling the debt
A growing number of rich art enthusiasts are taking advantage of the low rates of interest to take out loans from the value of their Picassos and Basquiats and Basquiats, increasing the risks of the possibility of a leveraged boom or crash in the market for art.
The Fine Art Group, an art advisory, and finance company have said that loan requests grew 30 percent in the year 2020 when compared with 2019 or use your car to get a loan, as collectors were looking to use their collections to fund more artwork or other business. Bank of America, the world’s largest art lender and art lender, saw its art loan business grow by 30% last year in addition, JPMorgan, as well as Goldman Sachs, also experienced significant growth according to executives from the industry.
“A lot of our clients are entrepreneurs, and they use leverage across their businesses and personally,” said Freya Stewart, the CEO of finance for the art of The Fine Art Group. “They have a lot of valuable capital tied up in their art collections and they want to release that capital for other uses.”
The big banks are the dominant force in art lending due to their low rates, the art financing companies, as well as auction house, are expanding their lending business to draw more customers.
Banks usually charge between 2% and percent for loans to artists dependent on the other assets and business as well as the type of business. Art lending firms and auction houses usually charge between 6 and nine percent. The duration of the loan that is backed by art typically lasts one year. The owners are typically able to borrow as high as half the appraised value of the artwork. That means that an owner of the $10 million masterpieces of Pablo Picasso, for instance, can typically obtain an amount as high up to $5 million.
A 400 billion dollar market
Sotheby’s has made the largest move among banks that are not. The auction house has recently entered into an alliance with the former manager of a hedge fund Alex Klabin to expand its lending operations and develop new financing models.
Klabin is currently the executive chairman of Sotheby’s Financial Services, which is the auction house’s financial division, Sotheby’s Financial Services. He was previously co-founder of Blackstone Group-backed Senator Investment Group and parted ways with the multibillion-dollar hedge fund around one year in the past.
The value of privately owned art is higher than 2 trillion dollars, Klabin said, yet the business of lending to art is estimated at around $20 billion. He estimates that the market for loans to art could easily exceed $400 billion.
“We think there is a tremendous growth opportunity ahead of us,” Klabin stated.
Sotheby’s chief executive Charles Stewart said the rise of collectors who are younger and tend to view art as an investment for the future is also driving the increase in loans for art.
“It’s not the same mindset as ‘you’re going to own something forever,’ ” Stewart declared. “There’s an idea that you purchase something and then when you want more or you’re done using it can sell the item and then resell it. It’s more of an investment-oriented mentality. This opens up opportunities for the financial products.”
Reselling art loans
The lenders say that the biggest opportunity — and the newest danger — lies in the business of reselling art loans to investors.
Yieldstreet an online investment platform, has added an $11 million junior loan participant for its Diversified Art Fund which pooled together art loans that are guaranteed by Andy Warhol, Roy Lichtenstein as well as other top artists. The fund, fueled by data from Yieldstreet’s Athena Art Finance unit, has already sold more than $40 million of loans to investors. The fund has an expected annual net yield of 9.5 percent.
Cynthia Sachs, managing director at Yieldstreet and chief executive officer at Athena Art Finance, said that the company is looking into the possibility of launching a second fund for art because of the increasing demand from investors and borrowers.
“We are really creating a credit market around art,” Sachs declared. “People speak about artwork as an investment class. However, it is impossible to create any asset without the credit market.”
Sotheby’s has said that it’s in the initial stages of expanding. However, experts in the industry believe that the auction house to start its own securitization fund or fund and package art loans into an investment opportunity for its other customers or investors outside the auction house.
“We’re going to look at all kinds of ways of lowering our costs of capital and building out a sophisticated funding framework,” Klabin declared.
A notoriously unstable market
The issue will be whether the investors aware of the dangers of making use of art, an infamously opaque, opaque, and volatile market as collateral for loans and an investment asset. Artists who may be popular one year can be a disaster the following year. The borrower, regardless of how rich they’re believed to be, could be the victims of themselves blow-ups.
Sotheby’s famously lent about $100 million to Jho Low, a Malaysian businessman-turned-fugitive who agreed to forfeit $700 million in assets following accusations that he helped mastermind a multibillion-dollar fraud from Malaysian sovereign wealth fund 1MDB. The loan was paid back, because of the market demand for art pieces that Sotheby’s used as collateral.
Sotheby’s claims its expertise in the valuation of art as well as its extensive knowledge of its clients help reduce the risks of defaults on loans to art.
“We really do think we have an actual edge because we are so attuned to both the auction and private market here in a way that really nobody else is,” Stewart declared. “If at some point there is the need to add additional collateral or to sell something, we know how to do that quickly, effectively.”
Yieldstreet’s Sachs said that because the loans are for half of the value of an artwork or perhaps less, they have a “huge cushion” in the event of a default. The fund also offers loans to works of artists that are the easiest to sell.
“We focus on the most liquid, least volatile part of the market,” Sachs stated. “We structure the deals with all those risks in mind.”