According to the latest Art Basel and UBS Global Art Market Report, global art sales reached an estimated $67.4 billion in 2018, up 6% year on year. This marked the second consecutive year of positive growth and brought the market to its second-highest level in 10 years. Meanwhile, Knight Frank’s 2019 Wealth Report reveals that the value of art assets grew 9% in 2018 and 158% over the past decade.
Fine art is considered more and more by ultra-high-net-worth individuals and family office investors as an attractive asset class that is uncorrelated to bonds and equities. In fact, we’re seeing asset managers introducing more art-related services for their clients, often with art secured lending. To discuss this particular trend in more depth, IQ-EQ’s Emmanuelle Dotezac recently sat down with Aude Lemogne, director of art wealth management and financing specialists LINK Management.
Please tell us a little about LINK Management. How has your service offering evolved in recent years, and why?
LINK Management is a leading art wealth management company, founded in 2009 and based in Luxembourg, with a presence in Germany and France. In addition to the classic advisory approach of evaluating a work of art from an aesthetical and historical point of view, we integrate the notions of in-depth due diligence, market timing and risk management.
In recent years, statistical studies have highlighted that asset allocation strategies integrating tangible assets such as art have become increasingly relevant for high-net-worth individuals seeking diversification. A corollary has been the expansion of our client base, constituted not only by art collectors but also by investors through a rising number of European banking institutions, family offices and wealth managers.
In addition, there’s demand from collectors for a new level of sophistication and service offering; for example, access to art finance in order to unlock capital from their art holdings. In this context we decided to set up Griffin Art Partners (GAP), to offer credit facilities to collectors on a non-recourse basis.
Our structure differs from all other art lenders, however, as it is a proprietary securitisation set-up. GAP issues art backed notes for each new loan, financed by a limited pool of institutional and private investors, interested to generate a high return on a short- to medium-term horizon. Each loan is structured by issuing notes with an international ISIN code and cleared through the leading clearing houses. Art backed notes are viewed by our investors as an innovative alternative to an art fund, as they provide an exposure to art but with a much lower risk.
In your view, how does art differ from other asset classes? What are the specific challenges associated with art as an investment asset?
In recent years, a convergence of factors has generated higher interest in art as an asset that has the potential to appreciate: interest rates at historic lows, stock market volatility and increased interest in art globally, among others.
Nevertheless, art remains by nature a high-cost-to-carry, long-term asset. Market timing, as in other asset classes, is absolutely crucial, and given shortened price cycles, partly induced by shifting consumer sentiment, it is essential to understand the trends driving up certain artists’ prices. Top auction houses want to sell proven names, so out-of-favor artists, or those whose careers have yet to take off, will not be considered, which means that liquidity is distributed unevenly across the board.
Furthermore, even though one might argue that recent years have seen an increased transparency in the art market (in particular in terms of having access to public auction prices), this market still remains largely unregulated, with no designated regulator supervising art transactions.
This also means that trading on non-public information is an important driver of returns. Listed financial assets like stocks, bonds or commodities continuously integrate in their pricing new public information, almost instantaneously available on Bloomberg, Reuters or other news channels to the public at large, to avoid creating an advantage for a privileged few at the detriment of others. Despite the creation of multiple platforms and magazines over the last 15 years, which have contributed to the democratisation of knowledge in the art world, the art market’s most successful investors actually reap their successes precisely from a persistent environment of asymmetric information flow. Those who know in advance that a major museum plans to stage a retrospective of a specific artist – potentially an artist that is still little known or has been overlooked for a long enough time – can position their investments ahead of everybody else.
Thus, your privileged access to market-moving information defines your credibility and legitimacy as an art advisor. It also means that newcomers are at a significant disadvantage if they decide to pursue art acquisitions without the guidance and information access of an advisor or an insider.
Today’s high-net-worth families are increasingly mobile with assets spanning multiple jurisdictions. At IQ-EQ, we’re seeing this translate into demand for more sophisticated cross-border holding structures to mitigate resulting complexities and risk exposure. How is this internationalisation affecting art wealth management?
The portable nature of artworks is definitely an attractive feature for high-net-worth families with assets spanning multiple jurisdictions.
One of the challenges though, that many collectors face, is understanding all the implications induced by the movement of artworks. Indeed, each displacement of an artwork implies potential import taxes, VAT impacts, shipping and insurance costs, transportation risks and export license problems. A careful examination of all of the above-mentioned factors needs to be performed in advance and we have observed an increased need from our clients to obtain guidance on these aspects.
Really, it is necessary to understand from the moment of acquisition whether the art objects will remain in one single jurisdiction or if they might be transported to various locations, so that the various implications and consequences can be planned for. Given our experience, we have a holistic understanding of all of these implications, but often still request written opinions from partners, lawyers and specialised tax experts.
In addition, the multijurisdictional nature of our clients’ holdings means that we often need to carefully plan their acquisition vehicle and transactional procedures ahead in order to optimise the holding structure.
You mentioned that the art market itself remains largely unregulated. In a context of growing international regulation surrounding private wealth, how do you expect regulation of art investments to evolve in the coming years?
The level of regulation that applies to specific art investments depends on how and where the investment is structured and held. But regulatory requirements are catching up with the art world; for example, changes in the EU’s Fifth Anti-Money Laundering Directive mean we – as a European private art dealer – must now comply with this directive and its multiple jurisdictional implementations.
Furthermore, I’d like to bring the Responsible Art Market Initiative (RAM) to attention. This is a cross-industry initiative formed in Geneva in 2015, which aims to raise awareness amongst art businesses of risks faced by the art market and to provide practical guidance and a platform for the sharing of best practices to address those risks. Since I joined the advisory board a year ago, I’ve witnessed increased interest from some of the big art galleries, art lawyers and auction houses in the setting up of art market best practices to decrease conflicts of interest that abound in the market currently and to increase transparency. These best practices are edited in guides that might become the basis of regulation for the art market in the future.
Interesting! And of course, added to that, whilst the art industry itself may not be specifically regulated globally as you say, most of the reputable fiduciaries and administrators (like IQ-EQ) of art-holding structures are regulated themselves, providing for indirect regulatory oversight of such an asset class, including via various proceeds of crime and AML-related regulation that already applies. Such providers will take a risk-based AML approach to art assets as best-practice adherence to such regulations, including verification of the true or ultimate client's identity, the provenance of the art object, and importantly the origin of the buyer's funds involved in the transaction(s).
Now, turning to the global art market – it is dominated by the US, UK and China, with their combined sales accounting for 84% of the global market’s total value in 2018. Does this statistic translate when looking specifically at art financing? What differences do you see in the North American, European and Asian appetites for art-securing lending?
Clearly the North American market is by far the most mature in terms of using art as leverage and as collateral. Specialised art lenders in the United States contributed to the dramatic increase of non-recourse art loans in the mid 2000s. Their growth has helped to support the increased popularity of American Art (mainly Post-War and Contemporary Art) over the last 15 years.
Europe and Asia are still relatively untapped territories, especially compared with the US. But mentalities are changing. Griffin Art Partners is now among the three main art lenders in Europe, according to the last Art & Finance report from Deloitte (2019) and we are confident that we will double our loan book size over the coming year. Leveraging an art collection is not for everybody though. Interest rates are significantly higher than a loan using real estate as collateral, as they have to reflect the reduced liquidity and volatility of the underlying asset. There are also cultural differences that make the appetite for leverage more developed in certain countries than in others.
We’re seeing growing client interest in consolidated wealth reporting that encompasses their full array of investments, spanning multiple asset classes, including luxury assets such as fine art. How are these sophisticated reporting requirements impacting your world?
We have been preaching for years in favour of a consolidated wealth view, as it implies a better asset allocation strategy, risk management and overall management of the collection. Given the increasing size and value of an art collection, we strongly believe that an adequate art collection management tool is required. We have observed an increase in demand, not only for NAV calculations or updated annual valuations, but also the emergence of a technological platform integrating tangible assets into the consolidated asset allocation, allowing asset managers and family offices to have a vantage point on the total wealth of their clients. Those innovations remain mainly private bespoke solutions though.
Absolutely. We now offer our own real-time investment data reporting and analysis platform, which enables consolidation and analysis of multiple portfolios and asset classes. It is fully customisable and allows for detailed reporting on an art collection within the context of the client’s broader wealth picture.
Thinking about technology more broadly – what impact is tech having on the art market, and your service sector specifically? For example, ArtTech developments and the rise of online art buying.
Technologies are likely to redefine many aspects of the art world going forward. New software, blockchain technology and artificial intelligence are already offering new possibilities for artists, but also for collectors, as new initiatives appear in the areas of creation, conservation, fractural ownership and collection management. Augmented and virtual reality will also have a major impact on our way to experience art as a whole.
E-commerce has seen a spectacular increase in art transactions over the last decade; online sales now account for 9% of the value of global sales of art and antiques. However, a survey done by Clare McAndrew of just over 70 companies engaged in art e-commerce in 2018 showed that most online-only outlets still sell the majority of their works in the segment of $5,000 and below, with less than 10% of transactions reporting price points above $250,000. It is highly likely that online turnover is going to increase even more, but so far it has mainly affected the transactions of lower value, i.e. less than $10,000.
LINK Management is specialised in the high-end of the art market, where most of the transactions still happen offline. This premium segment of the market remains extremely difficult to disrupt for various reasons. Given the average value for each transaction, it involves a much more complex transactional procedure in terms of due diligence, checking the artwork condition and provenance – not even mentioning the clearing of the funds. Those tasks are still far from being fully automatised.
Last but not least, even though some transactions can happen through the simple exchange of a digital image, most collectors still require to experience the artwork ‘in the flesh’. This requires an artwork to be physically transported for a private viewing in a dedicated location such as an auction house, gallery, private dealership or advisor’s office.
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