Art market view 2020: State of the art-secured lending market

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Guy has 25 years’ experience working in the art world. After senior management roles at both Phillips and Sotheby’s, more recently he held the position of Commercial Director of Falcon Fine Art, acquired by The Fine Art Group in 2019.

From a demand-side perspective, the art-only asset-based lending market is healthy; demand is strong and increasingly sophisticated, writes Guy Vaissiere, VP, Art Finance, The Fine Art Group.

In the sixth edition of its Art & Finance Report, Deloitte estimated that the global value of art-secured loans in 2019 was US$ 21-24bn, with private art owners and collectors accounting for between 90-92% of the overall lending market.

Awareness and understanding of art-only asset-based financing among the top-end collecting community and, importantly their financial advisors and family offices, have without doubt risen in recent years. Increasingly, buying tens or hundreds of millions of dollars of high-value art with equity alone is not seen as being capital efficient, and advisors to Ultra-High Net Worth Individuals (UHNWIs) are encouraging their clients to look at leverage. Significant younger collectors, and collectors who are entrepreneurs in other markets, are all coming to recognise the diverse utility of art-secured credit facilities.

More generally, the growing demand for art-backed loans is a natural reflection and extension of the increasingly sophisticated nature of the world’s most active and prominent art buyers. This demand is also global. In the past 12 months, we have seen a significant increase in transactions from Asia and the Middle East, as well as more established jurisdictions like the US and Europe. It is now more common for loans to involve multiple jurisdictions – indeed, four or five per transaction is not unusual.

Top reasons for borrowing

There is an increasingly diverse range of rationales and motivations from borrowers using the products. Recent examples include: supporting long-term collection acquisition objectives, auction and private sale purchase financing (including irrevocable bids), providing capital for IPOs, providing liquidity for collectors’ business operations, providing liquidity to trustees using trust assets as collateral, bridge financing to sale, and providing capital to plug margin calls on a collector’s investment portfolio.

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Rise in loans for art trade

We have also seen an increase in art dealers and galleries using art-secured loans, either to supplement their traditional sources of capital from banks, or to replace such conventional sources of financing altogether. The 2019 Art Basel and UBS report cites access to credit and financing as the third-biggest challenge dealers felt they would face in the next five years.

It is a well-known fact that banks have been more conservative in the provision of credit to businesses in recent years. Whereas specialist art lenders – such as The Fine Art Group – with in-depth knowledge of the art trade can deliver a more flexible, tailored product and have fueled this higher demand for loans.

Changes in lender dynamics

On the supply side, we are seeing, and will continue to see, the best art-only art-secured lending products and services being provided by specialist art lenders with in-depth domain expertise.

With that said, there are some interesting dynamics at play within the specialist art lender market. Now that Sotheby’s is back in private hands after the much-publicised acquisition by Patrick Drahi last year, we will have to wait and see what the new owner’s plans for Sotheby’s Financial Services are.

Will Sotheby’s follow the path of Christie’s, also privately owned, by focusing on the core auction and private sale business more than financial services? Consolidation and changes within the sector continue to influence the choices for collectors seeking credit.

Future of the art-secured lending market

The long-term challenge and opportunity for the art-secured lending market will remain the commitment to increasing awareness and understanding of the product and its diverse utility to collectors and traders in all key regions of the art market and HNWI wealth management markets (namely the USA, Europe, and Asia).

Specialist lenders’ ability to robustly underwrite art asset risk will also remain central to the long-term health of any lender in this space, which itself is an opportunity for specialist lenders with in-house teams of leading art experts.  

The Fine Art Group’s art financing business is growing faster than ever – the second half of 2019 has been our busiest to date and we have executed a number of ‘A grade’ loans with important collectors.