To understand the financial climate in the art market of the 2020s – shaped by the outbreak of the COVID-19 virus and Brexit – it can help to turn the clock back to the years after the financial crash of 2008.
Art funds were hugely over-hyped before the credit crunch, leading people to question their reliability altogether. Some of the reasons they did not work were the lack of transparency, regulation and the inability to project future progress.
In 2012, when art funds were at their peak, Deloitte estimate that there were 90. But the number went down to 72 by 2014. Funds had no public disclosure requirements, meaning that the total number – certainly lower – at present is anyone’s guess.
It is also well-known that total assets under management by art funds were down from $2.13bn in 2012 to $830m in 2017. And good funds need managers who can integrate both the finance and the art worlds.
Private Art Investor spoke to Javier Lumbreras, CEO of Artemundi and a fifth-generation art collector, to understand the nuances of the art lending market.
“Artemundi started from a closed database of family and friends,” he said. His company had its best year in terms of operating margin in 2018, with a 27% contribution margin and 22.4% Earnings Before Interest, Depreciation and Amortization (EBIDA).
And “in 2019, we celebrated our 30th anniversary and we felt it was a moment to embrace new challenges,” said Lumbreras. He is talking about applying the advantages of art investment to benefit Artemundi’s clients through philanthropy.
Lumbreras says 10 or 20 years ago it would rarely occur to collectors to leverage their art collections, because it was difficult to source asset-backed lenders. But things have been picking up of late. Deloitte’s latest Art & Finance report places the value of the art lending market anywhere between $21bn and $24bn, up 13% from 2016.
He says the art lending market is a safe and lucrative bet if you know what you are doing.
“Now, since the word has been out, and the number of brokers has multiplied, we have been witnessing this course of action with more frequency. As interest rates have fallen, borrowing has become more attractive across the market,” said Lumbreras. He also answered seven key questions about the future of Artemundi’s business:
Private Art Investor: Are the number of art collectors leveraging their art to get loans increasing? If yes, why do you think this is?
Javier Lumbreras: When you think about Citi Private Bank Art Advisors’ 30-year history of lending against art portfolios, the market has grown significantly since then. And exponentially in the last five. The famous ‘Three D’s’ – death, divorce & debt – have always been major contributors.
Numerous auctions, contrasting curatorial tastes of collections and global collectors with international homes have also benefited from the quick liquidity that art loans offer.
As a new source of collateral, art lending becomes a safer investment than art investing. Why? The cost of capital is very low and lending rates for non-recourse loans are retailing at 50-100% or more above such cost.
If you do your homework as a lender, you could potentially borrow at 3% in the EU and lend at 7-10% or more, charge an origination fee and remain competitive. The high interest charged is supposed to be a premium to mitigate risk, but at 50% loan-to-value (LTV) and easy access to global markets, if borrowers default, creditors can liquidate the collateral reaching out to broader demand in other, potentially more stable economies.
As this lending service is becoming more prevalent in some countries, we may also expect to see it becoming a component of art prices, due to its potential value for borrowing as an alternative to resales. This mechanism could affect the prices of blue-chip artworks with high common market value.
PAI: How are the collections of your clients valued?
JL: We provide professional appraisals for our clients the same we do for private collections, museums, fiduciaries, courts, and non-cash charitable contribution reports. Our field of expertise extends from Old Masters, XIX Century art, Impressionism, Modern, Post-War and Contemporary art.
We adhere to the high standards of the American Society of Appraisers and are a Uniform Standards of Professional Appraisal Practice (USPAP) member compliant through December 2020. The use of third-party databases of public market, econometric information on each artist and updated knowledge of the primary market allow us to deliver unbiased and objective valuations for insurance, estate tax and liquidation purposes.
PAI: What kind of art is being financed the most at the moment? Are collectibles and sculptures popular with financiers?
JL: With a massive wealth of $30m about to transfer to the next generation, Impressionists, Modern, Post-War and established Contemporary masterpieces are the first ones getting financed the most at the moment; what we label as ‘trophies’ of immediate recognition. Sculptures are also financed. The massive cost of storing a large and difficult-to-install Koons sculpture will be a burden on the borrower anyway.
PAI: What makes a good art fund?
JL: To list a few things: fair examination procedures, skilful investment protocols, hard due-diligence processes, innovative appreciation strategies, active management procedures, updated financial analysis and portfolio-balanced strategies based on quick-response timing have been some of our axioms.
PAI: What do you predict 2020 will look like for the art lending industry? How much is it likely to grow? And what else can we expect?
JL: In 2020, lenders will become more experienced, and the industry will expand. Simultaneously, the due-diligence processes will become more refined, strict and efficient. This increment of players in the arena will perfect the competition and eventually lead to art lending standardisation. With due-diligence process systematized and more legal standards applied by governments, the art lending process will help to secure title and will ultimately perfect the lean.
The new legislation programmes are already in process as we have recently seen in the new EU-wide KYC requirements and the UK’s Fifth Anti-Money Laundering Directive. In fall 2019, USA’s House of Representatives passed HR 2514, a law which requires, among other things, “a person trading or acting as an intermediary in the trade of antiquities” to establish a mandatory anti-money laundering programme.
PAI: What’s next for Artemundi?
JL: We are in the process of structuring several investment funds that will aim to provide US investors with tax-efficient ways of owning art, while supporting socially responsible art programmes and philanthropic services to economically challenged communities.
We are also about to start managing the portfolio of a public charity, which will be able to receive donations for the benefit of museums and other cultural institutions.
Artemundi hints at another big development on the horizon but is not sharing details yet. Stay tuned for updates from Private Art Investor.