Art Market
Why the Ultra-Wealthy Borrow Billions, Using their Precious Art Collections
Photo by Jimi Filipovski.

Photo by Jimi Filipovski.

Art lending is big business. Deloitte put the industry at an estimated $17 to $20 billion in 2017 in the U.S. alone, a 13.3 percent rise from the prior year.
As the art market continues to expand in value and in geographic scope, the amount of money borrowed against art is poised to grow as well. But rich people have always collected art. Why are they so keen to borrow money against it now?
Industry leaders cited several factors driving the growth in lending, such as the changing demographics of the U.S. and global collector base, the high values of private art collections as works have become more expensive, and a historically low-interest rate environment that makes it attractive to borrow in order to pursue other business opportunities.
“The value of art has increased more than anyone ever thought it would, and people all of a sudden have a lot of value hanging on their wall,” said Suzanne Gyorgy, Managing Director, Art Advisory & Finance at Citi Private Bank. “I think it’s just become more commonplace…why not take some of the value out and take advantage of some opportunities to invest, or to buy more art?”

Who borrows and how much?

The majority of art lending clients are ultra-high-net-worth individual art collectors, according to a report by the European Fine Art Fair, with dealers accounting for just under 10 percent of borrowers. At the big banks, such as U.S. Trust, Citi, or Morgan Stanley, nearly all of the borrowers are individuals. At boutique lender Athena Art Finance, by contrast, about half of the clients are art dealers, said Andrea Danese, Athena’s president and CEO.
That’s in large part because a bank’s art lending is typically one service among many provided to wealthy clients; a bank may also extend business loans or mortgages, or assist with wealth management and estate planning, and therefore know the client and the extent of her assets. Boutique lenders such as Athena or the finance arms of Sotheby’s or Christie’s have more in-house expertise to underwrite or evaluate just the art, and are less interested in the overall risk profile of a borrower herself. That also means boutique lenders can get a loan done for a new customer in as little as two weeks, said Danese.
That results in different kinds of loans: A non-recourse loan in the art lending sphere is one in which the artwork is the sole collateral. If the borrower is unable to pay, the lender can take possession of the art, but cannot pursue the borrower for any of her other assets. At banks, the loans are typically recourse loans, so even if the art is the primary collateral, the bank is essentially underwriting the lender’s overall risk profile. In the U.S., when a work is lent against, a lien is filed against it, and the work can remain in the borrower’s possession, since that lien establishes the lender’s right to claim it in case of non-payment.
Since boutique lenders have fewer options in case the loan goes sour, their interest rates are typically higher—LIBOR (the London Interbank Offered Rate, a global baseline interest rate) plus 650 to 700 basis points (or 6.5 to 7 percentage points) at Athena, said Danese, while at banks, which also have the advantage of cheaper capital, it’s closer to LIBOR plus 200 basis points.
In this high-touch universe, there’s no such thing as a standard loan, bankers said, with terms and borrowing rates dependent on the work of art in question, and in the case of banks, on the creditworthiness of the borrower overall. Most lenders will lend up to 50% of the value of the artwork, so a painting appraised at $10 million will be good for a loan of up to $5 million. Lenders across the industry said default rates are typically very low, almost negligible.
“People don’t want to lose their art,” said Danese.

Why do these people need money?

Art collectors at the very high end often hail from the finance and real estate industries, said Evan Beard, National Art Services Executive at U.S. Trust, Bank of America Private Wealth Management (and an Artsy contributor), two fields in which taking on staggering amounts of debt or leverage in order to make even more staggering profits is all in a day’s work. Taking a loan against their art is a natural next step for these collectors, Beard said. He added that the sheer value of some people’s collections has made it almost too good to resist—when $10 million or $100 million worth of art is hanging on the walls of a $6 million home, it’s natural to want to put some of that value to work in the form of investable capital.  
But why does a centimillionaire or billionaire need even more money? Many art lenders described their clients as opportunistic—when they see a good business opportunity, or a chance to buy a great work, they want access to capital, and fast. An art lender only needs to value the art and write up a contract, compared with, say, a mortgage lender, who might need extensive credit checks, salary history, and the like.
Beard said in his experience, borrowers are motivated by an arbitrage play. Financiers or private equity titans know there’s a business opportunity out there with a certain rate of return, and they’re happy to borrow against their art knowing their return is higher than their cost of capital.
The second major reason collectors take out loans against their art is simply to buy more art. “It’s a way to buy art without having to disrupt your life,” Beard said, noting this money is often used for big guarantees at auctions or to make a serious purchase at Art Basel.
The third driver is the desire to have more capital on hand—what Beard calls “dry powder.” At this late stage of the U.S. economic expansion, he said, clients think the economy is getting slightly overheated, and they’d like to have cash on hand to take advantage of any opportunities that may come in the event of a trade war, recession, or similar event. Some of his borrowers have set up medium-term credit facilities against their art, such as $10 million lines of credit they can draw on over the next three years.
Of course, even a mogul can fall on hard times and need liquidity fast. Sometimes the art loans are used to raise funds to meet a margin call on a stock or bond portfolio, Danese said. Andrew Augenblick, President of Emigrant Bank Fine Art Finance, said the common reasons are similar to “the three D’s” that auctioneers often cite—death, debt, and divorce—adding a fourth, the desire to diversify assets.

What if there’s a recession and the art market crashes?

Art lenders are generally bullish on their prospects going forward, for the reasons mentioned earlier. Even if the wider economy experiences a downturn, the industry should still fare well, since people borrow for different reasons in bull and bear markets.
“There are reasons to borrow that cut across economic cycles,” Augenblick said. “In good times, people might borrow to expand their business; in bad times, the same borrower might buy a competitor whose business is depressed by local market conditions, and he or she may tap into the value of the art to fund their business acquisition.”
Danese agreed the art-lending business is theoretically “market-neutral,” but said it was very difficult to tell where the economy currently is in the business cycle.
“I’ve never seen so much uncertainty,” he said, although he believes the art market is still generally on an upswing.
A working paper circulated earlier this year, “Art as Collateral,” sought to correlate regional economic cycles with art lending, using data on liens filed against artworks. The authors of the paper, William N. Goetzmann and Milad Nozari, found that the demand for art loans rises during economic downturns, on a regional basis. But several lenders said bigger loan deals are often not registered, or if they are, they are disguised through the use of shell companies. Danese also cautioned against finding correlations between a niche $17 billion to $20 billion industry and the U.S.’s $20.4 trillion economy, Goetzmann acknowledges his dataset may be partial. (Although $17 billion to $20 billion is small relative to the U.S. economy, it’s around a fourth of the $63.7 billion total value of the global art market, according to an estimate from Art Basel and UBS’s The Art Market | 2018.)
Some things are clear: the S&P 500 basket of stocks is arguably on its longest-ever bull run, and interest rates have risen from near zero to close to two percent in the last two years. That has had two somewhat contradictory effects. Beard said that since money is no longer “free” (ie. being lent at very low rates), people are shifting out of their stock and bond portfolios and into art, because there is less risk of a margin call. He added that the elimination of a tax loophole that allowed deferment of tax payments if profits from the sale of artwork are invested in more artwork has now increased the attractiveness of borrowing versus selling.
Gyorgy agreed with Beard’s assessment, noting that in the crisis ten years ago, art loans grew in popularity, since they were much less volatile than loans secured by a stock portfolio that was getting whipsawed during that period’s market turmoil. But she noted that as LIBOR rises, the arbitrage opportunities are less appealing. At Citi, art lending is also growing internationally—she has seen Asian collectors take to it with alacrity.
“It’s drawn consistent business over a 35-year period,” Gyorgy said, ever since Jeffrey Deitch set up the bank’s art department, marrying the worlds of art and finance. “It’s also a great relationship business, because our clients tend to be with us for a long, long time.”
Anna Louie Sussman is Artsy’s Art Market Editor.