Third-party guarantees: The case of the $157 million Modigliani
Auction houses oftentimes do not want to hold the risk of a guarantee. For example, maybe they already have a Picasso with house guarantees, but there is another Picasso consignor also looking for a guarantee. The auction house may feel uncomfortable taking on additional financial risk associated with Picasso. So to win the consignment, they provide a guarantee, but then sell it off to a third-party before the auction takes place.
To entice third-parties to be guarantors, auction houses can offer them two things: a portion of the buyer’s premium that the auction house hopefully earns from the successful bidder, and a portion of the upside split that the auction house negotiates with the consignor. Depending on the auction house, the buyer’s premium payment may be referred to as a financing fee or fixed fee, while the upside split may be referred to as overage.
The amount of buyer’s premium and/or upside split that a third-party receives for being a guarantor is highly deal dependent. It will depend on their negotiating skills with the auction house, knowledge of the artist’s market, and willingness to own the object if bids fail to materialize on the night of the sale, among other factors.
Most third-party guarantors like to receive both a financing fee and some portion of the upside as compensation for the risk they take on. Using the Picasso example above, a third-party may be able to negotiate a financing fee of 4 percent of the guarantee amount (i.e. a $400,000 financing fee), plus 15 points of the 20-point upside split, the auction house negotiated with the consignor. If the painting sells for a hammer price of $14 million, then the guarantor will earn $1 million, equal to $600,000 of upside and $400,000 from the financing fee. But if the painting fails to sell, then they are effectively forced to buy the painting for $9.6 million, which is the guarantee amount they committed to less the $400,000 financing fee. As illustrated by these two potential payoffs, being a third-party guarantor is truly a high-risk/high-return proposition.
Let’s use the recent sale at Sotheby’s of a Modigliani painting with a third-party guarantee to trace through a specific case of what happened to a guarantor. Sotheby’s offered a magnificent reclining nude painting by Amedeo Modigliani this May. The largest in a series of 22 reclining nudes by the artist, it was prominently displayed in the recent Modigliani retrospective at the Tate Modern
. The work had the highest pre-sale auction estimate
ever placed on a single work of art: $150 million. Press reports
indicated that the lot was guaranteed by Sotheby’s and a third-party for about the pre-sale estimate. Interestingly, another reclining nude painting from the series sold in November 2015 at Christie’s for $170.4 million.
In a surprising development, when the painting came up for sale, it sold on one bid to the third-party guarantor for a hammer price of $139 million, or $157.2 million with buyer’s premium. No other buyers expressed interest in the work that night. While details on the guarantee contract were not disclosed, the third-party guarantor received no payments whatsoever for taking on this huge risk. We know this because when a third-party guarantor buys a work, auction houses are now required by New York City’s Department of Consumer Affairs
to report the sale price net of any fees received by the third-party guarantor. But the sale price reported by Sotheby’s
was $157.2 million, so the third-party guarantor apparently did not negotiate a fixed fee into their contract; they must have been focused on negotiating a great upside split deal—but, because no other buyers wanted the painting that night, there was no upside split to earn. I have no knowledge whatsoever about the identity of the guarantor, so I can only speculate on their motives. My guess is that they believed the painting would sell for way above the guarantee amount, given that another painting in the series had sold two years before for $170.4 million.
What market forces may have been behind the painting selling for less than expected? There are very few people in the world who have the means and desire to spend over $100 million on a work of art, so the pool of potential buyers for this Modigliani was already quite small. But two other reclining nude works from the same series of 22 paintings were widely rumored to have sold privately, shortly after the previous Modigliani reclining nude painting sold for $170.4 million in November 2015. As a result, three potential buyers in the already extremely small pool of people with the means and desire to spend over $100 million on a magnificent Modigliani were probably not interested in acquiring another one in May 2018.