The Pros and Cons of Borrowing against Your Art Collection
If you’re in possession of $100 million, you should be able to spend it, right?
If that $100 million is hanging on your wall, now you can, thanks to a growing number of lenders willing to put up cash against high-quality art collections. The art-lending market has expanded to an estimated $15 billion to $19 billion of loans outstanding in the U.S. alone, according to the Deloitte Luxembourg & ArtTactic Art & Finance Report 2016.
Taking a loan out against part of its value turns the passive asset into money that can be actively invested. As the global art market has expanded, so has the financial sector that lends against it, evolving from murky overdrafts to cover a spur-of-the-moment auction purchase to multi-million-dollar leveraging of museum-worthy collections.
“Today there are more collectors around the world who opt to leverage their art to gain liquidity for other investments and to buy more art,” said Suzanne Gyorgy, head of Art Advisory & Finance at Citi Private Bank.
Borrowing against an art collection can provide a quick source of ready money, especially from boutique lenders whose in-house staff can swiftly value a collection and source money from their own credit line. But those services—alongside ancillary ones such as documentation and vetting, or storing art while it’s being held as collateral—can also make those loans relatively dear.
At Citi, the art lending program stretches back to 1979, when art dealer Jeffrey Deitch was helping build the bank’s art services group, but the size of the loans have grown significantly, Gyorgy said.
“Back in the 1980s art loans were much smaller, typically in the $500,000 range,” Gyorgy said. “Now the loans are much larger, averaging $35 million and upward.” About 20% of her clients use the loans to increase their art collections, with the remaining 80% simply looking for liquidity to make other non-art-related investments.
In 2016, art lending at private banks was a $13 billion to $15 billion business, Deloitte estimated, a rise of 13% over the past five years.
Gyorgy said art is a relatively low-risk asset to lend against, due to the art market’s low volatility. Her team appraises clients’ art collections annually, and prefers to lend against diversified collections.
“Experience shows that one artist might go up in value, another might go down, but having a diversified pool of artists that you’re borrowing against makes art a very stable form of collateral,” Gyorgy said. Still, Citi does not extend loans for the full value of a collection, instead typically lending against 50% of its value.
Gyorgy said the service (as well as other art-related services such as estate planning) enhances her relationships with clients and their families, some of whom she’s been working with for 25 years. And her North American clients, she said, can even keep their art on the walls while the loan is outstanding, thanks to the legal regimes in the U.S. and Canada. In the United Kingdom and Europe, lack of regulation means lenders will typically insist the art is held in storage while being used as collateral until the loan is repaid, which adds to the cost of the loan.
At Citi and other banks with art lending programs, such as Société Générale, Goldman Sachs, Deutsche Bank, and the private bank and asset manager LGT, these services are reserved for existing high-net worth clients. That’s left an opening for non-bank lenders, such as Falcon Fine Art, to go after a broader range of borrowers.
“If the client is right and the art is right, then I would say ‘Definitely think about it. Why wouldn’t you?’” says Guy Vaissière, business development manager at Falcon Fine Art, which has made almost $100 million worth of loans in the three years since it launched.
Neither Vaissière nor his vice president, Dr. Tim Hunter, are financiers by training. Vaissière previously worked as a business developer for Sotheby’s and Phillips and has consulted for the Masterpiece art fair, while Hunter’s credentials include a doctorate in Medieval European History, a curatorial stint at Oxford’s Ashmolean Museum, and 16 years at Christie’s as director. A background in the art business, common throughout his team of six, makes the valuation and lending process speedier—down to as little as four weeks from start to finish, Vaissière said.
“You have good-quality art, you get it valued, you give us a bit of information about yourself, we work out a [loan-to-value ratio], we crunch the numbers and work out what we can give you,” he said.
Like Citi, Falcon does not lend against a collection’s full value, typically maxing out at 40% of a conservative valuation. They also prefer diversified collections, with a minimum of two works and, so far, a maximum of 30. Loans start at $1 million, with no upper limit.
Falcon’s specialized art focus draws a clientele more tightly focused on collecting, with about half of its borrowers using funds to purchase more art. Hunter said one client had come to them in order to buy a number of paintings that would have gone to auction had he not been able to swoop in and buy them. “That was a great success,” says Hunter. “He bought the pictures, then he had them valued and they were double the price he’d paid for them so the financing paid for itself immediately. We’d used three pictures he already had in his collection and we gave him the liquidity he needed to buy these other pictures, and then we were able to use those second pictures to finance a second round,” said Hunter. “It’s a clever thing to do.”
Auction house Sotheby’s is another non-bank lender, one with an obvious vested interest in providing liquidity to fuel more art spending. It set up its lending arm Sotheby’s Financial Services in 1988; by 2016, its loan portfolio stood at $646.1 million, down slightly from a 2015 peak of $732.8 million. The aggregate loan-to-value ratio across its lending book stood at 48% in 2016, according to its annual report.
Interest rates on these loans vary, but Sotheby’s is explicit about its higher rates, noting in its annual report that “a considerable number of traditional lending sources offer conventional loans at a lower cost to borrowers than the average cost of loans offered by SFS”; Sotheby’s justifies these higher rates by its ability to accept art as sole collateral.
At two-year-old Athena Art Finance, a specialized art lender backed by private equity firm the Carlyle Group and investors from the Pictet Group, loan rates are calculated based on the artwork, but are typically between the mid- to high single digits for loans up to 50% loan to value, the company said. Its clients include gallerists and dealers who are constantly in pursuit of new, valuable inventory, as well as investors and others who need liquidity for more general business purposes.
Athena’s lending service includes additional trimmings, such as helping to vet and document the pledged works’ ownership history, provenance and title, which president and CEO Andrea Danese notes “will enhance an art owners’ ability to facilitate future transactions.” Unlike Sotheby’s, Athena is neither an advisor nor a seller, Danese noted.
But Luke Dugdale of London-based art advisory Cadell+Co said going to a specialized art lender can be needlessly expensive. Interest rates are usually around 4% to 5% from a bank, or up to 10% from a boutique lender, he said (by comparison, the average loan for a 30-year fixed-rate mortgage was under 3.9% in late June in the U.S.)
Dugdale, a former wealth manager who headed RBC’s private bank art advisory service, encourages his clients to consider other options before turning to an art loan.
“When someone sits down with me and says ‘I would like to borrow money against my art,’ I will tend to say ‘Shall we try and find something else we can raise money against?’,” Dugdale said.
“It really is an expensive way of raising money, no doubt about it.”
Still, for clients whose priority is quick access to cash or who needs the specialized knowledge of an art-focused lender, these services offer a way to put their collections in safe hands and get their hands on the money they need, enabling them to take advantage of fast-moving business opportunities or time-sensitive offers to buy more art. As the art market continues to claim a valuation in the tens of billions of dollars (an estimated $56.6 billion in 2016, according to Art Basel and UBS’s The Art Market | 2017), the amount of capital available to lend against it is likely to continue to grow.
The Van Cleef & Arpels Frivole Collection
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