Art becomes a serious business for banks

Demand for good art has been buoyed by interest from buyers from emerging economies, and an increasing number of private banks are teaming up with experts to advise clients. Spanish lender Banco Santander, Dubai-based Emirates NBD, EFG Eurobank Private Banking in Luxembourg and Italian bank Banca della Svizzera Italiana have enlisted the advice of The Fine Art Fund Group, a London-based fund run by former curator Philip Hoffman. As well as finding investment opportunities, Hoffman and his team organise regular seminars, provide research and offer a personal advisory service.

In November, Deutsche Bank co-hosted a seminar at its London offices for its wealthiest clients, called Art as an Asset Class, with art management expert Annelien Bruins. At JP Morgan’s annual conference for ultra high net worth clients in Paris last year, art investment was on the agenda for the first time.

Hoffman believes the surge in interest in art expertise is partly to encourage bonding between banks and clients. He said: “Private banks want to cultivate relationships with their best customers. If they invite them to a talk about hedge funds, clients switch off. The social side of art and its ‘safe haven’ status appeal to high net worths.”

The Mei Moses All Art Index, which tracks auction prices, gained 13.5% during the first half of last year, compared with a 6.5% fall in the S&P 500 index during the same period.

The resurgent interest in art as an asset class has prompted private banks to come up with new investment vehicles, and securitising artwork is one method to raise funds to purchase art and in turn provide investment income.

Several banks with large collections are considering structuring some of them into funds and other collective vehicles and offering them to investors, according to Sergey Skaterschikov, founder of US-based Skate’s Art Market Research.

He said: “The world’s major private banks, including UBS, JP Morgan and Deutsche, are under pressure to come up with an art market strategy beyond simply offering their clients access to art fairs and other concierge type services. The switching cost in private banking is so insignificant that banks are forced to develop products that appeal to client’s emotions – and art is a good place to start.”

Skaterschikov believes art securitisation will be the most important development in the sector this year, and says the size of art assets in investment vehicles will triple from $300m to more than $1bn by the end of the year.

Wealth managers are also interested in using art collections as collateral against large loans. Deutsche Bank’s head of lending and credit solutions, Michael Darriba, spoke at the November seminar on options for using art as collateral. He said: “We are targeting ultra high net worth individuals who are art collectors or investors. They will typically have a reasonable degree of liquidity on their balance sheet.”

Deutsche Bank said it had around $400m in commitments secured by fine art collateral. The bank offers a minimum loan size of €10m and a typical spread of between 2% and 5% over Libor with an arrangement fee of 1.5%. Darriba said the bank could go as low as 1% over Libor in special circumstances. Investors, including hedge funds, are competing with private banks to provide financing for cash-strapped collectors. An art financing service, Montage Finance, has been launched by a hedge fund specialist in New York, financing art purchases for collectors and dealers from $500,000 to $20m.

Founder James Hedges said rates were higher than at many private banks, but Montage focuses purely on art as collateral, as opposed to some lenders who will insist on the added security of a traditional portfolio. He said: “Montage is positioning itself as a private bank to the art world, with competitive interest rates of 12%-14% based on a loan of up to half the value of the art.”

Hedges, who launched the firm in September, has around 12 clients and has made transactions involving works valued at over $5m.

The Capgemini and Merrill Lynch World Wealth Report 2010 found that high net worth individuals are returning to art investment, which respondents to the survey indicated that they were approaching as “investor-collectors”, seeking items that are perceived to have tangible long-term value.

Some institutions are encouraging clients to incorporate art into their investment portfolios. Swiss private bank Lombard Odier has developed a custody platform that integrates deposited assets, such as equities and bonds, with non-deposited assets including art. Markus Koch, chief operating officer at Lombard Odier, who was instrumental in developing the service, said: “It is a way for clients to analyse their assets and liabilities and to see whether they need to diversify.”