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We talk to Overstone Art Services, a UK-based organisation, about the state of the world’s fine art market and how so much potential material is stored away and available for being transacted or lent against.
(This is part of a series of features and interviews about
the intersection of fine art and wealth management.)
As many as a third of art collectors keep their works in storage
and out of view, suggesting that a sizeable chunk of the $1.74
trillion privately held art could be lent against and used to
drive liquidity in the market, a European specialist firm argues.
London-based Overstone Art
Services, a firm providing risk scores for family offices,
private banks and wealth managers, reckons that the current arena
for lending and borrowing art does not go much further than
scratching the surface of what is potentially achievable.
“We think this market is going to [to be worth] $100 billion in
the next four to five years,” Harco van den Oever, Overstone’s
founder and chief executive, told this publication in a recent
call. The business was formed in 2012.
Overstone helps to help identify the financial risk and
opportunity of an artwork or a collection so that UHNWs can use
art as an asset. The business works with wealth managers to help
them leverage art for their UHNW clients to use as collateral for
loans.
The market in which Overstone works has been obviously affected
by the COVID-19 pandemic – there has been an accelerated shift to
digital auctions and online “viewing rooms” as happened in the
Hong Kong Art Basel fair at the start of the year, to give just
one example. A few players have sought to blend investment
banking savvy with art to capture value, with mixed results. In
2019, for example, New York-based investment platform YieldStreet
bought Athena Art
Finance from its owners, Carlyle Group and
Pictet for far less
than what was originally pumped into it. That transaction raised
questions of how deep and liquid the fine art market is and how
applicable investment banking models are to the space.
There are plenty of reasons to understand why private banks and
other advisory firms like the art market. While small compared
with the US equity market, for instance – estimated at more than
$30 trillion – the art market’s size at around $64 billion
(source: UBS, Art Basel, report on 2019,
issued
here) is not to be sneezed at. (There is a need to tread
carefully, as
this article explains.)
Van den Oever has plenty of experience in finance and art. He
served for 12 years at Christie’s as Continental European head
and global managing director of the Impressionist and Modern Art
Department prior to founding Overstone. With 12 years in debt
capital markets under his belt at Paribas, Bankers Trust, and
Credit Suisse First Boston, Van den Oever also founded
Fredfinds.com, the UK’s first online mortgage brokerage business,
acquired in 2001 by Netwindfall. Van den Oever has an MBA from
the University of Hartford and is an INSEAD alumnus.
Van den Oever said that his firm often works with family offices,
and one reason for starting Overstone was a sense that the market
potential was not being fulfilled: “There were not many offers in
terms of [art] lenders and we found there was something
fundamentally wrong with the market,” he said. “We were
approached by one of the big global private banks to right its
art lending policy.”
Out of the total $1.74 trillion art market in private hands,
about $24 billion is lent against. That is a relatively tiny
amount of leveraged art buying compared with other asset classes,
he said.
Van den Oever said that firms had been reluctant initially
because of the risks involved, but his business has developed
analytical tools and algorithms to map and track art
investment/lending risk more precisely, and remove some of the
mental blockages associated with it. Overstone has created
data-driven risk metrics.
Art comes with a variety of drawbacks: works can deteriorate, be
of questionable provenance/authenticity, and might be offered
fraudulently. In addition, there are other considerations
to take into account such as pricing, valuation and liquidity.
Navigating the reefs and shoals of such a space requires experts.
“We don’t lend ourselves but provide information to lenders,” Van
den Oever said. “We charge a fixed fee for our digital art
valuation and risk assessment, a fixed fee for full due diligence
services, and a monthly service fee for our SaaS delivery.”
So what are the main segments of the market?
Within the current art-based lending market, about 80 to 90 per
cent of it is done through private banks, with firms such as
JP Morgan,
Citigroup, UBS,
etc); such lending comes typically at around LIBOR+ 1.5-3.5 per
cent, Van den Oever said. “That market is growing
massively.”
There are specialised asset-backed lenders, such as Athena and
the Fine Art
Fund. The capital provided comes from a private equity-style
model where the aim is to make returns more in the region of
LIBOR+10 per cent or thereabouts. The reason why this margin is
bigger for banks than these specialists is that they are set up
specifically for the purpose of this market, while banks are
offering the lending levels as part of an add-on to other
services and often as a way to tie in a client and win their
wider business.
The auction houses such as Sotheby’s and Christie’s are a third
type of player who will offer lending services to clients; this
is asset-backed and tends to be relatively expensive. Family
offices and private equity shops tend to be relatively
opportunistic in this space.
The art market has been fairly opaque in the past and not widely
or deeply regulated, although change has come with the EU’s Fifth
Anti-Money Laundering directive, among other changes, Van den
Oever said.
Moving pictures
Banks are moving out of investment banking and looking for new
ways to add value; data services and transparency are improving.
Organisations such as Artnet provide more data on transactions
and pricing so that the situation is less opaque than before.
However, there is still some way to go before reaching a fully
accepted, international yardstick of the art market.
One statistic stood out when Van den Oever mentioned how much art
often does not see the light of day – not even appearing on an
owner’s wall. Citing figures from UBS this year, he noted that
just over 30 per cent of collections are in storage, and out of
sight. Van den Oever and colleagues reckon the share might be
even larger than that.
Art investment and advice on it is a complex field, and not
everyone has been able to make the business catch fire as much as
hoped, but what is clear is that this market has more room at the
top, particularly as and when the global economy bounces back.
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