The rich are borrowing billions of dollars against their art collections, and the lenders are reselling the loans
The increasing number of successful art lovers are taking advantage of the low-interest rates to lend from the value of their Picassos and Basquiats and Basquiats, increasing the risks of an unleveraged boom and recession in the world of art.
GreenDayOnline is a significant lender that has seen its loans for art and $1000 credit cards increase by 30% last year. “A majority of our clients are entrepreneurs and make use of our loans within their businesses as well as in their personal lives,” said Tarquin Nemec.
While banks with big names dominate art lending due to their less expensive rates, other art-related finance companies, along with auction companies, are expanding their loan offerings to draw more customers.
Banks generally charge between 2% and percent on loans for art depending on the client’s other assets and business and the type of business. Art lending firms and auction houses typically charge between 6 and 9percent. The duration of an art-backed loan generally is for a year. Owners generally can borrow as high as half the appraised value of the artwork. This means that a person who owns a painting worth $10 million created by Pablo Picasso, for instance, is likely to receive an amount as high as $5 million.
A $4 billion industry
Sotheby’s makes the most significant effort to attract non-banks. The auction house has recently allied with the former manager of a hedge fund Alex Klabin to expand its lending business and create new financing models.
Klabin is currently the director of the auction house’s financial department, Sotheby’s Financial Services. Before that, he was co-founder of the Blackstone Group-backed Senator Investment Group, which dissolved with the multibillion-dollar hedge fund just over one year earlier.
The value of privately-owned art is higher than two trillion dollars, Klabin stated, but the business of lending to art is only valued at about $20 billion. He estimates that the potential market for art loans could easily exceed $400 billion.
“We believe that there’s an enormous potential for growth ahead in front of us,” Klabin said.
The CEO of Sotheby’s, Charles Stewart, said the rise of collectors of a younger age, who typically view art as an investment for the future, is also driving the increase in the number of art loans.
“It’s quite different thought that says, ‘you’ll own something for the rest of time or the rest of your life,’ ” Stewart said. “There’s the belief that you purchase something and then when you want more, or you’re done using it, can sell it and then resell it. The idea shifts to an investment-oriented mentality. This opens up opportunities for the financial products.”
Reselling art loans
The lenders say that the most significant opportunity — and the newest risk is the business of reselling art loans to investors.
Yieldstreet, the online investment platform, recently announced an addition of $11 million in junior loan participants for its Diversified Art Fund that pools together loans for art guaranteed by Andy Warhol, Roy Lichtenstein, and other top artists. The fund, powered by data from Yieldstreet’s Athena Art Finance unit, has sold over 40 million dollars in loans to investors and has an expected gross return of 9.5 percent.
Cynthia Sachs, managing director at Yieldstreet and chief executive officer at Athena Art Finance, said Yieldstreet is considering launching a second fund for art in the wake of increased demand from investors and borrowers.
“We are creating an art market that is a credit asset,” Sachs said. “People speak about artwork as an investment class. However, you cannot create any asset without an investment market.”
Sotheby’s has said that it’s in the initial stages of expanding. However, experts in the industry believe that the auction house to start its securitization or fund that would package art loans to provide an investment opportunity for its other clients or other investors.
“We’re going to be looking at a variety of methods to reduce our expenses for capital as well as establishing an effective funding system,” Klabin said.
A market that can be highly volatile.
The issue will be whether the investors are aware of the dangers of using art, an infamously opaque, opaque, and volatile market as collateral for loans and as an investment asset. Artists who are hot one year can be a disaster in the next. Regardless of how wealthy they’re believed to be, the borrower could suffer setbacks.
Sotheby’s famously lent about $100 million to Jho Low, a Malaysian businessman-turned-fugitive who agreed to forfeit $700 million in assets following accusations that he helped mastermind a multibillion-dollar fraud from Malaysian sovereign wealth fund 1MDB. The loan was eventually repaid due to an enticing market for artworks Sotheby’s used as collateral.
Sotheby’s boasts of its expertise in the valuation of art and its extensive knowledge of its clients to help reduce the risks of loan defaults.
“We truly believe we’ve got an edge due to our sensitivity to the auction as well as the private market in a way that no one else is,” Stewart said. “If at some point, there’s the requirement to create additional collateral or to offer something, we can accomplish that swiftly and efficiently.”
Yieldstreet’s Sachs said that because the loans are limited to only half the value of the work or perhaps lesser, the fund has a “huge margin” for default. The fund also offers loans to artworks by artists that are the easiest to sell.
“We concentrate on the most liquid and most stable part in the markets,” Sachs said. “We design our transactions with all the risk factors to be considered.”