Thank you to Athena Art Finance for sponsoring this article.
While the practice of art lending — using a work of art as loan collateral to extend credit — has roots in the earliest development of the modern art market, it has grown significantly in recent decades. As collectors increasingly manage their art collections from an investment perspective, they are increasingly open to art lending as a tool to re-deploy capital across their balance sheets.
The expanded interest in loans secured by fine art coincides with the emergence of independent, institutional art finance companies, such as Athena Art Finance, which specializes in financing solutions for the global art world. Athena recently participated at Invaluable’s 2019 Global Auction House Summit and joined in discussion on the importance of the use of data in decision-making and risk management in the lending process.
Athena uses art market pricing data analysis primarily as a risk-management tool, relying on data sets to help evaluate price and liquidity trends among artists. This type of analysis assists Athena in determining which artists’ works are eligible as collateral and how much credit can be extended to a given artwork. Moreover, the rise of platforms such as Lobus — whose mission is to provide both qualitative and quantitative assessment of an artwork’s value within the context of an artist’s career — can help further enrich the data analysis performed by Athena and facilitates overall confidence in its risk decisions.
On the heels of the Summit, we sat down with Athena’s Managing Directors Naomi Baigell and Nigel Glenday to better understand the who, what, when, and where of art lending, the factors that art finance organizations consider when lending against art, as well as other essential tips for those contemplating borrowing against a work of art in their collection.
1. Who should consider art-secured lending?
Baigell says are three groups primed to take advantage of art lending: private collectors, family trusts, and art market professionals.
- For private collectors, art can be a financially-inefficient asset. Art lending can make sense as a means to re-deploy investment capital into other long-term assets with high expected returns, including real estate, private equity, or even for purchasing additional artwork.
- Art-secured lending is an attractive tool by which family trusts can manage wealth transfer and structuring needs, including assessing liquidity in advance of an eventual sale of artwork to manage interim payments and distributions.
- Services like Athena can be a more accessible source of credit for art market professionals, including galleries, dealers, and auction houses – many of whom are not well-served by the traditional banking industry. In addition, art finance companies can provide financing to consignors, buyers, even galleries and dealers looking to seize an opportunity in the market.
Despite the expansion of the global art market — which grew to $63.7 billion, according to the Art Basel/UBS Art Market Report 2018 — there is still a relatively limited number of collectors at the top end of the market. With this in mind, it is understandable that art lending has, so far, remained the domain of very specialized players. Glenday posits, however, that as larger institutions gain greater comfort with the idea of art as an asset class, “we may see art-based lending become an integrated part of the private offerings of larger institutions in the longer term.”
2. What is driving the rise of art lending?
As the nominal value of art rises, it is becoming a more meaningful part of a collector’s balance sheet. Two factors in the growing popularity of art lending are art’s relative lack of liquidity and short-term volatility compared to other types of financial instruments.
More and more, collectors are taking into account an artwork’s ability to store, appreciate, and realize future value before it is even purchased. Even so, managing the liquidity of an art collection is challenging due to the potentially high transaction costs associated with selling a work of art. Securing a loan to fund other investments has become an increasingly popular alternative to selling. This enables collectors to re-deploy liquidity from their art collection into higher-yielding parts of their balance sheet.
Art’s status as a longer-term asset also makes it an enticing source of capital for clients. “Art is not marked to market as frequently as other assets in an investment portfolio,” explains Glenday. “Because art is a longer-term tangible asset, it is less directly tied to the shorter-term financial market volatility.
3. When is the best time to borrow against a work of art?
Clients seeking to leverage their artwork using a loan have numerous objectives, and, as such, may find the right opportunity regardless of market conditions.
In bull markets, clients seek investable capital or to build liquidity cushions. In down markets, financial investments may drop in value and become more attractive. As such, clients may seek to reallocate capital from an art collection toward more alluring market opportunities.
4. Where is the most robust market for art lending?
The U.S. market is a leader in art lending for two reasons. First, the regulatory and legal landscape is most accommodative for secured lending activities. Second, the relative market size and activity level lends itself to growth.
“Increasing activity and valuation across the market will continue to make financing options like the ones provided by Athena more compelling for collectors and art market professionals,” says Glenday. “We are seeing considerable inbound demand for financing services among collectors globally and continue to expect activity to pick up in multiple geographies.”
5. Do art market trends affect lending opportunities?
The general consensus is that the art market will experience some volatility around price expectations in 2019 and 2020. As part of this natural cycle, buyers will remain selective and consignors will be more cautious in bringing high-quality works to auction.
According to Baigell, “Some collectors who have a need for liquidity may want to be more cautious about selling their art with this backdrop of macroeconomic uncertainty and may consider a loan against their art as an alternative solution.”
6. Which works are best to leverage?
It’s important when considering lending against a work of art to understand its position in the market over time. The expected change in valuation over the market cycle contributes to how much a company like Athena may be able to advance against an artwork.
“The prerequisite is not whether an artist is ‘hot’ or not, but rather if there is a sufficiently robust auction track record,” says Baigell. “As long as we are confident that there is a deep and international buyer base that could provide a bid at any point in the cycle, we can use the art as collateral.”
7. Does data play a role in valuation?
Data is critical. Public market data and private market intelligence are significant components of valuation underwriting. Athena bases its risk assessment in large part on the quality and value of clients’ art. To protect against risk in the art market, it’s important to be prudent with valuations and advance rates.
Caution and research pays off, Glenday advises. “While we don’t publicly discuss our portfolio, the historical track record of art based lending has been very positive from a credit perspective.”
8. Where should clients begin?
For those considering art lending, it’s important to be aware of the tools available to them to achieve their specific objectives, be it access to investment capital, estate planning, or collection building.
“The single largest limitation is client awareness; many collectors are unaware that this is an option for them,” asserts Baigell. “This is also why so much of Athena’s business is based on the direct building of relationships with our clients and their advisors.”
9. What should clients look for in an art financing partner?
“Trust, goodwill and reputation are all paramount to developing business among this client base, irrespective of the type of business you are in,” says Glenday. “Additionally, it is imperative that we effectively combine core competencies in the arts and personal wealth domains, which often is not done well elsewhere in the market.”