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INTERVIEW: Pictet, Private Equity House Take Art Investment Up A Gear With Athena

Tom Burroughes

17 November 2015

Eye-popping prices paid for art in all parts of the world - such as Asia, for example - have stirred investment interest from investors and the infrastructure of the market for such works has also developed. And a new shift involves the coming together of a US private equity titan and a venerable Swiss private bank. It is designed, so those involved say, to make the art investment business more liquid and flexible.

As commented upon in these pages several weeks ago (see here), New York-headquartered  enable art owners to use items as collateral) but what is distinct is that it is the only clear-cut example of a standalone business financing art, he said.

“It will help the art market to grow and to give more access to this market and the marketplace will develop where art can be traded as a financial asset and seen as part of a person’s balance sheet,” he said.

“What we will achieve is to give access to art risk in the form of securities. We can start to create things such as structured notes. Athena will not just be a lender but a market maker in terms of art risk. It is at present a relatively inefficient and underdeveloped market,” he said.
Greater market sophistication should, other things being equal, lead to improved liquidity, although as other market episodes have shown down the years, liquidity can dry up in an abrupt market downturn. 

Data on returns shows that art can play a part in an investment portfolio, as well as give a bit of excitement to those whose heartbeat doesn’t race around the topics of stocks and bonds. Citigroup, in a recent Global Perspectives & Solutions report on art investing, has this to say: “Looking at over 100 years of data, art has underperformed equities but outperformed bonds. Over time there is a clear link between art prices and the global economy.

“For example, some of the strongest falls in art prices were observed during World War I, in the early 1930s, following the 1973 oil crisis, in the early 1990s and after the 2008 financial crisis. Overall, we conclude that art deserves a place within illiquid asset holdings for those who would otherwise hold art for many reasons. However, successful investment in art appears to be much more a question of identifying relative value than it is of gaining exposure to the market as a whole,” it said.

That report also pointed out that art’s superior investment performance to some mainstream asset classes clearly explains much of its allure. 

“The global auction market for fine art has grown dramatically since the turn of the millennium, when sales were about $3 billion in total. Since then, global auction turnover has grown at an average annual compound rate of 13 per cent, reaching $16.1 billion in 2014. Not bad considering that the period was punctuated by the deepest global recession in almost a century. By way of context, in the same timeframe global GDP and exports grew at 3.5 and 8.1 per cent per year, respectively. The art market clearly outperformed, even during a time of solid average growth in economic activity and substantial advances in globalisation,” the bank said. 

Among other data, the Citigroup study noted that in the last 88 years, annual real (excluding inflation) returns on art have been 3.7 per cent, while those for real estate have been 7.7 per cent, and for the S&P 500 Index of stocks, 6.8 per cent. For 10-year US Treasury notes, it is 1.9 per cent, and on gold, 1.6 per cent.

How it works
Athena has said that loans will be made against artworks with highly marketable value, meeting the needs of high net worth individuals, family offices, and other market participants whose current options are limited to the recourse art-loans offered by the major private banking institutions or the short-term loans offered at double digit-rates by boutique lenders.

The firm says it expects to provide additional flexibility to financial advisors, estate planners, lawyers and other professionals who may now manage their clients’ collections as rationally as the rest of their asset portfolio.

Pictet’s involvement
Pierre-Alain Wavre, chairman of Pictet Wealth Management's investment committee, told this publication that his firm’s collaboration with Carlyle over backing such a venture as Athena was part of a pattern of work with Carlyle that goes back more than 20 years.  

The move to invest in art was part of an ongoing examination by Pictet at new opportunities for investment, he said.

“Art has had a fantastic run and there is tremendous value to be had there; there hasn’t been an institution that only specialises in that space. There are some players, such as banks, who have done work in this area, but not a specialist firm,” Wavre continued. 

“If you can finance a plane or a boat then you can finance art.”

There are a variety of institutions and people who need art finance, such as persons with collections who are not ready or able to sell but who want to add to a collection, or those with succession and wealth transfer issues, he said. Museums, dealers and others need financing for new acquisitions, etc. “There are a lot of different actors who need access to art finance,” he said.

Art can be a strong source of collateral, he said. It is important to adhere to strict limits and disciplines over issues such as loan-to-value ratios, and have a clear understanding of the underlying market, its liquidity, and other factors, he said.

“We are looking for a return on equity of around 10 to 15 per cent,” he added.