Art is a funny thing. One can appreciate the skill needed to create a beautiful painting without ever putting a value on it. But there’s value on a lot of art out there. Many consider some art to be priceless, but even the Mona Lisa would have some kind of value at auction (it once had an insurance value that adjusted for inflation might be worth $700 million today). The most expensive piece of art sold was a private sale of “The Card Players” for north of $250 million. And the most expensive piece (pieces, really) sold at auction was sold on Tuesday for $142 million. It’s called “Three Studies of Lucian Freud”.

It sure is… something.

I don’t have an appreciation for most art but I do understand an investment opportunity when I see one. Others have seen it too. While it’s quite difficult to gauge the returns on art investments, the idea is popular enough that many of the wealthy are using art just as they would real estate or even gold. It’s another asset that isn’t a stock or a bond, which is quite often enough for many. With crazy prices at auction there’s a very real possibility of an art bubble, just like any asset class.

But crazy anecdotal observations aren’t quite enough to say a bubble is possible. In recent years new products and services have popped up based around the idea of art holding its value. Here’s a couple examples of what’s going on behind the scenes in the art world.

Art Investment Funds: Like fine art but perhaps don’t have a ton of cash or want the hassle of hanging it your wall and worry about it getting stolen? Check out art funds. These funds act similarly to hedge funds. They charge a small annual fee to management costs, and the fund managers get 20% of the profits (or close to it). They buy art with the hopes of selling it a few years later for a profit. Sometimes it works, sometimes it doesn’t. There’s likely a method to the madness, but this is basically flipping art. Unlike a house though, you can’t “upgrade” the art to add value.

Art Lending: Let’s say you’ve got a handsome art collection. Between your three houses a dozen pieces collectively worth $10 million. Now a piece comes up for auction that you just must have. But despite immense wealth you value keeping cash and don’t want to empty the checking account for this piece. No problem. Call your banker and set up an art loan. You can use your current collection as collateral. An appraiser comes out and the bank effectively puts a lien on your collection. Now you have the money to buy that next piece. Most every bank that offers services to the wealthy has an art lending department.

Between art investment funds and art-based lending you have some recipes for a bubble. Investment funds may play with some house money, but it’s mostly going to be your money at risk. This raises the issue of speculation. And there’s probably not much regulation. Art lending is straight out of the home equity book. Take the value out of an existing asset to try and acquire more of that asset. If you’re doing this for investment purposes, you’re essentially doubling down on the asset. Like a home, if you use art you own to buy more art, and can’t make the payments, you lose all your art.

None of this is to say that the art market is in a bubble now. There’s just not enough information about the market to say. But some the tools for a bubble seem to be in place (little regulation, speculative investing, asset-based lending). And just because the average investor is going to be wealthy, doesn’t mean they know how to invest.

Be Sociable, Share!
categories: banking, investing