Algorithms and Guarantees, the value of art is not subjective
Algoritmi e garanzie, il valore dell’arte non è soggettivo
Teresa Scarale
Our partner Clarice Pecori Giraldi speaks to We Wealth in Milan about how algorithms can help assess art in terms of risk - understanding how the first risk of a collection is linked to its liquidity.
Google Translated from Italian & edited for readability
ALGORITHMS AND GUARANTEES, The value of art is not subjective
by Teresa Scarale
If art is to be a strategic asset for corporate finance, it must rely on objective evaluation algorithms and a solid risk management practice. Clarice Pecori Giraldi explains why, in the world of advanced finance, it is essential to go beyond the opinion of professionals, however authoritative.
Can a work of art constitute business risk? Yes. As such it must be managed with solid risk management policies. Having long since overcome the cultural obstacle of recognizing that art is heritage and not a cost, it is necessary to consolidate this step with adequate risk management practices, starting with the evaluation parameters for the balance sheet items. “And this cannot go beyond a truly objective evaluation of works of art. The same risk assessment that is carried out for real estate assets can be implemented for cultural ones,” comments Clarice Pecori Giraldi. A practice that is as rare (in Italy, but also globally) as it is useful.
Previous sale prices are in fact completely insufficient to make a correct evaluation of the work of art in terms of risk. The parameters relating to the marketability (and therefore the liquidity) of a work are many. To name just a few: the frequency with which a painting has taken part in prestigious exhibitions and international events, which galleries have represented it, which private collections it has been part of. The fame of the exhibition, as well as of the gallery, affects the value of the piece. The independent art collection manager sees algorithms as the only possible objectivity for a reliable monitoring of the risks of an art collection. “The risk assessment process for financial statements has a great potential in Italy, especially for collections corporate “, notes the expert.
How the algorithms for the risk management of art collections work
For this reason Clarice has entered into an agreement with the risk management company Overstone, founded in 2012 by Harco van den Oever, formerly continental European head of Christie's International, with experience in the world of investment banking. The company has in fact developed a set of algorithms for a sophisticated profiling of the risk inherent in art assets. A service that draws on more than 2.5 million sales results of works by over 10,000 artists. ”There are artists who, although very great, bring in very little at auction. It means they have no market. This will affect the valuation of their works for the purposes of the company balance sheet”, ontinues Clarice Pecori Giraldi. This is true not just of auctions, which represent only a part of the market.
Satisfy the need for liquidity
The first risk of a budgeted collection is that linked to its liquidity, i.e. its saleability. A particularly sensitive key topic in the current pandemic crisis, a moment in which the disinvestment of assets is a pressing need. Without prejudice to the current exchange prices, the danger is that of not being able to sell at that price, in case of need. It is therefore necessary to scientifically know the depth of the market. In this sense, algorithmic risk assessment concerns not only liquidity, but also the volatility and authenticity of art assets. Overstone produces evaluation reports in one to two days.
The emphasis on the "quantitative" risk of the works is separate to a qualitative assessment of the same, implemented through a composite database of materials. It’s not just the types of materials that are affected: the place where the painting or sculpture is stored, for example, also falls within the calculation of the qualitative risk. Different atmospheric conditions have a varied effect on the probability of deterioration of the property. The problems linked to authenticity, on the other hand, concern the possibility that the authorship of a work (by a non-living artist) can be called into question by the expert consensus.
Once the risk barriers have been defined, it is good to remember that art is an independent asset class, much less volatile than equities, so to speak. This aspect makes it a particularly attractive store of value for HNWI and businesses.
Read the whole article in original Italian here.