Overstone CEO van den Oever on the Impact of Private Equity Titan, Private Bank's Entry into Art Space


By Harco van den Oever

Published 16 October 2015 by Wealth Briefing

A new player in any market rarely marks a major shift but rather an evolutionary step towards a future equilibrium.

In a way, this is also the case with the announcement last week of the arrival of Athena Art Finance, a joint effort between Swiss private bank looking to offer its client loans collaterialised by high-value works of art as security. However something else is also taking place here.

Using art as collateral is nothing new and has been offered by the likes of Sotheby’s and some private banks for more than 15 years. In one case, it is mostly used by the auction house to generate future consignments, whilst in the other the bank is looking to attract or retain clients and only does this on a recourse basis. What has been changing over the past 18 months is the fact that art backed lending has seen unprecedented growth and is starting to be seen as a proper stand-alone business opportunity.

According to its annual report, Sotheby’s Finance for instance had, as of March 2015, an average portfolio of $678 million, an increase of 41 per cent from the previous period. In addition, earlier this year, Sotheby’s secured a credit line of more than $1 billion to make such loans from a consortium including General Electric Capital Corp.

As a lender, Falcon Fine Art, the art financing division of Falcon Group, announced that it allocated around $200 million to Falcon Fine Art and believes that it can build a $500 million art loan portfolio within five years. All of this is happening in parallel to specialist lender Emigrant bank, hedge funds and family offices lending more or less proactively using art as collateral.

One of the things that is clearly happening here is a massive amount of liquidity chasing yield. With interest rates at rock bottom, debt funds are finding it very difficult to attain the returns they need for their investors. A new opportunity offering attractive internal rates of return is therefore clearly interesting and no doubt we will see more players entering the market.

All of this is very good news for art collectors seeking additional liquidity. As more lenders enter the market, margins are bound to come down as more choices are made available. Will auction houses continue to insist on an exclusivity in case of a future sale of the collateral? Will most private banks continue to shy away from the opportunity? How many other funds will start to compete for borrowers? Each lender is now taking a slightly different approach. Arthena Art Finance for instance focuses on a limited number of key artists whilst others take a wider view, often expecting a higher return.

One challenge for these new lenders is the fact that some may forget that art is not an easy, standard asset. For borrowers, their collections are often emotionally important, and they expect their counterparts to appreciate and understand that. Collections also tend to be fluid in nature and therefore change during the life of a facility. In other terms, one size definitely does not fit all. IN addition other assets such as classic cars, wine or even race horses can be considered for collateral.

One thing is for sure, the arrival of Carlyle heralds a watershed moment in the art-backed lending business if not quite a revolutionary one.

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Harco van den Oever is CEO of Overstone Services. See his profile here.