Investment

Ultra-wealthy raising cash on their art collections

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Beauty is in the eyes of the beholder. Which can be precisely the problem, according to Philip Hoffman, founder of advisory firm, The Fine Art Group.

Over the last ten years, he has uncovered a distressing tendency for clients to end up paying too much for art, or selling for too little, after failing to take independent advice.

Right now the wealthy are borrowing rather than selling, using their art as security

“I’m very disappointed with the skulduggery that goes on with certain dealers and private galleries,” he says. 

History suggests that the coronavirus crisis will shine a light on the bad deals, as investors try to sell, or borrow against their art.

Hoffman uses an illustration: “A gallery might talk to a client and learn they want a Modigliani. I can get the best, its dealer would say, but it would cost $60 million, because it’s so difficult to find. Can you afford that?  The client says, yes. 

“The gallery then tells another client with a Modigliani that the artist is going out of fashion. He persuades them to sell it for $6 million. And the gallery pockets the difference.” 

The Fine Art Group charges a bargain-basement two to five percent, when it transacts.  But deceitful dealers can enjoy turnover, credit and overheads, to match their clients, including a private jet. 

They buy dinner for clients as equals, and friends, reinforcing the ties that bind. Hoffman has unravelled messy deals worth billions: “When you buy a company, you need banks, tax advisers and lawyers to screw a deal down. But you get large art deals where very wealthy families don’t take advice and get screwed without knowing it.”

Shouldn’t the regulators step in? “They aren’t interested in protecting the ultra-rich.”

You come across clients taking legal action against their former dealers, but wealthy people tend to avoid litigation, which can attract the media. Hoffman says: “These problems have blown up over the last ten years. The galleries have discovered a wonderful formula for making money.”

Hoffman started his career at accountant KPMG, going on to join Christie’s, the auctioneer, where he became deputy chief executive in Europe. 

He started The Fine Art Group twenty years ago: “I was going to have a big party in February, but I cancelled. It wasn’t the right thing to do.” The Fine Art Group has 140 private and family office clients. It employs more than 40 people. 

Early on, Hoffman launched two art funds, which have generated an internal rate of return of 13% a year. This compares to 22% which Fine Art has generated by co-investing with its clients and managing their risk. 

Why the difference?  “In the early days, our funds invested in Old Masters and Impressionists because we felt they were low risk. Our co-investments performed better because they backed modern and contemporary.”

Contemporary art is strong due to the growing influence of big collectors, newly enriched buyers (particularly the Chinese), online traffic and art museums. Art is about the celebrities who own it and the people that promote it, as well as how it looks.

Buyers who move markets include Francois Pinault, Bernard Arnauld and Steven Cohen, the hedge fund manager. Bridget Riley, renowned for her op-art, has enjoyed a revival thanks to a retrospective. Jean-Michel Basquiat and George Condo are typical of artists who have reaped big rewards by being part of the zeitgeist.

Last year, The Fine Art Group made an impact of its own as agent on the sale of jewellery by Qatar’s Al Thani family. Hoffman says: “We worked with Christie’s on a series of dinners and marketing events. We wanted to be sure our guests were end-users. The $110 million we raised would have been $60 million, if we had sold to dealers.”

The Fine Art Group used “affluencers”, often the children of celebrities, who agree to display jewellery or fine art in vlogs, or Instagram. They aim to boost their status, while getting paid for their endorsements.

Hoffman says: “Ownership and promotions have become entangled with the art valuations we carry out. It’s like interpreting a series of interlocking circles.” 

“I have also learned never to be surprised at the number of hedge fund managers who like to buy pictures of a circle with a red dot in the middle of it.”

He adds valuers need to adjust their view when artists become over-prolific: “I once made the mistake of buying three pieces from a Chinese artist for $200,000 each.  I sold one for $210,000. The last fetched $45,000, as the market fell away. I never did that again.”

Auction houses have been accused of over-inflating the art market by offering vendors price guarantees: “I don’t have a problem with third-party guarantees,” says Hoffman. “When the auction house is offering them, that becomes a different issue.”

He reckons the art market could be facing challenging times following the coronavirus crisis: “Right now, people don’t want to sell. But the auctions are closed. The warehouses are shut.  The market is super-quiet.” He is unconvinced that online transactions will take over from the auctions, except for lower-ticket items, like limited edition prints.

At worst, he reckons the top end of the market could fall in value by 10% while the lower tier could fall 30% to 50%. 

Right now, however, the wealthy are borrowing rather than selling, using their art as security. The Fine Art Group runs an art finance business which lends money to families who lack petty cash. It will lend money on Libor plus 7% and Hoffman says transactions can be agreed in three days.

But The Fine Art Group does need to have custody of the art: “Possession is nine-tenths of the law. If I lend on a Picasso, and it stays on your wall, then you might think you can use it for another loan down the line.” 

Hoffman is getting loan requests worth $10 million to $20 million a week: “Advisers have encouraged family offices to be fully invested, so they are rather short of physical cash in an emergency.”

He is also signing co-investment deals with his clients to take advantage of any future distress in the market: “We put 5% or 10% of our money into funds where a family office has agreed to invest. If the family wants to put the art on a wall we might let them but that’s not usual. We like to keep things simple.”

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