Fine art as an investment
Art is increasingly viewed as an investment and being used as loan collateral. Philip Hoffman CEO of The Fine Art Group explains why to The Wealth Report, but urges caution
6 minutes to read
First off, should we really be looking at art as an investment?
When I first started The Fine Art Group 20 years ago, my business idea of a private equity art fund was met with a lot of scepticism and art investment was relatively unheard of.
But one of our early deals was a Peter Doig painting on which we more than doubled our money within 12 months. After that, the scepticism soon turned to interest! Fast forward 20 years, and art investment has become a popular alternative to diversify an investment portfolio.
The UBS and Art Basel Report stated that in 2021 67% of all individuals surveyed were purchasing art solely as an investment to grow wealth. Certainly, some of my clients and art investors now buy museum quality art, hold it in storage, and sell it for a significant profit, all without ever seeing the picture.
However, buying art for investment and for passion are absolutely not mutually exclusive – many of our clients are very knowledgeable and passionate about their collecting, and supported by our advice, they are very smart about exactly what they buy.
As art as an asset class has risen in popularity, I have seen some of my clients make hundreds of thousands of pounds from the sale of a well-placed purchase. It should be said though I have seen plenty of collectors lose similar amounts too.
We steers our clients away from such losses with a dedicated team of in-house experts who provide advice, market insights, and due diligence reports.
Is art being more frequently used as an asset to borrow against?
Yes, art is increasingly used as loan collateral by borrowers from across the globe. At The Fine Art Group, our art finance product is purely asset-backed. We offer loans with one to three year maturities, secured by art as the only security.
Unlike a bank or other lenders, we do not securitise across a portfolio of assets, nor do we require in-depth credit underwriting or financial disclosure on the borrower. We have a dedicated Art Finance team to ensure that each loan is structured to meet each client’s individual needs, which is then executed swiftly and with the utmost discretion.
Are people borrowing to fund more art acquisitions or for other purposes?
Our clients come from all over the world and have a wide range of needs. Some of them are top end art dealers, collectors, and galleries who borrow against their art to free up capital to expand their existing collections.
We also provide loans to private collectors, family offices, and trusts with a similar strategy for acquisition of more art. However, a significant proportion of our loans are used to support entrepreneurial endeavour. These loans enable clients who have already found success in alternative industries to release meaningful capital from their art and jewellery collections, in order to fund business expansions and pursue other investment opportunities. Of course, there are always enquiries from individuals or businesses in need of immediate cash. These clients come to us because our in-house art expertise means we can often expedite loans more quickly than other lenders.
If I borrow against my art can I still display it in my home?
In the vast majority of cases, the artwork is placed into a fine art storage facility in the UK, US, Ireland, Switzerland, Hong Kong or Singapore. Very often the art is already in storage, in which case there is usually no requirement for any physical movement of the collateral.
Important artworks can also be on temporary exhibition in a museum, which can usually be easily facilitated within the loan structure. If the collateral art is on the wall at home, we can usually find a solution, such as swapping artworks from elsewhere in the collection, or making a high quality copy of the original as a temporary substitute, so the domestic aesthetic remains intact.
In exceptional circumstances, artworks may remain on the client’s wall, but this is certainly not the norm.
Is it easier to borrow against certain types or genres of art than others?
Typically, we lend against Impressionist, Modern, and Contemporary paintings and sculpture, including Twentieth Century British Art. Fine jewellery and precious stones also qualify as acceptable collateral.
These specific art genres are those with an established international market, making the collateral more suitable that those, such as Old Master paintings, where the market may be more selective.
Our in-house art experts have years of experience in fine art valuation, which means we are able to assess the suitability of potential collateral accurately and quickly. The more difficult artworks for lending purposes are particularly atypical examples by an artist, or those which are outsized.
Very large or very heavy artworks present not only logistical challenges, but also affect the saleability of the piece. After all, a Monet landscape is much easier to install than a two tonne Henry Moore sculpture.
What are the other practicalities of borrowing against my art collection I need to be aware of?
The process is simple and starts off with the potential borrower providing us with images, catalogue descriptions and provenance information for the proposed collateral artworks. Our in-house art specialists will then review the collection and, if suitable, a term sheet is issued within 24 to 48 hours.
To qualify for a loan, each artwork must have a minimum value of $200,000 and we typically require at least two pieces of artwork per loan. After the term sheet has been agreed, our in-house legal team will provide the legal paperwork, and our art specialists finalise their due diligence on the art.
Prior to the release of any capital, one of our experts will physically inspect the artworks, or when we have been unable to travel during the last year, we have engaged the help of a local art conservator to carry out the condition checks on our behalf.
Provided the artworks are in good condition, the loan is usually funded within one or two weeks of the physical inspection. We offer loans between $1 million to $150 million, with a 50% loan-to-value.
And finally, I’ve just spent a million dollars on an NFT artwork, can I borrow against that?
While the NFT art market is experiencing an undoubtedly exciting period of growth, the risks in this area are far too difficult to quantify to guarantee financial security to my clients and investors.
This is not to say that NFTs are not valuable assets, but at the moment we just don’t have the historical track record to predict how an NFT will accrue or depreciate in value.
Want to discuss your own art finance requirements? Speak to Alex Ogario, Head of The Private Office at Knight Frank Finance, for expert advice.
Photo by Josh Liu on Unsplash