A fine art

COVID-19 has reshaped economies worldwide, and the art market is no exception. In the first half of 2020, the cessation of auctions resulted in a near 50 per cent drop in year-on-year fine art sales. At just over USD3.3 billion, it was the lowest total recorded in over a decade.[1]

As traditional revenue streams suffered, collectors holding valuable fine art and jewellery looked to derive liquidity from these assets. With limited selling opportunities, they turned to art-backed loans to generate much-needed cash flow.

One trustee from a well-known Swiss multi-family office with responsibility for a number of items of high-value jewellery was able to release 50 per cent of its value, without having to remove the pieces for their existing storage facility in London. Realising the untapped potential of the assets delivered much-needed liquidity and ensured the ongoing service of the trust’s obligations. Trustees and advisors alike have found themselves having to improve their understanding of the assets under their control.

Even major collections have started using art-backed loans as a quick way of generating cash flow. A collector and his trustees were able to leverage a USD8 million loan against a collection of almost 60 contemporary artworks stored in London and Switzerland, with the whole process taking less than two months to complete. By selecting a specialist art lender, the due diligence on the collateral artworks was able to be completed in-house, thereby ensuring confidentiality and speed of execution.

A brighter future

Even before the end of 2020, major auction houses had begun directing their auctions online. Though online sales were nothing new, they had previously been the preserve of more modestly priced lots. With travel bans firmly in place and in-person viewings strictly limited, collectors found themselves purchasing bigger ticket artworks online. The market responded quickly: the first quarter of 2021 saw USD5.9 billion in transactions, already surpassing the figure for the entirety of 2020.[2]

Since then, the development of the art market has continued unabated. As global markets recover, the use of art to diversify portfolios has increased, as has the use of sophisticated financial structuring to assist with acquisition – the so-called ‘purchase finance’ model.

Purchase financing enables collectors to borrow up to 50 per cent of the value of their acquisition, potentially more if they leverage additional works from an existing collection. This means that art assets can be used to finance the ongoing development of a collection, without impacting the collector’s wider wealth portfolio. Given the asset-backed nature of this type of transaction, there is little or no requirement for borrower credit underwriting.

The return of the art fair and ongoing demand from Asia

By the end of 2021, art fairs made a cautious return. Widely recognised as the engines of the art market, fairs are a key sales point for collectors purchasing both primary and secondary market works.[3] Art Basel, an international art fair usually held in June, was warmly welcomed in September. Due to restrictions, Asian and US visitors were at a record low, yet there remained a vibrant atmosphere and a keen appetite for business.

Demand from Asia continues to grow, with Basquiat’s Warrior selling for USD41.8 million at Christie’s Hong Kong in March 2021, the highest price ever paid in the region for a western work of art.[4] The use of art finance remains popular among Asian clients, aided by the fact that art-backed loans can be structured within four weeks from initial enquiry without the need to cross securitise with other assets in the trust or structure. Collectors and advisors worldwide are seeing the benefit in using leverage when acquiring new artworks.

Irrespective of the residence of the collector, the structuring of trusts or special purpose vehicles (SPVs) in which the art is held also remains an important factor when considering the use of art finance factor. The baroque nature of art ownership means that financial lenders must be experienced across a wide range of jurisdictions.

The past 18 months have proved definitively that the art market is a malleable and resilient in the face of uncertainty. Though there is a unanimous desire to return to normality, the innovations and solutions deployed throughout the pandemic are here to stay. The use of art finance and purchase financing will only continue to increase as the art market becomes ever more sophisticated.