Will Art Financing Make Its Way To China's New Collectors?

Maturing Chinese Collectors And Art Market Creating Demand For Specialized Services Chinese contemporary art is in the midst of a "second boom". Recently, Zhang Xiaogang's "Forever Lasting Love" sold for $10.1 million in Hong Kong Driven by inflation fears, the appreciation of the Chinese yuan, a volatile property market, few outside investment options and a desire for the signifiers of sophistication, the strong buying of China's new generation of art, wine and antique collectors is proving a critical factor in the resurgence of Chinese contemporary art, traditional ink paintings, and even vintage bottles of baijiu. However, not all of China's aspiring new collectors can afford to drop millions at auction on a Zeng Fanzhi painting, and in response to growing demand we've seen new art funds, and pilot programs like Tianjin's art "stock market," offer investors of more modest means a chance to get involved in the art world. So as China's new collector class matures, along with the Chinese art market as a whole, what other investment options could we see emerging? In an ArtTactic podcast last week, James Hedges of Montage Finance gives a clue to one thing we could see soon in China: art financing. From the ArtTactic podcast, the audio of which can be downloaded here: Adam Green (AG): Art financing is one of the major services you offer at your firm. Tell us about the different lending options you provide to your clients. JH : We work with collectors, artists and galleries. And we help them access liquidity by providing asset-based loans, which is to say that we will lend them money against the artwork in their collection or artwork that they want to acquire. We also partner with people to act as a principal and to purchase artworks for resale. We also have purchased collections outright and resold the collections ourselves. And we’ve also been providers of liquidity for individuals and institutions that are in financial distress that need to liquidate an asset quickly. And finally, we’ve also made purchases of artworks from estates. AG: Presently, art financing remains a niche practice within the art market. Why do you think that’s the case? JH : There hasn’t been a large degree of financial and institutional participation in the art world because of the underlying problem with valuing the assets. It’s a world where we don’t have transparency on pricing for at least two-thirds to three-quarters of the industry. It’s reported that in 2010, $70 billion of artwork was sold globally. However, only about a quarter of that number transferred, or that business was conducted through auction houses that require public disclosure of their transactions. So, what we know is that probably three-quarters of the art world is done on a dealer to dealer or a dealer to private individual basis and all of those transactions are unrecorded and therefore it’s difficult to get a real sense as to where the value lies in these assets, whether markets are appreciating or depreciating, whether there’s enormous volatility or very consistent pricing with particular artists. So, I think that’s the primary issue. The primary issue being that the lack of ability to underwrite or value assets consistently has led the financial institutions to stay away from this asset class in spite of its size. AG: What do you envision for the future of art financing within the art market? How prominent of an activity can it become within the industry? JH : I think that art financing is going to be an increasingly important part of the art world because art has an increasingly global audience of owners, both collectors and institutions . I think that the art world is expanding because people realize that art is a commodity or a currency. They realize that it provides diversification benefits for one’s portfolio. And indeed people do view their artwork increasingly as part of wealth management, as part of their asset allocation. This series of statements means that we’re going to see an increasing number of billions of dollars of capital flowing into the art world and as more and more capital flows in, so will the number of financial securities, financial services, financial tools for the market. AG: As you said, everyone is starting to agree that the idea of art as a legitimate asset class is becoming accepted and embraced. But for some reason we aren’t seeing an increasing number of art investment funds emerging. I’m curious do you see something with how art funds are structured that is the cause for this or why do you think art funds aren’t launching in unison with the growth and globalization of the art market? JH : Well, I’m not sure that I completely agree. I do think that there is an ever increasing number of art equity funds. I think that there was an initial wave in the period of, call it 2002 to 2005, where a number of art equity funds were launched. Many of them, because of high transaction costs, high fees, high carrying costs and sort of lofty compensation expectations from the sponsors, they ended up not being very well received. There were also some instances of fraud with art equity funds during that period that sullied the reputation of the industry. Then, of course we had the decrease in value and the recessionary period of 2008-2009, which led people to question whether or not they wanted to own art equity as an investment. And now we’re in a period where people are again believing and committing to holding art as an equity like investment and I think there has been an increase in the number of equity funds that are being offered and I think we’re going to continue to see that. So, the historic backdrop is one where there was a wave of launches, a wave of sort of disappointed expectations of not superior performance and then a recessionary period, followed by the current period that we’re in where I think people are now really starting to look at launching these things or investing in these types of funds. AG: And lastly, the recent economic turmoil we’ve seen, both in the US and in Europe, has that changed your short-term outlook at all on the art market? JH : No, not in the least. While it’s true that the art market has enjoyed a recovery and we’ve enjoyed a rebound and in many respects it is a seller’s market today, it’s also true that the art market is a place where there are great inefficiencies and inconsistencies given the diversity in the art world. So, there are styles or themes or schools of art that are very undervalued and represent great opportunities for investment. There are individual artists whose work is undervalued and represent great opportunities, notably vis-à-vis their peers. And then finally, even within an individual artist’s body of work, we see that there are disparities in which the work is priced and we see opportunities there too. So, I think there’s a great menu, a great palette of choices for people to choose from and that the general recovery doesn’t mean that we’re a market top, I think there are an enormous number of places where one can invest very successfully these days. A growing collector base hoping to put their money into artwork that is selling for record highs, in many cases, and an overall greater awareness of art as an investment vehicle as well as something to appreciate will create the conditions for funds to offer art financing services in China. The question now is: who will be the first to offer it there?

Will Art Financing Make Its Way To China's New Collectors?

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Published July 25, 2011

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Will Art Financing Make Its Way To China's New Collectors?