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The rise of art-lending

07/12/2017 Guy Vaissière, head of business development, Falcon Fine Art,

Besides being a passion and a lifestyle for many collectors, art is also increasingly being seen as a safe investment at a time of great economic uncertainty. Having shown longevity and substance, many investors view art as an alternative asset class – and an ideal way to diversify their portfolios.

Meanwhile, the emergence of great wealth, especially in Asia, is further bolstering liquidity in the art market. With prices – particularly for high-quality works in established market sectors – showing strong increases since the early 2000s, many collectors find they have a great deal of capital tied up in their collections.

It is developments like these that continue to drive demand for a variety of specialised art and finance services among the financial community – as well as a greater focus on the role of art in overall wealth management. Of course, this also extends to art-backed lending. 

While not new, the art-backed lending industry is one that has seen increased activity in recent years. And with art lending market valued at US$17 billion in 2016, it comes as no surprise that the number of lenders willing to loan against high-quality collections is growing. 

Art-backed lending can free up liquidity for investment in other asset classes. Yet, for many collectors, borrowing against art to purchase more art is increasingly being seen as a “no-brainer” – turning what was once a passive asset into money that can be actively used to grow their collections.  

That said, banks with art-backed lending programmes, such as Société Générale and Goldman Sachs, typically tend to reserve these services for existing high net worth clients. Fortunately, that has left an opening for non-bank lenders to provide lending services to a broader range of borrowers.

Yet that is not the only difference worth noting. Banks also generally require clients to have other assets under management so – in the event of a default – collectors can repay the loan from another source, rather than selling the collateralised artworks. This type of finance is often referred to as a “recourse loan”.

In contrast, smaller, specialist non-bank lenders only require the artwork itself to secure the loan. What’s more, some are able to offer a mix of products and financial solutions that are bespoke and allow clients to leverage artworks that are already in storage or hanging in exhibitions and, in many cases, collectors can retain possession during the financing period.

The success of these niche financiers is built primarily on their ability to combine both art expertise and structured-finance know-how. Indeed, while the number of collectors choosing to capitalise on the value locked up in art is increasing, art is a complex asset to both value and collateralise – and not without its challenges.  

Certainly, the artwork must meet certain criteria – and even then not all art can serve as collateral. Highly contemporary works, for instance, may not have a proven secondary market meaning lenders are unlikely to consider such pieces. Antiquities can also be problematic from a lending perspective as a result of the complex due diligence often associated with works that may have been looted or illegally exported. 

Additionally, the location of the artwork can also prove tricky to navigate. Italy and Spain, for example, have notoriously stringent export laws regarding works of art – which in turn present barriers to the practice of art financing in these markets. Of course, these are just some of factors that lenders must take into consideration.

This notwithstanding, art is an expensive commodity that continues to tie up large sums of money, whether as an investment or not. Releasing this money to use elsewhere is a smart wealth management strategy – allowing collectors to maximise the value of an art collection while continuing to enjoy it.

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