The wealthy are considering liquidating their art assets to raise cash for the looming recession

Some wealthy people are looking at using their art assets as collateral to obtain hard cash amid the coronavirus pandemic, based on interviews with multiple sources in the art world.

Elizabeth von Habsburg, managing director of Winston Art Group in New York, said that people are looking to raise money from their art due to a mixture of “economic disruption and lowered interest rates” in the financial markets, giving clients “the opportunity to undertake, or add to, their loans collateralized by art.”

Athena Art Finance in New York said that the company was in “active discussions” with various art collectors and investors looking for liquidity, while London-based Fine Art Group said it has also seen an uptick in inquiries for financing against high art and jewelry this past month.

Fine Art Group CEO Freya Stewart said the uptick is because “cash is king” — especially in “times of volatility and uncertainty.”

“As equities tumbled and then, as concern and the consequences of the pandemic started to become apparent, some clients were looking for fast capital to meet capital/margin calls on their investment portfolios,” Stewart said. “Others simply want to secure capital now to ensure they are financially well positioned over the coming months and beyond.”

To be sure, there is evidence of that this activity is having a counter effect: wealthy people, collectors, and galleries sensing an opportunity and buying more art than before.  Bloomberg’s Katya Kazakina and Tom Metcalf reported that wealthy people have been buying art at massive rates to shift their stock into “real assets.”

Art financing has long been popular with investors, because art is seen as a “value-preserving asset class,” as noted by Deloitte’s 2019 Art & Finance report. Artwork in general isn’t necessarily impacted by the risks commonly associated with the financial market, which makes it a lower call risk as an investment, Kazakina and Metcalf reported.

For example, it took the S&P 500 five years to recover from the 2008 recession, while it took the Artnet Index for the Top 100 Artists only three years. During the 2015 and 2016 market sell-offs, though both the S&P and Artnet Index took a hit, Deloitte found that, when broken down by price bracket, high end works of art worth at least $1 million were able to lead a comeback in some art categories.

Since art is regarded as being a luxury item, it often rebounds and grows faster than traditional assets do. This is especially true for blue chip artists such as Picasso, Dali, Pollock and Warhol, whose works have been proven to hold value over time, even during economic crises.

“Over the past 10 years, art has become recognized as an acceptable asset class for banks to lend against,” Scott Lynn, founder of the art investment company Masterworks said. “We estimate that there is more than $10 billion in leverage secured by major art collections. Most art loans begin at $10 million and exceed $1 billion in collateral value.”

As a recession looms, the art world waits to see what’s next

Interest rates for art lending have fallen dramatically over the past few years, attracting more companies and art collectors that are looking to secure loans. In fact, von Habsburg said that last year alone, Winston Art Group appraised more than $3 billion worth of art to be used as collateralized loans.

“The benefits now as in the past are many — it is a way to make that asset class work as a financial tool; it is an alternate source of liquidity in a normally rather illiquid asset,” she said. “For those collectors or dealers who have large stocks of stored art that is not being hung or transacted, that art generates funds rather than sits as a static asset; and the art can be held and hung on collectors’ walls even while being used as collateral.”

But there could be a negative side to using art as collateral, she said, which could become more apparent over the next few months. Especially because this season’s art shows and auctions have been postponed, while private sales have started to slow down.

“The current situation, it is not just a financial crisis.  It is also a crisis of the health of so many people worldwide,” she continued. “I would imagine that the art market will be slower to recover than after the 2008 financial crisis, as galleries go out of business, leaving many artists without gallery representation, auction houses retrench, furloughing wide swaths of specialists across lower revenue areas of the market, and sales remain ‘virtual’ for longer periods of time.”

Meanwhile, as a recession continues to threaten the global economy, von Habsburg predicted that some art portfolios, such as contemporary or modern art, might need additional collateral to “maintain their ratios of loan to value.” But, she said, this could prove difficult for those who do not have excess work to place into the portfolio.

“Works may have to be sold to cover the debt, and the market has a sharp nose for works being sold under duress, which can lead to lower than normal financial results,” according to von Habsburg.

Cynthia Sachs, chief investment officer of Athena Art Finance, somewhat agreed with von Habsburg.

“Art collectors are waiting until the public part of the market opens to sell their art, while art investors are using this time to find interesting stressed opportunities,” Sachs said. “This global pandemic is clearly a new paradigm for all asset classes. We don’t have any precedent or foresight in our recent history to understand the true long-term effects of such a crisis on the art market.”


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