U.S. Trust's Beard: The Rapid Growth of the Art Lending Industry

Oct 7 2016 | 10:55pm ET

Editor's note: Alternative investment managers have emerged as some of the most significant art collectors of the 21st century. While art is fairly unique in that financial sponsors can own it for intellectual, cultural and social reasons, there are also financial and strategic reasons as well. For instance, says Evan Beard, national art services executive with U.S. Trust, Bank of America Private Wealth Management, art can also be a great asset through which to unlock otherwise captive capital.

How does the mindset of the collector differ today compared with generations past?

Beard: We’re in a post-humanist era of collecting. As the humanities have become mathematized, the collecting impulse has evolved. Long a pursuit of imprecision and connoisseurship, collectors increasingly view their art as part of their overall financial life.  They are more commercially driven, philanthropic, socially engaged, and willing to use their art as collateral to unlock capital.

For clients that treat art as a capital asset, what are the overall expected returns?

It’s a difficult question because the art market operates as hundreds of rather opaque sub-markets where half of all sales go unreported. Still, most economists (using repeat sales regressions or hedonic modeling) agree that historic returns are slightly above treasuries.  Our view is that better risk adjusted return exists than buying art purely as an investment. Better to buy for the social, cultural, aesthetic, and intellectual benefits and then be smart on the planning.

Why would a hedge fund or private equity professional leverage his or her art collection?

PE and hedge fund professionals have an innate aversion toward locking up capital in non-interest bearing assets.  They also have a metaphysical need to amass large art collections. Fortunately, low interest rates and a rising art market have made art an increasingly attractive internal source of capital. Many PE and hedge fund professionals now leverage their art as a way to redeploy capital into their fund.  It’s often more attractive than borrowing against their fund equity due to lack of daily pricing and a more streamlined due diligence process.  And the art stays on the wall.

What is the size and structure of the art lending industry?

It’s a two-tiered sector that has grown exponentially since 2000. There are approximately $15 - $18 billion dollars in art loans outstanding to individual collectors.  Private Banks, like U.S. Trust, originate 75 percent of these loans, typically on a full recourse basis.  The other 25 percent is split between auction houses like Sotheby’s and a group of boutique lenders that include hedge funds, collateralized debt funds, and boutique lenders that typically offer fully-collateralized non-recourse loans at higher interest rates.

Does U.S. Trust view art as an alternative investment class?

No, at least not in the traditional sense. We do offer alternative investing opportunities in farmland and timberland, but we take a more nuanced view on art. For our clients, art collecting is an autobiographical, intellectual, social, and financial pursuit.  Therefore we engage them on each of those levels.  I don’t know if that approach is taken with many asset classes. 

How do you see the art market changing over the next ten years?

The overheated rhetoric about art as an asset class will subside and collectors will again be guided by connoisseurship. Heightened financial expectations developed during this great era of contemporary art will leave many collectors disappointed when it comes time to sell. Most of the monochromatic, process-driven, art-fair art of this early century will not have lasting influence. Some will, though.

The era of mergers and acquisitions in the non-profit arts space is almost here. Auction houses will begin to look more like full-service investment banks to the art world. Gallery stratification will continue…either scale up or go digital. Big data will be far less disruptive to the art world than in other industries. Brown furniture will stage a comeback. Global art market growth over the next decade will lag significantly compared to the previous decade, primarily due to China. The art lending space will continue to expand rapidly, especially if interest rates stay low.

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