As the frenzy of the major fall auctions die down, ARTINFO wanted to take a broader look at the art market and its future as the alternative investment of choice for the world's wealthiest individuals. We sat down for coffee with Michael Plummer and Jeff Rabin, the two principals at the New York-based art investment advisory firm Artvest Partners. The pair once worked together in financial services at Christie's, but in 2009 set out on their own to found Artvest, which is an advisory firm dedicated to helping people look at their art not only as painting or sculpture, but also as an asset that — if properly managed — has the potential not only to help their diversify portfolios, but outperform their equities, bonds, and real estate holdings. The wide-ranging discussion touched on the growing role of art finance in the art market, as well as why you might want to consider investing in an art fund, despite some negative press in the past few years — after careful due diligence, of course.
How did you guys get started together?
Michael Plummer: We met at Christie's, where we worked on an art fund together. Initially we were going to take it to market with Goldman Sachs. Then the market fell and in 2009 Christie's — because it was under pressure in its core business ? ended the art fund project and all of its financial services operations. Jeff and I left in the spring of 2009 and founded Artvest in July. We based it on our experiences in financial services where there was a need for advisors who really focus more objectively — and more financially — on art as an asset, taking more of a wealth management approach to art collecting and wealth preservation.
How has the art finance world changed over the last three years?
MP: I think it has been changing really over the last eight. There was a trend beginning in the early 2000s ? 2003 or so ? with various art funds emerging. This trend has only intensified, especially since the financial crisis. It was hitting its stride in the market boom of 2006 and '07. Then you had the market crash, and that was a big interruption. But because the market recovered so quickly, I think it has sparked a renewed interest in art as an asset class, and its role in portfolios as a core value. I think the wealth creation that we've seen over the last 10-15 years has been staggering. It has increased people's interest in art and art investment vehicles. The conversation has turned from "Is art an asset class?" to "Art is an asset class," and then to "How do we take advantage of art as an asset class?" There are more and more vehicles coming to market, giving people access to art exposure or tangible assets, which has always been something that the Asian community and the European community has sought (less so for the United States). But since the seizing of the financial markets in '08 — really starting mid-'07 with the debt markets and credit markets — we've seen a tremendous increase in interest in true alternative assets and cash. I think that's a major change.
Jeff Rabin: Yeah, people are feeling that, intuitively, probably personally, that it's important for them to diversify their portfolios in terms of having some of their investments in non-financial assets.
The founder of ArtTactic [Anders Petterson], was recently interviewed by Bloomberg. He said that because of this change in art investment, the art market and the broader economic market will be more correlated. Do you agree?
MP: No. The problem with correlation is that the art market is non-continuous — unlike the financial markets where a stock is trading while the market is open, continuously throughout the day and every day. There's a commoditization of the financial market that doesn't exist in the art market. So, each artist has a certain number of works. You can pay, say, some similar price for a similar period, and similar works from similar artists can be compared to one another. But it's non-continuous, it's not commoditized, the data is relatively spotty, and you are only capturing on average 50 percent of the market. With auction data, that's all you can really capture.
JR: It's very hard to create a direct correlation between these two markets. One involves big trades that are very, very infrequent, and the other involves trades that happen on an hourly or even minute-by-minute basis. That's not to say that you can't run the numbers, which we do. And running the numbers, if you were forced to say, you would say that the two markets are not really correlated. What we prefer to say is that even though they are not necessarily correlated, there is a relative lag time because the art market, we think, is more directly correlated with wealth creation. The greater the wealth creation, the greater the participation in the art market. And that's what we're seeing over the last 10 to 15 years, with global wealth achieving levels never before seen on the planet, in Asia, Europe, and the United States.
MP: Yeah, its almost as if there were a consumer confidence index for the wealthy. That would probably be the biggest and best indicator of the health of the art market.
JR: The art market is not liquid. In times of dislocation like in '08 the art market is absolutely correlated with all other assets. All assets move together when there is dislocation, so everything goes down. The way it goes down in the art market generally is that people slash prices for anything that could potentially sell, but mostly things don't come to market. You don't see anything going to auction, because the risk of it being burned and not selling is great.
What do you see for the art market going forward?
JR: Let me pull out my crystal ball...
MP: It's hard to say. We have never seen the kind of volatility we've seen over the last 18 to 24 months with the U.S. equity market, where the market can move, in some cases, one to two percent per day. But that volatility has driven a lot of people to keep money in cash, a lot of that cash is now looking for a home, and many people are starting to look to the art market.
MP: The negative part is that because art is so illiquid, people who may not have so much cash on hand, who have liquidity concerns, will be reluctant to invest more money in the art market if they have a large exposure to the art market right now. If the economy takes a turn, if there is a run on the banks in Europe because of the debt crisis, if there is some sort of problem in the economy that surfaces very quickly, this would not be a good time to tie up a lot of your cash in art if you don't have other cash elsewhere, because it could be very hard to cash out. If you have to put your property up for auction at a time of a pullback in the art market, you might only get half of what you expect for that work of art — if it even sells at all.
So is there any point in investing in art if you aren't an ultra-high-net-worth individual?
MP: Yes. We think art is a terrific diversification tool for an overall wealth portfolio regardless of how much money you have in your account — or almost regardless, let me put it that way. Because in order to get some sort of diversification you would want to own more than one work of art — you would want to own a grouping of art. So, where there are art funds or art investment vehicles or private investment partnerships available — and there aren't that many available that we would suggest a client enter into — but that's one way for people with less capital at the core to get invested in the art market or get exposure to the art market. Once you get past a certain dollar figure I think a certain percentage of one's portfolio should be tangible assets, be it art, perhaps gems, real estate, so forth... One of the Rothschilds is said to have said five to ten years ago that they always felt that a third of their assets should be in real estate, a third of their assets should be in art, and a third of their assets in financial investments. It's not a new idea, but it's really starting to gain traction.
JR: But still, understanding that art is illiquid, and that when you have art in your portfolio you have to keep an eye on the fact that if you need to sell, you are going to want to be able to sell from your non-art assets. So you should have liquid fixed-income securities, liquid equities, currencies, whatever else that is in your portfolio that you would be able to fall back on in times of crisis. It should be looked at as a long-term investment and an illiquid investment. If done well, art should outperform all other assets in your portfolio.
You mentioned art funds earlier. Is there a future for art funds?
MP: Yes, actually. There has been a lot of art fund activity just in the last year. There are a lot of challenges facing art funds. More are launched than ever make it to closing on their first round of funding — and those that do close on funding end up much smaller than originally planned. But there is an ongoing evolution of this nascent industry. Some of the funds that are older, that were launched five or six or seven years ago are now on their second or third generation of funding and they've been finding it easier to raise more money more quickly. Once a fund establishes a track record, it becomes easier for that specific fund to move ahead.
JR: When someone says “We're going to launch an art fund,” they never know how much they're going to raise. They say "Our goal is a $100-150 million fund." The media picks it up and runs a story and talks about it. But there is never really a follow-up. Ultimately, that fund almost never raises $100-150 million. Generally they raise $15-20 million — if they get off the ground at all. There is a big misconception about how much money is under management in art funds globally. We'd say there's roughly a billion dollars under management in art funds globally — and that's art funds as opposed to private investment partnerships, which are different.
What about art-backed lending? How common is it?
MP: Well, it's more common than people think. It was just announced in the paper [Bloomberg] that Michael Steinhart took out a loan to buy a piece of property because he could get such great rates. I think that a lot of smart financial people realize that they can put the money in their art collection to work by leveraging it in today's interest rate environment, if they have the right kind of financial profile. There are extremely low interest rates out there, and they can often put that money to work in places where they can make a lot more than they are paying in interest and make money from the spread. People like Steinhart are very savvy about those things and that's a very smart financial path. We think that art is becoming a bigger part of people's portfolios and more people are thinking about it as an investment. That has been increasing pressure over the years for even those banks that didn't offer art-backed loans before. Banks are becoming increasingly competitive with one another to provide these sorts of loans because it is something that clients want.
JR: At one end of the market, rates are usually at the very low end in terms of the yield that they are charging. But they are securing it with other client assets and they are looking for a broader relationship. At the other end of the market — which could be close to usurious rates such as 18, 19, 20, 21 percent — they [the loans] are solely backed by the assets. The borrowers are those who have no other alternative and are willing to pay those kinds of rates. Then there is sort of the middle market, which is generally secured only by the art assets, and we think that's sort of a growing field. If you do the work properly and you have the right wealth-to-value and you secure the collateral, there's a pretty good business there.
*This interview has been edited for clarity and brevity.