CedarBridge

Fine art and high finance

© Banker Middle East 2011

14 September 2011

September 2011 Is fine art a safe haven investment, or just another tool to lure wealthy investors? Banker Middle East collates some opinions

With the US being downgraded, the UK's streets on fire, the Arab Spring turning into a winter of discontent and fears that gold is looking distinctly frothy, one of the biggest questions that everyone is asking at the moment (apart from what's next?) is where the safe havens are.

It could be art, also known in some quarters as 'passion investments.' Some investors (including banks) have been buying up/hoarding the stuff almost like they know that an economic nuclear winter could be around the corner. The sale of Lehman Brother's art collection in 2010 was treated almost like getting rid of the family jewels, which one newspaper described as 'crisis trinkets.'

Is it really a safe haven? Nouriel Roubini doesn't seem to think so. "I am in Basel for Art Basel. There is a bubble in contemporary art," he said on his Twitter page, but that didn't stop the hordes of collectors and investors who descended on the town of Basel in Switzerland in June 2011 to attend the Basel art fair (aka Art Basel) to see if there was anything that could beat gold as a monetary refuge of last resort.

More than 300 galleries from 35 countries on six continents showed works by over 2,500 artists of the 20th and 21st centuries. UBS has been the main sponsor of the fair since 1994, which in 2011 attracted over 65,000 visitors, many with deep pockets and 99 per cent of the exhibitors in 2010 returned the following year. Cartier, NetJets and AXA Art (the art insurance arm of AXA) were on board at associate sponsor level. OH DEALER, WHERE ART THOU?

Robert Read, a fine art expert at specialist art insurer Hiscox, in comments ahead of Art Basel said, "We estimate the total value at Basel this year to be $1.75 billion, of which the 10 largest dealers account for about $1 billion. The highest value items are the modern rather than the contemporary."

The equivalent in the Middle East is Art Dubai (21-24 March 2012), which is backed by the likes of Abraaj Capital, the Dubai International Financial Centre, Van Cleef & Arpels and the Jumeirah hotel group and in 2011 attracted more than 20,000 guests (with a 30 per cent increase in international visitors), had 81 participating galleries (from 34 countries) and 400 exhibited artists from 57 countries.

The Abraaj Capital Art Prize (ACAP) is, according to the Dubai-based private equity company, the only art prize specifically for the Middle East, North Africa and South Asia region and the only prize to reward proposals rather than completed works of art.

The winning artists go on to create the works alongside an international curator appointed by ACAP. At $1 million in disbursements, Abraaj claims that it is "the world's most generous art prize."

Abraaj has been taking the art prize on the road of late, to places such as London and Venice. "At this time of heightened attention in our part of the world, it is essential to give artists from the Middle East, North Africa and South Asia region, the opportunity to display their work and provide an arena to debate the impact that culture can have on all areas of society," Frederic Sicre, a Partner at Abraaj Capital said.

But competition is growing across the MENA region. Abu Dhabi Art has been drawing big name sponsors like HSBC and JCDecaux MEA and galleries like Gagosian Gallery and Lisson Gallery. The art market in the Middle East is estimated to be worth somewhere in the region of $10 billion.

Another emerging art fair is the MENASART Fair in Beirut, which describes itself as a boutique-style exclusive commercial fair that will gather galleries and artists from the MENASA region and it too, has financial services sponsors, such as BankMed, Merrill Lynch Wealth Management, Capital Concept and MENACapital.

Though still a relatively new market, MENASART explains on its website than the regional contemporary art market has seen a total sales turnover at auction of more than $200 million in the last three years and points out that the market has grown by over 600 per cent in the last four years. INTRINSIC VALUE

Some fairs are trying to distance themselves from suggestions that they are little more than gatherings of fabulously wealthy investors who are looking for somewhere safe to park their money, and instead like to claim that most of the attendees are collectors who are interested only in the intrinsic artistic value of the pieces or collections on display.

However, the results coming out of large auction houses like Christie's, Sotheby's and Bonhams suggest otherwise. That, or there is a large community of super wealthy individuals who only have sentimental interests. No one wants to be associated with the Wall Street 'greed is good' mentality that tars some investors, but the fact that so many banks and other financial service companies around the world are hiring art investment specialists is a strong sign that investors will go after anything they can get when decent returns on investment are thin on the ground.

Some banks have large collections of art, notably Deutsche Bank (95 per cent of the more than 56,000 artworks in the Deutsche Bank Collection are accessible to the public), UBS and Bank of America, which they use for a wide variety of reasons, such as branding, as well as decoration and for PR purposes. Other banks, like RBC, with its Emerging Artist Project and Barclays, which in 2011 won the Friends of the Arts category at the Sheikh Mohammed Bin Rashid Al Maktoum Dubai Patrons of the Arts Awards, for its sponsorship of the 2010 Emirates Airline Festival of Literature.

"Branding is certainly a very strong reason for companies buying art collections, but it is more than that. Companies are generally interested in good working environments," said Alexandra Brenninkmeijer, a Director and the Head of Sotheby's Corporate Art Services for Europe and the Middle East, adding that corporate social responsibility is another area where art is useful, such as by supporting local emerging artists. BANK DECO

Brenninkmeijer explained that the difference in corporate art collections (contemporary versus historical) is often a case where the company will have inherited it. "If you had a long-established bank, they would probably have great works from the 19th century. In Italy, for example, these very traditional banks, say from Tuscany, they have arts from the 14th century, because that is when they were collecting and they have kept these collections. It is how they have acquired art," she told Banker Middle East.

But corporate art collections are not just halls and walls full of fancy paintings. Some have a wide variety of works on display, ranging from watercolours to statues and video art installations, as well as manuscripts, tapestries, ornaments and maps.

"The space often dictates what corporations are buying," Brenninkmeijer said. "They are not an art gallery per se; it is art in a working environment, so curators are looking at what they can put in this space. The trend towards more glass buildings has also changed the way companies are buying art, because before, you had big wall spaces, but that changed. You tend to have lower walls, big glass spaces, of course, and video art and installations comes to prominence because there is more of a chance for that."

Banks, just like any corporate art collectors, will buy and sell various works as they work on themes with their collections, or fill gaps in the collections or get rid of duplicates. Western banks, which are tapping into emerging markets will often have a mix of local and international artists, to show customers and employees that they are locally, culturally sensitive, while at the same time, emphasising their international point of view.

The same goes for art funds. Some will invest purely in, say, American art, while others will have a mix of established and up-and-coming artists in the portfolio.

Private equity companies have even tried to get in on the art act. In 2008, IndexAtlas raised $50 million private equity fund and its portfolio now includes investment in companies like Skate's Art Market Research.

EXOGENOUS FACTORS

"I am not privy of PE going into art, except one transaction by Abraaj into an art-related company in India. But generally, this is not an area where PE funds are active mainly because the outcome can be binary due to exogenous factors - meaning that the value can go down dramatically for factors beyond your control," Imad Ghandour, the Managing Director of CedarBridge Partners told Banker Middle East.

"I am aware of some private equity [companies] moving into the art financing area, looking to help high net worth individuals raise capital against their collections," Randall Willette, the Managing Director of Fine Art Wealth Management said.

"There have been very few mainstream lenders against art, at least among the banks. We are starting to see a few banks come in to this space, recognising that more and more high net worth investors are looking to unlock some of the equity in the collections, and given that the banks really haven't been in this space, we are starting to see the private equity players step in to fill that void."

A number of Middle Eastern banks have been offering art-related investment opportunities, notably Bahrain-based Addax Bank in 2008 and Emirates NBD in 2011. Both teamed up with the Fine Art Fund Group (FAFG) from the UK to offer their wealthier clientele art-related investment opportunities. CAPITAL APPRECIATION

"The Middle Eastern Fine Art Fund was established to offer investors the opportunity to achieve long-term capital appreciation through investment in museum-quality works of Arab and Iranian art. With an increasing international interest in Middle Eastern art, many major exhibitions on Middle Eastern art are being curated globally. Institutions in the Middle East are starting to invest in Middle Eastern art, some with state backing, and we believe it is an opportune time to benefit from this paradigm shift," Addax said in a statement on its website.

Emirates NBD in its pitch, says that, "Investing in art enhances a diversified investment portfolio through an enjoyable alternative asset class. Driven by financial results, FAFG's art advisory team will strive to give our clients access to quality art works for the best prices available in the marketplace."

"The Fine Art Fund Group offers the opportunity to create a collection or a private fund on behalf of the client. This is a private art fund/art investment management service for clients who wish to establish and manage their own art collection, whereby works of Fine Art that are considered to be investment pieces, are purchased for the client," the UAE-based bank explained.

It added that "The collection will be diversified across different sectors of art, tailored according to the specific needs and tastes of the client" and that, "The private fund affords shorter term access to liquidity should the client need it," which to cash-starved clients going through a difficult patch during a period of global economic turmoil, could be a godsend.

Almost in tandem with the surging interest in fine art as an investment came a number of top class museums and art galleries, such as the Museum of Islamic Art in Qatar in 2008, the Arab Museum of Modern Art (also in Doha) in 2010, and in Abu Dhabi, the Guggenheim Abu Dhabi and the Louvre Abu Dhabi, which are due to open in 2012-2013.

DISCLOSURE

A report by Fine Art Wealth Management reckons that total assets under management in art and other passion investment funds globally is approaching $800 million. However, the report points out that a number of art fund managers have yet to become fully transparent in their disclosure of total assets under management and the figure could therefore conceivably be considerably higher.

"Chinese and Brazilian art funds are raising capital among a new generation of wealthy investors in these markets looking to diversify their assets. The growth of these art markets is directly linked to the economic expansion in each country and the combination of the two has launched a new group of young and avid art collectors," the report said.

It added that, "Consequently, art funds in developing economies appear to be succeeding whereas some Western art funds are struggling. Meanwhile, art funds in India, which are in many respects among the pioneers in the art fund space, have recently come into the spotlight due to poor investment performance."

"Having navigated through the worst of times, the art and passion investment fund industry must now act to lay the ground work for its future success by building investor confidence," Willette said.

WANTS LIST

Several different art funds have sprung up in recent years, ranging from stamps to Ferraris. UK-based Stanley Gibbons, the AIM-listed, 150-year old company which trades in stamps, historical documents and rare signatures for collectors and investors, set up a designated investment department during 2003 to cope with increased interest in rare collectibles as an investment following a wave of positive press. The department, which has grown considerably since inception, now has rare stamp and autograph portfolios of over £20 million under management, with a £12 million 'Wants List' from collectors for rare items.

In June 2011, it launched a China Stamp Index following an increasing number of enquiries for investment grade Chinese stamps. Unlike Stanley Gibbons GB30, SG100 and Frasers Rarities Indices, the China Stamp Index is yet to be listed on Bloomberg terminals. However, the company said that stamps have been selected by experts to provide a cross section of the China stamp market as a whole, using data gathered from third party auction prices, mainly conducted in mainland China and Hong Kong.

THEORETICAL VALUES

"With the growing Asian interest in alternatives from wine ... to stamps widely reported by the financial press it may come as little surprise to investors that the Index shows growth of 200 per cent over the four and a half years; an average annual return of 44 per cent," the company said.

In February 2011, the Swiss-based Count of Custoza Family Office launched a classic car fund. "The only existing fund worldwide in this sector was developed to capitalise on the significant growth in value of vintage automobiles in the last years," the company said.

"A car always has a value and cannot be compared to theoretical values such as those held by Lehmans brothers or Swiss Air," the company said on its website.

It went on to explain that the fund will, under normal circumstances, invest an average of about 70 per cent of the fund's assets in classic cars, although the weighting may be changed in the reasonable opinion of the investment manager.

In addition, some of the classic cars held in the portfolio of the fund may be lent to museums, film studios, private exhibitions, etc. "The income generated by such lending activities will only ever favour the fund," it said. "A particular focus will be laid on equities of the automotive industry and closely related industries including precious metals."

Will banks and PE houses pile into art with the same herd mentality that they did with toxic derivatives during the boom years of the 'noughties' leading to another, nastier art bubble? Many were stung after the art market meltdown which followed the collapse of Lehman Brothers. Will it happen again?

© Banker Middle East 2011

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