Niche money managers offer wealthy investors shares in works of art
1/15/2011Art aficionados have long held themselves to be in a more elite class than Wall Street speculators.
Now, their worlds are colliding as a new crop of financial firms moves to sell shares in pools of paintings — and some fear the results may resemble the chaotic splashed canvases of Jackson Pollock.
Although many investors favor transparency and asset gathering, art dealers generally like secrecy and exclusive holdings. But as the prices of major artworks have risen, niche money managers are developing art funds with the hope that their underlying works of art — and shares — will appreciate in value.
What makes art experts nervous is that these funds bear some similarities to asset-backed securities and derivatives, opaque investments that got a bad name in the financial crisis.
In the middle of this struggle are proponents such as the art research firm Art Meets Law.
With stocks and bonds still volatile, rich overseas investors are rushing to tangible assets such as art.
Last year, auctions set records. Bidders paid $106.5 million for a Picasso, $104.3 million for a Giacometti, $89.5 million for a Qianlong Chinese vase, and $11.5 million for a rare Audubon book.
Financial firms are looking to capitalize on that interest by offering the chance to own art without paying the large fees and heavy taxes usually associated with full ownership. Some money managers say returns can run as high as 20 percent. The field, with $300 million in assets, is small but growing.
In Paris, the Art Exchange has plans to publicly list at least six pieces, including one by Sol LeWitt, and sell shares to investors. The Russian asset management firm Leader — controlled by close associates of Vladimir Putin — created two art-related investments.
Last summer, Russia passed regulations to allow art to be turned into securities, the second country to do so after India. Noah Wealth Management and the Terry Art Fund are starting portfolios in China.
The idea behind many art funds is relatively simple: A few big investors put up money to help a money manager buy paintings.
Smaller investors buy ownership units with values tied to the underlying art. For the privilege, they pay fees of around 5 percent of the assets and 20 percent of the profits.
When investors want to cash out, they have to trade the stakes — just as early owners of Facebook have sold some shares on secondary exchanges.
A handful of companies are trying to bring transparency to the historically shadowy, unregulated arena. Skate's — founded by a Russian investment banker and entrepreneur, Sergey Skaterschikov — has set out to be "the Standard & Poor's of art," said its chairman, Michael Moriarty.
The firm keeps a database of more than 5,000 of the world's most valuable art pieces, and its nine-person staff churns out industry reports on paintings, including the background, investment risks, and prices.
"We're not first and foremost art people," said Mr. Moriarty, a former lawyer for the Securities and Exchange Commission. "We're business folks."
Skate's and others face hurdles, including a graveyard of previous efforts.
During the economic boom of 2005-07, around 40 art funds raised $350 million to $450 million, according to Skate's. But most disappeared after the financial crisis. Only the most established survived the shakeout, including the China Fund and the Fine Art Fund.
This time around, some experts worry that art funds — popular mainly in emerging markets such as India, China, and Russia — will attract the wrong element. Art funds, they say, have the potential to provide an easy vehicle for money laundering or hiding assets.
"Corrupt government officials who have money are always looking for ways to keep it, and to keep it out of the banking system," said William Browder, the founder of the hedge fund Hermitage Capital, whose efforts to expose corruption in Russia got him blacklisted from doing business there and brought death threats.
But financial firms may find it hard to penetrate the art community, a critical step when buying and selling paintings. The president of the Art Dealers Association of America, Lucy Mitchell-Innes, said she would never allow a young artist to sell work to a pooled fund. She is the influential co-founder of the contemporary-art gallery Mitchell-Innes&Nash in New York's Chelsea neighborhood and is close to the estate of Roy Lichtenstein.
"Generally we resist seeing art as another financial instrument," she said. "None of us goes into this market to trade commodities."
Given such conflict, some art experts worry that investors looking for deals may get stuck with less-than-desirable works. Art dealers are more likely to keep bargains for themselves, said Harry Smith, chief executive of the appraisal firm Gurr Johns.