Direct Investment in the Art Market and Value Creation: A Role for Family Offices

Within the universe of direct investments in the art market deal structures vary in their degree of separation from the ultimate source of value creation. A family office can choose to invest in an art-related business or financial transaction, commission a work of art, or provide backing for commissions in conjunction with galleries, dealers, and institutions or even the artists themselves. However, the further away from the initial value creation you go, the greater the propensity for art market intermediaries to claim a larger share of the pie.

A new white paper released by Fine Art Wealth Management looks at the opportunities for family offices generated by the underlying dynamic of the art market which is inefficient, illiquid, and lacks transparency.

There are two distinct investment strategies for art-related opportunities that reflect the successful activity of the two different groups of art-world professionals who make money in art. The first group is composed of the world's collectors who tend to focus on specific sectors of the broader art market by assessing the market dynamics that would cause one sector to appreciate at a more accelerated rate than another, and acquiring works opportunistically with an eye to anticipating and capturing future value.

The second group making money is the world's leading art dealers, auction houses, and specialist art lenders who successfully identify financial transactions that can result in superior returns. Transactions include trading opportunities to buy and sell works to achieve an immediate return as well as financing opportunities and equity participations at negotiated rates with the possibility of significant upside potential.   

Among the many business transactions in which successful art market investors engage include the following:

Primary and Secondary Art Market Trading:

The primary art market is composed principally of dealers, galleries and others who sell new works by living artists. From an investment perspective, this market may represent higher risk as many of the artists in this category have not yet established a proven track record. Approached wisely, it may also offer the highest returns. The secondary art market pertains to works that have achieved a resale at auction or through private sale transactions. Today, an artist often makes the transition from primary to secondary market in his or her lifetime. 

Major Art Sector Focus:

Segmentation in the art market is the result of historical study, in conjunction with established dealer, auction house, and collector practices for categorising art for trae.  Just as sectors within the equities market reflect specific industry activity and behaviour; art sectors reflect different bodies of work and the interests of those that collect them.  These sectors are generally defined by period, by style or by nationality or region.  The most active sectors are those representing the greatest annual sales, available research, and potential transactions.

Regional and Niche Opportunities:

There is almost no limit to the permutations in which collector will define their focus or in which unique works can be categorised. Well informed dealers, collectors, and investors with a keen eye for quality regularly seize opportunities wherever they may be found.  While many of these diverse categories may command less activity than the major art sectors, they are no less attractive from an investment perspective. Indeed, the competition for scarce and desirable objects within these categories can be fierce and the premiums paid significant.

Art-related Businesses:

 At the highest end of the value continuum is the direct ownership and operation of a closely-held art business. Here you directly build or buy an art business venture. You maintain total discretion; have the authority to lead company governance, and, most importantly have the opportunity to capture 100% of the value that you create. Of course, this description downplays the difficulty and the dedication that is required. Still, the direct ownership option enables you to determine the extent you participate and contribute to the day-to-day operations.

Financial Transactions:

Financial transactions within the art market occur every day between dealers, auction houses, financial institutions, investors, and collectors.  These may include short-term loans, acquisition financing, inventory or collection financing; consignment and guarantee financing, and art-related venture capital investment.  Players within this relatively narrow field are specialists with access to broad expertise and the market intelligence necessary to evaluate and accept the risks proposed; consequently, the return expectations built into each transaction are often substantial.

Co-Investment:

 Family offices may also seek to collaborate with others who have a particular expertise in the art market to leverage the investment opportunities they identify. The attraction of co-investment opportunities include the fact that one or more of the investors will typically have a significant stake in the project; a demonstrated expertise; and the ability to add value beyond capital (e.g. via business skills, expertise, proprietary deal flow, or art market intelligence).  We foresee a steady rise in shared intelligence and co-investments in the art market facilitated by increasingly formalised structures that involve buying artworks in partnership with art dealers and auction houses and even co-investment with other family offices.

Direct investment is a growing trend among family offices and may soon be ready to emerge full force within the art market in the near term. By responding to shortages of capital in the marketplace and actively deploying capital in art financing transactions family offices can provide art dealers, auction houses, and other art market entities with the resources necessary to make timely investments in exchange for a share of the financial upside. In addition, there may be opportunities for value creation through restructuring/scaling up of art-relate operating businesses which are at a critical juncture or in early stages of global expansion and financial transformation.

Finally, while there is growing interest in direct deals in art-related businesses, we would also counsel caution. Those wishing to invest directly should consider whether they really have the expertise to compete effectively. Proprietary deal flow is critical when investing directly and access to deep art-world expertise, an international network of related specialists, and sophisticated economic and financial savvy are the foundation for potentially significant out-performance.

To learn more about direct investment in the art market by family offices see our Knowledge Library.