When Lorenzo Ghiberti designed the Florence baptistry’s “Gates of Paradise,” he singlehandedly sparked the movement that would become known as the Renaissance. Six hundred years later, wealth managers and family offices are looking for that same spark to set them apart from the competition as they fight to become the provider for ultra-high net worth individuals and families. They need to look no further than Ghiberti and the art market for their inspiration.
The current ultra-high-net-worth wealth associated with the art market is estimated to be around $1.742 trillion and is expected to grow to $2.125 trillion by 2023, according to Deloitte’s global 2019 Art and Finance Report. Compared to the stock market, or even other alternative asset classes, art is a much more nuanced space for UHNWs to invest in — it is both extremely personal and almost entirely disconnected to the financial markets. But this can offer positives, because in volatile market conditions, such as those caused by the Covid-19 pandemic, art can be a safer asset class for investors to pour funds into. Furthermore, not only does art offer a secure investment choice, but a growing number of UHNWs are taking the opportunity to unlock liquidity by borrowing against their art (particularly in response to uncertainty as a result of the global pandemic).
According to Deloitte’s report — of which 30% of those surveyed are based in the U.S. — 69% of collectors said they would be interested in using their art collection, or parts of it, as collateral. While wealth managers and private bankers in Europe are often not focused on offering art-secured lending services (which typically entail collateralized lending with art as the underlying asset), U.S. private bankers see this market differently, with 80% of private bankers planning to focus on these services in 2020. This accounts for a large proportion of wealth managers that offer broader art-related services, such as estate planning (77%), client entertainment (77%), and art philanthropy (67%) with 72% of wealth managers and family offices offering some, or all, of these services.
However, while there is a high level of enthusiasm from U.S. private bankers to dive into the art-backed lending market, there are still high barriers of entry. Concerns over an unregulated art market, lack of market data, a perception of illiquidity and uncertainty around how to measure and assess risk often dissuade wealth professionals from providing these services.
The United States is leagues ahead of Europe in terms of its regulatory framework, having implemented the Uniform Commercial Code (UCC) seventy years ago. This legislation governs the buying and selling of art, and from this data a public database has emerged that keeps track of art owners who have leveraged works of art. This has the added benefit of allowing U.S. borrowers to keep their art in their homes when they borrow against it, something that U.K.-based borrowers are unable to do. As the UCC has made it easier for borrowers to secure loans, the United States dominates the art-secured lending market, with 90% of the market located in the U.S.
Across the pond, wealth managers’ hesitation may stem from the lack of regulation in the U.K. and European art markets. This thin regulatory framework has in turn given rise to money laundering fears, with Deloitte noting that 76% of wealth managers perceive money laundering is a key concern across the art market. While Europe is moving in the right direction with the recent AML Directive 5 requiring those involved in an art transaction to carry out KYC and due diligence checks before completing a transaction, there needs to be further steps taken to put regulation in place and increase transparency.
However, efforts to pass a law similar to the AML Directive 5 in the U.S. have stalled in the Senate. An effort back in 2018 to pass the Illicit Art and Antiquities Trafficking Prevention Act stagnated on the House floor last year, never making it to an initial vote. The most recent effort in 2019, the Counter Act, has passed within the House, but is yet to pass in the Senate. Passing an anti-money laundering law will increase regulation, which creates greater transparency in the art market as more data becomes publicly available. In turn, more data can only be a good thing for the art market, as price transparency not only provides price results and valuations for buyers and sellers, but it serves to change the perception that art is an illiquid asset and can lead to heightened confidence in art-backed lending services.
Further to this, 71% of private bankers said that the difficulties associated with measuring and assessing risk was the key challenge to providing art-secured lending services. Wealth managers and family offices need to be able to measure and evaluate the risk of artwork their clients might be looking to buy or borrow against. Assessing the risk of artwork can be especially tricky when wealth managers must keep in mind valuation, authenticity, condition, ownership and market dynamics.
With presently issued art-secured loans accounting for only 2% of the $1.742 trillion UHNW art and collectables global private wealth today, wealth managers and private bankers need to close this gap between demand and the services they can provide in order to take advantage of the market. Even though the U.S. has 90% of the art-backed lending market, there are still a number of changes that need to be made to increase confidence. By replicating the conditions of the financial markets through greater regulation and transparency, increased data to navigate liquidity, and tools to measure the risk of borrowing against a piece of art, private wealth borrows can spark their own renaissance, just like Ghiberti did, through art-backed lending.
Harco van den Oever is CEO and founder of Overstone.
