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Skates seminar 2 michael plummer



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  • Update art fund graphs and returns
  • Returns on Assets Sold is not reflective of actual final returns


  • 1. ART AS AN INVESTMENT: THE FUNDAMENTALS – 15 MAY 2012 © Artvest Partners LLC 2012
  • 3. © Artvest Partners LLC 2012 WHAT IS THE VALUE OF GLOBAL ASSETS UNDER MANAGEMENT IN ART FUNDS? A. US $550 Million B. US $1.00 Billion C. US $2.25 Billion D. US $3.50 Billion
  • 4. © Artvest Partners LLC 2012 WHAT IS AN ART FUND? ART FUND Structured investment vehicle Offering documents Third party investors PRIVATE INVESTMENT PARTNERSHIP (PIP) Group of individuals who pool resources Closed to outside investors
  • 5. © Artvest Partners LLC 2012 WHY INVEST IN AN ART FUND? PROS Allows for overall portfolio diversification with a relatively small individual capital commitment Does not require investor to have art collecting expertise Mitigate cost of security, transactions, insurance, storage, research, t ax, etc. CONS Lack of transparency & track record Undisclosed conflicts Currently, limited art fund options
  • 6. UNIQUE ESTATE PLANNING BENEFITS AS PART OF INVESTMENT STRATEGY STANDARD CASE DEFERRAL / AVOIDANCE OF TAXES Collector Collector Art Sale Shares in Fund Fund Capital Gains Deferred until Earlier of Fund Selling Art or Cash Paid to Collector Death (If before Capital Gains Tax Due) No Capital Gains Incurred Sale of Art 66% Net Proceeds above Cost Basis 34% Capital Gains Tax* Death 55% to Heirs 45% Tax of Value of Estate at Time of Death *Combined Federal &- New York State Capital Gains Tax Rate 55% to Hiers 45% Tax of Value of Estate at Time of Death For significant collectors based in the US, section 721 of the US tax code allows for a collector to invest a work of art, rather than cash, in a fund for shares deferring the 28% - 34% capital gains tax and thereby earn returns on that deferment until there is a qualifying “liquidity event” In certain circumstances, there is an opportunity to mitigate all capital gains tax – if the collector dies before the capital gains tax is due © Artvest Partners LLC 2012
  • 7. © Artvest Partners LLC 2012 EARLY ART FUNDS PEAU DE L’OURS Founded in Paris in 1904 Acquired 100+ works before liquidating in 1914 Net of fees, annual IRR was 14.6% 1970s Several art investment ventures were launched By 1985, ventures aside from the British Rail Pension Trust had all collapsed BRITISH RAIL PENSION TRUST Between 1974 and 1980, invested £40 M in 2,400 artworks and collectibles The fund liquidated these assets between 1987 and 2000 Net of fees, annual IRR was 11.3%
  • 8. © Artvest Partners LLC 2012 SAMPLE ART FUND FUND STRUCTURE Management Fees: 2% Hurdle: 5% net Carry: 20% Duration: 5 years Cash returns: From end of year 3 onwards SALES Between years 2 and 5 To private collectors At auction To dealers OPPORTUNISTIC APPROACH Funds are typically opportunistic with sales prior to year 3 as part of their active asset management strategy RETURNS Re-invested to the end of year 3 Distributed to investors after year 3
  • 9. ART INVESTMENT CYCLE Supplementary Harvesting Period Harvesting Period Potential Profit Growth (%) Value Creation Ramp-up Time Initial Distribution Phase (target date) 0 © Artvest Partners LLC 2012 1 2 3 End Distribution Phase (target date) 4 5 6…8YR End (eventual liquidation)
  • 10. © Artvest Partners LLC 2012 OPPORTUNISTIC GAINS IN A DOWN MARKET PIERRE MATISSE GALLERY: OVERVIEW Sotheby’s partnered with Acquavella Galleries, Inc. to form Acquavella Contemporary Art, Inc Sotheby’s put forward the entire $153.1 million in May 1990 to acquire all the common stock of the Pierre Matisse Gallery Gallery assets comprised 3,500 works of fine art of the 20th century (Matisse, Picasso, etc.) The purpose of the partnership was to liquidate the inventory with each partner having an equal ownership stake
  • 11. © Artvest Partners LLC 2012 OPPORTUNISTIC GAINS IN A DOWN MARKET PIERRE MATISSE GALLERY: RESULTS By December 31, 1993, $278.5 million had been distributed to Sotheby’s in accordance with the partnership agreement Additionally, at the end of 1993, $45.7 million of inventory remained, the proceeds of which would fall to the bottom line The compound annual growth rate for the investment over the period May 1990 to the end of 1993 was ≈ 25% From 1993 to 2006, an average of $2 million of the remaining inventory was sold annually At the end of 2006, $20.3 million of inventory remained to be sold
  • 12. © Artvest Partners LLC 2012 ART FUND DUE DILIGIENCE Asset Allocation Liquidation Strategy Fund Structure & Governance Transparency Investment Strategy Risk Controls Valuation & Reporting Methodology Manager & Advisor Compensation Potential Conflicts of Interest Market Access & Expertise Track Record
  • 13. © Artvest Partners LLC 2012 ART FUND STRUCTURING – KEY ISSUES Governance & Conflicts Areas / Sectors of Focus Acquisition Strategy Holding Period & Exit Strategy Risk Mitigation Value Enhancement & Revenue Generation Use of Other Investments (i.e. Fixed Income, Leverage, etc.) Innovative Opportunities (3rd Party Guarantees, Funding Artists, Lending)
  • 14. © Artvest Partners LLC 2012 ART FUND STRUCTURING – KEY ISSUES (CONTINUED) Operations, Administration & Logistics Financial Expectations & Expense Forecasting Valuation & Reporting Staffing, Advisors & Resources
  • 15. © Artvest Partners LLC 2012 POPULAR ART INVESTMENT STRATEGIES Buy & Hold Global Arbitrage Distressed Acquisitions Collection Buyouts Sector Specialization Promotion/Showcasing/Scholarship Leverage Acquisitions Leasing Financing & 3rd Party Guarantees Deal Participation
  • 16. THE ART FUND LANDSCAPE Funds Announced vs. Funds Active * 2 6 Private Investment Partnership * * Active Art Fund 6 31 31 * * Start-Up Phase * Never Launched 1 Fraud Full Cycle *All funds between 2003 – 2012 ** Only Private Investment Partnerships that have received press coverage were included *** Multiple Funds run by the same manager are counted as a single fund Data: Artvest Partners © Artvest Partners LLC 2012
  • 17. HONG KONG HAS BECOME INCREASINGLY IMPORTANT TO WESTERN AUCTION HOUSES Status of Active Art Funds 1 7 9 Start-Up Phase Acquisition Phase Asset Management Phase 15 Liquidation Phase Data: Artvest Partners © Artvest Partners LLC 2012
  • 18. GOOD PRACTICE & RISKS RISK  Loss of capital MITIGATION / RESPONSE  Art rarely goes to zero value  Too much value concentrated in a single object or category  Implement concentration limits  High auction house fee structures will reduce investment returns  Fund should negotiate preferential fee structure with auction houses  Dealers will try to saddle the Funds with lesser quality product  Strict investment guidelines and rules of engagement;  Fund will not be able to liquidate all of its investments during life of the Fund  Active Fund management; buying at right stages in art business cycle  Opportunity costs should returns be less than projected  Term of Funds should allow for extensions  Funds will invest or have to sell at wrong moment in art value cycle  Importance of combining market expertise and term extensions  Small group of market insiders can distort activity and results, and enrich themselves at the expense of less knowledgeable investors  Clear rules and investment practices, staying clear of known artificial markets © Artvest Partners LLC 2012
  • 19. HONG KONG HAS BECOME INCREASINGLY IMPORTANT TO WESTERN AUCTION HOUSES Art Fund Companies by Country by Year 45 40 Other 35 UK 30 Asia 25 Europe 20 North America 15 10 5 0 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 Data: Artvest Partners © Artvest Partners LLC 2012
  • 20. REPORTED ART FUND RETURNS Fund Name Fund’s Estimated Annualized Returns Annualized Returns on Assets Sold ≈ 39% Aicon Art Fund I Artemundi Global Fund 24.33% Art Photography Fund 7.98% British Rail Pension Fund 19.86% 11.30% Castlestone 3.85% China Fine Art Partners ≈ 26.00% Dionysos Art Fund 12.41% PFF Fine Art Invest Fund 5.60% Sharpe Art Fund 10.26% Terry Art Funds ≈ 20.00% The Collector’s Fund 28.50% © Artvest Partners LLC 2012 The Fine Art Fund I: 25.40% II: 26.70%
  • 21. © Artvest Partners LLC 2012 KNOWN FUND FAILURES Marble Art Investment (UK – Fraud) Ronald Coles Investment Gallery (Australia – Fraud) Osian Art Fund (India – Losses) Cannonball Art Fund (Singapore – Losses) Art Trading Fund (UK – Losses) Fernwood (US – Fraud) Meridian Art Partners (US – Never Launched) Societe Generale Asset Management (France – Never Launched) The Savigny Art Fund (US – Never Launched) Emotional Asset Management (UK – Never Launched) ABN AMRO (UK – An Illusion)
  • 22. © Artvest Partners LLC 2012 THE FUTURE OF ART FUNDS Despite some notable setbacks, interest continues to grow in art funds: Several funds in the US and UK have raised 2nd and 3rd generation funds Continued global uncertainty and low returns on other investments will drive interest More funds will mean more investment options As existing players build track records, institutional investors will begin to participate more actively
  • 24. The Art Market is Highly Illiquid During market pullbacks, already limited liquidity becomes even more scarce In difficult economic times, the lack of liquidity becomes one of the most daunting issues facing an owner wishing to sell Percentage of Art Unsold Impressionist & Modern New York Evening Sales 45% 41% 40% 35% 29% 30% 25% 22% 23% 21% 20% 15% 14% 13% 22% 19% 22% 18% 17% 14% 11% 12% Nov '06 May '07 10% 5% 0% May '05 Nov '05 © Artvest Partners LLC 2012 © Artvest Partners LLC 2012 May '06 Nov '07 May '08 Nov '08 May '09 Nov '09 May '10 Nov '10 May '11 Nov '11 May '12
  • 25. ART LIQUIDITY Artist Tier 1 © Artvest Partners LLC 2012 © Artvest Partners LLC 2012 Tier 3 First Rate Artwork Tier 2 High Moderate Low Second Rate Moderate Low Very Low Third Rate Low Very Low Illiquid
  • 26. 2011 – 2012 TYPICAL LENDING RATES Rates vary significantly based on the type of lender Auction House 0% © Artvest Partners LLC 2012 © Artvest Partners LLC 2012 2% Private Banks 4% 6% Asset-Based Lenders 8% 10% 12% 14% 16% 18% 20% 22% 24%
  • 27. BORROWING OPTIONS Private Bank Rates Conditions 300-400 bps above LIBOR Specialized Lender Auction House Advance 12% - 24% per year varies by client ranges from interest free to Prime + 3% full-recourse non-recourse borrower sometimes retains lender takes possession possession auction house takes possession Caveat banking relationship other assets limited to certain sectors title insurance works must be sold through the auction house LTV 50% 30% - 50% 30% - 50% Term 1+ year (renewable) 6 months to 1 year (renewable) 3 months to 1 year © Artvest Partners LLC 2012 © Artvest Partners LLC 2012
  • 28. © Artvest Partners LLC 2012 THINGS TO WATCH OUT FOR IN AN ART FINANCING CONTRACT Yield Terms Estimates Loan To Value (LTV) Collateral UCC Filings vs. Possession Access to collateral incl. default
  • 29. © Artvest Partners LLC 2012 WHEN TO GET ART-SECURED FINANCING When the art market is weak and estate tax is due To Avoid Capital Gains Tax When interest rates are low When returns from another investment opportunity are likely to outweigh the interest on the art loan
  • 30. © Artvest Partners LLC 2012 © Artvest Partners LLC 2012 Auction Advocacy Private Selling and Sourcing Art Investments Art Financing Market and Value Analysis Art Wealth Preservation: Tax & Estate WWW.ARTVEST.COM 30