*This use case is a scenario from our partner GenTwo
Art has been one of the steadiest, most profitable alternative investment asset classes over the past few decades. It has also been decorrelated from traditional assets. Accessing good opportunities can however be challenging for investors outside the art world. For asset managers wanting to offer art investments to their clients, securitization offers an excellent solution.
In recent years, there's been a growing interest among investors in fine art, and in particular contemporary art.
This is understandable. Historical returns have been high and generally steady, with the overall art market returning over 7% annually and contemporary art over 14% over the past 25 years. Art is also generally not correlated with traditional financial investments like stocks or bonds, making it an excellent tool for portfolio diversification.
Unlike other alternative assets, art also has a cultural and personal dimension. Owners can take satisfaction in supporting the arts generally and can also derive personal pleasure and satisfaction from enjoying and learning about their pieces and the artists. Through ownership, investors can also become part of the larger arts community.
Considering this demand, many asset managers are looking to offer art investments to their clients, either as an extension of their core offering, or to react to specific client inquiries.
Unfortunately, while appealing as an asset class, there are many hurdles to successful art investing.
The biggest one is the generally high cost of quality pieces. Works by established contemporary artists with strong track records (and hence high potential resale value) are generally priced in the millions. This puts them out of reach of many asset management clients.
Individual artworks are also not liquid. It can be difficult for owners to find a buyer with the interest and means to purchase at the exact time they want to sell.
The art market is also notoriously opaque. It is hard for outsiders to judge the true value of an artist or a particular work of art, not to mention its potential for appreciation. Access to good opportunities can also be difficult for outsiders without the necessary connections. It also takes specialist expertise to be able to ascertain the provenance of a piece, and to tell forgeries from legitimate works. Expensive works of art also need to be properly stored and cared for, and protected against theft.
The good news is that these hurdles can all be easily surmounted via securitization.
In securitization, a work of art (or more typically a portfolio of works) is purchased by an issuer who then issues an actively managed certificate (AMC) with the portfolio as the underlying asset. The issuer can then sell shares to clients.
Securitizing an art portfolio in this way can make a lot of sense for an asset manager looking to provide art opportunities to clients.
Depending on how it is set up, the AMC will be fully bankable, with an ISIN number, making it easy for clients to purchase and/or sell. This can help mitigate the liquidity risks of individual art purchases.
By pooling assets, the issuer can gain access to the higher-end of the art market where there are interesting opportunities, and so get around the high cost barrier that make art investing often prohibitively expensive for individual buyers.
With a sufficient asset pool, issuers will also be in a position to either hire or partner with external art experts to help with assessing the options, getting access to good opportunities as well as handling the art (storing it, displaying it, insuring it, etc). Many of our clients do just this.
This access, liquidity, and bankability are clear advantages for end clients. So too is the fact that an AMC, which is typically issued by a special purpose vehicle set up for the sole purpose of securitizing a specific portfolio, is secured by the art works in the portfolio. That means there is no issuer risk.
Art AMCs can also be advantageous to the asset managers that issue them. It allows them for instance to expand their product offering, meeting client needs and potentially winning new clients. An AMC-based approach also allows asset managers to set and adjust their art investment strategy as they see fit, and to set their own fees and conditions.
