Three weeks ago, Picasso’s “Les Femmes d’Alger” sold for $179.4 million, the highest price paid for any single piece of art, at any auction, ever.
Of course, the vast majority of art investors will never see their art investments fetch anything near that sort of price. However, art can be a great investment if it is purchased in a smart way. Returns vary, but according to the AMR Art 100 Index, art prices have increased at a compound annual growth rate of 8% over the past 25 years. However, most new collectors do not realize there are ways to invest in the art market, and below are some alternative ways to start investing. Remember to always consult with your financial advisor before committing your funds to any new investment.
Art funds – Art funds have been around for a century, but they have become a popular form of investment in recent years. They work like private investment funds: investors, usually working with an adviser, put in money, and a professional team acquires investment-grade art. Some art funds try to get works placed in museums to improve their provenance and enhance their value. They then try to sell them for a profit, generally in 5 to 8 years. There is a low barrier to entry, since minimum investments are often less than a single piece of art, and investors do not have to worry about the issues that accompany owning fine art, like insurance and upkeep.
Private investment partnerships – Private investment partnerships are groups that pool their money to buy investment-grade art with the help of an adviser. They are smaller and more informal than art funds. Unlike in an art fund, investors have much more of a direct say in what the group buys. These funds are private, so unless you know the right people, you may not necessarily be able to join one.
Leverage your existing collection to buy more art – Most people do not realize that just like a house, an art collection can be used as collateral for a loan. A variety of institutions, from major banks to boutique firms, will make these loans. Some boutiques will even do non-recourse loans, using just the asset as collateral. Just like any type of loan, there is some risk involved. And interest rates can be high—10% is a standard rate, although they can be as low as 4% at a private bank and up to 20% at some boutique firms.
Make irrevocable bids at auctions – In the case of an irrevocable bid, the auction house finds a bidder willing to pay a certain amount for the work, usually below the low estimate. If no one bids higher, the bidder buys the work (and pays the buyer’s premium). If someone does bid higher, the person who made the irrevocable bid gets a cut. Unlike a third-party guarantee, the “irrevocable bidder” can bid on the piece at auction, and the process is open to everyone. It is a way to save some money, and even if you do not win the art, you will get a small amount of compensation.
Consider buying works from developing market sectors – A lot of people are concentrating on China, Brazil, Russia, the Middle East and India. Investors are acquiring art from those parts of the world because they expect demand to increase substantially. As with investing in emerging artists, the payoff can be huge, however, there is always the possibility that a particular market will fizzle. Develop a good relationship with an adviser who can point you in the right direction.