Alternatives to Art as An Alternative Investment
I wrote the essay below for the China Art Wealth White Paper which was published last summer in Mandarin translation only. As will be obvious, it was written prior to the explosion of NFT speculation, but its tenets still hold I think. The art world is in dire need of capitalization, and opportunities abound if you know where to look and you’ve got a bit of imagination.
The conventional wisdom that fine art can serve as an “alternative investment” only became conventional quite recently. Deloitte published its first “Art and Finance Report” in 2011, which covered the years immediately following the global financial crisis, when (expensive) art remained (apparently) a relatively stable asset against the backdrop of cratering financial stocks and real estate markets. In a matter of months after September 2008, when Lehman Brothers filed for bankruptcy, research papers began to emerge that confirmed, or at least appeared to confirm, that fine art could serve as a hedge when other investments were heading south. As early as March of that year, for example, Raya Mamarbachi, Marc Day, and Giampiero Favato of Henley Management College in the UK, published “Art as an Alternative Investment Asset,” which reconfirmed one of the founding myths of how art can serve as an investment, which is that it isn’t correlated with equities markets and so makes for a nice diversifier in one’s broader investment portfolio.
The non- or low-correlation to equities argument had its genesis in a different financial crisis. After the US stock market cratered on “Black Monday” in October of 1987, analysts began to take note that prices for other “hard” assets didn’t take the same hit. In fact, between 1987 and 1991, many once long-standing sales records for auctioned works of art, Impressionist paintings in particular, made headlines. Van Gogh’s Irisis (1889), which sold for $53.9 million in 1987, and the artist’s Portrait of Dr. Gachet (1890), which sold for $82.5 million three years later ($161 million in today’s dollars) are only two of the most well known examples.
The problem with this story hinges of course on the question of which equities. Buyers and sellers (and where they are) matter to markets, not just prices, and between 1986 and 1991, Japanese equities and asset markets, particularly real estate, were running hot. But when the Japanese government intervened and popped the real-estate bubble, equities markets followed, and the flows of cash that had been propping up the headline-grabbing sales of paintings at auction, and thus all of the other exuberant purchases downstream, quickly dried up. By the end of 1992 the art market globally resembled nothing more than a post-gold-rush ghost town.
The 2008 financial crisis was a different story of course. And while the art market in 2009 felt pretty dreary, most of the wealthy who had been collecting art over the previous decade didn’t feel immediately strapped for cash. And if they did, there was no need to liquidate publicly at auction. Prices for art remained “stable” as long as no one was seen, or actually needed, to sell. By 2011, more savvy analysts, such as Yale Professor of Finance William N. Goetzmann (along with Luc Renneboog and Christophe Spaenjers) had firmly demonstrated that fine art prices and equities (as well as incomes!) were very well correlated indeed.1 If art is an investment, it certainly isn’t an alternative one in the sense that portfolio theory would understand it.
The other problem with the conventional wisdom on art’s capacities as an alternative investment has less to do with how it came to be (wrongly) conventional and more to do with art itself – that is, fine art doesn’t generate revenue. Thus its value is tied only to how much the next person wants it, not to what it can produce or do. Sure works of art have aesthetic value and other sorts of satisfactions, other sorts of utility. But that utility is very rarely put to work in the creation of other utilities, which can translate into revenue streams. (I say “very rarely” because recently the advent of commercial fine art leasing programs have begun to show some promise, on which more below.)
The greatest collector of all time put this nicely in a different context. Art is one of a class of “assets” that,
will never produce anything, but that are purchased in the buyer's hope that someone else will pay more for them in the future…This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce but rather by the belief that others will desire it even more avidly in the future.
Who was that collector? Warren Buffett, who famously doesn’t collect art, just dollars. Over the long term, a bet on the next person’s desire is never a good bet; bets on the next person’s needs, on solutions to the next person’s problems and challenges, on opportunities that increase one’s own purchasing power – those are good bets, and that is where one should look for alternatives to art as an investment.
This does not mean giving up on art. It means switching one’s focus to the challenges, and thus the opportunities, that are facing the arts in general. Do not mistake this as a plea for charity. It is a call for investment, and for investors – be they collectors, connoisseurs, speculators, or mere enthusiasts – to benefit from returns on those investments. What follows are a just a few possibilities that will expand the fields of art production, consumption, and infrastructure in the future, if, that is, they find the right alternative investors:
Gallery equity partnerships. The one thing that plagues most contemporary art galleries from the middle-tier down is a lack of capital or access to it. The consignment model followed by most commercial galleries that deal in contemporary art has artists financing gallery operations with their own inventory. On the face of it this arrangement aligns the interests of the parties involved, but in practice it disadvantages the artists who shoulder most of the risk.2 Greater capitalization would allow galleries to actually invest in their artists by buying inventory and then selling dear when the time comes, either in the near term as an artist’s work achieves market traction, or in the long term, as institutional recognition adds value to an artist’s reputation. Think of it as “every gallery an art fund,” but funds that take an active (activist?) hand in managing their investments and producing new value.3
Transaction facilitation. One of the things that plagues the international art market is a lack of liquidity compounded by transaction (invoice) aging. Quite often, the larger the transaction, the slower it is to clear. Historically fine art auctions have provided the most expedient clearing mechanism in the industry, but auction transactions only account for, on some estimates, 40% of the global trade in art and collectibles.
Recently, however, some new ventures have popped up to tackle this problem. The Australia-based ArtMoney, for example, provides collectors the opportunity to divide their purchases into 10 payments, with interest on the financing of the upfront purchase paid by the gallery. Galleries are paid quickly, collectors pay over time, and both parties can manage their cash flow. Because it’s designed like a credit instrument, purchase prices are capped (to mitigate risk), but in principle there is nothing holding ventures like these back from providing the clearing mechanism that the art (and collectibles) market truly needs. Escrow and invoice factoring models are equally compelling opportunities in this space. And there will be knock-on effects: whoever captures a large enough share of this market will have proprietary information on non-auction transactions, something notoriously difficult to come by and thus highly valuable in its own right.
Art Leasing. The biggest collector of art in Canada is the Canadian government. It’s one of the ways that the arts are supported directly via public funds. And in turn, the government makes that collection available to businesses and agencies – for rent. Which is why one shouldn’t be shocked to encounter “Art Rental & Sales” signage at major museums such as the Vancouver Art Gallery. Similar signage at U.S. or E.U. museums would immediately be taken as works of institutional critique -- and pique -- by some enterprising artist. But this also points to the slow uptake of what should be a common business activity globally.
The challenges to art leasing are more cultural than operational. Collectors want to own their work, not lease it. Loans are risky, and insurance is expensive. And the quality of the work on offer has often been subpar and considered “merely” decorative, the kinds of stuff that adorns down-market corporate lobbies and corridors.
More recently, though, Creative Art Partners, based in Los Angeles, has managed to overcome these challenges. By drawing on a vast collection of established and emerging contemporary artists, many recently out of MFA programs and discovered via Instagram and other social media platforms, C.A.P. provides its clients – such as high-end real estate firms and other boutique but high-style corporate entities (such as the talent agency ICM Partners), but increasingly individuals too – with “real” art as well as the logistics and handling services to move, curate and hang it. Given the increasing numbers of people and firms that don’t want to carry these assets on a balance sheet but yet need visual art to set the culture and tone of their businesses or personal brands, the art leasing business is poised for growth in the decade to come.
Skills Platforms. To complete our graduate program in Art Business at CGU’s Center for Business and Management of the Arts, students, in teams, must propose and plan for a new arts-related venture. Over the past two years some of the most promising of these plans have centered on skills platforms for connecting people who need specialized work and the trades that can provide it. This ranges from temp workers, who are essential to the increasingly events-driven art world calendar – such as multilingual sales associates as well as check-in staff and general fixers at art fairs – to experienced art handlers, who can assist with packing, hanging, and moving works for a range of both private and institutional clients.
We are all familiar with these platforms in other sectors. In the U.S., DoorDash does food deliveries, Instacart does grocery shopping, and TaskRabbit will get you someone to put your Ikea furniture together or do other odd jobs around the house. At scale, these gig-economy jobs are designed for the low-skilled and opportunistic part-timer, but in the next five years I predict we will see much more differentiation, with new platforms catering to specific sectors and specific kinds of work. The challenge will be building a big-enough network of customers and providers, but the arts sector is a prime market for just this kind of two-sided gig-based enterprise. As the ranks of collectors and museums grow, there will be increasing demand for well-trained and well-vetted art handlers, shippers, appraisers, and temp workers who understand the context and the material they are working with. An app that aggregates this skilled labor in any given region and connects it with the broadest pool of clients and allows labor to set and compete on rates and services will create immense value for both sides of the transaction.
The real payoff will come when these platforms enter into the technical training space, providing credentials when particularly difficult-to-achieve skillsets are learned and practiced (for example, custom crating for paintings with delicate surfaces or finishes that need to ship internationally). Right now these services are dominated by the big art logistics companies, but we have to remember that the companies don’t have the skills, the workers do, and they are only learned if someone new joins the company and works with someone more knowledgeable. This apprenticeship model, essentially “know-how” capture, keeps others from entering the same business. A skills platform has the potential to aggregate that knowledge base and then democratize it, to turn it into its own kind of technical and trade “school,” and to create a host of new well-above-minimum-wage employment opportunities for artists and others who make their living in the sector.
These are just a few areas of opportunity and alternatives to the conventional wisdom on investing in “art.” Too often just the vernacular of “investment” drives funders to think only of the financial sector. That is certainly one area where we have seen substantial growth in new enterprises offering to “unlock” the value of art for the high-net-worth collector. In 2011, the opening pages of Deloitte’s First Art & Finance report were dominated by advertisements for fine art insurance; in 2019, the majority of the opening ad space was bought by firms, many of them new, offering art financing. Insurance is still present, but it has been retooled with high-minded tech such as blockchain-backed provenance registries. Like the word “internet” in the late 1990s, “blockchain” (along with “AI” and “machine learning”) empties investors pockets faster than Softbank, with similar results.
But the CEOs of the art finance and art tech companies were never that interested in art, just in the people who buy it and the other assets (the other business) that might come with them. Collectors shouldn’t invest in art, they should collect it. If you want to invest, consider the alternatives.
Goetzmann, Renneboog, and Spaenjers, “Art and Money,” American Economic Review (2011), 101:3. Available at http://depot.som.yale.edu/icf/papers/fileuploads/2426/original/2011_ICF_WPS_Art_and_Money_-_Goetzmann.pdf
I have written about this more extensively in “The Art Gallery: A Cut-Throat Business,” ArtReview, 23 November, 2018. Available at https://artreview.com/ar-november-2018-jonathan-td-neil-venture-galleries/
Equity partnerships in galleries, or just straight forward equity stakes, are the real (and unmysterious) “fractional shares” that any smart collector should be pursuing. Fractional shares in works of art themselves, backed by blockchain technology or just good old-fashioned contracts, are merely low-capital intensive investments in unproductive assets – and don’t come with any of the benefits of art ownership to begin with!