Third Party Guarantees

After the Contemporary art sales week, and the Phillips sale in particular, auction guarantees are again in the news.Auction houses continue to use them as a means of luring reluctant sellers with quality works.

The Economist recently published a good article on guarantees and reports that much is still not known, or at least the transactions and guarantees are not as transparent as many buyers and auction watchers would like to see.

The Economist reports:

The first guarantee funded by a third party is believed to date back to November 1999, when Sotheby’s found a backer to pledge $40m for Pablo Picasso’s “Seated Woman in a Garden”, which had been consigned by Eleanore Saidenberg, Picasso’s long-time American dealer, and her husband, Daniel. From 2000 onward, both houses have been working with outside financiers—often cash-rich dealers such as Bill Acquavella, Bob Mnuchin, David Nahmad and Adam Lindemann, who know a lot about the distinct markets of individual artists. There are also an estimated 30-40 collectors who provide guarantees, such as Si Newhouse of Conde Nast magazines, Steve Cohen, founder of SAC Capital, Pierre Chen, owner of the high-tech Taiwanese Yageo Corporation, and the Qatari royal family.

Very little is publicly known about how these agreements are constructed. In September 2008 Sotheby’s began publishing small symbols in their auction catalogues, which distinguished between the lots guaranteed by Sotheby’s itself and those backed by third parties. Christie’s followed suit a month later. Yet the identity of the guarantors and the level of their commitment remain confidential.

One controversy revolves around the way third-party guarantors earn “financing fees” at the two main houses. At Christie’s guarantors earn a fee whether they end up buying the work or not; at Sotheby’s the fee is only paid if the guarantor does not in the end acquire the artwork. The stakes are high and can earn a guarantor several million dollars on a single lot. The differences between the way Sotheby’s and Christie’s structure their financing deals are significant, and can affect the way guarantors approach doing business with each auction house

Click HERE to read the complete Economist article on third party guarantees.