Auction Houses Look Again to Guarantees

The NY Times is running an article on the upcoming Spring art sales in NY, happening this week and next, first with Imp/Mod followed by Contemporary sales.

The NY Times is reporting on the auction houses growing use of 3rd party guarantees, which is a bit different than the auction house giving the guarantee which caused a lot of problems a few years back.

Typically, in the case of a 3rd party guarantor, if the hammer price is higher than the guarantee, the guarantor can be paid around 20% of the difference.  For example, lets say there is a $20 million guarantee on a painting and it hammers at $25 million.  The guarantor will make 20% of the difference from the hammer price of $25 million and the guaranteed price of $20 million, or $1 million.  If bidding is below the guarantee price the guarantor then owns the painting at the guarantee price.

As a public company Sotheby's must disclose its guarantee activity, but as a private auction house Christie's does not. The article notes Sotheby's has nearly $280 million in guarantees for the upcoming sales, but has not yet revealed how much is house money and how much is from 3rd parties.  Christie's is said to have nearly $400 million in guarantees for the sales with 3/4 of that from 3rd parties.

Regarding growth in the art marketplace at the top end, the article reports that Christie's claims to have 141 clients who have the ability to purchase a singular work of art for over $50 million, and that since 2008 the number who can purchase a singular work over $25 million has doubled.

The NY Times article has some interesting insight and statistics, well worth reading in full, just follow the source link below the block quote.

The NY Times reports

Guarantees to sellers have long been part of the auction business, traditionally made by the houses themselves to secure trophy artworks. Now, betting on rising prices, more outside backers are joining in.

At auction time, if the final hammer price is higher than the one promised by the guarantor, that person makes money — generally around 20 percent of the difference, which can translate into millions of dollars in profits. If the guarantor’s offer is higher, he or she goes home with the art.

“It’s a win-win situation,” said Abdallah Chatila, a Lebanese-born contemporary art collector who lives in Switzerland and who has guaranteed two artworks at Christie’s May sales. “I really want both works, and if they sell for more than the guarantee it can also be very lucrative.”

This spring, although most sellers are not revealed in catalogs, dealers familiar with their collections say David Ganek, the former hedge fund manager, is believed to be parting with a Twombly and a Warhol; Peter M. Brant, the newsprint magnate, is selling canvases by Basquiat and Haring; Steve Wynn, the casino magnate, a de Kooning; and Ronald O. Perelman, the New York investor, a Rothko. Most of those artworks have guarantees. (A guarantee is noted in catalogs, generally with a small symbol next to the work’s lot number.)

Sotheby’s reported nearly $280 million in guarantees as of April 15, more than four and a half times the $60.2 million figure for the first quarter of 2013; the proportion coming from outside parties is still in flux. As a publicly traded company, Sotheby’s is required to report guarantees. Christie’s, which is privately owned, is not, but officials there confirmed it has about $400 million in guarantees to sellers this season, of which some $300 million is given by outside parties.

Some critics say that the frenzy to lock up choice artworks in advance is making auctions a prearranged system in which much of the magic has disappeared. “When I started 25 years ago, collecting was romantic, but it’s not anymore,” said Philippe Ségalot, a former Christie’s expert who is now a private dealer. “Today it’s become business and guarantees are just part of the equation.”

Brett Gorvy, worldwide chairman of postwar and contemporary art at Christie’s, says it reflects the new attitude of many collectors, who no longer talk about an emotional response to art but increasingly ask him to chart its “trajectory,” to predict how their holdings will appreciate over time.

“The mind-set and perspective of these people have changed,” Mr. Gorvy observed. “It used to be that collectors rarely plotted the value of their art the same way they do their homes or stock portfolios, but more and more people are looking at their collections in the same terms as their other assets. “

He added, “Art has become an international commodity because the values are so high, and so are the returns.”

Global sales of art and antiques rose 8 percent last year to $65.9 billion, the highest level since 2007, according to the annual report for the European Fine Art Foundation. Growth was buoyed by an 11 percent spike in sales for postwar and contemporary art in 2013.

Expectations were fueled last fall when Elaine Wynn, a co-founder of the casino empire, paid $142.4 million for a Francis Bacon triptych that Christie’s had estimated at around $85 million. Mr. Gorvy said 10 people had been willing to spend up to $80 million. “Of those, four were new to the field,” he said. “And two had never bid at auction before.”

Christie’s estimates that it has 141 clients now willing and able to spend more than $50 million for just one work of art, Mr. Gorvy said. Officials at Sotheby’s say the number of buyers for art worth over $25 million has more than doubled since the market peaked in 2008.

Guarantees are still short of the high point in 2007, back when the lion’s share were furnished by the auction houses. The landscape changed in 2008, when the financial markets and the art market crashed and Sotheby’s and Christie’s ended up losing a lot of money — and owning art they didn’t want when works they had guaranteed failed to sell.

Given today’s frothy market, “the demand to do third-party guarantees is at an all-time high,” Mr. Gorvy of Christie’s said.

Several weeks ago Alexander Rotter, a co-head of Sotheby’s contemporary art department worldwide, started getting phone calls from clients wanting to act as guarantors.

But guarantees can be “a dangerous game,” warned Mr. Brant, a major collector. “I would never guarantee something I didn’t want to own.”

For the seller, a guarantee reduces the financial liability of going to auction. Mr. Chatila in Switzerland has been on that side of the deal, too.

“You never want to risk something going unsold, because then it’s burned for four or five years at least,” he said, explaining why he prefers to have his art guaranteed. However, he admitted, a seller might then have to share some of the profit with the guarantor.

On Saturday, among those spotted perusing the sales — which include two Monets, multiple Picassos, Jeff Koons’s six-foot sculpture of Popeye and his stainless steel train filled with bourbon, each estimated at more than $25 million — were the hedge-fund billionaire Steven A. Cohen, the comedian Steve Martin, the cosmetics heir Ronald S. Lauder and his wife, Jo Carole, and the financier Donald B. Marron.

For the first time, hoping to attract a younger generation of collectors, Christie’s is holding a second evening auction of contemporary art, organized by a 33-year-old expert, Loic Gouzer. The works are mostly dark in subject matter. That sale and one at Phillips, the smaller auction house, include some of today’s trendiest artists, like Joe Bradley, Oscar Murillo and Lucien Smith whose prices have been rising — some say too quickly — as speculators try to flip them for a fast profit. Betting on who will be future stars, some investment specialists say, can be a gamble as tastes change.

Source: The NY Times