Guarantees, Loans and Advance Arrangements for London Sales

The Financial Times has a short, but interesting post on an art investment firm which has obtained a $100 million credit line to advance immediate payment against auction house guarantees. So in addition to advances, sellers can also get immediate cash advances against the guarantee.

The Financial Times reports

As the London art market prepares for its auction season (beginning February 28), the spotlight is on the guarantees used to encourage wary sellers. To add to the suite of financial incentives, the art investment firm Willstone Capital has obtained a $100m credit line from the New York hedge fund Allegiance Investment Advisors, and two other investors, to include advancing immediate cash against an auction-house guarantee. Olyvia Kwok, a dealer and the founder of Willstone Capital, says that this overcomes an average two-month wait for funds after work sells. Her firm’s fees begin at 1 per cent a month, for a minimum of six months, and there is also potential to take a cut of any price achieved above the guarantee level.

Loan and advance arrangements can also be made through the auctioneers directly, as well as through other niche firms. These add to a growing trend for owners to shift their risk. This month, Sotheby’s revealed that it would be selling Klimt’s “Bauerngarten” (1907, estimated at about £35m) as the star lot of its high-stakes Impressionist & Modern art auction on March 1. Catalogue symbols show that this carries an irrevocable bid — a form of guarantee that means a third-party has promised to buy the work — and that Sotheby’s has an (unspecified) ownership interest in the work.

Guarantees are limited to a handful of blue-chip works and are not particularly liked by the market, not least because the exact structure, costs and beneficiaries are kept under wraps, plus they arguably distort true demand. But they are not surprisingly popular with sellers who are prepared to exchange some of their possible upside for the ability to secure cash from an illiquid asset. Whether or not works of fine art, rather resistant to rational investment strategies, can absorb such pass-the-parcel products remains to be seen.

Source: The Financial Times