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A rt collecting is now a part of the financial portfolio of wealthy collectors to a greater extent than ever before, and is now a more widespread cultural activity at various levels of society than at any other time in history.
“It’s fascinating to see how, over the last few decades, the globalization of the art markets, demographic shifts of the collector base and financial innovation have led to a deeper pursuit of passion assets,” says Ron Elimelekh, Chief Operating Officer & Chief Capital Officer at Sotheby’s Financial Services, which lends to collectors and businesses based on the value of their existing collection. “These rare objects have the potential to make people feel engaged and connected.”
The numbers tell a compelling story. According to a 2021 report from Deloitte, nearly $1.5 trillion (US) in the wealth of ultra-high net worth individuals is connected to art and collectibles; according to a 2022 Knight Frank Wealth Report (PDF), these wealthy collectors are directing more and more toward “investments of passion.”
These collectors are part of a tradition that goes back thousands of years, at least to when well-to-do Romans created the first proper art market by adorning their homes with Greek sculptures and other fine collectibles. Families like the Medicis of Florence assembled legendary art collections during the Renaissance, and state and royal figures like Cardinal Richelieu of France continued the tradition in the 17th century. Even then, art was seen as an investment: “Paintings are as valuable as gold bars,” the Marquis de Coulanges wrote in the 17th century.
When they donated those collections to public museums, growing numbers of people were inspired to follow suit, and wealthy Americans like J. P. Morgan traveled to Europe and joined the fray in the 19th century. The rise of the modern art dealer/gallery system has led to a more diverse and formalized art market, with art increasingly seen as an asset class: since the late 1960s, investment funds, pension funds and savvy individuals have treated art explicitly as an investment.
Today, according to a recent Sotheby’s report on the market for artworks valued at over $1 million, ever-younger collectors from all over the world compete for these trophies at auction. The art market even rebounded in 2022 to greater levels than before the pandemic, according to the new Art Market Report from Art Basel and UBS, with art sales reaching some $67.8 billion, growing 3 percent year-on-year.
Art collecting has become ever more financially sophisticated over the last 35 years, with the growth of resources such as art market indices, auction price databases, and market outlooks that allow collectors to buy based on market data combined with taste and intuition.
That most recent period of systematization and sophistication coincides with the founding of Sotheby’s Financial Services (SFS) in 1988, which offers financing from $1 million to as much as $200 million. Collectors with assets in nearly any category sold by Sotheby’s – ranging from sneakers to contemporary art, from watches to Old Master paintings – can borrow up to half the value of their assets, for any purpose, with an art equity loan. SFS also provides advances on property that is consigned for sale, as well as acquisition financing to reduce upfront, out-of-pocket costs associated with a private sale or auction purchase.
“The biggest collectors in the world … borrow at a comparatively low interest rate to invest in contemporary art and other asset classes with much higher compounded returns.”
Consider, says Sotheby’s Elimelekh, a client with a good – though not yet remarkable – collection who is eager to acquire a dream work of art coming to market for the first time in years. SFS empowers the client to leverage the substantial value of their existing portfolio to acquire the trophy asset – and attain the perhaps otherwise unattainable. He also explains that while SFS’s financing solutions “most often serve as a sword to fuel acquisitions, investments and supporting operating businesses,” they can also serve as a “shield” to allow a collector to use funds to satisfy a tax or similar obligations.
Elimelekh joined Sotheby’s in late 2021, after a decade of leadership in the financial-technology industry, bringing a wealth of experience scaling lending business and international expansion. Co-leading SFS is Scott Milleisen, Global Head of Lending. He joined Sotheby’s in November 2021, before which he was US Head of Lending Solutions at J.P. Morgan Private Bank for 24 years, where he was involved with lending billions of dollars against art assets.
Similar to how a mortgage allows a homeowner to live in a home they couldn’t purchase with cash, Milleisen explains, SFS can help art collectors use leverage to their own advantage – just as top art collectors have been doing for some time.
“If you think about the private-equity investors and hedge-fund managers who make up some of the biggest collectors in the world, they appreciate art and understand it as a store of value. But they also started thinking about these assets in a different way by using leverage. They’ve been borrowing at a comparatively low interest rate to invest in contemporary art and other asset classes with much higher compounded returns.”
SFS has distinct advantages over banks in terms of art lending, says Milleisen, because of the house’s specialized knowledge. “For the most part, banks will lend secured by fine art only if they’re happy with the underwriting of the individual borrower,” he says. “As interest rates go up and incomes flatline, the ratios start to look worse.”
“But as the art marketplace starts to look more like a financial market, understanding the underlying asset class is more important,” he continues. “Banks don’t have access to the data and the people who understand the market. Sotheby’s does.”
