According to the Financial Times, approximately 80% of the world’s art is in storage – just waiting to be securitised and to provide the art owners with a cash flow based on the valuation of the artworks without having to sell them.
It is important to emphasise that most art owners are not interested in selling their artwork - although the artwork has been bought with investment in mind, almost 90% of the buyers have a collecting purpose.
“Art-secured lending may be viewed as an effective way to enable art collectors to access the equity value in their artworks without having to sell them.”
- Deloitte, Art & Finance Report, 2017
Furthermore, with an expected 41% increase in UHNWI by 2025, the demand for passion investments will continue to rise, and the collateral will then most likely continue to increase in value.
OMNIA IS NOT AN ART FUND
At OMNIA, we have structured a platform where fine art owners receive an income stream based on the value of their assets, the bond market receives a safe bond secured against high value artworks of OMNIA Bonds II plc, and OMNIA receives funds for private equity investments through OMNIA Private Equity AG.
This means that OMNIA is not a traditional art fund, as we do not invest in art – we are a privately held private equity firm securitising fine art to underpin our bond offerings and fund our private equity investments, which secure the art owners and provide them with an income stream from the investments made.
Although art funds have struggled to gain a proper foothold among investors, few new art investment products are being developed to address many of the shortfalls associated with art investment fund, (…).
- Deloitte, Art & Finance Report, 2017
Traditional art funds have long existed, in different forms since the 1970s – but generally with limited success. Likely, because you have Wall Street type of business men trying to be art experts and turning a hedge fund into a sophisticated art fund.
There are of course some big art funds that generate a solid return for their investors, such as The Fine Art Fund Group, which has produced an average return of 9% before fees.
Instead of OMNIA trying to be art collectors and art investors, we believe that we should leave that to the actual art collectors who have made the right bets. Then, we can focus on generating cash flows and profits through our private equity investments by not having any leverage on our portfolio. In return, we offer the market the combination of the best collateral available and the highest cash flow investments.
A RECORD-BREAKING SALE
For more than 20 years, artworks have been sold at auction houses, such as Sotheby’s and Christie’s, within 15% of the valuation and skewed in an upward direction according to registered auction history. Thereby, fine art has proved to be a stable asset class, which makes securitisation of art better than securitisation of properties in many cases.
Recently, we saw a rather extreme but great example of this, when the art world was stunned, as Leonardo da Vinci’s portrait of Christ, “Salvator Mundi”, was sold for a record-smashing USD 450.3 million, which is more than double the old price for any work of art at an auction. It is worth noting that the auction house Christie’s’ pre-sale estimate was of about USD 100 million.
Actually, the painting was sold in 2005 for USD 10.000 before being authenticated and later, in 2013, first sold for USD 79 million and later same year for USD 127.5 million.
INCREASE VALUE WITH THE RIGHT VALIDATION PARTNER
Just as no one in the art world failed to notice this remarkable sale, we also paid extra attention at OMNIA, as it was our authentication partner, Analysis & Research (AA&R), which did the forensic work on the “Salvator Mundi”.
AA&R offers technical investigations of paintings through their fully equipped and state-of-the-art laboratory, and they have decades of combined experience working with paintings from the medieval to the mid-twentieth century, European Old Masters to the Russian Avant-Garde and American abstract art.
ART AS AN INVESTMENT
Art is becoming an important component of many high net worth individual investment portfolios, and according to Deloitte, 88% of wealth managers report that they intend to cover art in their portfolios.
“(…) art and collectible assets are worthwhile as a means to safeguard value.”
- Deloitte, Art & Finance Report, 2017
With low yields and limited investment options available, art and collectibles are one of the alternative assets that are increasingly considered a store of value – a motivation that remains significant among collectors and art professionals.
LOW RISK ART INVESTMENT
Generally, there is a high risk associated with being a traditional art investment fund where all bets are on a 20% value increase on a specific work of art or art collection.
At OMNIA, we do things differently. We do not place our bets on a yearly 20% increase in value on a certain piece of art over the next five years. We are in a position where we can handpick masterpieces, that are both liquid and stabile. We then use them as asset-backing for our low risk private equity investments, where we have chosen the art specifically for our bonds.
“Art lending allows art collectors and gallerists to realize liquidity without having to make unfavourable sales to satisfy short-term cash flow concerns”.
- Deloitte, Art & Finance Report, 2017
For us, art functions as backup for our private equity investments, and for the art owner there is an entire unleveraged private equity portfolio protecting the art.
ART VS REAL ESTATE
It is interesting to compare art as an investment with that of real estate, which is often mentioned as one of the safest investments. Numbers from 2015 shows the average 20-year returns in commercial real estate is 9.5%, residential and diversified real estate investments is 10.6% and real estate investment trusts (REITS) average annual return is of 11.8%.
“I’m amazed that there is 2,5 trillion dollars of unleveraged art when it’s safer than real estate”.
- Daniel Hansen, Founder of OMNIA
However, artworks sold for over USD 10 million have generated a 27% compound annual growth rate, or a 1,000+% return over ten years.
From a rating and securitisation perspective, the lower the loan-to-value, the lower volatility and quicker sale without the need for fire sale, the better the collateral. Within all those terms, fine art might be a better match than real estate, which currently enjoys top rating. Maybe we will see this change in the near future.
MAKING ART INVESTMENTS EVEN SAFER
Although art per definition has an element of subjectivity to it, and we once in a while see spectacular sales, art as an investment is much less volatile than one might think. As mentioned earlier, we see that appraisers generally get remarkably close to the final auction price.
There is a great amount of data collection that is accessible on art – today, you can retrieve just as much data on art as you can on real estate. We see the yearly Art & Finance Report from Deloitte, and a company like Pi-eX, which has built a proprietary database of auction sales results and developed a systematic methodology for analysing liquidity, performance, volatility and volatility hedges. Pi-eX strives to provide valuable market-focused information to art collectors and investors to better understand liquidity, performance and volatility in the fine art market.
“Thanks to the annual regularity of public auction sales, one can systematically analyze year after year what collectors like to buy or sell, where they prefer to do so, how their tastes evolve, what their critical price points are, which artists they are confident in or not, etc.”
- Christine Bourron, CEO, Pi-eX, Deloitte’s Art & Finance Report 2017
Another interesting aspect providing further security for art investments is the possibility of financial products like futures auction sales (CFS derivate), where art sellers hedge part of the risk by letting investors take a speculative short-term position in the fine art market, and auction guarantees, where the financial market and not the auction house takes the risk. This is possible due to the before-mentioned great amount of auction data available to the market.
THE OMNIA STRUCTURE
If we, for whatever reason, are unable to get a guarantee on a certain art work, we are in the luxurious situation of being able to simply just find another piece of art. This means that we have the possibility of setting up our art portfolio in the exact way that works best as collateral for our structure.
As we are able to combine art as collateral with cash flow and return coming from OMNIA Private Equity, we have a much different view on art as an asset class than traditional art funds.