By way of a brief introduction to the realm of alternative asset financing, Danae Constantine, Associate in the Real Estate Finance group and a specialist in art lending, gives insights into the rising trend of art-backed secured loans and the rising scope for alternative asset classes.
Art financing and art-backed secured loans
Art financing, particularly through art-backed secured loans, is an increasingly popular method for art collectors and investors to unlock the value of their luxury assets. This financial strategy allows individuals to leverage their art collections to obtain credit or liquidity, which can be used for various purposes, such as investing in a business or diversifying their investment portfolio.
Asset-backed lending is not limited to artworks and the principle can be transposed to alternative asset classes, for example, jewellery, watches and wine. Subject to legal due diligence and context, the use of funds may also be utilised in a manner of different ways; think of a grandfather's inherited Picasso used as collateral to fund a grandchild's/entrepreneur's vision.
Pros of art-backed secured loans
- Liquidity without sale: One of the primary advantages of art-backed loans is that they provide liquidity without the need to sell the artwork. This allows collectors to retain ownership and potential appreciation of their art while accessing funds.
- Flexible use of funds: The funds obtained through these loans can be used for a wide range of purposes, from personal needs to business investments, offering flexibility to the borrower.
- Potential tax benefits: In some cases, using art as collateral can offer tax advantages, such as deferring capital gains tax that would be incurred if the artwork were sold.
- Preservation of collection: By not selling the artwork, collectors can maintain the integrity and completeness of their collection, which might be important for personal or historical reasons. This may also be a specific requirement where the artwork is part of a special trust, if for example, created as part of a gift to charity.
- Charitable ownership: This could be an alternative for trustees in a situation where an artwork or other artefact is restricted from sale or captured by other preservation type restrictions, particularly if Charity Commission or original donor consent is required; the Commission or donor might be more amenable to agreeing to a charity engaging in asset-backed lending to create liquidity without sale than to lose the artwork or artefact from the charity's collection (via a sale) permanently.
Cons of art-backed secured loans
- Valuation challenges: Accurately valuing art can be complex and subjective, potentially leading to disputes or undervaluation, which might affect the loan amount.
- Market volatility: The art market can be volatile, and fluctuations in value can impact the terms of the loan or the ability to repay it.
- High interest rates: These loans can come with higher interest rates compared to traditional loans, reflecting the risk and specialised nature of the collateral.
- Risk of loss: If the borrower defaults, they risk losing their valuable artwork, which might have significant personal or cultural value.
Growth in art financing
The growth in art financing is driven by the increasing recognition of art as a valuable asset class. As the global art market expands, more collectors and investors are seeking ways to monetise their collections without relinquishing ownership. This trend is further supported by the rise of wealth management services that cater to high-net-worth individuals, offering tailored financial solutions that include art-backed loans.
A fresh perspective on asset-backed security can be an interesting route for entrepreneurs and 'Next-Gen', who may see through the traditional value of an asset class and be open to its alternative use cases.
In conclusion, art financing through secured loans offers a unique opportunity for art collectors to access liquidity while retaining ownership of their prized assets. Despite the challenges, the potential benefits make it an attractive option for those looking to maximise the value of their luxury assets.