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Art as an Investment & Endowment

64% of private banks say that estate planning around art is a strategic focus for them.

Global Influencer

Global Influencer
Global Influencer

Image via C-Monster/Flickr CC

When I wrote an article on Art as An Investment class for Equities last year, I didn’t realize the increase in art sales since and the interest investors are showing in buying art.

Fine art as an investment class has outperformed the S&P 500 every year for the last 10 years. In fact, 64% of private banks say that estate planning around art is a strategic focus for them. People invest in Oil & Gas and lots of other things, why not art?

According to the 2014 Deloitte Art & Finance Report, 75% percent of art collectors and buyers are purchasing art for collecting purposes with a view to investment — a large jump from 53% in 2012.

While the general public has always considered art as an investment, the business community has been loathe to change their investment tactics. The merchant bankers and investment houses I work with are more loyal and comfortable working with oil and gas investments and mining flow-through deals. They really don’t want or have any desire to re-invent the system so it’s more logical for them to think oil and gas.

Brokerage houses have a difficult time breaking away from the traditional methods of investment.

I can certainly understand their dilemma. They have been selling resource stock for decades to a certain type of client and now people are telling them to consider another flow-through investment like art. The two groups of investors the houses are pitching to are different types of investors. The only thing that they have in common is that both set of investors are usually high net worth individuals.

The brokerage houses understand that it’s easy to sell their normal portfolio to their existing clients but art as an investment may require them going outside the box and recruiting new investors. In their minds it makes little sense to do so. However, it is an opportunity for aggressive investment advisors to increase potential investors across a diversified portfolio.

I spoke to Terry Lyons, Chairman of Canaccord Genuity Wealth Management in Vancouver about art investment. Canaccord has $31 billion under independent wealth management in Canada and is an industry leader in Canada, Australia, the UK and Europe.

Mr. Lyons and his wife spend their holidays at art galleries and museums around the world and consider art as part of their lives. Indeed, most, if not all, of Lyon’s clients’ list art as one of their top personal interests and many invest in art to build their assets and collections.

He said that of his ‘ultra high net worth individuals’ most are seeing art collecting as an asset class. In the US this group invests an average of 16% of their total assets in art. In addition to supporting art activities and inviting clients to art-related events, many investment banks also provide specialized services to their clients including art advice, representation in buying and selling and other services related to their collections.

With Mr. Lyons expert appreciation of fine art, investment houses like Canaccord would benefit from his leadership in creating new markets for their investors. Since new clients are often acquired through customer referral and recommendations from existing clients a new alliance between investment houses and art institutions does open up that new database of potential investors that eludes them.

Lyons said he would recommend Canaccord’s dealer reps promote a unique offering based on art instead of the usual resource industry offerings. It is a step in the right direction.

The banking sector has also been identified as an active supporter of art and culture. An example of this collaboration between banking and art is the interaction between the Union Bank of Switzerland (UBS) and Planet Art, Art Basal and with major museums such as the Guggenheim in the US.

UBS has a long history of supporting culture and the arts especially contemporary artists. Its collection spans 30,000 pieces and includes many emerging as well as some of the most important artists in the last 50 years.

In 2010, UBS restructured its’ sponsorship strategy away from music to contemporary art on a global level.

It seems that if one of the world’s largest investment bank with 60,000 employees can focus on art as both an asset class as well as a sponsorship opportunity then North American investment houses need to rethink their resource-based bias.

The defunding proposal for the National Endowment for the Arts (NEA) in March this year by President Trump illustrates the fragility of the system of endowment to museums. The proposal failed but it opens up a needed focus on art as well as an investment opportunity for business to sponsor the arts.

The decline of government support for years, however, has created a state of chronic underfunding for various institutions. Major obstacles include funding resources and dwindling audiences. In addressing these challenges, museums must be nimble in their ways of responding to donors, audiences and opportunities.

A Vancouver company, ARTContent Publishing is offering a Limited Partnership as an investment to a select group of investors. The Partnership is a fine art publisher that seeks capital appreciation by commissioning renowned international artists to produce unique works of art and original limited edition prints that the Partnership will sell to the global art market. The management of the Partnership believes that fine art is an attractive alternative asset class with a low correlation to other financial markets, providing diversification to the Investors‘ portfolios.

The offering is based on a maximum subscription amount of $10,000,000. The Unit price is $10,000. The minimum subscription is $10,000

The investment of $10,000 will provide the investor with tax deductibility, artwork equal to the value of the investment and a 50/50 split of the sale of the balance of the artwork. Not a bad deal in any market scenario.

A second Limited Partnership offering by ARTContent is an attempt to collaborate between the artistic, visual art, museum and the investment communities, adding value to both sectors in terms of interaction.

ARTContent’s endowment LP will be extremely beneficial to museums around the world and will mark a new source of art previously unseen by the public.

Public art museums are possibly facing the greatest forces of change since the storming of the Louvre. Large art museums in major metropolitan centers are getting bigger and even franchising globally, while many others are struggling. Some are considering a move further into the field of entertainment, a shift fraught with challenges and the risk of reduced public funding.

How the Cultural Institutions could use an ARTContent Endowment Limited Partnership to raise additional non-restricted funds from its existing and new donors where those donations would effectively be free after tax savings for the donors. Providing these after tax savings would encourage new donations.

Under the ARTContent Endowment program the donors; invest as limited partners in an Endowment Limited Partnership and receive a tax deduction (Estimated -of 90% (+/-2%)) of their initial investment amount in the first year. They also receive artwork produced by the Limited Partnership equal in value to their investment in the second year. The Cultural Institution would be entitled to the net proceeds from the sale of the art sold by the Endowment Limited Partnership. These proceeds are estimated to amount to $35,000 USD (+/-) and are paid in years two and three of each Partnership minimum $10,000 investment.

Both Limited Partnerships put original art in the hands of both investors and museums. While the concept of using art deals as a flow-through investment like mining is foreign there is a growing sense from brokers and dealers, especially in the Vancouver market that a diversified investor pool is good for everyone.