Felix Salmon

Talk about alternative asset classes: Venetia Kapernekas, a New York art dealer, has traded her claim to part-ownership of two Damien Hirst works in return for custody of her 8-year-old daughter. Need I add that one of the Hirsts is entitled “In this terrible moment we are victims clinging helplessly to an environment that refuses to acknowledge the soul”?

(Via Maneker)

Law firm Heller Ehrman spent millions of dollars putting together a corporate art collection during the biggest bull market the art world has ever seen, before going bankrupt at the end of last year. Now that art collection is being auctioned off:

The largely contemporary collection is expected to fetch between $610,000 and $1 million in a slow art market, according to bankruptcy papers and the auctioneer hired to conduct the sale…

Martin Gammon, director of business development for Bonhams, acknowledged the art will be going on the block at a time when “the art market is somewhat down from its highs of 2007.” But he said he expected the Heller auctions to be successful.

“In this particular instance, the pieces are post-war and contemporary, which has seen some deflation, but most of that speculation took place at the very high-end of the marketplace, pieces that were selling for hundreds of millions of dollars,” Gammon said. “This is all, I would say, very well selected and well curated material.”

Peter Benvenutti, the chair of Heller Ehrman’s dissolution committee who is now at Jones Day in San Francisco, said he expected the auction to generate “a small fraction of the original cost” of the art, which he said was substantially more than $1 million.

Anybody who claims that art can ever be a good investment should bear this in mind. If anything could have turned a profit, it would be contemporary art which was bought a decade ago and which is being sold now. But no: this collection is worth much less, at auction, than the amount that was paid for it.

If you buy art — especially works on paper — from an art gallery at full retail price, then your chances of being able to ever sell that art at auction for more than you paid are slim indeed. When people talk about art as an asset class, they’re not talking about the kind of art which you see hanging on law-firm walls, or even in suburban homes. They’re talking about a tiny subset of the art world, which you’re not invited to except as a sucker. Caveat emptor.

(Via)

Given that the government (despite my urging) isn’t going to significantly increase its arts funding, creative types are naturally going to look online for alternative sources of funds. And a new model is springing up across the web which I like a lot.

The way it works is that projects get posted on a website, and individual funders can pledge money towards them. Once a certain total amount is pledged, the money is released; often the funders get some kind of material recompense as well, like a print or a CD or even a share of the eventual proceeds.

So far Kickstarter, Funding the Arts, and Trust Art all seem to have adopted more or less this model, although in the case of Trust Art the creatives have to be invited to participate, which makes it less democratic. I’m sure there are others out there too.

The key difference between this model and fundraising 1.0 is that funders pay nothing unless and until a certain total is reached. In that sense, it’s a bit like Lending Club: if someone’s asking to borrow $5,000 and I offer to lend that person $50 of the total, that money won’t be lent out until other people club together to raise the other $4,950.* The result is that the people asking for money have an incentive to keep their asks and their budgets low, and that individuals offering a small amount know that they get to keep that money until the project is genuinely going to get off the ground.

I’m not particularly familiar with any of these websites, but it would make a certain amount of sense for one such site to be the clear leader in the field, with many more fundraisers and funders than the others. Everybody’s better off with one eBay than with a thousand smaller, competing auction sites. But I have no idea how any one of these sites might be able to set itself off from the rest and become the default place to donate and raise money for the arts.

*Update: Turns out this isn’t actually true: if you don’t “raise” the full amount you ask for, you have the option of taking only the amount that you did raise, or alternatively of trying again from scratch a second time. About 85% of qualified Lending Club loans are fully funded, 8-10% are partially funded, and the last 5-10% either don’t take the partial funding or relist.

Luc Renneboog and Christophe Spaenjers of Tilburg University have done their own analysis of the art market, and conclude:

Our art index has underperformed stocks since 1951 and bonds over the last quarter of a century (but at a higher risk). Moreover, there are high transaction costs associated with trading art, which reduce the reported returns. When considering the low profitability and the high riskiness of art investments, one can only conclude that art should primarily be bought for its beauty.

This study shows art returning 4.03% between 1951 and the top of the market in 2007. That’s low, in comparison to other findings in the literature:

The returns on art calculated in this study are lower than the outcomes in the often-cited studies by Goetzmann (1993) and Mei and Moses (2002), even though our time frame includes an extra boom period. We argue that this can be explained by the fact that our dataset has a much broader coverage than the ones used in earlier papers, and therefore not only captures the (re)sales by top artists at big auction houses.

I think this works more generally: if you could somehow include in the survey all the art that anybody ever buys, the aggregate returns would certainly be negative. Most art is bought in the primary market and is never sold, mainly because it never can be sold. To all intents and purposes, it has zero monetary value the minute that it leaves the gallery or artist’s studio.

The greatest investors in art never bought art as an investment. If you take the set of all art collectors, statistically speaking some small proportion of them will see their collections grow substantially in value. Those collectors are deemed in retrospect to have had a “great eye”. But people who buy art as an investment are almost certainly going to be disappointed — and even more disappointed if they get someone else to buy art for them.

The only time it makes sense to think in such terms is in terms of asset allocation and risk profile: if a large proportion of your net worth is tied up in art, that should be taken into account when constructing the rest of your investments and your estate planning strategy. But don’t think that art has any real chance of growing substantially in value.

The latest chapter in the Brandeis fiasco is that president Jehuda Reinharz is resigning, just one year after signing a new five-year employment contract. The official letters don’t once mention the name “Rose”, which is insane: how can Reinharz say with a straight face that he “will leave the University in good condition with a strong foundation on which to build in the future”, even as there’s still enormous uncertainty over the question of whether the university will have to sell millions of dollars from the Rose’s art museum just to make up its funding shortfall?

Reinharz explicitly denied, in an interview with the Brandeis Hoot, that his decision had anything to do with the Rose — while admitting that PR surrounding his resignation would be handled by the same crisis-management firm that was hired after the Rose news broke and the university’s own communications officers utterly botched the way they dealt with the announcement. There’s certainly nothing in Reinharz’s stated reasons for his resignation (“It is now time for me to enter the next chapter of my professional life”) which explains what has changed since a year ago, when Reinharz signed his five-year contract.

With any luck a new president will be found soon, who has no personal association with the decision to close the Rose — and who might be able to better cope with the attention now being paid to that beleaguered museum.

Scott Reyburn has a very misleading lede to his Hirst story:

Sept. 17 (Bloomberg) — A year after the record Damien Hirst sale, works by the artist are again being valued at levels seen at the peak of the art market boom.

His sole datapoint supporting this assertion? That a Hirst butterfly painting is coming up for auction with an estimate of £450,000 to £650,000. A substantially identical painting sold at the top of the market — the “Beautiful Inside My Head Forever” sale — for £1.6 million. Which means, I think, that Hirst values are actually down about 66% from the peak.

The ArtTactic Average Price Index for Hirst butterfly paintings (yes, there really is such a thing) is down a mere 41% since September 2008, which means that the estimate on the painting coming up for sale is if anything lower — not higher — than you might expect. So where on earth does Reyburn get his idea that Hirsts are back to their peak valuations? Just this: that the £1.6 million Hirst “had a low valuation of £500,000″ when it was auctioned.

No. Auction estimates aren’t valuations, they’re just tools the auction house uses to try to maximize its revenues. The valuations are whatever the paintings sell for. And it’s pretty obvious that this year’s butterfly is going to sell for substantially less than £1.6 million. Which is the only comparison that matters.

It seems that the Long Beach Museum of Art would rather lose $569,000 in annual operating support from the city of Long Beach than repay the principal on a $3.06 million loan. I find that hard to understand: it should just take the $569,000 and use some fraction of it to pay off the $3 million over time, spending the rest on art and programming. Or is there some good reason why the museum’s implied discount rate is so incredibly high (over 18%)?

(Via Maneker)

Bloomberg’s Katya Kazakina has done the rounds of various real-estate appraisers, asking them how much Annie Leibovitz’s property might be worth, and it turns out that the real estate alone – never mind her life’s work – could well sell for substantially more than she owes Art Capital Group. But, as Kazakina says with delicious understatement:

Whether the appreciation of the real estate, in Manhattan and upstate New York, will offer the photographer a path out of her financial troubles is unclear.

For one thing, Leibovitz has to repay Art Capital the sum of $24 million, plus $2.9 million interest, plus fees, by September 8. As one appraiser told Kazakina, “It’s not going to sell in a week” – especially not her West Village live/work studio, renovated at enormous expense, and custom-designed to the specific needs of Annie Leibovitz. And there’s another major impracticality: according to Art Capital’s complaint against Leibovitz, she has refused to allow Art Capital’s real-estate brokers to show her property to interested potential buyers.

For there’s the rub: as part of the loan agreement, Leibovitz authorized Art Capital to act as the “irrevocable exclusive agent” for the sale of both her photography and her property. Neither Leibovitz nor anybody else can sell these properties, the liens on which are held by Art Capital. Only Art Capital can do that. And the way that Art Capital’s sales agreement with Leibovitz is structured, there’s very little incentive for them to sell any property before September 8. As Kazakina reported on August 18, quoting Art Capital spokesman Montieth Illingworth:

Goldman and Art Capital stood to gain 12 percent interest from their one-year loan to Leibovitz, Illingworth said. This means, Leibovitz would have to pay $2.9 million on top of the $24 million loan…

If Leibovitz doesn’t default, Art Capital would receive a 10 percent commission on copyright and real estate sales, Illingworth said. If she does, the commission would increase to 25 percent of the sale of the collateral (the higher rate includes 11 percent to 13 percent in legal, real estate and other fees, Illingworth said.)

How many people, working on commission, will sell an item at a 10% commission today if they know full well that the commission rate rises to 25% in little more than a week’s time?

It’s not just the sales agreement which gives Art Capital an incentive not to sell the property. There’s the loan agreement, too: Art Capital’s Ian Peck told me in June, talking about his business in general rather than Leibovitz in particular, that his “commissions and fees are designed to be prohibitive” in the event that a borrower defaults on her loan. Come September 8, Art Capital won’t just be collecting a 25% commission on any real or intellectual property it sells on behalf of Annie Leibovitz. The amount which Leibovitz needs to repay Art Capital will also spike significantly: the interest rate on the loan will go up to some unknown penalty rate, from 12%, and Art Capital will almost certainly charge Leibovitz substantial (and also unknown) fees on top for going into default.

What’s more, since Art Capital is now working on a 25% commission, it’s also clear that it has every incentive to sell both the real estate and the intellectual property, rather than the real estate alone, since the best-case scenario for Art Capital involvesmaximizing its total sales commission.

The subtext to the Bloomberg article, as elucidated by the likes of Jessica Pressler, is that if she’s really lucky, Leibovitz might be able to pay off her whole loan just from real-estate proceeds, without having to touch her intellectual capital. But that seems improbable to me. Clearly, no real estate deal is likely to get done between now and September 8 — so if and when the property is sold, Art Capital will take a 25% commission off the top. Using the high end but not the highest end of the estimates in the article, the Rheinbeck property could sell for $6 million, with the West Village property going for $24 million. That’s $30 million together, or $22.5 million after commission – not enough even to repay the loan principal, let alone the interest and any unknown default penalties.

Art Capital would, I think, then be fully within its rights to continue to shop Leibovitz’s full archive of photographs, which it values at $50 million, to the highest bidder – and to take its full 25% commission on any sale before repaying the balance of the loan plus interest. Let’s say it sold the archive for $30 million: again there would be that $7.5 million in sales commission, leaving $22.5 million to repay $1.5 million loan principal, plus interest and unknown penalties. Even with no penalties at all, there’s $2.9 million in interest already accrued: in the wake of her real estate and life’s work being sold off for a total of $60 million, Leibovitz would be left with just $18 million, or less. The rest of the proceeds ($42 million plus) would be kept by Art Capital. Oh yes, and Art Capital would also be entitled to a 25% commission on any income from photography which Leibovitz makes for two years after the loan is paid off.

How can Leibovitz get out of this mess? As I see it, she has two hopes. One is that Goldman Sachs, which owns part of the loan, takes pity on her and advances her the money to pay it off in full. The other, as sketched out by John Cook, is that she files for bankruptcy and throws herself on the mercy of a sympathetic bankruptcy judge:

Art Capital would still likely be able to force the sale and recoup some or all of its debt, but a judge might be convinced to reduce the amount, modify the interest rate, or alter the sales agreement under which Art Capital gets commission on the sale.

For Leibovitz, there’s a real risk that the bankruptcy strategy would gain her little and just end up diverting precious millions to two (or more) sets of bankruptcy lawyers. But I reckon it might well be her best hope.

In 2007, hot young artist Doug Aitken unveiled a massive public video-art project at MoMA. Sleepwalkers featured A-list celebrities, acres of publicity, and millions of dollars in production costs; its Flash site alone almost certainly cost many multiples of the total budget for Those About to Die Salute You, the utterly insane and hugely enjoyable public-art project put on by Duke Riley at the Queens Museum of Art last night in conjunction with the Brooklyn Museum, Bronx Museum of the Arts, and El Museo del Barrio.

Do check out the Flickr slideshow of the event, or you could try my own wobbly video, which at least gives a flavor of just how anarchic the whole thing was, and how much fun everybody was having.

The two events encapsulate a lot of the upside to the downturn in the art market. The expensive Manhattan-based project was somber and highbrow and quiet; the cheap chaos in Queens was raucous and bloody and quite probably illegal, especially when the fireworks started exploding at the end. (No wonder the museum director was looking a little stressed.) The MoMA project was organized to the finest detail, and projected onto Yoshio Taniguchi’s pristine walls; there was a vague plan behind the Riley event, but it started going awry at roughly the time that the toga-clad crowd started throwing tomatoes at each other before the boats had even appeared, and it all went magnificently downhill from there. (Perhaps the free beer for anybody in a toga played a part.)

Needless to say, this is not the kind of art that highbrow art collectors tend to spend millions of dollars on — while Duke Riley is doing admirably well as an artist, financially speaking he’s no Doug Aitken (yet). But then again, the art market, with its obsession with price as an indicator of quality, was the last thing on anybody’s mind last night. We were far too busy throwing tomatoes, getting wet, and enjoying the freedom that comes with near-zero budgets.

Update: The NYT has some great reporting; Gothamist has  fabulous photos.