Eye of the Beholder

Art represents a $1.7 trillion asset class. That makes it bigger than private debt and about half the size of private equity.

Eye of the Beholder
Capital Thinking | Eye of the Beholder

Capital Thinking · Issue #997 · View online

It’s a rite of passage for any budding hedge fund manager to buy some art. For me, it happened a number of years ago.

-Marc Rubinstein

The Financialisation of Art

Marc Rubinstein | Net Interest:

I’d just bought a new house and one particularly plain wall screamed out for adornment. The house itself was a nice place to live, but it also served as an investment; why not extend that duality to the internal decor?

If I could brighten up my walls and earn a return at the same time, what’s not to like?

Trouble is, while I knew my way round the equity market (I was a budding hedge fund manager after all) I had no idea how to navigate the art market.

Fortunately, one of my close friends is an art historian with expertise in contemporary art; he agreed to be my sherpa through this unfamiliar terrain.

It didn’t take long for my friend to identify an up-and-coming artist he thought worth backing. She was represented by a swanky Mayfair gallery and we arranged to meet there for a viewing.

I was eager to go straight in, cheque book in hand. But my guide stopped me. Apparently I would first need some coaching.

It seems that buying art from a gallery isn’t like buying a regular item from a store. The gallery owner is less your typical retailer and more a kind of gatekeeper.

Which meant I needed a story.

To even be considered a prospective buyer, I needed to dispense with the budding-hedge-fund-manager shtick and assume the role of collector.

Like a spy about to go undercover, we rehearsed my story: I had viewed numerous other pieces by a range of artists and was embarking on a multi-year project to build up a collection. I wasn’t in it for the money; I was in it for the aesthetic.

Art represents a $1.7 trillion asset class. That makes it bigger than private debt and about half the size of private equity.

Its centres of gravity line up with those of international finance. In London and New York, the biggest art galleries and auction houses sit blocks away from the biggest hedge funds and banks.

Financiers are known to be active collectors of art. A few years ago, Ken Griffin of Citadel bought a Willem de Kooning and a Jackson Pollock for a combined total of $500 million (and more recently a copy of the Constitution for $43 million).

Steve Cohen, founder of Point72, has spent over $1 billion on works by artists including Andy Warhol, Pablo Picasso, Jasper Johns and others.

And one of the biggest corporate collections in the world is owned by Deutsche Bank, its value more than Deutsche’s earnings in a typical year.

Yet in spite of the overlap, the market operates very differently from traditional financial markets. Historically, the art market worked on a patronage system where owners would act as stewards of artists’ work and seek to maintain their legacy.

Speculation undermined this model, hence the need for gatekeepers.

By allowing patrons to pass through while keeping speculators out, dealers brought order and stability to the market. In this model, monetary value isn’t the prime focus. The very architecture of a gallery banishes commerce to a back room, the front exhibition space cleansed of monetary fingerprints.

By law in most markets, galleries must have set price lists, but you have to ask for them – they are never displayed in the shop window. This market structure affords dealers a lot of power.

They create a market for the artists they represent and maintain it by controlling price levels, tempering speculation and courting influential buyers. The heterogeneous nature of the market, where every item is unique, further supports a dealer-intermediated model.

Dealers have a pecking order of preferred buyers.

At the top are museums, because nothing beats the endorsement of a recognised museum. An exhibition at the Museum of Modern Art (MoMA) in New York, say, would boost an artist’s career trajectory enormously.

The museums know it, but they are coy about the monetary impact they can have on an artist’s work.

Glenn Lowry is director of MoMA:

“We do not create financial value. We may, incidentally, create financial value by making a larger public aware of an artist’s importance. But the value we create is art-historical importance.” [Source]

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The Financialisation of Art
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