Risk Management in the Art Market, November 2016
On Thursday 10 November 2016 we attended a conference on risk management in the art market at the offices of K&L Gates, overlooking St Pauls. Of particular interest was the presentation given by Larry Shindell, Executive Chairman of ARIS Title Insurance Corporation. Shorthand notes of his key points are given below.
Assessing art risk involves analysis of the 3 legged stool:
Art industry still opaque.
What dynamics are driving change in the market?
Jihadists storing loot at Freeport? A cloud on title at the moment in the market. In the opaque market, given wall of confidentiality we might as well be buying from someone from another planet.
Global market – gives rise of a number of issues. Not uncommon for a sculpture to change ownership 4 times with 4 different nationalities in 10 years without ever leaving the warehouse.
April 2015 gave a forecast – how much has come true??
1. Trade regulators begin to take close look at art industry – has happened
2. Self regulation – happening
3. Legal doctrines to avoid conflicts of interest in EU – in USA too? – on the cusp
4. Means to anchor authenticity – on the cusp
5. Deloitte Art Finance
We believe AML issue will be the fundamental dynamic which changes the art industry.
Where are the pressures coming from??
Institutional capital markets – demand better due diligence, moving throughout the market even down to individual investors
Commercial grade platforms – individuals may take on risk, they won’t.
Individual investor perspectives – increasingly individuals are buying to invest.
ILPA – institutional limited partners association – institutional benchmark for investors. Collapse of a fund caused ILPA to change due diligence questionnaire. Explain exactly what you’ve done and why you’ve assumed accuracy and validity of your decision. What’s the basis on which you have ownership to all these assets? The point is as the world gets more complex these standards are changing.
KYC – know your customer. Checking name in provenance – could create risk around transaction
In time there will be enforcement against dealers and collectors on claw back basis to combat money laundering.
HEAR Act pending in USA. Holocaust – new federal statute of limitations to bring claim – 6 years to bring claim from date had claim and find work.
Point is: any collector who believes their work may ever end up in USA for eg exhibition becomes exposed to this legislation, restitution. Must bear this in mind for any work which might have been held by Nazis. You should be aware of these kinds of trends in the market. Grey area – at what point during collapse of Europe were people compelled to sell their work at a deflated value? Eg when leaving Europe. Test case pending.
1. Provenance does not equal title.
Provenance is the history of the work.
2. Title issues are not all about stolen art – to do with import / export / lien / divorce / death / subrogation
2 burning questions:
Will it be mine if I buy it?
Is it real?
Passion / culture / the Arts / investment are all drivers. Need to shine our flashlight to make sure we are clear when we buy. Why is this important? – for our cultural legacy.
Rely on auction house due diligence when I buy. How many come into question?
10% of the best (i.e. what comes to us as insurers) we decline to insure – often comes as a surprise
If the buyer is important enough, and decides they need insurance, the auction house will tell the insurer the name of the consigner and they can investigate.
Private transactions – what should I be looking for?
Imagine not going for title insurance on every occasion. Insist they warrant it to you. Private indemnity theoretically works but in practice enforcing it might be hard work.
Eg coming out of Italy – no idea what it is. Comes to UK and suddenly very valuable. Track down email exchange to establish whether truly a fresh discovery.
External restorers often produce condition reports for auction houses – can always go and talk to them. Now buyers are paying buyer’s premium on most transactions, they should be entitled to receive the condition report. Reading condition reports can be confusing – often highlight lots of problems and then say that it’s in good condition – advise buyers to talk to a restorer they know and trust.
At a certain price point, the market will find ways to slow the transaction down and do the due diligence. The smart sellers will have full enhanced due diligence available – this will be part of the package. The smart buyers will put letters of intent on the table, subject to various proof being produced.