The Truth About Art Funds
Michael Plummer, Principal and Jeff Rabin, Principal Artvest Partners LLC
The outstanding performance of the art market over the past 10 years, coupled with the trepidation many haveabout financial markets post-2008, has led to growing interest in art as an investment and increased dialogue aboutart fund vehicles.
Defining an art fund
The sheer mention of the term ‘art fund’ often stirs controversy. A contributing factor to the lack of understandingand agreement is that the term is broadly, and sometimes inappropriately, applied. Artvest defines an art fund as astructured investment vehicle with Offering Documents that is open to third-party investors for the purpose of financial gain. Everything from valuation methodology, to inherent conflicts of interest, to risk control anddiversification must be sound, well-considered and documented. Properly created, an art fund will share similaritiesin structure to financial asset funds yet take into account the crucial difference that art is the underlying asset.Specialised expertise is essential to successfully manage such an entity.Private Investment Partnerships (PIPs) are often conflated with art funds, creating additional misunderstanding.Unlike art funds, PIPs are not made available to outside investors and are simply groups of individuals who havepooled resources to invest in art or other assets.
The current art fund landscape
The scale of the art fund industry is commonly believed to be significantly larger than it is. New fundannouncements usually garner extensive attention from the press yet few actually raise capital, and those that doare typically a fraction of their intended size. It is not uncommon for funds that had stated goals of US$100 million+when announced, to have total assets under management of US$10 – US$15 million when they close on fundingand begin art buying.There are less than a handful of operational art funds investing meaningful capital — greater than US$50 million.Artvest estimates the global art fund industry to be US$1 billion, with Asian funds accounting for approximately onethird of that total.Traction has been slow for a number of reasons, most importantly apprehension about investing in a little-understood market. Another concern is the impact that unpredictable trends in fashion and taste can have on the artmarket over time. A scarcity of art fund structuring expertise has also been a detriment. These factors, along withthe absence of established long-term track records, has made the possibility of meaningful institutional investmentin art funds a challenge thus far.Further exacerbating the broader acceptance of art funds are a few notable instances of fraud and/or incompetencein the last five years — the result of unscrupulous practices by a handful of individuals that led to the loss of investor capital, numerous lawsuits and a considerable hit to the industry.More confusion comes from individuals successful in financial products venturing into the art fund space, believingthat their experience is portable. The art market is remarkably different from all other asset classes — it is opaque,illiquid, unregulated, non-commoditised and emotional. A deep understanding of the players, artists, sectors andintricacies is essential. Getting involved without this knowledge is akin to letting a child drive the family car.
Considerable due diligence is imperative
When considering an art fund investment, many critical questions must be answered such as: how is the fundstructured; are there adequate risk controls; how often is the fund valued and what is the methodology; what is theliquidation strategy; and most importantly, who are the principals and advisors, how are they compensated andwhat are their potential conflicts of interest? This is not by