Art and Finance

Art and Finance

Pandora Mather-Lees
Pandora Mather-Lees
IORMA Luxury and Creative Centre

Deloitte Art and Finance Report 2023
The Deloitte Art and Finance Report, now in its 8th edition, serves as an annual guide for wealth managers supporting clients with significant art assets. Traditionally centred around classic investments like equities, wealth management has evolved to include alternative assets, notably art and collectibles. The 2023 Luxembourg conference which is the focal point for presenting the results of the report each year, adds to the findings through discussion and by attracting pertinent thought leaders in the sector. In doing so panellists bring to the fore key trends and projections at the intersection of finance and the art market.

Key Findings of the Report
Each year there appears to be a marked shift in Wealth Managers’ perceptions of art as an investment vehicle. Around 2016, a notable shift occurred in wealth managers’ attitude towards art investments – they started to embrace the art world seriously. Moreover, overall figures from 53% in 2014 to 90% in 2023 reveal that stakeholders now recognize art and collectibles as integral to wealth management. Technology is poised to further drive this trend, with 80% of wealth managers anticipating increased market transparency through technological progress, particularly in blockchain and tokenization.

Luxury Collectibles and Wealth Transfer
The report introduces a focus on luxury collectibles, witnessing a surge in interest. Notably, 2022 marked a record year for single-owner collections entering the auction market with 2023 figures continuing the trend. The survey highlights the changing dynamics among younger collectors, emphasising returns, social impact, and risk management. Furthermore, 74% of wealth managers with existing offerings intend to provide specific art wealth management services.

Art-Secured Lending
Financial Art-secured lending is anticipated to reach $29 billion by the end of 2023, indicating sustained growth despite economic uncertainties. Private banks prioritize liquidity for business operations, while family offices view art leverage as a means to acquire more artworks. The globalization of the art-secured lending market, particularly in Asia and Europe, reflects shifting dynamics.

Art as an Investment
Art serves as a hedge during economic uncertainties. Some evidence suggests it outperformed the S&P 500. Every piece of art is unique and one cannot use this as a reliable source as to whether the portfolio as a whole, or indeed its constituent parts will definitely increase in value. There are different ways in which companies measure art by indices.

Traditional analytics such as the Mei Moses repeat sales and artnet hedonic regression methods have sought to develop tools to help analysts. The latter digs deeper than the former, however the statistics often need to be manipulated to obtain meaningful and attractive graph trajectories where, say an auction sale has ‘spiked’ the curve. These are inherently unreliable as an investment tool as every art piece is unique and presents its own opportunities and challenges for collectors. As such, an investment in a piece or collection must be looked at in terms of the individual parts as well as the overall portfolio.

Wealth managers have struggled with the lack of uniform and consistent reliable data to inform their decisions in a way that they can glean from other investments. Fine art is deemed a non-correlated asset and as such is now an important part of any portfolio. It enables risk management by enabling one to spread one’s assets, but it must be done so with an understanding of both fine art and the market.

Technological innovation, especially blockchain, is driving transparency and greater adoption of technology by the art market. The intersection of art and technology is increasingly viewed as a catalyst for incorporating art into wealth management services.

Digital asset securities (DAS) are attracting a lot of interest today at the higher end of the market. In particular technology in digital securities has assisted with fractional ownership, tokenisation and other forms of investment. The 2023 Art & Finance report cites as many as 23 companies, mostly US, operating as fractional ownership platforms. In the US, Global Art Exchange (GAX) promotes investment in digital assets backed by ‘blue chip art’. Then there is 360X, founded in 2021, a digital asset platform enabling investment in art, music and real estate by investment in tokens. To reassure investors, the underlying asset is verified by experts and the company is backed by two German banks.

Similarly, two blockchain companies, Artory and Tokeny have created a joint venture to offer tokenised assets, again supported by experts in the back end, but specifically focused on standards and compliance. However, whilst transactions are based on adoption of blockchain technology, Artory admits it is more efficient to run most of the verification and authentication process “off chain”. Nevertheless, 80% of young collectors are generally behind blockchain as a valuable and verified tool to support their investing. Wealth managers see blockchain as a game changer for their ability to assist managing clients’ assets along with big data, AI and advanced collection management software. It will no doubt assist the future of art platforms and fractional ownership.

The rise of Non-Fungible Tokens has also driven greater use of the blockchain. Nevertheless, the NFT bubble has largely burst and dipped with market saturation, issues with centralised exchanges and the instability of Ethereum, the cryptocurrency underpinning most digital art transactions. It is likely the market was saturated and battered by fraud, theft and lack of policing. It is unclear whether art related NFTs which made up 8% of UHNW spending on collectibles will make a comeback, but there is a sense that it will never regain the 2021 peak of $2.9bn having dropped to $1.5bn in 2022. The overall market for NFTs including art related assets in 2021 was $22bn, so this has been a significant sector for development.

Challenges in the Art Market and Regulatory Outlook Challenges persist in the art market, including a lack of transparency and issues related to authenticity. While stakeholders agree on the need for modernization, opinions on regulation differ. There is a call for increased transparency and regulation, but progress is perceived as slower than expected. Many art market players are still relying too heavily on provenance research (often incomplete) and connoisseurship which, whilst important, may involve conflicting and differing opinions.

Scientific analysis is still not undertaken as a matter of course which it should be. Authenticity should now be a consensus of many factors and investigative research but it seems wealth managers are not sufficiently au fait or focused on this aspect. Providing information, education, traceability and provenance is becoming increasingly important, no doubt fuelled by major scandals and cases of fraud coming to light which impact on the reputation of the various art market participants.

The Future of Art and Wealth Management
The report emphasizes the potential of luxury collectibles in expanding the art and wealth management sector.
Wealth managers need to better communicate the financial and non-financial benefits of art-related services, fostering a deeper understanding among clients. With a substantial wealth transfer down the generations expected in the next two decades, wealth managers must align with both older and younger family members to ensure a strategic transition in art and collectible wealth.

Sustainability and Impact Investment
Social impact investment in art and culture emerges as a new opportunity, especially for the younger generation. While only 30% of wealth managers currently perceive interest, there is potential for purpose-led investment products in the art and cultural sector.

The collectibles market is strengthening. All auction houses saw an increase in lots and particularly Bonhams Auctioneers which saw a growth of 32% in the first six months of 2023. Bonhams have developed their audiences with special sales such as the Sir Roger Moore, Michael Caine and The Beatles memorabilia sales. According to Guy Schooling of Sworders Fine Art Auctioneers, “The Art Market is polarising, there is extraordinary money available to purchase extraordinary items and little for more mundane pieces. Traditional works of art are unfashionable with millennials, who live in smaller spaces and wish to collect modern art and design.”

Additionally, another trend in the decentralisation of art and the various platforms now available means that artists can circumvent the intermediaries and develop a direct relationship with collectors.
A space to watch is investment in metaverse assets. The report cites that wealth managers are starting to look beyond crypto assets to be able to capitalise on future trends and be ahead of the curve.

In summary, the Deloitte Art and Finance Report 2023 highlights the evolving landscape where art and finance converge, offering insights into the challenges, opportunities, and future trends shaping the industry. With global wealth associated with art and collectibles having reached US$2.174 TN and the number of UHNW persons having doubled in the last 10 years, it is not surprising that 63% of wealth managers are now placing fine art as an asset firmly within their strategy. The report and conference were instigated by Adriano Picinati di Torcello back in 2008. The report is prepared by Anders Petterson of Art Tactic in association with Deloitte.

IORMA has the full report available. Please see HERE

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