Simply about the difficult: art-фонды
ARTinvestment.RU   21 апреля 2020

Top 10 theses on the work of investment funds offering collective ownership of art objects

the Unstable economic situation, which regularly develops in most countries of the world, forcing them to change ways of working in the financial market. Art, like gold, a hard asset with limited supply, but unlike real estate, it is portable and requires relatively low maintenance. In addition, art can significantly reduce the overall risk of the investment portfolio due to low correlation with other investment types (lack of direct proportion to the rise or fall of other assets. — AI.), provides good protection from inflation and currency fluctuations. While the stock market in one day can yield losses, expressed in double-digit percent, the art market historically shows a much greater stability.

One of the forms of investing in art is a collective property and its physical embodiment — investment art-фонды. Questions about art-фондах, in particular, appear regularly among the audience webinars conducted ARTinvestment.RU. Do not delay for a long time the answer, we dedicate the next series of the cycle "Just about the complex" art-фондам.

1. Art-фонды — are private investment funds (for organizational-правовой the form — mutual, mutual or hedge), whose goal is to make a profit through the acquisition, management and sale of works of art as a capital asset. They are managed by professional management company receives an annual management fee (1-3% of the value of the net assets of art Fund's portfolio or the total capital commitments made by investors), and part of the total profit Fund (average 20 %) obtained from the sale of art objects.

2. The main tasks of the management company art-фонда:

• the registration of the company according to the chosen jurisdiction and its further compliance with the administrative, accounting and tax rules;

• raising capital for Fund (investment pool) and work with investors;

• identification of potential acquisition targets (art) with further buying;

• managing a portfolio of art, including logistics, storage and insurance;

• actions aimed at increasing the cost of art (for example, using short-term rentals museums or publishing projects);

• monitoring of the art market in General and the artists that make up the Fund's assets, in particular;

• proper distribution of profits by results of the operating cycle of the Fund.

3. Three aspects of the structure of art-фонда:

• the Board (of the General solution, finding investors, making decisions on equity participation, the most significant purchases of portfolio diversification);

• the management (care, marketing, legal issues, and increasing capitalization);

• transaction: purchasing and sales (consulting on whether to acquire, search and direct contact with the seller and the buyer, marketing).

4. Unlike mutual funds and other regulated investment vehicles, the majority of the art-фондов is not legally restricted in choosinginvestment strategies and choose them yourself. Each strategy or combinations thereof have different degrees of risk and profitability level. Basic strategies that are used by art-фондами:

• "buy and hold": the traditional strategy for the common investment market;

• "geographic arbitrage": the use of price differentials works of certain artists in different geographical locations;

• "strategy for regional art": to focus on investing in art from a particular geographic region (Asia, Africa, Latin America etc.);

• "strategy of periodization": focusing on investing in a particular period of art (old masters, modernism, contemporary art, etc.);

• "strategy for young art": investing in artists that are not yet recognized by the market and therefore have the potential for rapid price growth;

• "strategy of internal value": investing in art, which (in the opinion of the management company) have hidden the cost, or purchased at a large discount (70 %) relative to the actual price or having hidden unnoticed by the market value (for example, work could temporarily enter the congregation of the Royal family or exhibited at the first impressionist exhibition — confirming both facts documents are consultants of the Fund, but the current owner at the time of sale Fund doesn't know about them);

• "the strategy of financial leverage": the borrowing of art-фондом additional assets (borrowed funds) to purchase additional art — promising income, the Fund must exceed the amount of fees for loan;

• "strategy is problematic art": art acquisition at a large discount to collectors on the verge of bankruptcy or insolvency;

• "a strategy of joint ownership": the acquisition of art objects together with other third party investors for the section of risk of a particular investment and provide further diversification of the investment portfolio art-фонда;

• "demonstration" strategy: increasing the value of the art portfolio of the Fund by placing works in major Museum exhibitions and in the permanent exhibition;

• "the strategy of massive purchases": conducting a one-time purchase large volumes of the art for lower operating costs;

• "genre" strategy: focus on investments in one direction or the genre segment of the art (for example, a photo or a collectible design), according to which the management company art-фонда has special expertise and established marketing channels.

5. From the above, there are three main strategies that are used in determining portfolio art-фонда:

• diversification of artists by period or directions;

• the "vertical sampling" of one country or region at different periods;

• "opportunistic" approach: the purchase of works of artists having an aggressive marketing strategy that entails the maximum speculative nature of investment in the fastest time possible.

Diversified portfolio art-фонда averageas follows:

• the art of the old masters — 15 %;

• impressionism and modernism — 25 %;

• post-war art (1950-1985) — 30 %;

• contemporary art (since 1985) — 20 %;

• emerging markets / young artists — 10 %.

6. Operating cycle art-фондов, as well as other investment funds are divided into three schemes: open, closed and mixed:

• the scheme of "open Fund" allows you to make new and current investors to withdraw during the duration of the Fund;

• the scheme is "private Fund" is more common among art-фондов is not available for investments of new investors with the end of the fixed term of the capital raising (usually 9-18 months from the opening date of the Fund);

• the third variant of the scheme — "mixed Fund" — is a hybrid model that allows investors to redeem their share throughout the operating cycle of the Fund. Despite the withdrawal of money which the investor pays in the event of early exit, the hybrid model increases the competitiveness among art-фондов, providing a quick exit for investors who for various reasons decided to return earlier attachment.

7. The General scheme of work of art-фонда as follows:

• normal operation period: 5 to 10 years;

• brought financial pool from $5 million to $300 million (most art-фондов $10-30 million);

• the costs of start-up: 3-5 % of the body of the Fund (financial pool);

• the minimum contribution of the shareholder: from $100 thousand to $250 thousand (in the major art-фондах from $500 thousand);

• the cost of investor's participation: 1-3 % (asset management) 10-30 % (profit);

• the average annual yield of art-фондов in the overall market: 10-15 %;

• the average annual yield of the most successful art-фондов (15% of total): 30-55 % (in the founders of such funds, as a rule, there is a large art-дилеры or employees of auction houses that provide access to art objects at a discount and providing other inside information);

• period of acquisition of objects of art: 1-4 years since the announcement of the closure of the admission shares;

• the most expensive work of portfolio: not more than 15 % of the total value of assets;

• sales period: 4 to 10 years from the date of purchase;

• beginning of payment of dividends (if any, and the payment is not by results of work of Fund): since 4-го of the year when the assets are gradually beginning to appear on the market for sale.

8. The first art-фонд was created in 1974, the Pension Fund of British Railways (eng. British Railway Pension Fund). 3 % of the capital BRPF (£70 million) was transferred to an independent organizational structure and invested 2.5 million objects of art for a six-year period. To fully realize its assets BRPF could only in 1999, while receiving 11.3% of the average annual yield over 25 years (in other words, the total return of the Fund made up of 282.5 %). In the early 2000-х, the results of BRPF, occurred about 50 attempts to create art-фонды. Some companies in the memoranda declared enterprises with well-known financial institutions in the US such as JP Morgan and Merrill Lynch. However, these initiatives mostly failed because management companies showed a complete misunderstanding of the mechanisms of the art market (among other things, the inability to determine the market value of art objects and the inability to properly manage operating costs to maintain and capitalization).

9. The art market-фондов has grown significantly over the last ten years, simultaneously with the advent of the tools of financial forecasting in the field of art and the new generation of managers with education in the field of art-финансов. On the assessment of the Art Fund Association, for all the time at different stages, there were about 200 investment art-фондов with just under $3 billion in total investment. In addition, at the end of 2017, there were more than 9 thousand hedge funds with private equity assets under management of more than $1.7 trillion, of which $1.8 billion were works of art (0,1 %). By the beginning of 2020 in the world at different stages there were about 60 art-фондов, 20 of which were in search of investors or had an "open structure" of the operating cycle (to enter the Fund, the investor could at any time). Currently, some art-фонды are developing fundamentally new approaches to attracting and retaining investors — in particular, it is possible to trade shares of individual art objects in the project portfolio among the shareholders of the Fund through blockchain technology.

10. Investing in art-фонд have a number of features, which must be prepared both organizers and potential investors:

• a long investment period. Investment in art-фонд are long-term relations with investors: as a rule, their capital expenditures are not refundable during the period from six to ten years. The main reason for the collapse of most art-фондов lurks in the starting phase: they are unable to collect financial pool, offering a closed operating cycle and a long period;

• the credibility of the management company art-фонда. the Investor art-фонда usually has no information about which specific pieces of art will be purchased by the Fund, and the possibility to refuse the implementation of specific acquisition. As a result, investors must rely mainly on the investment strategy of restricting the portfolio and the criteria set out in the private Memorandum of the Fund, as well as on the experience and qualifications of the management company and hired it consultants and curators. In other words, after making the initial decision about investing in art-фонд the investor does not actually affect investment decisions and Fund management. The second cause of the collapse of art-фондов lies precisely in the early-exit investors (even in spite of severe penalties). This entails the impossibility to carry out long-planned purchase or need to quickly sell part of the art for the calculation of the investor — that will inevitably lead to losses and negatively affect the entire portfolio and the total return;

• the inadvisability of raising the entire investment capital immediately. in order to achieve the best rates of return, the art-фонд will seek to minimize the time raising money from investors (sell shares). The dates and amounts, as a rule, discussed with the investor for 2-4 weeks before placingcontribution. Investors who have invested their capital after the deadline are subject to penalties that usually follow when distributing dividends or confiscation of their capital in art-фонде;

• the use of art-фондами several jurisdictions simultaneously. To ensure that the Fund can accept money from international investors subject to the taxation regimes of their countries of residence, the management company usually offers several investment tools — each with its own organizational structures (usually registered in offshore zones). Simultaneous use of the offshore Fund and the underlying Fund allows the management company to accept money from domestic (at the actual place of jurisdiction) and foreign sources, to divide investments between the two funds and to avoid additional tax expenses of investors.

Denys Belkevych, AI