Art & Finance report 2017

Transcript

1 Art & Finance Report 2017 th edition 5 REFUGEE ASTRONAUT II © YINK A SHONIBARE MBE (2016), PHOTOGRAPHER: STEPHEN WHITE

2 Empower your lifestyle Protect your passions We believe the best client relationships are all about partnerships. AXA ART not only helps clients to protect their assets but also provides detailed bespoke guidance on all aspects of managing a collection, including loss prevention, mitigation and conservation. As pioneers of lifestyle protection insurance, we work closely with policyholders, insurance advisers and a whole network of art experts to provide a seamless service, combining in-depth advice on risk management with a first-class claims process. www.AXA-ART .com Ad_Deloitte_3.indd 1 31.07.17 11:46

3 Empower your lifestyle Protect your passions We believe the best client relationships are all about partnerships. AXA ART not only helps clients to protect their assets but also provides detailed bespoke guidance on all aspects of managing a collection, including loss prevention, mitigation and conservation. As pioneers of lifestyle protection insurance, we work closely with policyholders, insurance advisers and a whole network of art experts to provide a seamless service, combining in-depth advice on risk management with a first-class claims process. www.AXA-ART .com Ad_Deloitte_3.indd 1 31.07.17 11:46

4 François PRIVAT ART EXPERT NOT JUST ANOTHER FREEPORT LE FREEPORT | LUXEMBOURG Service - Transparency - Security Ultra-safe and secure facility dedicated to storing, handling, and trading art and other valuables with direct access to tarmac. www.lefreeport.com

5

6 INVESTMENT HOUSE PRIVATE BANKING ASSET MANAGEMENT THE REAL VALUE OF MONEY IS WHAT YOU CREATE WITH IT. EDMOND DE ROTHSCHILD. BOLD BUILDERS OF THE FUTURE. edmond-de-rothschild.com Edmond de Rothschild (Europe), established at 20, Bd Emmanuel Servais, 2535 Luxembourg and subject to the supervision of the Commission de Surveillance du Secteur Financier in Luxembourg. Registered number RCS Luxembourg : B19194

7 INVESTMENT HOUSE PRIVATE BANKING ASSET MANAGEMENT THE REAL VALUE OF MONEY IS WHAT YOU CREATE WITH IT. EDMOND DE ROTHSCHILD. BOLD BUILDERS OF THE FUTURE. edmond-de-rothschild.com Edmond de Rothschild (Europe), established at 20, Bd Emmanuel Servais, 2535 Luxembourg and subject to the supervision of the Commission de Surveillance du Secteur Financier in Luxembourg. Registered number RCS Luxembourg : B19194

8 ART WORKS YOUR LOAN BASED SOLELY UPON YOUR ARTWORKS. DON’T MISS THE OPPORTUNITY. THE FAST WAY OF ART FINANCING . 49 30 / 300 683-11 BY APPOINTMENT: + [email protected] pbb_az_deloitte2017_210x297mm_RZ.indd 1 05.10.17 11:25

9 ART WORKS Deloitte’s services within the art market’s ecosystem YOUR LOAN BASED SOLELY UPON YOUR ARTWORKS. DON’T MISS THE OPPORTUNITY. THE FAST WAY OF ART FINANCING 04 03 / 02 / / 01/ Private wealth Public sector, Traditional Product development museum, art-related consulting for (i.e., art funds, services cultural art-related art financing models) institutions companies strategy • Strategy & operations • Art & collectible funds • Strategy & operations • Strategic planning - set-up assistance, tax, • Finance • Tax - Estate planning • Impact analysis statutory audit & feasibility study • Marketing • Art-secured lending - • Selection of third party selection of third party • Finance • Ta x service providers service providers • Social & Cultural impact • Technology • Education • Strategy, operations and studies • Risk Advisory risks management • Building consultancy • Financial Advisory • AML and forensics • Statutory Audit • Statutory Audit • Family Business Deloitte Luxembourg contacts Vincent Gouverneur Adriano Picinati di Torcello Partner - Art & Finance Leader Director - Global Art & Finance Coordinator +352 451 452 451 +352 451 452 531 [email protected] [email protected] . [email protected] / 49 30 BY APPOINTMENT: + 300 683-11 www.deloitte-artandfinance.com © 2017 Deloitte Touche Tohmatsu Limited 05.10.17 11:25 pbb_az_deloitte2017_210x297mm_RZ.indd 1

10 LAST SUPPER (AFTER LEONARDO) © YINK A SHONIBARE MBE (2013), PHOTOGRAPHER: STEPHEN WHITE Art & Finance Report 2017 | Table of contents 10

11 Art & Finance Report 2017 | Table of contents 11

12 Art & Finance Report 2017 | Table of contents Table of contents Foreword 14 Introduction 16 Deloitte Canada 20 Key Findings 21 28 Priorities The future of art & wealth management 34 39 Section 1. The State of the global art market Highlights 40 Art market outlook 2017–2018 56 97 Section 2. Art and wealth management survey Highlights 98 Art and wealth management – Current situation 102 Art & wealth management services – Future directions 114 114 A. Private bank and family office key survey findings 2017 Art and estate planning 124 Private banks vs family offices – Comparative trends 2017 136 B. Art professional and Art Collector key survey findings 2017 140 Section 3. Art-secured lending 153 Highlights 154 A U.S. market update 156 Recent non-US initiatives 158 159 Survey findings 12

13 Art & Finance Report 2017 | Table of contents 173 Section 4. Art as an investment Highlights 174 The performance of the art market as whole and among collecting categories 176 Art investments funds 182 findings 190 Survey Section 5. Art and technology 203 Highlights 204 206 A digital art world – The intersection of art, wealth and technology Trends – Online art market continues to grow, but competition intensifies 210 Art data & analytics providers 212 New infrastructure developments 218 Section 6. Risk management and regulation 235 Highlights 236 240 Survey findings 13

14 Art & Finance Report 2017 | Foreword Foreword Deloitte Luxembourg and ArtTactic are pleased to present the Art & Finance Report 2017, the fifth edition of the report. We are delighted to have 34 contributions It is now six years since the first issue of this year from 42 experts within the report was published and it has been and outside of the Deloitte network exciting to follow and monitor how the representing different voices of the Art & Art & Finance industry has evolved over Finance industry. We are also delighted the years. In this anniversary report we to announce that what started as a local have brought together and compared initiative in Luxembourg in 2011 has now the findings and developments from the become a truly global Deloitte initiative. previous four editions with this year’s findings. Adriano Picinati di Torcello Once again, we would like to express our Director - Global Art & Finance most sincere gratitude to all the individuals Increasing competition in the wealth Coordinator and institutions that have contributed to management industry has put emphasis Deloitte Luxembourg this report over the years, especially those on a more holistic wealth management who have taken part in interviews and model, which has become a key driver and Anders Petterson surveys. Their collaboration and sharing of motivation for incorporating art-related Managing Director expertise and knowledge is truly what has wealth into the service offering. A r tTac tic made this report the benchmark for the Art London & Finance industry today. A lot has happened since we launched the inaugural issue in 2011. One major change over these years has been a shift in the primary focus on art investment toward issues around the management of art-related wealth, including art- secured lending, estate planning, art advisory, and risk management. What is particularly encouraging this year is that we are seeing both a confirmation of the increasing convergence between collectors, art professionals, and wealth managers on the role of art in a wealth management service offering, as well as a convergence of different stakeholder initiatives when it comes to improving art market transparency and the infrastructure around the management of art and collectible wealth. Many of these tools and services are mentioned in this report. 14

15 | Foreword Art & Finance Report 2017 But for individuals, the impact is also The economic impact of cultural important: nowadays, investing in art has investment is no longer limited to the become an obligation. Investors entering traditional sphere of the art market and its this sphere must, however, be guided evolution. and informed, in particular with respect to the most innovative creators among Cultural and artistic investment is the younger generations. It is a gamble, an essential driver for the economic but it can be immensely gratifying from development of local communities as several points of view. It simply requires well as private companies. Additionally, it Aurélie Filippetti good knowledge of aesthetic (r)evolutions, is a potential source of diversification of French Minister of Culture and the legislative (r)evolutions in various financial investments. But it doesn’t stop (2012–2014) countries. there. Associate Professor, Classical Literature, Sciences Po, Paris Traditional banks are poorly equipped to Today, cultural investment has a multiplier assist those who wish to embark upon such effect within organizations. In the eight a venture, and it is essential to develop main “capitals” selected by Deloitte for Art is the best part of our financing and evaluation networks that are the purposes of evaluating the impact of lives and the only way specific to the cultural sectors in question. cultural projects, we have observed that These exist in the film and creative culture has a positive influence on the for two souls to deeply industries, but demand is outstripping curiosity of teams and customers; the communicate. "Art is the supply. They must be expanded. environment, through a new relationship While the art patrons of today are still with utility; brand identity; social capital, by shortest way from a man obliged to fulfil their traditional role, their creating and strengthening interpersonal to a man" (André Malraux). work has expanded in scope. This is why relationships; economic capital, since Italy adopted legislation on arts patronage investments are most effective when they inspired by the French law of 2003. receive adequate support; and social Nevertheless today ... However, a more dynamic and inventive organization, as well as the capacity for view must be encouraged. For the cultural innovation. institutions, the challenge of developing strong links with families of art collectors Cultural investment is thus a formidable is now of paramount importance, since the source of change and even transformation enrichment of collections occurs mainly within an organization; this is apparent in through donations and inheritance. One the medium term, but can even be evident clear example of this is the close bond in the short term provided that extensive between the Musée d'Orsay and Spencer preparation work is carried out. Moreover, and Marlène Hays that allowed one of the cultural investment must be integrated largest donations of impressionist and within a company or community strategy, fauvist paintings in the world. This was and not considered to be a luxury or a only made possible by years of assistance whim. and detailed knowledge, hand-in-hand, between the couple and the chairman of In France, economic studies have the Musée d'Orsay. demonstrated that the economic weight of cultural activities accounts for 3.2 percent Such examples must be encouraged of national GDP and more than 800,000 and increased in the future. This is the direct jobs. It is therefore an important challenge of the work of developing studies source of development. on the relations between art and the economy. This report is an example of that. 15

16 Art & Finance Report 2017 | Introduction Introduction So what are the key drivers behind the Need for better art risk management above trends? A combination of art Is there a risk While last year’s report was published market growth and higher valuation and during the global art market slowdown, prices have triggered more demand for this year’s report comes at a time where that collecting art and more wealth allocated to art the art market has staged a significant and collectibles. This in turn has forced recovery in the first six months of the year. wealth managers to take a more proactive art is just However, while the art market seems to approach with regards to their client’s be on the mend, a new set of challenges art-related assets. This trend has been and uncertainties have emerged in the last another trend? further fueled by a shift in an increasingly 18 months. Political uncertainty around competitive private banking industry the future of EU and Brexit, geo-political toward a more holistic approach to wealth risk in many parts of the world, and the management. fear of conflict on the Korean peninsula are all macro factors that could weigh Is there a risk that collecting art is just negatively on art market developments in another trend? Although there are the coming year. In addition, the art market fashionable aspects about buying art, for is also increasingly feeling the pressure to an increasing number of HNWIs, art and change and adapt to a new environment collectibles are playing a more significant shaped by changing consumer preferences, role in their lives and is accounting for a technological innovation, and new larger share of their overall wealth, a trend regulations. In a world of increasing that is forecasted to continue in the next 10 uncertainty, the need to better understand, years. In addition to its financial attributes, monitor, and measure risk is becoming there are also strong emotional and social increasingly obvious, which is a core theme aspects associated with buying and owning running through this year’s report. art—motivations that wealth managers are realizing could be harnessed and cultivated Art and wealth management is now more effectively, ultimately resulting in part of a longer term trend a stronger and more sustainable client When we launched the inaugural Art & relationship. Finance report six years ago, one third of the wealth managers surveyed said they As illustrated throughout the report, the were aware and followed the developments challenges are many, and the need for a linked to art as an asset class and issues coordinated response across the different around art and wealth management. This industry stakeholders is more critical than year, close to 60 percent of the wealth ever. We hope that this year’s edition of the managers said the same. However, it’s not Art & Finance Report continues to provide only awareness that has increased over a forum for the Art & Finance industry to the last years—we are also seeing real express their concerns and needs, but also action, with 64 percent of wealth managers provide ideas and possible solutions to saying they were actively offering services how one can best address these issues. As related to art and collectibles. The most before, the main aim is to build a platform recent survey shows an increase from 78 to encourage and facilitate sustainable percent in 2016 to 88 percent in 2017 of relationships between the Art & Finance wealth managers saying that they think art world going forward. and collectibles should be included as part of the wealth management offering, the highest registered reading since the launch of the survey in 2011. 16 16

17 | Introduction Art & Finance Report 2017 Sample by geography Methodology and limitations The first Art & Wealth Management Survey 2% 4% 6% 4% was conducted in 2011 and included 3% 4% 2% 19 private banks from Luxembourg. In 6% 11% 2012 the sample was increased to 30 private banks from Europe. In 2014, the survey included 35 private banks from predominantly Europe & the USA and an additional 14 family offices from Europe 55% 63% 45% and the USA. In 2016, the survey included 53 private banks from Europe, USA and 78% Middle East and 14 family offices from Europe and the USA. This year, Deloitte Luxembourg and ArtTactic conducted 37% 35% 31% the research for this report between May 16% 2017 and August 2017. We surveyed 69 private banks among which 5 are art- Fam llectors ffi Privat e b an ces ks Art p rofessional s Art Co ily o secured lenders (specialized boutiques) USA Europe Asia Middle E as t Others Latin A merica and 27 family offices. Adding more private Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 banks and family offices from different geographical regions could have an Section 1 of this report (market outlook the global art fund industry, combining impact on the results from one year to for different art markets) includes data and information from interviews with another. However the increasing number findings based on qualitative Art Market US and European art funds, as well as of private banks and family offices is part Confidence Surveys that ArtTactic sent public records on art investment trusts and of our ongoing effort to ensure that the out to 310 international art collectors, art art funds in China. The Chinese art fund report is increasingly representative of advisers, galleries, and auction houses industry analysis is based on conservative the perceptions and opinions of the global in June 2017. This section also includes estimates about the size and maturity of wealth management community, when it auction data analyses of different modern different art investment trusts. However, comes to issues around art as an asset and contemporary art markets, and many Chinese trust companies are no class. is predominantly based on data from longer marketing or publishing information Sotheby’s and Christie’s, but also includes about their art-related trust investment As for the previous report, we have other auction houses when they represent activities and it is not possible to know again conducted research among other a major share of the market. whether these funds have been wound up important stakeholders in the Art & early or are still active. Our estimates are Finance market, such as art collectors In order to provide a market context based on the publicly available information and art professionals (galleries, auction for the survey findings we have given a as of July 2017. houses and art advisers, art lawyers, art broad, international overview of recent insurers, art logistics, etc.). A total of 155 developments across various regional We have expanded the regulatory section art professionals (up from 126 in 2016) modern and contemporary art collecting (Section 6) this year to also include a strong and 107 major art collectors participated categories. Most of the data is collected focus on art and risk management, in in the survey (up from 94 in 2016). These from Sotheby’s and Christie’s, as they addition to new issues around regulation art collectors were from Europe, the cover the majority of the modern and in the art market. As in the previous US, Middle East, Latin America, and contemporary art collecting categories editions, we are delighted to have many Asia, and were surveyed on a variety of covered in this section, although certain contributions from leading experts in this topics relating to art as an asset class, regional markets such as China, India, field to complement each section of the Art their motivations, current and future Russia, and Africa also include auction data & Finance report. involvement, challenges, and opportunities. from other leading auction houses. In the art investment section of the report (Section 4), we have estimated the size of 17

18 Art & Finance Report 2017 | Introduction We are delighted to be able to publish a series of interviews and opinions from key figures in the Art & Finance industry: Aurelie Filippetti Harvey Mendelson French Ministry of Culture (2012-2014) Managing Director at 1858 Ltd Art Associate Professor, Classical Literature, Advisory Science Po, Paris Celine Fressart Nisha Dhaliwal Head of Special Projects at 1858 Ltd Art Account Manager, Deloitte Canada Advisory Alan Mudie Micaela Saviano Responsible for Société Général Private US Tax Private Wealth and US Art & Banking Investment, Société Générale Finance, Deloitte US Asia Institute of Art and Finance in Mark Stokes Shanghai UK Family Office Tax, Deloitte UK China Javier Lumbreras Rosine Makhlouf Family Business CEO, The Charitable Museum Endowment Advisor Fund, L.P. Deloitte Private (ME) Emilie Villette Dr Tahir Hatim Business Development, Director, Director, Deloitte Islamic Finance Group Christie’s France Bola Asiru Phillip Ashley Klein Deloitte West Africa Leader for Strategy U.S. Art & Finance Coordinator, Deloitte & Operations & Africa Art & Finance Consulting LLP Coordinator Kevin Ye Raphaël Glohr Consultant, Deloitte Consulting LLP Partner VAT at Deloitte Luxembourg Victoria Kisseleva Cyrielle Gauvin Assistant Director Financial Advisory, Tax and Art & Finance at Deloitte Deloitte UK Art & Finance Coordinator, Luxembourg Deloitte LLP (UK) Maria de Peverelli Ben Williams Executive Chairman – Art Management, Managing Director, Head of Lending Stonehage Fleming Solutions in the UK & Nordics for J.P. Morgan Private Bank Melanie Damani Attorney-at-law, Art Services – Family Shirin Kranz Advisory, Edmond de Rothschild (Suisse) Head of Art Lending, Privatbank Berlin v. SA. 1929 AG 18 18

19 Art & Finance Report 2017 | Introduction Adrien Chiariello Mathilde Heaton We also want to thank all the survey Senior Consultant, Deloitte Luxembourg Lawyer and art law consultant, participants—without them this report Researcher at the University of Geneva’s would not be possible. Thank you to Claude Claire Hiller Art-Law Centre and RAM’s task force Hermann from Fine Art Logistics Natural Managing Director – Global Originations, coordinator Le Coultre, Salma Shaheem, Head of Borro Middle-Eastern Markets and Joint Venture Avvv. Giuseppe Calabi Partner at the Fine Art Group in Dubai & Fabian Bocart Studio Legale, CBM & Partners Oscar N. Oneyma, CEO of the Nigerian Vice President of Analytics, Stock Exchange as well to Monica Carabajal artnet Famke Schaap Zamora, Capital Markets Manager, and her Director, Global Trade Advisory, Deloitte team, as well as Jean-Philippe Peters, Risk Yaoge Wang Belgium Advisory Partner at Deloitte Luxembourg, Business analyst, artnet for their precious contributions. A special David Heurtevent thank you also to Fabian Bocart and artnet Violaine Remacle Manager, Forensic & Restructuring, for their support in supplying valuable IN ART Managing Partner Deloitte Luxembourg annual art market performance data. We also express a special thank you to Mr. Alain Balanzategui Laura Patten Yinka Shonibare who contributed to the IN ART Board Member Specialist Leader, Risk and Financial quality and the originality of this report by Advisory, Deloitte & Touche LLP allowing us to use a series of images from Miguel A. Muñoz his own artistic creations. We wish you an IN ART Board Member Borna Emami inspiring reading. Senior Manager Marcelo Garcia Casil Deloitte Consulting LLP Deloitte Luxembourg and ArtTactic Founder & CEO of Maecenas recognize that the findings are indicative Deborah Gunn and see the limitations of these findings; Madelaine D’Angelo Senior Advisor, Faurschou Foundation however, we believe that the results reflect Founder & CEO of Arthena a broad representation of the perceptions Rebecca Jennings and attitudes that exist in the global wealth Christine Bouron Art Researcher, The Fine Art Group management and art and art collector CEO of Pi-eX Ltd communit y. Dr. Shermin Voshmgir Founder, blockchainhub.net Sandrine GIROUD Partner with Lalive, Switzerland, Board member of the Art Law Foundation and member of RAM’s task force 19

20 Art & Finance Report 2017 | Introduction Deloitte Canada The Canadian art market is relatively small Projects in Architecture’s mandate was to in size, currently sitting at around US$1.3 strategically integrate art into the design billion. However, the opportunity for of the particular space in question during growth is significant. Art hubs including the design conception stage. Nisha worked Toronto, Montreal, Vancouver, and Calgary with each developer to meet specific needs are steadily growing in size and attracting and requirements, provided strategic international interest. input for special art pieces and special considerations, and provided traditional art In the last few months, Nisha Dhaliwal consultancy services. Nisha Dhaliwal has been leveraging her passion for art in Account Manager a professional context by promoting the After returning to Toronto, Nisha’s Deloitte Canada Deloitte Art & Finance initiative, with the interaction with clients led her to notice aim to develop this service line in Deloitte that there was a gap in the market for Canada. Nisha received her master’s in professional services such as consulting At a time when countries Art and Business from Sotheby’s Institute and corporate strategy, specifically tailored are becoming increasingly of Art. Her dissertation focused on to the arts. Today, Nisha is a strategic how financial institutions invest in art, account manager in Canada’s capital city economically and politically specifically in Canada. Nisha then began of Ottawa. Nisha is motivated to bring the interdependent, promoting her own art consultancy, DART Consulting, Art & Finance initiative to life in Canada, which is currently in its sixth year of in an innovative and disruptive fashion. cultural expression operation. Her work as an art consultant She has begun compiling research on the through a cultural policy exposed her to clients and artists in Canadian art market, by interviewing key New York, London, Los Angeles, Toronto, players in both art and finance ecosystems. for the arts is a valuable Vancouver, and Calgary. DART Consulting’s She continues to make business case way to emphasize and mandate involves more than merely placing presentations to promote the launch of art on a wall. DART has delivered, and the Art & Finance initiative in Toronto. Her define what distinguishes continues to successfully deliver, custom placement in Ottawa currently positions one country from another. and strategic art-related advice to those her well, providing her with great exposure inside and outside the art market. An and access to art and cultural policy on a Canada continues to face example of a unique project Nisha led was federal level. Nisha is working closely with significant in challenges Projects in Architecture. Through DART, the Luxembourg team throughout this she partnered with a prominent gallery process and is already engaged in some the arts. Its vast geography in Los Angeles to develop Projects in pre-work with a potential anchor client. and relatively small Architecture: an initiative to make gallery- quality art available for new and upcoming Please contact Nisha Dhaliwal if there is population make it difficult developments (residential, educational, and anything Canada-centric you wish to inquire for the country to produce, commercial) in LA and surrounding areas. about in regards to the Art & Finance initiative. exchange, disseminate, and communicate works of art. It is difficult—but not impossible. 20 20

21 Art & Finance Report 2017 | Introduction Key findings SECTION 1 – The state of the global art and economic uncertainty as the biggest market risk to the development of the global art market in the coming 12 months. A new approach to art and wealth • The ArtTactic art market speculation management needed: With more barometer is up 17.7 percent from wealth expected to be allocated to art January 2017, which suggests that and other passion assets in the next experts feel the current art market 10 years, coupled with a complex and recovery has reintroduced more uncertain global art market, a more speculative behavior. sophisticated and dynamic approach to managing art-related wealth is required in Positive outlook for the US • the future. contemporary art market: Experts signal a more upbeat outlook for UHNWI population is expected to • 2017–2018. Based on the responses of increase by 43 percent in the next experts surveyed by ArtTactic in June The world’s ultra-high-net-worth decade: 2017, 62 percent believe that the US individual (UHNWI) population grew by contemporary art market will go up in 3.5 percent in 2016, a recovery from a the next 12 months (versus 47 percent in sharp fall in 2015, according to a recent January 2016). wealth report. The total number of ultra- wealthy individuals is predicted to rise 43 Brexit could have a negative impact • percent by 2026. on the UK contemporary art market in 2018: Much of London’s relative Growing demand for luxury • success following the Brexit vote last year investments: 37 percent of wealth can be linked to the decline in sterling, managers surveyed in a recent report by motivating buyers from outside Europe to Knight Frank said that their clients already take advantage of the benefits of a lower had a number of luxury investments, exchange rate. However, 38 percent think such as art, wine, and classic cars. A total that the market will come down in the of 47 percent of these managers said that next 12 months (up from nine percent in these types of investments had become January 2016). more popular in recent years. • European art market outlook looks Auction sales recovers in the first • 36 percent of the experts positive: half of 2017 and the art market surveyed believe that the European outlook for 2018 remains cautiously contemporary art market will see a Total auction sales at optimistic: positive development in the next 12 Sotheby’s, Christie’s, and Phillips were months (up from only 14 percent in up 18 percent in the first half of 2017 January 2016). compared to the same period last year; the overall art market sentiment remains • Chinese contemporary art market more cautious over the next 12 months. outlook turns neutral-to-positive: The The increase in sales comes on the back direction of the Chinese contemporary of a global art market slowdown between art market in 2017/2018 signals that the the second half of 2015 and throughout market is getting more positive compared 2016. to 2016. 32 percent believe that the Chinese contemporary art market will Heightened geopolitical and • go up in the next 12 months (versus 26 A recent ArtTactic economic risk: percent in January 2016). survey from June 2017 ranks political 21

22 | Introduction Art & Finance Report 2017 • The Middle-Eastern auction China’s focus on building a regulated • market bucks the trend last year: The Chinese government art market: Total auction sales of modern and attaches great importance to the contemporary Middle Eastern art rose by development of cultural projects, which 11.9 percent in 2016. The first half of 2017 are crucial to the soft power of China. In was also marked by solid performance. recent years, according to Asia Institute of However, there are concerns about the Art & Finance (AIAF), the government has next 12 months, with 41 percent (up from emphasized the healthy and regulated 24 percent in January 2016) predicting development of culture and the art that the Middle Eastern art market will market through the introduction of new decline. Wars, terrorism, and geopolitical policies. tension in the region were cited as the Sentiment in the South Asian modern • main reasons for this. and contemporary art market turns Art has the Art and Islamic finance: • from positive to neutral in the first potential to make a good underlying asset half of 2017: South Asian modern and for a financing or investment structure contemporary auction sales in the first under Sharia Law. With an increasing six months of 2017 were 14 percent lower interest in the region around art as an than in the first half of 2016. Based on asset class, there are opportunities for the responses of the experts surveyed banks and investment houses to address in June 2017, only seven percent of the the needs and opportunities associated experts believe this market will go up in with art financing and investment in the the next 12 months (versus 40 percent in region. January 2016). • The Russian art market sees a Slowdown in the Southeast Asian • positive start to auction sales in 2017, art market: Modern and contemporary but experts remain cautious about Southeast Asian art saw a 29.7 percent Despite a positive start to its outlook: year-on-year decrease in sales in 2016. the year, only 19 percent of the experts The auction sales in the first half of 2017 surveyed by ArtTactic in June 2017 (up suggest that the downward pressure from 16 percent in January 2016) believed on this market could continue into the that the Russian art market would see a second half of the year. Only 17 percent positive growth trend this year. of the experts surveyed believe the market will go up in the next 12 months • African art auction market sees (down from 40 percent in January 2016). The African significant growth in 2017: modern and contemporary auction • Uncertain outlook for the Latin market has seen steady growth since Latin American American art market: 2014, but sales have accelerated this year auction sales in 2016 saw a year-on-year as Sotheby’s launched its first African decrease of 27.2 percent following several modern and contemporary art sale in years of steady growth. Based on the May 2017 in London. responses of the experts surveyed by ArtTactic in June 2017, 34 percent believe • Art & Finance in Africa: Rising global the market will go up, versus 37 percent demand for African contemporary art who believe that the Latin American and improved art market infrastructure modern and contemporary art market is likely to increase the demand for Art & will go down in the next 12 months. Finance related services and initiatives in the African art market, supported by investment in art education, awareness raising, and capacity-building. 22 22

23 Art & Finance Report 2017 | Introduction SECTION 2 – Art and wealth • More investment and resources Art and estate planning: • Estate management survey allocated to art-related services: planning is viewed as the most important An average of 44 percent of wealth art and wealth management service • Art and wealth management managers reported that increasing focus by wealth managers, art professionals, This year’s industry converge: and resources would be dedicated to art and collectors. With a massive transfer report confirms that art and wealth and wealth management services in the of wealth from baby boomers to management is part of a long-term coming 12 months, up from 38 percent millennials about to occur, art and industry trend, particularly as the wealth in 2016. This is the highest reading since estate planning is likely to become an management industry moves toward a the launch of the survey in 2011, and is increasingly important area for the wealth more holistic asset management model. supported by a positive trajectory for all management industry. • Stronger motivation to include art art-related products and services. Almost half of collectors surveyed • within wealth management: • Art-related wealth to be included in have yet to discuss their art-related 88 percent of wealth managers surveyed wealth reporting: Findings from this Although estate with their heirs: this year say that they think art and year’s survey show that 69 percent of the majority of collectors surveyed collectibles should be included as part the wealth managers surveyed said they have formal estate plans for their art of the array of wealth management expected their clients to want to include collection, 46 percent of collectors have solutions. art and other collectible assets in their yet to discuss these plans with their heirs, A more holistic approach to wealth • wealth reports. although they intend to do so. management drives interest in Collecting art with a view to • Family offices, especially US family • With an art and collectible wealth: investment: A large majority (86 offices, seem better prepared to estimated US$1.62 trillion of UHNWI percent) of art professionals said that offer art wealth management wealth allocated to art and collectibles in their clients buy art and collectibles for services: When a family office has to 2016 and an estimated US$2.7 trillion by emotional reasons (passionate about deal with an art collection, it usually 2026, wealth managers are forced to take collecting), but also focus on investment provides the different services to protect a more holistic approach to the way they value; this was up from 79 percent in the wealth of clients allocated to the art work with their clients’ assets. This year’s 2016. 54 percent of wealth managers (up collection. The majority (61 percent) of survey findings show that 85 percent of from 51 percent in 2016 and the highest family offices (all US family offices and half wealth managers believe that the move reading since the survey was launched of the family offices from the rest of the toward a holistic wealth management in 2011) increasingly see art as a way to world) stated that their clients maintain model is the strongest argument for safeguard value. an updated inventory of their collection including art and collectibles in a wealth allowing them to administer the estate management service range. • Art is increasingly becoming a without the collector’s input. Again, in For the third time lifestyle product: • A majority of wealth managers offer stark contrast, only 13 percent of private since the launch of the survey in 2011, the art-related services to their clients: banks said the same. social value associated with buying art 64 percent of wealth managers surveyed was the primary motivation among art More wealth managers are offering • said they were actively offering services collectors according to art professionals valuation services to their clients related to art and collectibles, including (85 percent of the art professionals mainly through third party providers: entertainment and client hospitality. surveyed said so, up from 80 percent All of the family offices that responded to Client pressure on wealth managers: • in 2016 and 72 percent in 2014). This this year’s survey said that they offered 55 percent of wealth managers said that confirms the findings from previous years valuation services (73 percent said they clients were increasingly asking their suggesting that art is increasingly viewed were providing this through a third party). private bankers and wealth managers to by art professionals and collectors as a A high number (84 percent) of private help with art-related issues (up from 48 “lifestyle” product and investment. banks also provided valuation services percent in 2016). for their clients, with 67 percent providing this through a third party. 23

24 Art & Finance Report 2017 | Introduction Private banks and family offices are • art and collectibles market remains the focusing on art advisory services: biggest challenge for incorporating art 83 percent of wealth managers said they into their service offering (up from 62 offered art advisory services (this was up percent in 2016). from 79 percent in 2016 and 67 percent Lack of management support: • in 2014), and 47 percent said the services 51 percent of wealth managers said that were delivered in-house. lack of interest internally was a major Collection management and wealth • challenge, up from 26 percent in 2016. reporting are likely to converge: This could suggest that as interest in 78 percent of wealth managers said art and wealth management is gaining that they offered art collection services; momentum, there is a lack of leadership this was up from 59 percent in 2016. support for these types of initiatives. We are likely to see increasing demand Difficulties in finding and developing • for integration between art collection talent and expertise: 55 percent of management software and banks’ wealth managers said that finding the existing reporting systems. This would right expertise remains one of the key offer the wealth management sector an challenges in building an art-related opportunity to be more proactive, to service offering (up from 46 percent in support estate planning, and to better 2016). monitor and protect art-related wealth. • More demand for services related to 72 percent of art and philanthropy: the wealth managers surveyed this year said they offer services related to art philanthropy and individual giving to the arts (gifts, donations, help with setting up foundations, etc.). This was up from 64 percent in 2016, and suggests that art is now playing a bigger role in the spectrum of philanthropic activities that clients are seeking their wealth managers’ advice and help on. • Lack of art market transparency remains a key hurdle: As the wealth management industry continues to grow and expand its investment in art-related wealth services, there is also a sense of heightened concern regarding the lack of transparency in the art market (75 percent of wealth managers expressed this view). • Unregulated nature of the art market 65 percent of remains a key hurdle: the wealth managers surveyed this year said that the unregulated nature of the 24 24

25 Art & Finance Report 2017 | Introduction SECTION 3 – Art-secured lending SECTION 4 – Art as an investment funds were a relevant/very relevant service for their clients and 37 percent of US art-secured lending market • • Art market returns recover in the collectors said the same. grows an estimated 13.3 percent: last 12 months: Six out of seven Artnet The art-secured lending market in the US art price indices see positive return Challenges in the pre-investment • reached an estimated US$17-20 billion between April 2016 and April 2017, with process: 79 percent of the wealth in 2016, which represents a 13.3 percent Impressionist Art and Contemporary managers surveyed said that due growth from 2015. Art accounting for the highest annual diligence and assessing the viability and returns of 10.50 percent and 7.45 percent credibility of the art fund was one of the Art-secured lending services stable: • respectively. main obstacles (up from 77 percent in In this year’s survey, 67 percent of wealth 2016). This challenge is linked to other managers said their institution now The art fund market seems to • aspects of the art fund industry and the offered art-secured lending services. struggle to gain momentum: art market, such as a lack of track record The lack of transparency around the • Risk management a key challenge: for art funds and the unregulated nature actual number of active art funds makes Issues around risk management, liquidity, of the art market. the evaluation of the size of the market valuation, and regulation remain key difficult. The overall art fund market in • Challenges in the post-investment challenges for the future growth of this the first half of 2017 is conservatively 85 percent of the wealth monitoring: market. estimated to be US$834 million down managers cited the lack of mark-to- New accounting requirements for • from US$1.03 billion in 2016 and US$1.2 market valuation as a major challenge art-secured lending: New accounting billion in 2015. However, with many art for incorporating art into the wealth requirements stipulate that provisions funds operating away from the scrutiny of management offering (this was up from for credit losses will no longer have to be the public eye, these numbers are likely 77 percent in 2016). recorded with an incurred loss model, to be higher. • New art investment products: but rather with an expected loss model. • Chinese art fund industry declines In recent years new art investment This will have significant implications for on the back of tougher regulation: products are being developed trying to risk models and risk management with The estimated AUM for the Chinese art address many of the shortfalls associated regards to art-secured lending. investment fund/trust business has fallen with art investment funds, such as New developments in the European • from US$1.48 billion at the peak in 2012 liquidity and price transparency. art-secured lending industry: New to an estimated US$483 million in 2016 offerings have recently come to the and US$373 million in first half of 2017. market, including the possibility of Art investment fund products • lending transactions using high-quality remains a niche service: artworks transferred as collateral Only 11 percent of the wealth managers without taking physical possession of the surveyed offer an art investment fund artworks as collateral. product as part of their in-house offering Art-secured lending providers call • (down from 18 percent in 2016). for more regulation: Art lenders • A small minority of banks are suggest that regulation would create new planning to offer art investment to expand opportunities and democratize fund products to their clients in the the art market, as banks and wealth The recent survey coming 12 months: managers would be able to put their full among wealth managers shows that only weight into the market. 13 percent of the wealth managers see it as likely that they will offer their clients art investment fund products in the next 12 months (this is up from 10 percent in 2016). However, 43 percent of art professionals stated that art investment 25

26 | Introduction Art & Finance Report 2017 SECTION 5 – Art and technology New technology could transform • parts of the art industry: Blockchain Technology is increasingly playing • could revolutionize the art industry by a key role in the evolution of the resolving questions of provenance, and art market. Art-technology startups improving transparency, copyright, and (ArtTechs) are building new digital ownership issues. Seeing the potential, business models aimed at enabling and art startups are already building real- supporting traditional art businesses, world applications based on blockchain. rather than replacing them. Technological innovations are aimed at increasing trust and transparency, but also supporting data-driven valuation methodology, building social capital and transforming the backbone of the art market ecosystem. • Online art sales continues to grow: According to Hiscox Online Art Trade Report 2017, online art market sales reached an estimated US$3.75 billion in 2016, up 15 percent from 2015. This gave the online art market an estimated 8.4 percent share of the overall art market, up from 7.4 percent in 2015. Traditional art businesses take up • Growth in the the online challenge: last two years has picked up among the traditional auction houses. Sotheby’s grew its online business (online bidding and online-only auctions) to US$155 million—an increase of 19 percent in 2016—and Christie’s increased its online activities (bidding and online-only auctions) by 34 percent from US$162 million in 2015 to US$217 million in 2016. • Auction and dealer markets converge online: Increasing competition is already forcing online art platforms to embrace new strategies to expand their business and diversify their income streams. Data and analytics infrastructure • We are starting to in the art market: see the emergence of new art market data and analytics addressing both risk and return in the art market. This is an important development and could contribute toward improving transparency, valuation accuracy, and risk management of art-related wealth. 26 26

27 Art & Finance Report 2017 | Introduction SECTION 6 – Risk management and • Price manipulation and other • Reform of the Italian art market regulation anti-competitive behavior: One In Italy, a new reform aimed regulation: of the biggest perceived threats to at the existing Cultural Heritage Code is • Call for modernization of the art the reputation of wealth managers, set to improve Italy’s competitiveness in 73 percent of wealth managers, market: collectors, and art professionals are the international art market. On 29 June 74 percent of art professionals, and issues linked to price manipulation, 2017, the Italian house of representatives 64 percent of collectors said that the insider trading, and other anti- (Camera dei Deputati) approved five art market needed to modernize its competitive behavior. amendments to a bill aimed at fostering business practices to meet the expected competition. standards of a transparent, trustworthy, • Lack of market transparency: and developed marketplace. 79 percent of wealth managers and 62 percent of collectors see the lack of • Self regulation preferred over transparency in the art market as one Over government intervention: of the key challenges in the art market. 77 percent of art professionals and Most of the problems outlined above 76 percent of collectors prefer a boils down to the fact that the art market self-regulated approach to establish continues to operate opaquely. trust and credibility in the art market. However, wealth managers feel that more • Money laundering regulation will government regulation is required. A affect the art market: 65 percent mixed approach seems recommended of the wealth managers (up from 56 to support a sound growth of the art percent) felt that money laundering is market. a serious threat to the credibility of the art market. With tighter anti-money • Authenticity, lack of provenance, laundering rules implemented around forgery, and attribution remains the the world, the art world will be forced to greatest threat to the reputation of comply with these new regulations. the art market: 83 percent of wealth managers see authenticity, provenance, • Guidelines around money laundering and attribution issues as the greatest launched to assist art businesses: risks in the art market. Art professionals The Responsible Art Market Initiative are echoing this sentiment, with 81 (RAM) published its first set of guidelines percent saying these are major risks to to tackle the threats of money laundering the art market. financing in the art market in and terrorist January 2017. The guidelines are tailored Undisclosed conflicts of interest: • to art transactions and focus on three 65 percent of wealth managers, 63 areas of enquiry: the client, the artwork, percent of collectors, and 69 percent and the transaction. of art professionals see issues around undisclosed conflicts of interest as a • New regulations around the import problematic issue in the art market. of cultural goods in Europe: The new Increasing focus on due diligence in art rules could enter into force as early as transactions is called for. 2019, and are part of a broader plan to fight terrorist financing. The new rules are • Lack of standards around aimed at bringing consistency and clarity professional qualifications in the on the types of restrictions and control 65 percent of wealth art market: measures proposed by the European managers feel that the lack of standards Commission in tackling the illicit trade in around professional qualifications in cultural objects. the art market is a major challenge, as it complicates the search and selection of individuals or firms with the appropriate knowledge and skills. 27

28 | Introduction Art & Finance Report 2017 Priorities Since the inaugural issue The fact that several of our priorities There have been a number of recurring this year are related to those of previous themes over the last six years, which also of the “Art & Finance reports does not mean that there have not will be addressed in this edition. They been developments, or that these issues Report” in 2011, we have include the lack of transparency, the are not being addressed. Instead, this lack of valuation standards, the need for identified a number of should serve as a reminder that the issues better understanding and quantification facing the Art & Finance industry revolve key priorities we believe of risk, and the need for an improved risk around a core set of challenges that require management framework. Also, investment are important in relation all stakeholders’ attention and focus going in better information infrastructure, forward. to overcoming challenges improved knowledge-sharing between stakeholders in the art and finance and encouraging further As in the previous four editions, the “Art & industry, and education and professional Finance Report 2017” aims to prioritize key investment in the development for wealth managers remain considerations for the future development key priorities this year. development of the of the Art & Finance industry, and to encourage dialogue and collaboration Art & Finance industry. We also discuss how technology and between the three key stakeholder groups: innovation can enable further growth and wealth managers, art professionals, and art have the potential to address many of the collectors. key challenges on the market, and while we have seen an increase in new ArtTech We have structured this year’s priorities services and products, further investment around three main areas: and better coordination between industry needs and current solutions are required. • regulation • technology and risk management Last year, we launched a new section on regulation in the art market. This year we • art and wealth management related have broadened our exploration of this issues topic to include more of the key issues surrounding art and risk management. It is becoming evident that regulatory issues, particularly money laundering regulations, will increasingly have an impact on the development and evolution of the market, and it is important that stakeholders in the art and wealth management industries take a proactive role in creating and coordinating the efforts to shape a better regulatory framework for the Art & Finance industry. This involves striking the right balance between self-regulation and statutory regulation. 28 28

29 | Introduction Art & Finance Report 2017 Regulation—addressing the reputation 2. The art and wealth management of the art market industries should develop common 1. Improved transparency is essential standards and guidelines to address for the art market: One of the key reputational concerns: This year’s areas that may need to be addressed survey findings show that the lack of collectively by the wealth management art market regulation ranks as one industry and the art market is the of the top three concerns for wealth issue of transparency. As the wealth managers offering art-related services. management industry continues to The question is how best to move this grow and expand its investment in forward, and earlier studies show that art-related wealth services, this year’s the art trade might not be prepared to findings show that there is a sense of heightened concern regarding the As the wealth management industry lack of transparency in the art market. There is an opportunity for the various continues to grow and expand its art-market stakeholders, in both the private and the public sector, to drive investment in art-related wealth services, this initiative forward in partnership with wealth managers, particularly when this year’s findings show that there is a it comes to education, information and knowledge sharing, and data sense of heightened concern regarding and research. There is a need for innovation, and for better standards and the lack of transparency in the art market. guidelines, which should be developed as a collaborative effort between the stakeholders in the Art & Finance do this alone without external pressure. industry. Technology will continue to Instead of pressure coming directly from play a role in enhancing transparency the government, there is an opportunity on the art market, but it is also about for the art industry to collaborate with bringing in stakeholders who have the wealth management industry to kept a low profile in the evolution of influence and help shape new guidelines the Art & Finance market thus far. One and standards covering art and of these stakeholder groups is the collectibles in a wealth management non-commercial art sector (museums context. With more wealth managers and non-for-profit institutions). This providing art-related services to their sector’s deep knowledge and access clients, there will be an increasing need to expertise, combined with its market for the art industry to adhere to certain neutrality, could ensure that it plays a guidelines and practices, and better very important role in bringing more communication and collaboration trust and transparency to the art market between these stakeholders will through education, and the sharing of be required to ensure that these expertise, knowledge, and information expectations are aligned. It is likely with the wealth management sector. that guidelines produced in this way would be more nuanced and potentially less heavy-handed than government intervention, as wealth managers would have their clients’ best interests in mind when developing a framework. 29

30 Art & Finance Report 2017 | Introduction New technology and risk management Technology will continue to play a Using technology and innovation 3. to support the growth of the Art & role in enhancing transparency on Finance industry: There is no doubt that technology will enable the evolution the art market, but it is also about of the Art & Finance industry. ArtTech startups have raised increasing amounts bringing in stakeholders who have of money in recent years: although the majority of the funding has gone kept a low profile in the evolution of toward art and e-commerce, there is a growing realization that investment the Art & Finance market thus far. also needs to go toward key enabling technologies, addressing issues such as transparency, valuation, authenticity, collection, and risk management. This is similar to how firms such as Schwab and Ameritrade revolutionized the financial investment arena by creating an online marketplace, and how crowdfunding continues to revolutionize real estate investment, investment in startups, and peer-to-peer lending. We believe that the same level of transparency, the democratization of information, and the improved access to investments that transformed the securities and real estate industry also have the potential to transform the Art & Finance industry in the years to come. 30 30

31 Art & Finance Report 2017 | Introduction New specific models for art and risk 4. An increasing need for independent 5. 6. Collection management and Given the management are required: and unbiased valuation combining wealth reporting systems need to new regulations affecting art market both expert and data-driven models: With a more holistic be combined: operations (see Section 5), increasing Valuation of art and collectibles is approach to art-related wealth, we wealth invested in art and collectibles, often considered to be subjective—an are likely to see an increasing demand and the complex nature of the global art rather than a science. Given the for integration between art collection art market, it is clear that a new risk increasing levels of wealth invested in management software and the banks’ management framework and standards art and the financial risk associated existing reporting systems. Although are required. Again, this is an area that with this, it is clear that greater there are a number of art collection will become increasingly important to standardization is required in terms management providers in the art market wealth managers, and greater emphasis of asset valuation and risk monitoring. (ArtLogic, Collectrium, Artbinder, and should be placed on investing and This has become particularly relevant Artbase to name a few), the strong focus developing better risk management, with the development of activities such on client discretion and confidentiality is due diligence, and reporting tools. It is as art-secured lending, art investment hampering the integration of these tools paramount that the art market industry funds, financial auction guarantees, etc. with existing wealth reporting. There and its expert providers (with their This does not mean that we advocate is a clear opportunity for art collection wealth of knowledge of object-specific reliance on a purely data-driven management systems to collaborate risks), together with other existing approach, but that a combination of with existing wealth reporting software third-party providers (offering services independent expert opinions alongside providers to see how passion-based such as collection management, price more historic and forward-looking data assets, such as art and collectibles, databases, forecasting data, and would provide a more transparent and could be integrated with overall wealth market performance indices), and credible approach to valuing these reporting, while simultaneously serving purveyors of fresh innovations (such non-traditional assets. The majority as a collection management system as blockchain, tagging technology, of art collectors and art professionals and facilitating the estate planning and the development of title registers) said in this year’s survey that valuation process—a service that has been rated start to combine their expertise. The was a service that should be provided by art professionals, art collectors, and challenge is to streamline the due- by the wealth management sector, wealth managers as one of the most diligence and risk management process and it is possible that this could lead vital art wealth management services. In in a fragmented industry like the art to greater standardization and better addition to the financial aspect, it is also market, although this could potentially guidelines with regards to valuations important not to forget the emotional be achieved through a credible third- (i.e., in the context of art-secured and social side of collecting art. The party due-diligence platform, which lending and mark-to-market valuations opportunity to access your collection would allow smaller, niche providers to for art investment funds). The existing online, and enjoy and selectively share “pipe-in” their knowledge, information, industry of valuers, appraisers, your art collection with others should and data—to measure and form an and providers of data and analytics be incorporated into this service. aggregated, holistic view of various should work in collaboration with This is a service that the majority risk factors. See Section 4 for further the wealth management sector to of existing collection management discussion of this topic. develop valuation standards and risk providers already offer, and the potential management tools that are better suited development of a hybrid collection/ to the financial risk associated with art wealth management reporting system and collectibles. is likely to generate significant interest in the current market. 31

32 Art & Finance Report 2017 | Introduction Art and wealth management related 8. Moving from a reactive to a proactive Estate planning, art philanthropy, 10. issues art and wealth management and donations to public museums: 7. Strong leadership support is required approach: This year’s findings show that In this year’s survey, only five percent of when integrating art and collectibles the trend toward incorporating art and art collectors said that their collection in a new holistic wealth management collectible assets in wealth reporting will would go to a public museum, versus 67 model: Growing frustration is in contribute to the drive toward a more percent of art collectors, who had made evidence among wealth managers this holistic wealth management approach formal arrangements for their collection year in response to the fact that there and a much more proactive approach to to go to the family. At the same time, is not sufficient leadership support wealth invested in art and collectibles. public funding for the museum and to strategically develop art-related This is because wealth managers will gallery sector has dwindled in recent services to meet the increasing level have access to information about art- years, making the public sector more of demand from clients and embed related wealth. The ability to report dependent on private donations. Closer these services within a more holistic on and monitor art and collectible collaboration and communication wealth management model. According wealth represents an opportunity between wealth managers (and their 1 the to a recent Deloitte report, and an effective way to provide value- estate management services) and public wealth management industry is under added services to clients. By raising museums’ needs could enable a large pressure to increase profit and to adapt awareness of the financial value and portion of individual art-related wealth to changing client needs, as well as risks associated with their clients’ art to end up in public museums, providing technology and innovation. The wealth and collectible wealth, wealth managers public access and the opportunity for management industry is facing a shift could develop a better understanding millions of people to enjoy these cultural from mainly providing investment of their clients’ total assets, which is treasures. advice to a holistic wealth management a prerequisite for the development model. This means looking at a client’s of a proactive and holistic wealth total balance sheet rather than only management strategy. the assets held with a wealth manager; in other words, clients are being 9. Education and professional offered services to boost their entire development for wealth managers: financial well-being. A holistic wealth As the wealth management community management model has the potential realizes the potential of art as part to open up new sources of revenue of a holistic wealth management and strengthen client relationships. strategy, more focus and investment However, this would involve the wealth in staff training and professional industry going beyond the current development will be required. Better core and building up expertise, new access to art market data, research, products and services related to art and and information could stimulate wider collectible wealth, and other passion- appreciation and interest in art-related based assets, which also requires services in the future. In order for the leadership support and endorsement wealth management industry to be from senior management. able to properly service clients’ art and collectible wealth, a significant investment in training, education, and access to market intelligence is required. As mentioned in Priority 1, we see the potential for a new type of relationship between the non- commercial art sector (museums and not-for-profit art institutions) and wealth managers. The non-commercial art sector could play a vital role in this education and knowledge-sharing process—and simultaneously add a 1 Deloitte Switzerland, “Innovation in Private Banking & new revenue source in addition to the Wealth Management - Embracing the Business Model more traditional corporate sponsorship Change” 2017 model. 32 32

33 | Introduction Art & Finance Report 2017 | Introduction Art & Finance Report 2017 The wealth management industry is facing a shift from mainly providing investment advice to a holistic wealth management model. 33 33

34 | Introduction Art & Finance Report 2017 The future of art & wealth management How to bring passion into wealth management Deloitte Art & Finance : Art & Finance is uniquely positioned at the intersection of three interconnected sectors Fina nc e tur e Cul • Private banker s • ms blic museu Pu • lth manager s Wea ms museu Private • • Fa mily o ffi ces Corporate collectors • s • Private investor Private collectors • • Art/ col lecti bles fu nd • Etc. prom s oter • Art insu rance com panies panies Art tr ading com • Etc. • Art & Fi nance ss ine Bus panies ia com Art & med • panies sel ling art • Com ica l ar t • Tech nol og panies • Digita l art com com panies Art log • com isti cs panies Etc . • Source: Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 34 34

35 | Introduction Art & Finance Report 2017 | Introduction Art & Finance Report 2017 For the past six years*, we have been monitoring the development and evolution of the Art & Finance industry, and particularly the role of art and collectible wealth within wealth management. * The “Art & Finance Report” was launched in December 2011 and is now in its fifth edition. 35 35

36 | Introduction Art & Finance Report 2017 2 2 Based on an estimate from the “Knight Frank Wealth in art One of the key findings from this year’s With an estimated US$1.62 trillion Report 2017,” (six percent of global UHNWIs allocate and collectible wealth held by UHNWIs in report is the growing body of evidence assets to art and collectibles; pp. 63) and the fact that 3 Wealth-X reported total UHNWI wealth of US$27.035 by 2016, and an estimated US$2.7 trillion to suggest that wealth managers are trillion in 2017, which gives an estimated US$1.62 trillion 2026, wealth managers seem to realize taking a more proactive approach when in art and collectible wealth. both the financial and emotional value it comes to addressing art and collectible 3 The ten-year estimate is based on the Wealth-X forecast of US$27.035 trillion in UHNWI wealth in 2016. We have attached to art and collectibles, and to wealth. Moreover, this year’s survey results assumed that UHNWIs wealth (US$) grows at the same be starting to take a more strategic and represent the highest overall reading to - growth rate as the expected growth in the UHNWI pop ulation according to Knight Frank Wealth Report 2017. holistic approach to these passion-based date for anticipated investment in art Knight Frank Wealth Report 2017 reports that 47 percent assets. Despite the auction market volatility wealth management services over the next of wealth managers having noted luxury investments increasing in popularity among their clients. Based on seen in the last two years, the global 12 months. These findings indicate that art this, we assume that the allocation of wealth toward art 4 auction market saw total sales growth wealth management services are slowly but and collectibles rises from six percent to seven percent as a global average, then an estimated US$2.706 trillion of 319 percent between 2000 and 2016, surely moving into the mainstream. would be allocated to art and collectibles by 2026. 5 allocated to art and with more wealth 4 These sales are based on Sotheby’s and Christie’s four main auction categories—Impressionist and Modern art, and collectibles, this positive trend is likely These results are confirmed by the fact Post-War and Contemporary art, Old Masters art and to continue. Offering art and collectible that 88 percent of wealth managers (up Chinese works of art. 5 According to the “Knight Frank’s Wealth Report 2017,” a management alongside other wealth from 78 percent in 2016) said that they global average of 47 percent of wealth managers said management services tailored to UHNWIs believed that art and collectibles should be that luxury investments had become more popular with their clients. is an opportunity to better serve clients, included as part of a wealth management but providers also have a responsibility to offering. In addition, 69 percent of the ensure that all client assets are monitored wealth managers surveyed said that they and protected. expected their clients to want to include art and other collectibles in their wealth reports to have a consolidated overview of their financial and passion-based assets. Global UHNWI Art & Collectibles Wealth 2016 to 2026 Estimates US$ 1.622 billion in 2016 to US$2.706 billion in 2026 Russia & CIS (2016) US$33bn (2026) US$64bn are 2016 market sh 2.1% dle Ea Mid st market sh 2.4% are 2026 US$86. 4bn (2016) Eu rope (2026) US$140bn 24% market sh are 2016 No rth Americ a 5.3% market sh are 2016 29% market sh are 2026 36% market sh are 2016 5.2% market sh are 2026 33% are 2026 market sh US $519bn (2026) US$883bn (2026) US$ 386bn $578bn US (2016) Asia US$ (2016) market sh are 2016 21% 338bn (2016) market sh are 2026 29% US $776bn (2026) Africa Latin Americ a (2016) US$75. 6bn US$12.7 bn (2016) US$117 bn (2026) US$20bn (2026) 0.8% market sh 5% market sh are 2016 are 2016 are 2026 market sh are 2026 market sh 0.7% 4% Source: Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 36 36

37 | Introduction Art & Finance Report 2017 One of the key findings from this year’s report is the growing body of evidence to suggest that wealth managers are taking a more proactive approach when it comes to addressing art and collectible wealth. Art and wealth management Four core service areas Typology of Art Wealth management services Accumulating wealth Protecting wealth Managing risks Growing assets • Art advisory • Museum endowments • Valuation • Art investment • Assets consolidation • Art funds • Reporting • Stocks of art businesses • Art insurance • P/E in start-ups • Passive portfolio management • Financing of art business Wealth managers • Art collection management • Art risk management • Art-secured lending • Philanthropy advice • Art related inheritance & estate planning • Securitization Converting wealth to income Transferring wealth Creating a legacy Creating an income stream • Client entertainment • Art sponsoring • Internal education Corporate collection • Source: Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 37

38 Art & Finance Report 2017 | Section 1 - The state of the global art market 38

39 Art & Finance Report 2017 | Section 1 - The state of the global art market Section 1 The state of the global art market BUT TERFLY KID (GIRL) © YINK A SHONIBARE MBE (2015), PHOTOGRAPHER: STEPHEN WHITE 39

40 | Section 1 - The state of the global art market Art & Finance Report 2017 HIGHLIGHTS • Cautious outlook for 2018: Despite the significant rebound in the first six • Art and wealth management services months of 2017, the overall market needed in an increasingly complex art sentiment remains more cautious market: With more wealth allocated to about the next 12 months. The outlook art and other passion assets, a trend that regarding contemporary and modern is expected to continue in the coming art markets in the United States, China, 10 years, coupled with a more volatile Russia and Africa are looking more and uncertain global art market, suggest positive compared to 18 months ago, that a more sophisticated and dynamic while art markets in the United Kingdom, approach to managing art related wealth Europe, South Asia, Southeast Asia, is required in the future. Latin America, and the Middle East have • Strong tailwind in the first half of turned less optimistic. Total auction sales at Sotheby’s, 2017: • London and New York strengthen Christie’s, and Phillips were up 18 percent their market share in the first half of in the first half of 2017 compared to Despite the economic and political 2017: the same period last year. This was uncertainty around Brexit, London primarily fueled by an increase in auction sales based on Sotheby’s, sales of impressionist, modern, and Christie’s, and Phillips saw a US$404 contemporary art, as well as a 21 percent million increase in the first half of 2017 increase in sales of Chinese and Asian compared to the same period last works of art. The increase in sales comes year. New York maintains its dominant on the back of a global art market slow position, with 45 percent market share down between the second half of 2015 (up from 41 percent in 2016), ahead of and throughout 2016. Auction sales at London with 30 percent market share (up Sotheby’s and Christie’s across four of from 27 percent in 2016). 6 were down the main auction categories 5.9 percent in 2015 and a further 35.7 • Dealer market holding up better than percent in 2016. The Art the auction market in 2016: Basel Report 2017 reported an overall art market decline of 11 percent for 2016, while TEFAF’s art market report documented a small two percent increase Despite the in global art market sales, primarily driven by an estimated 20 percent rebound significant growth in dealer sales (offsetting an 18.75 percent fall in auction sales). Both reports in the first six highlight healthier growth in the private dealer market, and this could indicate months of 2017, that the overall volatility associated with the current auction market is having less the overall market impact on the private, non-auction art trade. sentiment remains more cautious about the next 12 months. 6 Contemporary art, Impressionist and modern art, Old Masters, and Chinese works of art 40

41 Art & Finance Report 2017 | Section 1 - The state of the global art market Political and economic uncertainty • A recent ArtTactic survey from June 2017 perceived as the biggest risks to the art market: A recent ArtTactic survey ranks political and economic uncertainty from June 2017 ranks political and economic uncertainty as the biggest as the biggest risk to the development of risk to the development of the global art market in the coming 12 months. the global art market in the coming Geo-political risks related to North Korea and Middle East, and Brexit-related 12 months. uncertainties remain among the most important political sources of risk in the art market. • Growing popularity of luxury • Uncertainty around Brexit could 37 percent of wealth investments: have a negative impact on the UK Speculation risks on the increase: • 11 said managers surveyed by Knight Frank contemporary art market in 2018: The ArtTactic art market speculation 7 that their clients already had a number of Much of London’s relative success is currently standing at 7.3, barometer luxury investments, such as art, wine, and following the Brexit vote last year can up 17.7 percent from January 2017. This classic cars. A total of 47 percent of these be linked to the decline in sterling, suggests that experts feel the current managers said that these luxuries had motivating buyers from outside Europe art market recovery has reintroduced become more popular in recent years. to take advantage of the benefits of more speculative behavior, after a six- Although personal enjoyment ranked as a lower exchange rate. However, 34 month market slowdown. The sharp the most significant client motivation, the percent of the experts surveyed in June reversal in expert perceptions of risk potential for increased capital gains came 2017 believe that the UK’s post-war and and speculation calls the health of the in second, which implies that the financial contemporary art market will go up in the recovery process into question, and aspects of luxury investments are gaining next 12 months (down from 47 percent in raises the question of whether the sharp in importance. January 2016) and 38 percent think that auction market rebound in 2017 is an the market will come down in the next 12 indication that we are entering a period • US contemporary art market outlook months (up from 9 percent who expected of increasing volatility in the art market. turns positive: Experts signal a more the market to decline in January 2016). upbeat outlook for 2017–2018. Based on • ealth growth recovers after a W the responses of experts surveyed by • European art market outlook looks sharp fall in 2015 and is expected to ArtTactic in June 2017, 62 percent believe positive: 36 percent of the experts increase by 43 percent in the next that the US contemporary art market will surveyed believe that the European decade: The world’s ultra-high-net-worth 8 go up in the next 12 months (versus 47 contemporary art market will increase grew individual (UHNWI) population percent in January 2016). in the next 12 months (up from only 14 by 3.5 percent to 226,450 individuals in percent in January 2016). This indicates 2016, a recovery from a sharp fall in 2015, 9 that there has been a shift toward a according to a recent wealth report. more positive stance on the European Their combined wealth also increased in post-war and contemporary art market in 2016, expanding by 1.5 percent to US$27 2017, despite the political and economic trillion. However, the average net worth uncertainty. of the ultra-wealthy declined for the first time since 2013. The total number of ultra-wealthy individuals is predicted 10 to 275,740 by 2026. to rise 43 percent Predicted growth rates vary widely on a regional basis, with emerging economies still leading the way. 7 The ArtTactic risk and speculation barometer is part of a six-monthly art market expert survey conducted by ArtTactic. Respondents are asked to rate their perception of current art market risk and speculation on a scale from 1 to 10, where 1 is a very low level of risk/specula - tion and 10 is a very high level of risk/speculation. 8 UHNWIs are defined as individuals with US$30 million or more in net worth 9 Source: Wealth-X World Ultra Wealth Report 2017 10 The Wealth Report, 11th edition by Frank Knight, pub lished in March 2017 11 Source: World Wealth Report 2017 by Knight Frank 41

42 | Section 1 - The state of the global art market Art & Finance Report 2017 • Chinese contemporary art market FLOWER POWER KIDS (DUELING) © YINK A Sentiment in the South Asian modern • SHONIBARE MBE (2014), outlook turns neutral-to-positive: and contemporary art market turns PHOTOGRAPHER: STEPHEN WHITE Chinese contemporary art market from positive to neutral in the first direction in 2017/2018 signals that the South Asian modern and half of 2017: market is getting more positive compared contemporary auction sales in the first to 2016. Based on the responses of six months of 2017 was 14 percent lower experts surveyed by ArtTactic, 32 percent than the first half of 2016. Based on the believe that the Chinese contemporary responses of the experts surveyed by art market will go up in the next 12 ArtTactic in June 2017, only seven percent months (versus 26 percent in January of the experts believe the market will 2016), and 22 percent believe that go up in the next 12 months (versus 40 the market will come down (versus 45 percent in January 2016) and 65 percent percent in January 2016. believe that the market will remain flat (versus 42 percent 12 months ago). • China’s focus on cultural development and a regulated art market: The • Slowdown in the Southeast Asian art Chinese government attaches great Modern and contemporary market: importance to the development of Southeast Asian art saw a 29.7 percent cultural projects, which are crucial year-on-year decrease in sales in 2016. to the soft power of China. In recent The auction sales in the first half of 2017 years, according to Asia Institute of Art suggest that the downward pressure & Finance (AIAF), the government has on this market could continue into the emphasized the healthy and regulated second half of the year. 17 percent of development of culture and the art the experts surveyed believe the market market through the introduction of new will go up in the next 12 months (down policies. from 40 percent in January 2016). A larger number of the experts (68 percent, up from 41 percent in January 2016), believe 42

43 | Section 1 - The state of the global art market Art & Finance Report 2017 Art has the potential to make a good underlying asset for a financing or investment structure under sharia law. that the Southeast Asian art market will • Art and Islamic finance: Art has the • African art auction market sees remain flat in the next six months. This potential to make a good underlying asset significant growth in 2017: The African for a financing or investment structure indicates a shift toward a more negative modern and contemporary auction stance on the modern and contemporary under sharia law. It is equally possible market has seen steady growth since that other Islamic financing structures art market in the region for the coming 12 2014, but sales have accelerated this year months. can be used to fund art projects, such as as Sotheby’s launched its first African the renovation of old mosques or Islamic modern and contemporary art sale in • Latin American auction sales fall in cultural properties. With an increasing May 2017 in London. 46 percent of the 2016, and experts remain divided interest in the region around art as an experts surveyed in June 2017 believe the Latin about its 12-month outlook: asset class, there are opportunities for African modern and contemporary art American auction sales in 2016 saw a banks and investment houses to address market will go up in the next 12 months year-on-year decrease of 27.2 percent the needs and opportunities associated (up from 39 percent in January 2016), following several years of steady growth. with art financing and investment in the only 12 percent think that the market will Based on the responses of the experts region. come down in the next 12 months (versus surveyed by ArtTactic in June 2017, 34 11 percent who expected the market to • Russian modern and contemporary percent believe the market will go up decline in January 2016). (versus 25 percent in January 2016), 37 art market sees a positive start to percent believe that the Latin American auction sales in 2017, but experts • Art & Finance in Africa: Rising global remain cautious about its outlook: modern and contemporary art market demand for African contemporary art Despite a positive start to the year, only will go down in the next 12 months and improved art market infrastructure (versus 14 percent in January 2016). 19 percent of the experts surveyed is likely to increase the demand for Art & by ArtTactic in June 2017 (up from 16 Finance-related services and initiatives Middle-Eastern auctions defy global • percent in January 2016) believed that the in the African art market, supported by art market downturn: Total auction Russian art market would see a positive investment in art education, awareness sales of modern and contemporary growth trend this year. 46 percent of the raising, and capacity-building. Middle-Eastern art rose by 11.9 percent respondents believe that the Russian art in 2016. The first half of 2017 was also market could deteriorate in the coming marked by solid performance with 12 months (compared to 43 percent in US$23.4 million in sales, up 76.8 percent January 2016). from the second half of 2016 and 1.7 percent from the first half of 2016. However, there are concerns about the next 12 months, with 41 percent (up from 24 percent in January 2016) predicting that the Middle-Eastern art market will decline. Wars, terrorism, and geopolitical tension in the region were cited as the main reasons for this. 43

44 Art & Finance Report 2017 | Section 1 - The state of the global art market Art & Finance Report 2017 | Section 1 - The state of the global art market STILL HALF FULL Investors experienced a bout of nerves in the aftermath of the Brexit referendum and US presidential election, fearing that Europe’s elections in 2017 could yield similar shocks. These worries have proved unfounded so far and indeed the overall environment has been much more benign than expected. By Alan Mudie, Responsible for Société Political mayhem was avoided in ...but not in Washington and Europe... Général Private Banking Investment, Westminster Mariano Rajoy’s minority center-right Société Générale Theresa May’s inability to achieve an government has remained in power enhanced majority in June’s snap election in Spain, far-right populists failed to has added another level of uncertainty create upsets in neither the Austrian surrounding the Brexit negotiations. The presidential election nor the Dutch initial rounds of talks have shown no parliamentary poll, and recent surveys real progress on major stumbling blocks have credited Alternative für Deutschland such as the “divorce bill,” and opposition with 10 percent of voting intentions in is growing to the government’s plan to Within the UK September’s federal elections (well below achieve a clean break with the EU. In light the 15 percent registered in mid-2016). of the murky outlook, businesses have government, Perhaps most significantly, Emmanuel begun to make plans to transfer activities Macron won the French presidency with to the EU in order to ensure long-term some calls for a an explicitly reformist and pro-European access to the single market and customs Union platform. It now looks increasingly union. more pragmatic likely that Germany and France will be willing to forge ahead with much-needed The economic fallout is already becoming approach to Brexit reform of the economic and fiscal apparent. UK GDP growth in the first governance of the eurozone. half of 2017 averaged an annual rate negotiations have of around 1 percent, well below the This rather benign backdrop can in 2.2 percent pace registered in the been voiced. large part be attributed to the ongoing eurozone. Moreover, devaluation-induced improvement in Europe’s economic inflation—hitting 2.9 percent in August— performance. Unemployment continues is eating into household confidence and its steady decline, business confidence disposable incomes. has strengthened in both manufacturing and services, and consumer sentiment In the US, the boost to small business recently hit a 10-year high. This confidence that followed Donald environment is bolstered by a powerful Trump’s election has yet to be justified combination—the euro remains by progress on the president’s flagship undervalued despite its rally this year, reforms to trade policy and taxation. The monetary policy is exceptionally easy, White House has seen rapid turnover and governments have backed away from among advisers, which has added to the fiscal austerity. In addition, the recent perception of a lack of clear direction. rescue packages for banks in Spain and And the economic surprise index Italy suggest that a more pragmatic calculated by Citi hit a six-year low in early approach to solving the financial system’s summer. woes is gaining traction. 44 44

45 Art & Finance Report 2017 | Section 1 - The state of the global art market Art & Finance Report 2017 | Section 1 - The state of the global art market STILL HALF FULL However, we would not completely Furthermore, the improving outlook bonds whose coupons will be adjusted in avoid the US and the UK... has been recognized by currency line with any rise in inflation, and floating- First of all, with hope on Trump reforms traders, pushing the euro up by over rate notes where coupons are linked to at rock-bottom, any progress on 13 percent against the dollar since early base rates. healthcare reform, deregulation, or 2017. This has encouraged analysts to the tax code would come as a welcome begin to revise their earnings forecasts Regarding the corporate bond market, surprise to investors. Second, the US downward, given the eurozone’s the yield differential with government economy continues to create numerous significant reliance on international trade bonds is currently at extremely low levels, new jobs and with core inflation rising in some sectors. meaning that investment-grade corporate only gradually, it looks unlikely that the bonds offer little protection against Fed will be forced to tighten policy to the So, one shouldn’t extrapolate recent higher yields. Pockets of opportunity point where growth potential would be trends into the future. The outlook for do exist—in particular, we highlight the choked. Finally, economic surprises tend the eurozone has improved but downside attractions of the financial sector where to come in waves—after a long period risks remain. And while the challenges credit quality has been vastly improved of negative surprises, economists tone faced by Prime Minister May and under the impulse of regulatory pressure. down their forecasts opening the way for President Trump are daunting, they are We also note the improved macro a cycle of positive surprises. Indeed, the not insurmountable. fundamentals in a number of emerging Citi index has staged a strong rally since markets and the attractive pick-up in mid-June. We still recommend a moderately yields to be found in that segment. risk-on stance Within the UK government, some Fixed income markets face several The expansion currently underway in the calls for a more pragmatic approach challenges. The US Federal Reserve is global economy is above all supportive to Brexit negotiations— most notably continuing gradual normalization of its for equities, as are the pick-up in earnings from Chancellor Hammond—have been monetary policy, and is beginning to and the improvement in fundamentals. voiced. It is possible that Mrs. May’s poor shrink its investment portfolio, which Valuations are high on average, and electoral performance could encourage a expanded dramatically during the three investors should favor markets that have leadership challenge, and any inkling of a successive rounds of quantitative easing. catch-up potential, such as the eurozone “softer” Brexit might spark a reappraisal Other central banks are likely to follow and Japan. Price momentum is strong of the downside risks for sterling. suit in coming quarters, most notably the across the board, but some sentiment European Central Bank, which we expect indicators—such as implied volatility— ...while downside risks remain in to reduce its asset purchase program show signs of complacency. Well- the eurozone next year. This will put downward diversified holdings across asset classes In Italy, where there is still talk of a pressure on fixed income markets, with and investment themes should enable snap election, the populist Five Star yields—which move inversely to bond investors to capture the upside potential movement has been leading the ruling prices—rising over the next 12 months. without taking on undue risk. Democratic Party in most polls since late In this context, we prefer inflation-linked February. In Spain, Prime Minister Rajoy’s minority government could yet face a challenge from the upsurge in support for the left-wing PSOE. In addition, Catalonia has again begun to push for its independence from Spain, in a challenge to the government’s refusal to sanction a referendum. Also, there remains a risk that Emmanuel Macron’s labor market reforms could provoke widespread protest and strikes. 45 45

46 Art & Finance Report 2017 | Section 1 - The state of the global art market Art & Finance Report 2017 | Section 1 - The state of the global art market An art +18 percent auction sales growth in the first six months of 2017 market Although it is too early to say whether the art market is on the path to a full recovery after a recovery? challenging 2016, the signs from the first six months of 2017 suggest that buyer and seller confidence is returning to the overall auction market. Total auction sales at Sotheby’s, Christie’s, and Phillips were up 18 percent, primarily fueled by an increase in sales of impressionist, modern, and contemporary art, as well as a 21 percent increase in sales of Chinese and Asian works of art. This means that the three auction houses generated US$1.08 billion more in sales from these collecting categories in the first half of 2017, compared to the first half of 2016. Total lots sold at auction (all categories) at Sotheby's, Christie's, and Phillips) 57k 51k st st half 2017 1 half 2016 1 +US$912 million more sales generated by impressionist, modern, and contemporary art in the first half of 2017 compared to the same period in 2016. Impressionist and modern art auction sales saw a 62 percent increase in the first six months of 2017 compared to the same period last year; this was followed by a 25 percent increase in sales of post-war and contemporary art. Post-war and contemporary art accounted for 30.2 percent market share of overall sales in the first six months of 2017. 46 46

47 Art & Finance Report 2017 | Section 1 - The state of the global art market | Section 1 - The state of the global art market Art & Finance Report 2017 Total auction sales in US$ million (all categories) at Sothby's, Christie's, and Phillips) 5.713 4.843 st st half 1 1 half 2017 2016 -10 percent in the number of lots sold at auction in the first six months of 2017 Despite the increase in overall sales, the number of lots sold in the first six months of 2017 decreased by 10 percent to 51,263 works of art and collectibles. This resulted in an overall increase in the average auction price across all categories at Sotheby’s, Christie’s, and Phillips of 31 percent, from US$85,000 in the first half of 2016 to US$111,400 in the first half o f 2 0 17. Auction sales by category (n US$ million) H1 2017 vs H1 2016 (Sotheby's, Christie's, Phillips) st 1 H al f 2016 st 1 H al f 2017 Post-War & Contemporary Art 1.724 Modern & Impressionist Art 1.471 1.375 Chinese & Asian Art Jewels & Watches 951 908 783 749 692 Decorative Arts & Furniture Old Master Paintings & Drawings American Art European Art 20th Century Design Islamic, Indian & Middle Eastern Art 149 130 120 108 96 88 84 74 70 60 51 49 Source: ArtTactic 47 47

48 Art & Finance Report 2017 | Section 1 - The state of the global art market Art & Finance Report 2017 | Section 1 - The state of the global art market +21 percent growth in Chinese and Asian auction sales in the first six months of 2017 Millions 922 June 887 2.566 May 2.251 700 April 763 1.220 March 229 201 February 563 104 January 151 2017 (H1) 2016 (H1) Source: ArtTactic the Fujita Museum,” which raised US$262.8 million alone. The significant jump in sales for March 2017 was due While the first quarter of 2017 saw auction sales growth to a rescheduling of the major winter season, normally of 61.8 percent, Q2 growth fell back to a more modest taking place in early February, to accommodate the +7.4 percent compared to the same quarter in 2016. Chinese New Year. This is a sign that Asian buyers are This could signal that the speed of the recovery might be playing an increasingly important role in today’s market. tapering off as we enter the second half of the year. Contributing strongly to Asian growth in the first half of 2017 was the New York Asian Art Week in March, and in particular the sale entitled “Important Chinese Art from 48 48

49 | Section 1 - The state of the global art market Art & Finance Report 2017 Art & Finance Report 2017 | Section 1 - The state of the global art market +31 percent growth in auction sales in London in the first half of 2017, followed by 29 percent growth in New York auction sales. All Auctions at Sotheby's, Christie's and Phillips - By Total Sales per Location Millions 2.578 1.998 1.700 1.296 853 820 382 304 248 244 38 33 33 30 Geneva ng Hong Ko London Milan New Y ork Other Par is 1s t H al f 2016 1s t H al f 2017 Source: ArtTactic of London with 30 percent market share (up from 27 Despite the economic and political uncertainty around percent in 2016). European auction centers such as Paris, Brexit, London auction sales based on Sotheby’s, Milan, and Geneva ended up with a 10 percent market Christie’s, and Phillips saw a US$404 million increase in share after the first six months of 2017, down from 14 the first half of 2017 compared to the same period last percent in 2016. year. New York maintains its dominant position, with 45 percent market share (up from 41 percent in 2016), ahead 49 49

50 | Section 1 - The state of the global art market Art & Finance Report 2017 CAGR (2000-2017) 9.3% Figure 1. Christie’s and Sotheby’s: Auction Sales (in millions US$) by category 2000 - 2017 (H1) $8,787 $8,270 $7,675 $6,641 $6,274 $5,906 $5,816 $5,621 $5,313 $3,967 $3,833 $2,820 $2,875 $2,393 $1,519 $1,396 $1,275 $1,267 2002 2016 2000 1s t H al f 2017 2001 2015 2014 2013 2012 2005 2006 2007 2008 2003 2011 2010 2009 2004 Contemporary Impressionist & Modern Old Masters Chinese Art Source: ArtTactic Should we expect more art market art market report documented a small months, with the economic indicator volatility in the future? two percent increase in global art market component dropping 32.4 percent in the A strong tailwind has helped major global sales, primarily driven by an estimated 20 last six months. Geopolitical factors such art auction segments such as post-war percent growth in dealer sales (offsetting as political instability in the UK and US, and contemporary art, impressionist an 18.75 percent fall in auction sales). conflicts in the Middle East, the fear of and modern art, and Chinese and Asian Both reports highlight healthier growth in terrorism, and heightened uncertainty works of art in the first six months of 2017, the private dealer market, and this could around China’s debt bubble were some 12 in additional sales adding US$1.08 billion indicate that the overall volatility associated of the key concerns mentioned by survey compared to the same period last year. with the current auction market is having participants. less impact on the private, non-auction art After five years of uninterrupted growth trade. Does this mean we are facing an imminent between 2009 and 2014, the global art reversal of the market recovery? Probably market started to slow down in the second So, how sustainable is the latest auction not—the share of market experts who half of 2015, a trend that deteriorated recovery? Based on the findings of the believe the positive trend will continue for throughout last year. Auction sales at ArtTactic art market confidence survey the remaining half of the year rose from 39 Sotheby’s and Christie’s across four of the in June 2017, market confidence has not percent in January 2017 to 45 percent in 13 were down 5.9 main auction categories increased in-line with the jump in auction June 2017. However, the overall decline in percent in 2015 and a further 35.7 percent sales for the first six months of 2017. In art market confidence does suggest that in 2016. fact, the six-monthly confidence indicator the pace of the recovery could be slowing has declined by 13.4 percent from the level down. These auction market trends were also seen six months ago, raising questions reflected in the wider global dealer and about the speed and sustainability of the The bigger question is whether we are auction market reported in the “Art Basel current art market recovery. starting to experience a shift in the way Report 2017,” which noted an overall art that the global art market behaves. Are market decline of 11 percent for 2016, while The confidence indicator has been affected auction market cycles becoming shorter auction sales saw a more severe 26 percent by an increasingly negative outlook and are levels of sales volatility increasing? decline last year. However, TEFAF’s recent for the global economy in the next six And is this caused by changing motivations 12 Based on auction at Sotheby’s, Christie’s, and Phillips only. 13 Contemporary art, Impressionist and modern art, Old Masters, and Chinese works of art 50

51 Art & Finance Report 2017 | Section 1 - The state of the global art market WIND SCULPTURE I © YINK A SHONIBARE MBE (2013), JONTY WILDE PHOTOGRAPHER: among art buyers and sellers? With the outcome of an auction season. The recent Geopolitical factors growing interest in art as an asset class sale of Jean-Michel Basquiat’s “Untitled” such as political identified by the findings of this report (1982) for US$110.5 million (with a presale since we launched the first edition in estimate of more than US$60 million) at instability in the UK 2011, is the art market starting to behave Sotheby’s New York in May accounted for and US, conflicts in in a similar fashion to other asset classes more than a third of the overall auction and investments? And could art market sale value at Sotheby’s that evening. The lot the Middle East, the volatility be set to increase as art buyers carried both a financial guarantee and an 14 fear of terrorism, and . become more investment-oriented and irrevocable bid increasingly amenable to short-term heightened uncertainty The recent auction sales rebound among investment horizons? (see survey findings around China’s debt the top auction houses in the first half of if investment/financial motivations are 2017 could indicate that the art market increasing) If this is the case, the art market bubble were some was going through a supply adjustment and its participants need to start thinking of the key concerns rather than a price correction in 2016. about risk management in a different way. This adjustment was largely caused In Chapter 6, we discuss and address mentioned by survey by a reduction in the level of financial many of the issues related to the growing participants guarantees offered, making the process demand for art and risk management tools. less attractive for potential sellers of top- quality art. The level of financial guarantees A new auction dynamic driven by for the major auction sales by Christie’s, financial guarantees Sotheby’s, and Phillips (such as post-war The divergence in sales trends between and contemporary evening sales, dropped the auction market and the dealer market 15 in May 2016 to around US$220 million suggests that there are different dynamics 14 Under an “irrevocable bid” arrangement, the auction house finds a person prepared to submit a bid for an from US$634 million in May 2015, but and risks playing out in the two spheres. undisclosed amount. Under normal circumstances, the jumped up again to US$425 million in May The nature of the fiercely competitive financial guarantor do not bid on the lot, but offers the seller a guaranteed amount for the artwork. In this case, 2 0 17. auction market, and particularly the rivalry the combination of both a financial guarantee and an between Sotheby’s and Christie’s, and irrevocable bid could suggest that the auction houses felt the need to “hedge” the financial guarantee by finding a increasingly Phillips at the high end of buyer prepared to commit to bid on this particular lot. the market, has led to heavy reliance on 15 These values are calculated based on aggregating the value of lots that are flagged up as being guaranteed by financial guarantees to secure top-quality the auction houses using the low presale estimate for auction supply. With the value of art each lot. While auction houses are required to disclose financial guarantees to bidders, their hazy wording reaching astronomical levels, single lots prevents us from knowing if the guarantee is provided by can play a significant role in the overall a third party or by the auction house itself. 51

52 Art & Finance Report 2017 | Section 1 - The state of the global art market March evening sale and 46 percent of the Although financial guarantee levels for sales value guaranteed for the June sales post-war and contemporary evening sales this year being supported by guarantees. in London have traditionally stood at a This shows how important and integral the more modest level (between 15 percent financial guarantee market has become and 20 percent of the total sales value to the overall performance of the auction based on the low estimate), there has been market today. a significant shift in the level of guarantees offered this year, with 33 percent of the Financial Guarantees: New York Post-War & Contemporary Evening Sales (Sotheby's, Christie's and Phillips) (in millions US$) Figure 2. 637, 1 634 515 231 298 425 68% 62% 58% 57% 56% 37% May 2017 Nov 2015 May 2016 Nov 2016 May 2015 Nov 2014 Source: ArtTactic cial G uar an Finan tees - N ew Y ork P ost-W ar & Co ntemporar y E vening s al es % o f o veral l s ale Financial Guarantees: London Post-War & Contemporary Evening Sales (Sotheby's, Christie's and Phillips) (in millions US$) Figure 3. 46, 94 78, 38 17, 17, 40 25, 50 40, 58, 06 37 17 46% 33% 22% 19% 18% 16% 15% 5% Mar ch 2017 June 2016 June 2017 Februar y October 2015 June 2015 October 2016 2016 ar & Co ntemporar y Evening s al es ( USD) % o f o veral l s ale Finan cial G uar an tees - L ondon P ost-W Source: ArtTactic 52

53 | Section 1 - The state of the global art market Art & Finance Report 2017 | Section 1 - The state of the global art market Art & Finance Report 2017 The divergence in sales trends between the auction market and the dealer market suggests that there are different dynamics and risks playing out in the two spheres. 53 53

54 Art & Finance Report 2017 | Section 1 - The state of the global art market Art market risks: could speculation A recent ArtTactic survey from June 2017 According to the undermine the recovery process? ranks political and economic uncertainty as Since 2006, ArtTactic has monitored the biggest risk to the development of the “World Wealth perceptions of art market risk and global art market in the coming 12 months. speculation, particularly focusing on the With tricky Brexit negotiations under Report 2017” by post-war and contemporary art market. way, a new level of political and economic The ArtTactic art market speculation uncertainty is likely to dominate several Knight Frank, 37 16 is currently standing at 7.3, barometer of the world’s largest art markets in the up 17.7 percent from January 2017. This coming years. percent of wealth suggests that experts feel the current art market recovery has reintroduced more Economic outlook: global economic managers surveyed speculative behavior, after a six-month activity is picking up pace market slowdown. According to the latest report published by said that their the World Bank in June 2017, global activity The sharp reversal in expert perceptions of is picking up, and this is contributing to an clients already had risk and speculation calls the health of the improvement in confidence. A recovery in recovery process into question, and raises industrial activity has coincided with an a number of luxury the question of whether the sharp auction increase in global trade, after two years of market rebound in 2017 is an indication weakness. According to the World Bank, investments, such that we are entering a period of increasing global growth is projected to strengthen volatility in the art market. So, what are the to 2.7 percent in 2017 and 2.9 percent as art, wine, and current risks in the market? in 2018–19, in line with January 2017 forecasts. Activity in advanced economies classic cars. is expected to gain momentum in 2017, supported by an upturn in the United States. Growth forecasts have been upgraded in the Eurozone and Japan, reflecting strengthening domestic demand and exports. 16 The ArtTactic risk and speculation barometer is part of a six-monthly art market expert survey conducted by ArtTactic. Respondents are asked to rate their perception of current art market risk and speculation on a scale from 1 to 10, where 1 is a very low level of risk/speculation and 10 is a very high level of risk/speculation. Figure 4. ArtTactic Art Market Risk & Speculation Barometer 2006 - 1st Half 2017 Where 1= Very low Risk/ Speculation and 10 = Very high Risk/ Speculation 10 9, 0 8, 3 0 8, 7, 8 7, 7 7, 6 7, 4 7, 3 7, 3 7, 2 6, 9 7, 1 7, 1 7, 0 7, 0 6, 9 6, 9 6, 9 6, 8 6, 8 6, 8 6, 6 6, 6 6, 6 6, 6 6, 5 6, 5 6, 4 6, 4 6, 3 6, 3 6, 2 6, 2 6, 2 6, 2 6, 1 0 6, 6, 0 5, 9 5, 8 5, 7 5, 6 5, 4 5, 3 5, 2 5, 1 5, 0 4, 1 4, 0 3, 6 3, 0 0 2, 0 1, - Risk ti Specula on Source: ArtTactic 54

55 Art & Finance Report 2017 | Section 1 - The state of the global art market According to the “World Wealth Report In emerging markets and developing economies, growth is predicted to recover 2017” by Knight Frank, 37 percent of wealth managers surveyed said that to 4.1 percent in 2017 and reach an average their clients already had a number of of 4.6 percent in 2018–19 as obstacles to growth for commodity exporters diminish, luxury investments, such as art, wine, and while activities for commodity importers classic cars. A total of 47 percent of these managers said that these luxuries had continue to be robust. Risks to the global become more popular in recent years. outlook remain on the downside, and Although personal enjoyment ranked as include increased trade protectionism, the most significant client motivation, the economic policy uncertainty, the possibility of financial market disruptions, and, over potential for increased capital gains came in second, which implies that the financial the longer term, weaker potential growth, aspects of luxury investments are gaining the report says. in importance. Global wealth trends: UHNWI population and wealth grows in 2016 Growing client demand for luxury investments and rising According to the “Wealth-X World Ultra Wealth Report 2017”, the world’s ultra- philanthropic engagement will have implications for the 17 grew high-net-worth (UHNWI) population wealth management sector in the coming years, and by 3.5 percent to 226,450 individuals in 2016, a recovery from a sharp fall in 2015. as the findings in this report confirm, we are already Their combined wealth also increased in starting to see more wealth managers taking a proactive 2016, expanding by 1.5 percent to US$27 trillion. However, the average net worth of approach to these types of “personal investment.” the ultra-wealthy declined for the first time since 2013. Despite the overall increase in UHNWI Growing client demand for luxury population and wealth, there were investments and rising philanthropic significant regional differences in dollar- engagement will have implications for the denominated wealth creation, with North wealth management sector in the coming America (+5.1 percent) and Asia (+3.5 years, and as the findings in this report percent) recording the only significant rises confirm, we are already starting to see in wealth in 2016. However, Latin America more wealth managers taking a proactive and the Caribbean registered a significant approach to these types of “personal fall and Africa also posted a decline. The investment.” This also dovetails with the Middle East remained largely unchanged, ultra-wealthy’s growing requirement for Figure 4. ArtTactic Art Market Risk & Speculation Barometer 2006 - 1st Half 2017 Where 1= Very low Risk/ Speculation and 10 = Very high Risk/ Speculation while Europe followed a gentler trajectory, tailored solutions in today’s increasingly with the UHNWI population and its total commoditized world. wealth coming in slightly lower than in 2015. The stock of liquid assets (primarily cash) owned by the ultra-wealthy stood at US$9.6 trillion in 2016, according to the “Wealth-X World Ultra Wealth Report 2017.” These assets accounted for 35.4 percent of UHNWIs’ holdings. One of the key findings of the report is that abundant liquidity also reflects a continuing search for yield and underlines the enormous spending potential of the world’s ultra-wealthy. 17 UHNWIs are defined as individuals with US$30 million or more in net worth 55

56 Art & Finance Report 2017 | Section 1 - The state of the global art market Art & Finance Report 2017 | Section 1 - The state of the global art market Art market outlook 2017–2018 In a year of political shocks and economic uncertainty, the world’s modern and contemporary art markets saw an annual contraction in auction sales of 32.2 percent, predominantly led by the fall in the US and the UK post-war and contemporary art market. NEUTRAL/POSITIVE Mirroring the volatile global backdrop, NEUTRAL/NEGATIVE there were marked regional differences POSITIVE in the modern and contemporary art markets. Among the 10 regional modern and contemporary art markets monitored in this report, two—the Middle-East and Africa—recorded an increase in auction NEUTRAL/POSITIVE NEUTRAL/POSITIVE sales in 2016. In contrast, 2016 was a difficult year for the US, UK, and European contemporary art markets, which suffered double-digit falls in auction sales, although NEGATIVE/NEUTRAL these markets have been the fastest to rebound in the first six months of 2017. Elsewhere, the picture was muted, with auction sales edging lower in China, South Asia, Southeast Asia, and Latin America. NEUTRAL/NEGATIVE NEUTRAL/NEGATIVE POSITIVE/NEUTRAL NEUTRAL/NEGATIVE 56 56

57 | Section 1 - The state of the global art market Art & Finance Report 2017 | Section 1 - The state of the global art market Art & Finance Report 2017 NEUTRAL/POSITIVE NEUTRAL/NEGATIVE POSITIVE NEUTRAL/POSITIVE NEUTRAL/POSITIVE NEGATIVE/NEUTRAL NEUTRAL/NEGATIVE NEUTRAL/NEGATIVE POSITIVE/NEUTRAL NEUTRAL/NEGATIVE 57 57

58 Art & Finance Report 2017 | Section 1 - The state of the global art market Where is the global art market heading in The same goes for the Russian art market, the next 12 months? Will the positive sales where sales take place in London but most trends in the first half of 2017 continue into buyers are from Russia or the CIS. Our the second half of the year? analysis is predominantly based on auction sales by Christie’s and Sotheby’s, although The global contemporary art market other auction houses are included as faced challenging conditions in 2016, but they represent a major share of the there are signs that buyer confidence is overall market for that particular modern returning and that the global market is and contemporary art segment. This is recovering from the 2016 downturn. In highlighted in each individual section. this section of the report, we will take a For the United States and Europe, and closer look at various regional modern China and Africa, we have used the and contemporary art markets and their contemporary art category to reflect broad outlook for the coming 12 months. market trends. However, in respect of the markets for artworks by Indian, Middle As in all previous editions of the Art & Eastern, Latin American and Southeast Finance report, our primary focus in the Asian artists, we have included the modern art market section is global trends in the art segment based on the auction category modern and contemporary fine art market. classification used by the main auction We believe that the trends emerging in houses such as Sotheby’s and Christie’s. the modern and contemporary art sector across the different regions provide a We have also added wealth trends for reliable indication of nascent trends in each of the geographical markets, when these art markets more broadly. We have available, drawing on results from research also aimed to link art market dynamics reports produced by Wealth-X and Knight to overall wealth trends to hone our Frank in 2017. understanding of the potential connections between the global art market and the global wealth management industry. The following analysis focuses on modern and contemporary art by artist origin, The global contemporary art market focusing on the United States, Europe, China, India, the Middle East, Latin America, faced challenging conditions in 2016, but Southeast Asia, Russia, and Africa. Rather than providing a comparative analysis there are signs that buyer confidence is between the different regional markets, the analysis will focus on the art market and returning and that the global market is wealth trends within each region to see how the two elements might be linked, and recovering from the 2016 downturn. what this may tell us about the potential for the Art & Finance industry. Our art market analysis is not necessarily limited to auction sales data generated within the country or region itself. For instance, our Latin American modern and contemporary art market analysis is based on sales at Sotheby’s, Christie’s, and Phillips in New York, but the majority of the buyers in these sales are of Latin American origin. 58

59 Art & Finance Report 2017 | Section 1 - The state of the global art market Figure 5. Market Share: Regional Modern & Contemporary Art Markets $4.466 a Af ric $3.887 ssia Ru $3.645 $3.304 dle -East Mid ia South East As $2.635 $2.543 a Latin Am eric $1.903 India Chin a Euro pe UK US (US & Euro pe) 20 13 14 20 20 20 11 t 1s 16 20 12 20 15 Half 20 17 Source: ArtTactic Market Share: Regional Modern & Contemporary Art Market (Excluding US/European contemporary art market) Figure 6. $502 $485 $469 Af ric a $391 $364 ssia Ru $334 dle -East Mid $215 ia South East As Latin Am eric a India Chin a 12 13 20 14 20 15 20 16 20 20 11 20 1s t Half Source: ArtTactic 59

60 Art & Finance Report 2017 | Section 1 - The state of the global art market Treasure assets Treasure assets Treasure assets Treasure assets Wealth indicator geo market Buy indicator geo market Buy indicator Wealth indicator geo market Buy indicator Wealth indicator Wealth indicator geo market Buy indicator Table 1. Regional market trends in modern and contemporary art and 2018 outlook Percentage allocation 23 Percentage allocation Percentage allocation Art market trend Collector outlook auction Treasure assets Percentage allocation auction Collector outlook Art market trend Treasure assets Treasure assets Art market trend auction Collector outlook auction Collector outlook Art market trend Buy indicator geo market Wealth indicator geo market Buy indicator Wealth indicator geo market Buy indicator Wealth indicator Percent who believe luxury Art collector outlook 2016 Art market outlook trend Modern and contemporary Proportion of clients who Future wealth indicators: Geographical 21 22 investments are becoming have a number of luxury 2017-2018 market predicted growth in auction sales trend 2015-2016 20 UHNWIs in the next 10 investments, such as art, more popular 18 19 wine, or classic cars years Global trends Economic uncertainty has The majority of art collectors have a Although there are some 47% 37% +43% Percentage allocation Percentage allocation Percentage allocation auction Art market trend Collector outlook auction Collector outlook Collector outlook auction Art market trend Art market trend a dampening impact on regional differences, 8 out of 10 neutral or positive outlook for the next 12 confidence in the global art modern and contemporary art months. However, the outlooks for South market. With all art markets markets were down in 2016. Asia, the Middle East, and the UK modern and contemporary art markets are (except India) expressing less gloomier than they were 12 months ago. positive development in the next 12 months. +30% 44% -30% 48% +20 % Art collector poll: market direction UP: 32% United States FL AT: 52% DOWN: 16% 24 +30% 39% - 41% Art collector poll: market direction 49% -30% UP: 32% FL AT: 52% United Kingdom DOWN: 16% 39% 49% +12% -21% -3% market direction Art collector poll: UP: 36% FL AT: 4 4% Europe DOWN: 20% 25 +14 0 % 28% 44% -16% +60% Art collector poll: market direction UP: 32% FL AT: 46% China DOWN: 22% +39% 32% 38% +11.9 % - 41% Art collector poll: market direction UP: 25% Middle East FL AT: 34% DOWN: 41% 26 28% 44% -24% -78% Art collector poll: market direction +15 0 % UP: 7% FL AT: 65% South Asia DOWN: 28% -26% Art collector poll: market direction +37% -27% 64% 46% UP: 34% Latin America FL AT: 29% DOWN: 37% 27 +30 to +170% 28% 44% -30% -35% Art collector poll: market direction UP: 17% FL AT: 68% Southeast Asia DOWN: 28% -4% +60% 33% 40% market direction +6% Art collector poll: UP: 19% Russia FL AT: 35% DOWN: 46% +19 % 32% 55% +12% +0% Art collector poll: market direction UP: 46% Africa FL AT: 42% DOWN: 12% th 18 Knight Frank, “The Wealth Report 2017,” 11 edition, page 67 th edition, page 64 19 Knight Frank, “The Wealth Report 2017,” 11 th edition, page 64 20 Knight Frank, “The Wealth Report 2017,” 11 21 These auction sales are predominantly based on sales by Sotheby’s and Christie’s, but will also include domestic auction houses for markets such as China, India, and Africa. 22 The art collector outlook for 2017–18 is based on an annual ArtTactic art collector survey conducted in June 2017. The percentage represents the change in the ArtTactic confi - dence indicator between 2016 and 2017. 60

61 | Section 1 - The state of the global art market Art & Finance Report 2017 Treasure assets Treasure assets Treasure assets Treasure assets Wealth indicator Buy indicator geo market geo market Buy indicator Wealth indicator Buy indicator Wealth indicator geo market Buy indicator geo market Wealth indicator Percentage allocation 23 Percentage allocation Percentage allocation auction Art market trend Collector outlook Treasure assets Percentage allocation Collector outlook auction Art market trend Treasure assets Treasure assets Collector outlook auction Art market trend auction Art market trend Collector outlook Wealth indicator geo market Buy indicator geo market geo market Wealth indicator Buy indicator Buy indicator Wealth indicator Proportion of clients who Art collector outlook 2016 Art market outlook trend Percent who believe luxury Geographical Modern and contemporary Future wealth indicators: 22 21 have a number of luxury auction sales trend 2015-2016 market 2017-2018 predicted growth in investments are becoming 20 UHNWIs in the next 10 more popular investments, such as art, 19 18 years wine, or classic cars Economic uncertainty has The majority of art collectors have a Although there are some 47% 37% +43% Global trends Percentage allocation Percentage allocation Percentage allocation Art market trend Collector outlook auction Art market trend Collector outlook auction Art market trend Collector outlook auction regional differences, 8 out of 10 a dampening impact on neutral or positive outlook for the next 12 confidence in the global art months. However, the outlooks for South modern and contemporary art market. With all art markets markets were down in 2016. Asia, the Middle East, and the UK modern (except India) expressing less and contemporary art markets are gloomier than they were 12 months ago. positive development in the next 12 months. +30% 44% 48% -30% +20 % Art collector poll: market direction UP: 32% United States FL AT: 52% DOWN: 16% 24 39% +30% -30% Art collector poll: market direction 49% - 41% UP: 32% FL AT: 52% United Kingdom DOWN: 16% 39% 49% -21% +12% Art collector poll: market direction -3% UP: 36% FL AT: 4 4% Europe DOWN: 20% 25 28% +14 0 % -16% +60% Art collector poll: market direction 44% UP: 32% FL AT: 46% China DOWN: 22% 32% 38% +11.9 % +39% - 41% Art collector poll: market direction UP: 25% Middle East FL AT: 34% DOWN: 41% 26 Art collector poll: 28% market direction 44% -24% -78% +15 0 % UP: 7% FL AT: 65% South Asia DOWN: 28% -26% Art collector poll: market direction +37% 46% -27% 64% UP: 34% Latin America FL AT: 29% DOWN: 37% 27 +30 to +170% market direction 44% -30% -35% Art collector poll: 28% UP: 17% FL AT: 68% Southeast Asia DOWN: 28% +60% 33% 40% -4% +6% Art collector poll: market direction UP: 19% Russia FL AT: 35% DOWN: 46% +19 % 32% 55% +12% +0% market direction Art collector poll: UP: 46% Africa FL AT: 42% DOWN: 12% Source: ArtTactic 23 ArtTactic outlook survey among art collectors, art advisers, galleries, and auction houses in January 2016. 24 There is no separate breakdown for the UK in “The Wealth Report 2017,” 11th edition, page 64 (Knight Frank), so we assumed the same rate as for Europe. 25 There is no separate breakdown for China, South Asia, and Southeast Asia in “The Wealth Report 2017,” 11th edition, page 64 (Knight Frank), so we assumed the same rate for all of Asia. 26 This figure is based on an estimate about India’s UHNWI population growth between 2016 and 2026. 27 Regional differences: Indonesia’s UHNWI population is forecasted to grow 30 percent by 2026, Malaysia’s UHNWI population estimated growth rate is 70 percent and Vietnam’s UHNWI population is predicted to grow by 170 percent. 61

62 Art & Finance Report 2017 | Section 1 - The state of the global art market US South east asia US and Europe China India Market review 2016–2017 This surge in the level of auction New York auctions bounce back in the guarantees in the first half of 2017 comes first half of 2017 after a challenging on the back of a significant scale-back of Christie’s, Sotheby’s, and Phillips 2016: these financial incentives in 2016. post-war and contemporary (evening and day) sales in New York raised US$1.57 Outlook 2017–2018 billion in 2016, which was down 30 percent Experts signal a more upbeat outlook Africa Russia Middle east Latin america compared to 2015, when auction sales for 2017–2018: Based on the responses totaled US$2.25 billion. However, the of experts surveyed by ArtTactic in June first half of 2017 shows that this market 2017, 62 percent believe that the US has recovered from its 2016 lows, with contemporary art market will go up (versus total sales in New York in May between 47 percent in January 2016), 15 percent Christie’s, Sotheby’s, and Phillips up 27.9 believe that the market will go down in percent from May 2016, and 32 percent the next 12 months (versus 9 percent above the results from November last year. in January 2016) and the remaining 23 This result reinforces the global art market percent believe that the market will remain recovery that started during London flat (versus 45 percent 12 months ago). This auctions in March 2017. indicates a positive shift among art market experts for the coming 12 months. New York market share up in 2016: Auction market share of post-war and Political risk on the art market: There is contemporary art in New York increased significant uncertainty regarding Donald slightly to 68.3 percent in 2016, up from Trump’s longer-term impact on the art 65.7 percent in 2015. However, the first market. On the one hand, reduced tax six months of 2017 show that New York’s rates combined with a business-oriented market share decreased to 65.6 percent as cabinet will likely be interpreted as London took a larger share of auction sales generally positive; on the other hand, a (28.1 percent). protectionist stance on trade and borders could have a negative effect on the global Auctions supported by strong demand art market. New at the top end of the art market: York’s post-war and contemporary sales Economic outlook in the US: Following a in May 2017 signaled strong interest in investment in 2016 that reflected slowdown lots worth in excess of US$5 million, which and export weakness, growth is expected accounted for 71.1 percent of the total to recover in 2017 based on findings from 28 The sales value (up from 64.3 percent in May a recent report by the World Bank. report forecasts US GDP growth of 2.2 2016). The top 10 lots raised US$352.1 percent in 2018, up from an estimated 2.1 million and accounted for 46.5 percent of percent in 2017. the combined sales value (down from 48.8 percent in May 2016). Increase in financial guarantees in 2017 lifts the market from its lows: Almost half (47.7 percent) of the lots offered across the three post-war and contemporary evening sales in New York in May 2017 carried financial guarantees, compared to just 29.6 percent in May 2016. 28 Source: “World Bank - Global Economic Prospects - June 2017 - Global Outlook” 62

63 Art & Finance Report 2017 | Section 1 - The state of the global art market Supported by a stronger Wealth trends: Supported by a stronger currency currency and rising equity markets, the US consolidated its dominant position and rising equity markets, the US as the leading country for ultra-wealthy individuals in 2016. The United States consolidated its dominant position saw a 6.7 percent increase in its UHNWI 29 population in 2016 according to Wealth-X. as the leading country for ultra- These individuals accounted for an estimated US$8.719 trillion in wealth, wealthy individuals in 2016. up 6 percent in 2016. A recent wealth 30 management survey by Knight Frank reported that 44 percent of wealth managers said that their US clients had a number of luxury investments (art, wine, classic cars, etc.). Furthermore, 48 percent of the wealth managers surveyed said that luxury investments had become more popular in the last year. US - Post War & Contemporary Art Auction Sales Figure 7. Auction sales (in millions US$) Sotheby’s/Christie’s $2,902 $2,402 $2,246 $1,955 $1,572 $1,400 $ $1,105 $ $1,108 $ $755 $ $ $ $ $ $ 2015 2012 2010 2016 2016 2017 2011 2014 2013 (H1) (H1) Source: ArtTactic 29 Source: “Wealth-X World Ultra Wealth Report 2017,” 30 Source: “Knight Frank Wealth Report 2017” 63

64 Art & Finance Report 2017 | Section 1 - The state of the global art market UK Europe China US and Europe India UK Market review 2016–2017 Outlook 2017–2018 London sales drive the 2017 art market Negative-to-neutral outlook for the recovery: Auction sales for post-war and London post-war and contemporary contemporary art in London experienced art market in the next 12 months: 34 a substantial drop in value in 2016, percent of the experts surveyed in June returning to levels last seen in 2010–2011. 2017 believe that the UK post-war and Total auction sales (based on Sotheby’s, contemporary art market will go up in the Russia South east asia Africa Middle east South asia Latin america Christie’s, and Phillips) for 2016 were next 12 months (down from 47 percent down 41 percent from the previous peak in January 2016), 28 percent expect that year in 2015. However, the sales total in the market will remain flat (down from 45 March 2017 was 54.1 percent higher than percent in January 2016) and 38 percent in February 2016, and 66.7 percent above think that the market will come down in the the July 2016 total. This positive trend next 12 months (up from 9 percent who continued into June 2017, in which both expected the market to decline in January Sotheby’s and Phillips increased their 2016). auction sales from last year. Christie’s decided to focus on the October season Uncertainty around Brexit likely to instead and did not hold any post-war and have an impact on the UK art market contemporary art evening or day sales in in 2018: Much of London’s relative June. success following the Brexit vote last year can probably be linked to the decline in London’s market share fell in 2016, but sterling, motivating buyers from outside bounced back in the first half of 2017: Europe to take advantage of the benefits London’s market share based on auction of a lower exchange rate. However, as the sales of post-war and contemporary art global art market is becoming increasingly decreased from 28.8 percent in 2015 to competitive and cross-border trade and 25.2 percent in 2016. However, data for movement of talent is central to its growth, the first six months of 2017 shows that a potential exit from the customs union London’s market share has jumped back is likely to create uncertainty. Hence, to 28.1 percent, clawing back most of last questions remain with regards to how the year’s losses. global art market will look at the UK in the future. Sotheby’s overtakes Christie’s position as market leader in 2016 and Phillips In June 2017, Economic outlook in the UK: 31 upgraded its forecasts for gains further market share: Sotheby’s the World Bank UK GDP growth over the next three years increased its market share in 2016 to 44.8 against a stronger global backdrop that percent of the post-war and contemporary will boost the British economy, despite the art market (up from 41.7 percent in 2015). uncertainty around Brexit and a weak start This put it ahead of Christie’s, which saw to 2017. Economists at the bank expect the a drop in its market share to 39.4 percent UK economy to grow by 1.7 percent in 2017, (down from 45.4 percent in 2015). Phillips and at the slightly lower rate of 1.5 percent also saw its market share of London’s post- in 2018. war and contemporary art market rise to 15.8 percent in 2016 (up from 12.9 percent in 2015). 31 Source: World Bank - Global Economic Prospects - June 2017 - Global Outlook 64

65 Art & Finance Report 2017 | Section 1 - The state of the global art market Wealth trends: The United Kingdom saw a Much of London’s relative success 14.2 percent drop in its UHNWI population 32 These in 2016 according to Wealth-X. following the Brexit vote last year individuals accounted for an estimated US$994 billion in wealth, which fell by can probably be linked to the 14.2 percent between 2015 and 2016. Despite the fall in the UHNWI population, a decline in sterling, motivating 33 forecasts that the report by Knight Frank UHNWI population will grow by 30 percent buyers from outside Europe to take between 2016 and 2026. advantage of the benefits of a lower exchange rate. Figure 8. UK - Post War & Contemporary Art Auction Sales Auction sales (in millions US$) Sotheby’s/Christie’s $983 $891 $760 $688 $660 $580 $475 $425 $417 2011 2010 2017 2016 2016 2015 2014 2013 2012 (H1) (H1) Source: ArtTactic 32 Wealth-X World Ultra Wealth Report 2017 33 Source: Knight Frank Wealth Report 2017 65

66 Art & Finance Report 2017 | Section 1 - The state of the global art market EUROPE Europe China US and Europe India UK Figure 9. Europe - Post War & Contemporary Art Auction Sales Auction sales (in millions US$) Sotheby’s/Christie’s $189 $163 $163 $150 Russia South east asia Africa Middle east South asia Latin america $119 $108 $104 $105 $63 2016 2016 2014 2010 2013 2017 2011 2015 2012 (H1) (H1) Paris Milan Amsterdam Source: ArtTactic Market review 2016–2017 Paris, Milan, Europe gains market share: Market resilience amid a global and Amsterdam gained market share slowdown in contemporary auction in the auction market for post-war and Christie’s and Sotheby’s sales in 2016: contemporary art (based on evening and post-war and contemporary art sales day sales), up from 5.5 percent in 2015 to in Paris, Milan, and Amsterdam raised 6.5 percent in 2016. This increase in global US$149.7 million in 2016, representing a market share was in evidence across all 20.9 percent decrease in sales from 2015. three locations. The market share in the However, European sales fared better first half of 2017 came in at 6.2 percent. than those in New York and London, which suffered drops of 30 percent and Paris increases its market share, further 41 percent respectively. Contemporary establishing its position as the main art art auction sales in Paris, Milan, and market hub on the European continent: Amsterdam have seen a positive trend in Paris increased its market share in 2016 to the first six months of 2017, with a total of account for 62 percent of the continental US$105.3 million in sales, accounting for 70 European market (up from 58.6 percent percent of total sales in 2016. This shows in 2015), putting it ahead of both Milan, that the market is on course to match the which saw a drop in its market share to 27.5 record year 2015. percent (down from 30.3 percent in 2015), and Amsterdam, which also saw its market share decrease to 10.5 percent (down from 11.1 percent in 2015). 66

67 Art & Finance Report 2017 | Section 1 - The state of the global art market Outlook 2017–2018 Figure 9. Europe - Post War & Contemporary Art Auction Sales Paris increases Experts are increasingly positive Auction sales (in millions US$) Sotheby’s/Christie’s regarding European market growth in its market share, 2017: 36 percent of the experts surveyed believe that the market will increase in the further establishing next 12 months (up from only 14 percent in January 2016). A smaller number of the its position as experts surveyed (44 percent, down from 61 percent in January 2016) believe that the main art the contemporary art market will remain flat in the next six months. Meanwhile, 20 market hub on percent of the respondents believe that the market will fall in the next 12 months; only the European 11 percent believed so in January 2016. This indicates that there has been a shift toward continent. a more positive stance on the European post-war and contemporary art market in 2017, despite the political and economic uncertainty. London could see increasing Europe saw a 0.2 percent Wealth trends: competition from EU art markets in decrease in its UHNWI population in 2016 With uncertainty looming 2017–2018: 35 These individuals according to Wealth-X. over the London art market in the wake of accounted for an estimated US$7.724 last year’s Brexit vote, the city risks losing trillion in wealth, down 2.4 percent in 2016. market share to the European continent. A recent wealth management survey by Although London will, for the time being, 36 reported that 39 percent of Knight Frank keep its position as Europe’s main art wealth managers said that their European market hub, Sotheby’s and Christie’s clients had a number of luxury investments regional offices could pick up market (art, wine, classic cars, etc.). Furthermore, share of the total EU-UK post-war and 49 percent of the wealth managers contemporary art market in the years to surveyed said that luxury investment had come. become more popular in the last year. Economic outlook for Europe: In 34 upgraded June 2017, the World Bank its forecasts for EU growth, reflecting strengthening domestic demand and exports. Economists at the bank expect Eurozone economies to grow by 1.7 percent in 2017, and at the slightly lower rate of 1.5 percent in 2018. 34 Source: World Bank - Global Economic Prospects - June 2017 - Global Outlook 35 Wealth-X World Ultra Wealth Report 2017 36 Source: Knight Frank Wealth Report 2017 67

68 Art & Finance Report 2017 | Section 1 - The state of the global art market CHINA Europe China US and Europe India UK Chinese contemporary art sales Figure 10. Market review 2016 Contemporary Chinese art auction Auction sales (in millions US$) in Hong Kong and Mainland China Following sales fall 15.9 percent in 2016: (Sotheby’s, Christie’s, Poly, and Guardian) a substantial drop in sales in 2015, it looks like the Chinese contemporary art $269 market reached its low-water mark in 2016. Overall sales from Christie’s and Russia South east asia Africa Middle east South asia Latin america Sotheby’s fell by 13.1 percent in 2016, $210 while the China Guardian and Poly Auction $183 saw its contemporary art sales drop $167 by 18.2 percent in 2016. However, the contemporary Chinese sales total across $124 the four auction houses for the first half $108 of 2017 came in at the same level as in the $90,5 spring and autumn of 2016, suggesting that the contemporary Chinese art market is $57 $46 stabilizing. $44 Overall Chinese auction sales improve The trend from the second half of 2016: 2012 2016 2015 2014 2009 2010 2011 2013 2017 2016 in the Chinese contemporary art market (H1) (H1) was similar to the overall trend in the Chinese market in 2016 (all categories) d Ch ina ( Poly & Ch Hong Ko uar dian ) ng ( Sotheby' s & Ch ristie's) Mai nlan ina G based on sales at Sotheby’s and Christie’s in Hong Kong and Poly and China Guardian’s mainland sales, which saw an 18 Source: ArtTactic percent decrease in sales during 2016. The overall sales result for the first six months Figure 11. Chinese Art Auction Sales (all Chinese collecting categories) of 2017 shows a 5.2 percent increase from Auction sales (in billions US$) in Hong Kong and Mainland China (Sotheby's, Christie's, the second half of 2016, but came in 29 Poly and Guardian) 2008-1st Half 2017) percent lower than the first half of 2016. 3% 64, Domestic Chinese auction houses hold 9% 63, 61, 9% a majority market share: Compared 53, 7% 0% 55, $4,8 51, 2% 2% 52, to Sotheby’s and Christie’s, Poly and 47, 8% 45, 3% China Guardian maintained the biggest 49,5% $3,6 32, 5% market share in 2016, and accounted for $3,3 $3,1 $3,1 $2,8 53.2 percent of contemporary art sales, $2,5 compared to 54.6 percent in 2015. The market share of the domestic auction $1,5 $1,2 $1,2 $1,1 in the first six months strengthened houses of this year, with the two domestic auction houses accounting for 64.2 percent of the 2016 2011 2016 2009 2014 2013 2012 2015 2017 2010 2008 sales of Chinese contemporary art. (H1) (H1) d Guar dian ) ng ( Sotheby' s an Hong Ko Mai nlan ristie's) d ( Poly an d Ch d A uction P roportion Mai nlan Source: ArtTactic 68

69 Art & Finance Report 2017 | Section 1 - The state of the global art market Outlook 2017–2018 GDP growth in China Economic outlook: is expected to slow to 6.5 percent in 2017 China’s art market trajectory for 2017– 37 China reported and 6.3 percent in 2018. 2018 suggests a neutral-to-positive disappointing growth in industrial output, outlook for Chinese contemporary investment, and consumer spending in May Based on the responses of experts art: 2017, increasing the uncertainty around the surveyed by ArtTactic, 32 percent believe sustainability of GDP growth in the world’s that the Chinese contemporary art market second-largest economy. will go up in the next 12 months (versus 26 percent in January 2016), 22 percent Wealth trends: China saw a 3.6 percent believe that the market will come down increase in its UHNWI population in 2016 (versus 45 percent in January 2016), and 38 These individuals according to Wealth-X. the remaining 46 percent believe that the accounted for an estimated US$1,950 market will remain flat (versus 29 percent billion in wealth, representing a 2.2 percent 12 months ago). rise in 2016. This makes China the third largest UHNWI nation after the United Other Asian contemporary art markets States and Japan. The projected growth take center stage: In recent years, forecast for China’s UHNWI population international auction houses have shifted is 140 percent between 2016 and 2026. their focus from Chinese contemporary A recent wealth management survey by artists toward artists from Japan, South 39 reported that 28 percent Knight Frank Korea, and Southeast Asia. This shift is not 40 of wealth managers said that their Asian only driven by auction houses; many of the clients had a number of luxury investments biggest contemporary art dealers in the (art, wine, classic cars, etc.). Furthermore, world have been championing Japanese 44 percent of the wealth managers and Korean art in the last year. surveyed said that luxury investment had become more popular in the last year among their Asian clients. The contemporary Chinese sales total across the four auction houses for the first half of 2017 came in at the same level as in the spring and autumn of 2016, suggesting that the contemporary Chinese art market is stabilizing. 37 Source: World Bank-Global Economic reports-June 2017-Global Outlook 38 Source: “Wealth-X World Ultra Wealth Report 2017” 39 Source: “Knight Frank Wealth Report 2017” 40 This includes other Asian countries besides China. 69

70 Art & Finance Report 2017 | Section 1 - The state of the global art market Art & Finance Report 2017 | Section 1 - The state of the global art market A VIEW ON ART & FINANCE IN CHINA In the past, China’s culture and art By the Asia Institute of Art & Finance Art & Finance will serve the art industry industry depended on government based in Shanghai and increase its size and strength. The financial aid. This hindered the purpose of art should not be regarded development of a market-oriented only as investment or financing. Art relationship between culture and capital, and finance covers a wide range of and posed significant challenges in the remits, including wealth management, field of Art & Finance. In terms of the price discovery, trans-temporal asset stock of artworks in China, the sheer allocation, hedge funding and risk volume of pieces was only rivaled by the diversification, economic compensation, volume of historical artifacts. However, incentive mechanism, etc. As it is still the liquidity of these artistic assets considered a young industry in China, required a considerable amount of much more time should be taken to capital. Thus, the relationship between observe, reflect, and refine the definition. these assets and financial demand was the key driver for the art market. 2.What is the level of development of Art & Finance in China? Who are the In light of this, the Asia Institute of Art and main players and what are they doing? Finance business school was established Compared with the more mature to provide a strong talent platform for markets in Europe and America, Chinese the development of China’s Art & Finance people have only recently developed market, to assist the government in clear aspirations in terms of cultural creating infrastructure for the market, consumption and wealth management, and to explore innovation in these fields as a result of China’s rapid economic with the goal to pass on China’s national development and wealth accumulation. artistic and cultural heritage to future Therefore, China is currently seeing active generations. innovations taking place in the Art & Finance market. 1. In the context of China, who are the main stakeholders, and what are the In recent years, capital in the Chinese main products and services in the field auction market has risen from the billions of Art & Finance? of RMB to the hundreds of billions. For Many Chinese scholars have differing a vast number of people, it was the definitions with respect to Art & Finance. jaw-dropping prices at auctions that first Although a vast number of scholars brought the art market to their attention. disagree with the opinion that it is a On the one hand, the rapidly increasing simple combination of “art” and “finance,” scale and pricing of the art market have this opinion is still the prevailing view caught the attention of society at large; among the majority of Chinese people. on the other hand, the positive economic Some scholars regard Art & Finance benefits of owning particular pieces of as an industrial form and a financial fine art at an early stage have been clear- service system aimed at formulating cut and prompted numerous business artistic values. Meanwhile, other scholars capital and art funds to dip a toe into the interpret it as certain financing and market. With revenue as their primary credit actions targeting major players purchase motivation, some people view in the art market, thereby accelerating art purely as an investment product, the improvement of the art industry which has led to a large amount of funds through exposure to modern ideas and flooding into the art market. operating methods. It is clear that while In the meantime, the composition of minor distinctions exist among the many buyers in the art market has undergone interpretations of Art & Finance, the profound changes: market entries made term itself still lacks a definition that is universally recognized by the public. 70 70

71 Art & Finance Report 2017 | Section 1 - The state of the global art market by entrepreneurs have expanded the 4. What is the outlook for the Chinese scale and boosted the price of the art government’s position in relation to Art market, which has made the art market & Finance? shift from “collection alone” to “collection The Chinese government attaches plus investment.” The entry of short- great importance to the development term funds seeking financial returns of cultural projects, which are crucial has enriched the bulk of the art market, to the soft power of China. In recent heightening the economic value of art years, the government has emphasized to a certain extent, while repositioning the healthy and regulated development the primary purpose of art in terms of of culture and the art market through culture, history, emotion, and social the introduction of new policies. For contact. Recently, entrepreneurs such instance, the Ministry of Culture of as Wang Jianlin and Liu Yiqian have the People's Republic of China issued become frequent callers in art market. Business Management Regulations of Art Furthermore, enterprises such as China in March 2016. The State Administration Taikang Life Insurance, China Minsheng of Cultural Heritage issued Some Bank and more have dominated the Suggestions to Utilize Cultural Relics Chinese high-end art market and made Reasonably in December 2016, and the this a go-to resource for market actors. General Administration of Customs issued Adjustment Programs of Customs In addition to the high-end auction Duties in 2017 to reduce the import tariff market, other market players have also attached to artwork. demonstrated great enthusiasm for art investment. It was reported by the media With wealth accumulation and improved that, according to incomplete statistics, artistic appreciation, Art & Finance in the sum of business transactions of China has a promising future ahead. post and coin cards on the platform of the Culture Assets and Equity Exchange Agencies reached RMB 3.9 trillion in 2016. Globally speaking, China’s Art & Finance market ranked number one in terms of scale. However, in the last two years, the government has introduced regulation to curb speculation on the market. 3. What are the drivers supporting the development of Art & Finance services in China? On the one hand, the rapid economic development of China and wealth accumulation have meant that the public are eager to preserve the spirit of Chinese culture and seek wealth management. These impulses are the major driving forces behind the development of Art & Finance services in China. On the other hand, when the development of art in China reaches a certain stage, it is believed that the market will, in return, foster innovation in the service of Art & Finance. 71 71

72 Art & Finance Report 2017 | Section 1 - The state of the global art market Europe China US and Europe India UK SOUTH ASIA Russia South east asia Africa Middle east South asia Latin america Indian modern and contemporary art market (2006–H1 2017) Figure 12. Auction sales (in millions US$) based on Christie's, Sotheby's, and Saffronart $77,1 $66,9 $61,5 $52,8 $52,3 $53,4 $46,5 $39,7 $37,4 $ $ $30,4 $ $22,9 $24,3 $ $ $ $20,7 $ $ $ $ $ $ $ 4% 10% 8% 13% 9% 15% 41% 5% 7% 3% 12% 18% 5% 16 17 20 06 20 07 20 08 20 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 (H1) (H1) % of the total ntemporary ntemporary Co Modern Co Source: ArtTactic Outlook 2017–2018 Market review 2016 Classical Indian art gains traction in The South Asian art market was Sentiment in the South Asian modern 2016: Traditional, classical South Asian affected by the global downturn in 2016 and contemporary art market turns art categories accounted for 24 percent and is struggling to gain momentum: from positive to neutral in the first half in 2016, which represented a 59 percent of 2017: South Asian auction sales of modern Based on the responses of the increase in sales for the year. This signals and contemporary art decreased by experts surveyed by ArtTactic in June 2017, that art collectors and art buyers are 24.4 percent in 2016 compared to the only 7 percent believe the market will go widening their horizons when it comes to up (versus 40 percent in January 2016), previous year. The first half of 2017 raised segments. collecting different 28 percent believe that the market will go US$20.8 million in sales of modern and down in the next 12 months (up from 5 contemporary sales across Sotheby’s, The modern art market broadens its percent in January 2016) and the remaining Christie’s, and Saffronart. This was 14 Major museum exhibitions focus in 2016: 65 percent believe that the market will percent lower than the US$24.2 million of Bhupen Khakhar at the Tate and remain flat (versus 42 percent 12 months raised in the first half of 2016. Nasreen Mohamedi at the Met Breuer have ago). fostered interest in schools other than the Modern art dominates, but other South Progressive Group, which has dominated Since 2009, Asian collecting segments gain traction: South Asian biennial fever: the auction market in the last 10 years. the South Asian art market has seen The top three auction houses (Christie’s, The support from major international Sotheby’s, and Saffronart) saw a 24 percent eight new biennials and festivals. These institutions shined a spotlight on artists decline in modern art auction sales in include the Kochi-Muziris Biennale, Dhaka from the South Asian market in 2016. 2016. South Asian modern art dominated Art Summit, Colombo Art Biennial, Pune the sales in that period, accounting for 72 Biennial, and the Serendipity Arts Festival. percent of total auction sales across all A further two biennials planned for Lahore categories. and Karachi will open in 2017, which could inject even more energy into the regional art market. 72

73 Art & Finance Report 2017 | Section 1 - The state of the global art market Since 2009, the South Asian art market has seen eight new biennials and festivals. 41 Economic outlook: The World Bank India saw an 8.9 percent Wealth trends: Contemporary South Asian art will predicted that growth in the region increase in its UHNWI population in 2016 receive more museum exposure in 42 These individuals would increase to 6.8 percent in 2017 and according to Wealth-X. In March 2017, the Stedelijk Museum 2017: accounted for an estimated US$604 billion accelerate to 7.1 percent in 2018, reflecting in Amsterdam will present the exhibition in wealth, representing a 4.7 percent rise a solid expansion of domestic demand and entitled “Nalini Malani: Transgressions.” th largest in 2016. This makes India the 11 exports. Excluding India, regional growth From October 2017 to January 2018, the UHNWI nation, but among the fastest is expected to remain at 5.7 percent, rising Centre Pompidou in Paris will put on a growing. The projected growth in India’s to 5.8 percent, with growth accelerating in retrospective of Nalini Malani, making UHNWI population is forecast to grow by Bhutan, Pakistan, and Sri Lanka but easing her the first Indian artist to have a 150 percent between 2016 and 2026. in Bangladesh and Nepal. India is expected retrospective at the prestigious venue. The to accelerate to 7.2 percent in the 2017 major institutional support through 2016, fiscal year (1 April 2017 to 31 March 2018) 2017, and 2018 is likely to increase the and 7.5 percent in the next fiscal year. international focus on South Asian modern and contemporary art. 41 Source: World Bank-Global Economic reports-June 2017-Global Outlook 42 Source: “Wealth-X World Ultra Wealth Report 2017” STEPHEN WHITE END OF EMPIRE © YINK A SHONIBARE MBE (2016), PHOTOGRAPHER: 73

74 Art & Finance Report 2017 | Section 1 - The state of the global art market Europe China US and Europe India UK SOUTHEAST ASIA Russia South east asia Africa Middle east South asia Latin america Market review 2016 Outlook 2017–2018 Slowdown in the Southeast Asian art Neutral-to-negative outlook for the Since the global art market market: next 12 months: 17 percent of the experts downturn in 2009, the Southeast Asian surveyed believe the market will go up in modern and contemporary art market has the next 12 months (down from 40 percent been on a steady climb, with an annual in January 2016). A larger number of the growth of 23.4 percent in sales between experts (68 percent, up from 41 percent in 2010 and 2015, based on auctions at January 2016), believe that the Southeast Sotheby’s and Christie’s. However, in Asian art market will remain flat in the next 2016 the Southeast Asian market finally six months. Moreover, 28 percent of the succumbed to the forces driving the respondents believe that the market will fall global art market slowdown. Modern and in the next 12 months (up from 9 percent in contemporary Southeast Asian art, which January 2016). This indicates a shift toward is primarily sold in Hong Kong, saw a 29.7 a more negative stance on the modern and percent year-on-year decrease in sales last contemporary art market in the region for year. The auction sales in the first half of the coming 12 months. 2017 suggest that the downward pressure on this market could continue into the Contemporary art from the Southeast second half of the year. In Asian market is gaining attention: 2017, the National Art Center in Tokyo, Contemporary art from Southeast the Mori Art Museum, and the Japan Asia increases its market share: Foundation Asia Center will put on a major Modern Southeast Asian art accounted survey exhibition entitled “SUNSHOWER: for 80.3 percent of the sales total in 2016 Contemporary Art from Southeast (down from 88.9 percent in 2015). This Asia 1980s to Now,” which will be the results in 19.7 percent market share for largest-ever exhibition of Southeast Asian the contemporary art sector (up from contemporary art to be held in Japan. 11.1 percent in 2015). The sector has 43 experienced steady growth in market share The World Bank Economic outlook: reported in June 2017 that it expected in the last four years, with 2016 delivering Southeast Asia to grow at an estimated the second highest total for contemporary rate of 5.1 percent in 2017 and 5.2 percent art. in 2018. Indonesia is anticipated to pick up to 5.2 percent in 2017 and 5.3 percent in Indonesia is the strongest sector 2018. Growth in the Philippines is forecast Indonesian art continues to in 2016: to hold steady at 6.9 percent this year dominate the region’s art market with and the next, driven by an uptick in public 48.8 percent market share based on total and private investment. Thailand should auction sales at Sotheby’s and Christie’s similarly maintain 3.2 percent growth in (down from 54 percent in 2015), followed 2017, accelerating to 3.3 percent next year, by the Philippines, with 22.6 percent supported by greater public investment market share. Vietnamese art comes in and recovering private consumption. third position with 16.2 percent market share. 43 Source: World Bank-Global Economic reports-June 2017-Global Outlook 74

75 Art & Finance Report 2017 | Section 1 - The state of the global art market Wealth trends: Despite a 0.5 percent Since the global art market downturn in decrease in the UHNWI population in Singapore in 2016, other Southeast Asian 2009, the Southeast Asian modern and markets experienced significant growth. Indonesia saw a 9.6 percent increase in its contemporary art market has been on a UHNWI population in 2016, followed by 4.2 increase in Thailand. These three nations steady climb. accounted for US$677 billion in wealth 29 held by UHNWIs according to Wealth-X. Vietnam has also seen strong growth in the last 10 years, with a 320 percent increase in the country’s UHNWI population, and with predictions that this population will continue to grow by 170 percent in the next 30 decade according to Knight Frank. 44 Source: “Wealth-X World Ultra Wealth Report 2017” 45 Source: “Knight Frank Wealth Report 2017” Southeast Asian Modern & Contemporary Art Market (2005-2017 1st Half) Figure 13. Auction sales (in millions US$) based on Christie's, Sotheby's and Phillips $76,3 $59,6 $53,7 $50,8 $37,5 $29,5 $ $31,4 $26,6 $25,4 $ $22,2 $ $20,7 $ $17 $14,8 $13,9 $ $ $ $ $ $ $ $ $ $ 15% 5% 33% 27% 7% 48% 20% 11% 16% 17% 18% 20% 19% 35% 2016 2014 2006 2007 2008 2009 2016 2005 2015 2017 2013 2012 2011 2010 (H1) (H1) Modern Co ntemporar y Co ntemporar y % o f t he t otal Source: ArtTactic 75

76 Art & Finance Report 2017 | Section 1 - The state of the global art market Europe US and Europe China India UK L ATIN AMERIC A Russia South east asia Africa Middle east South asia Latin america Market review 2016 Outlook 2017–2018 Latin American auction sales fall in Market experts take a polarized view on 2016, but the decline seems to level out Based on the Latin American art market: in the first half of 2017: Latin American the responses of the experts surveyed by auction sales saw a year-on-year decrease ArtTactic in June 2017, 34 percent believe of 27.2 percent in 2016 following several the market will go up (versus 25 percent in years of steady growth. The sector January 2016), 37 percent believe that the reported US$62.2 million in modern and Latin American modern and contemporary contemporary Latin American auction art market will go down in the next 12 sales last year. These results are the lowest months (versus 14 percent in January 2016) recorded for the sector since 2006. Data and the remaining 29 percent believe for the first half of 2017 shows that auction that the market will remain flat (versus 61 sales decreased by 13.4 percent from percent in January 2016). the second half of 2016, but were up 5.4 46 According to a World percent from the first half of 2016. Economic outlook: Bank report, growth in Latin America and the Caribbean is projected to increase to Contemporary Latin American 0.8 percent in 2017 as Brazil and Argentina art shows growth despite market emerge from recession and rising While the overall auction downturn: commodity prices support agricultural market for Latin American art fell in 2016, and energy exporters. Brazil is forecast to the contemporary art sector reported its expand by 0.3 percent in 2017, with growth strongest year to date. Contemporary art expected to pick up to a rate of 1.8 percent accounted for 12 percent market share in 2018. Growth in Argentina is forecast of the Latin American market in 2016 (up to expand at a rate of 2.7 percent in 2017. from 8 percent in 2015) as sales hit US$7.8 Growth in Mexico is anticipated to average million (up from US$6.8 million). However, out at 1.8 percent in 2017 (principally as a auction sales from the first half of 2017 result of a fall in investment stemming from show the share of contemporary art falling uncertainty about US economic policy), back to only 3 percent of the overall total, before accelerating to 2.2 percent in 2018. indicating a more conservative attitude among buyers. Latin America saw a 3.4 Wealth trends: percent decrease in its UHNWI population Mexican and Colombian artists gain 47 These in 2016 according to Wealth-X. market share in the first half of 2017: individuals accounted for an estimated During the Latin American auction sales in US$945 billion in wealth, down 10.2 percent New York in May, artists from both Mexico from the previous year. Latin America’s and Colombia increased their share of UHNWI population is forecast to grow by overall sales. Mexican artists accounted for 37 percent between 2016 and 2026, with 31.8 percent (up from 23.3 percent in the Mexico’s UHNWI population predicted to second half of 2016) of the total sales value, grow by 40 percent, Brazil’s by 20 percent followed by Colombian artists accounting and Colombia’s by 30 percent over the next for 24.4 percent of total sales (up from 10 years. A recent wealth management 15.3 percent in November 2016). Brazilian artists only accounted for 3.9 percent of the sales value in May 2017. 46 Source: World Bank-Global Economic reports-June 2017-Global Outlook 47 Source: “Wealth-X World Ultra Wealth Report 2017” 76

77 Art & Finance Report 2017 | Section 1 - The state of the global art market 48 survey by Knight Frank reported that 46 During the Latin American auction percent of wealth managers said that their Latin American clients had a number of sales in New York in May, artists luxury investments (art, wine, classic cars, etc.). Furthermore, 64 percent of the wealth from both Mexico and Colombia managers said that luxury investment had become more popular in the last year increased their share of overall among their Latin American clients, which was the highest percentage compared to sales. other regions reported in the survey. 48 Source: “Knight Frank Wealth Report 2017” Latin American Modern & Contemporary Art Market (2006-1st Half 2017) Figure 14. Auction sales (in millions US$) based on Christie's, Sotheby's and Phillips $85,4 $86,2 $81,6 $81,7 $76,3 $72,7 $68,8 $67,1 $65,1 $62,2 $48,9 $ $ $ $ $ $34,3 $32,4 $ $ $ $ $ $ $ $ 3% 6% 3% 8% 6% 12% 7% 4% 8% 4% 3% 3% 3% 2012 2010 2016 2016 2015 2014 2013 2017 2011 2009 2008 2007 2006 (H1) (H1) ntemporar y Modern Co ntemporar y % o f t he t otal Co Source: ArtTactic 77

78 Art & Finance Report 2017 | Section 1 - The state of the global art market Europe US and Europe China India UK MIDDLE EAST Russia South east asia Africa Middle east South asia Latin america Market review 2016 Outlook 2017–2018 Middle-Eastern auctions defy the global Neutral-to-negative outlook for art market downturn and expand by 2017–2018: a recent survey conducted by Total auction sales of 11.9 percent in 2016: ArtTactic among international art collectors modern and contemporary Middle-Eastern shows that 25 percent believe the Middle- art rose by 11.9 percent in 2016, as more Eastern modern and contemporary auction houses started offering sales of art market will see further growth in art from the region. The first half of of 2017 2017–2018 (down from 45 percent in raised $20.5 million, down 11 percent from January 2016), with 34 percent believing the first half of 2016. market will remain flat. However, there are concerns about the next 12 months, with 41 percent (up from 24 percent in January Total auction sales of modern and 2016) predicting that the Middle-Eastern art market will decline. Wars, terrorism, and contemporary Middle-Eastern geopolitical tension in the region were cited as the main reasons for this. art rose by 11.9 percent in 2016, Sotheby’s opens a new office in Dubai: as more auction houses started Sotheby’s, which up until now has held its Middle-Eastern auctions in Doha, opened offering sales of art from the region. a new office in nearby Dubai in March this year. In the UAE, the auction house has reportedly experienced a significant An Iranian auction house sees a 392 increase in sales and is now looking to cater percent increase in sales from 2012: for the local clientele. The move is likely Since Tehran Auction held its inaugural sale to heighten the firm’s competition with in 2012, sales have increased from US$1.7 Christie’s, which already holds its sales in million to US$8.4 million. The auction Dubai. house’s sales of modern and contemporary art accounted for nearly one quarter According to the World Economic outlook: 49 , growth in the region is projected to (24.9 percent market share) of the Middle- Bank fall from 3.2 percent to 2.1 percent in 2017 Eastern art market in 2016. as the adverse impact of production cuts by the Organization of Petroleum Exporting Christie’s continues to be the leading Countries (OPEC) on oil exporters player in the Middle-Eastern art market: modestly outweighs improving conditions Christie’s share of the Middle-Eastern in oil importers. Growth is expected to market came in at 44.6 percent in 2016, accelerate to 2.9 percent in 2018, assuming putting it far ahead of its competitors: an easing of geopolitical tensions and an Tehran Auctions (24.9 percent market increase in oil prices. share), Sotheby’s (15.7 percent market share), and Bonhams (14.8 percent market share). 49 Source: World Bank-Global Economic reports-June 2017-Global Outlook 78

79 | Section 1 - The state of the global art market Art & Finance Report 2017 Wealth trends: The Middle East saw a Saudi Arabia’s by 20 percent over the next 10 years. A recent wealth management 0.1 percent decrease in its UHNWI 50 51 reported that 32 survey by Knight Frank population in 2016 according to Wealth-X. These individuals accounted for an percent of wealth managers said that their Middle-Eastern clients had a number of estimated US$1.440 trillion in wealth, luxury investments (art, wine, classic cars, representing a 0.1 percent increase from etc.). Furthermore, 38 percent of the wealth the previous year. The Middle East’s managers said that luxury investment UHNWI population is forecast to grow by had become more popular in the last year 39 percent between 2016 and 2026, with among their Middle-Eastern clients. the UAE and Qatar’s UHNWI population predicted to grow by 60 percent and 50 Source: “Wealth-X World Ultra Wealth Report 2017” 51 Source: “Knight Frank Wealth Report 2017” Middle-East Modern & Contemporary art market (2007-1st Half of 2017) Figure 15. Auction sales (in millions US$) based on Christie's, Sotheby's and Bonhams $36,2 $35,2 $32,3 $29,8 $28,1 $23,7 $23,0 $20,5 $ $15,6 $ $15,1 $12,2 $ $11,7 $ $ $ $ $ $ $ $ $ 8% 6% 13% 25% 21% 38% 45% 21% 17% 38% 27% 38% 2010 2016 2015 2014 2013 2011 2012 2009 2008 2007 2017 2016 (H1) (H1) Co Co Modern ntemporar y % o f t he t otal ntemporar y Source: ArtTactic 79

80 Art & Finance Report 2017 | Section 1 - The state of the global art market Art & Finance Report 2017 | Section 1 - The state of the global art market ART & FINANCE IN THE MIDDLE EAST AND GCC Dr. Hatim Tahir leads the think-tank “Deloitte ME Islamic Finance Knowledge Center,” where he advises clients across By Rosine Makhlouf the globe on Islamic financial strategy Family Business Advisor and market development. He also works Deloitte Private (ME) extensively with industry standard- setting bodies and other stakeholders to promote best practices in the industry and share experiences and insights in different jurisdictions. Hatim holds a PhD in Business Management, from the University of London, and was a Research Associate at the London School of Economics from 1995 to 2000. He is currently a visiting research fellow at the ICMA Centre, Henley Business School, University of Reading and Fellow of the British Chartered Institute for Securities & Investment (CISI). 80 80

81 Art & Finance Report 2017 | Section 1 - The state of the global art market Art & Finance Report 2017 | Section 1 - The state of the global art market The United Arab Emirates is among late 30s or early 40s, these individuals several of the GCC countries renowned are seeking to acquire their first work for investing heavily in their cultural of art with the knowledge that they economy. With the development of the are investing their money. Shaheem’s Sharjah Art Foundation, Mathaf Arab primary research suggests that this Museum of Modern Art, Art Abu Dhabi, market is increasingly learning about Art Dubai, and the Sharjah Biennale, the value of art, and how acquiring the there has been significant growth in the right piece at the right time evidently regional art market. generates long-term value. The appetite is largely for regional artworks and the This year marked the 11th edition of typical investment (per piece) starts in Art Dubai—the region’s leading art the range of US$15,000–US$30,000. fair—which featured works from 277 different artists from over 40 countries. In 2008, the market saw a trend for the These artists were represented by 94 launching of various investment vehicles international galleries that participated in focusing on Middle-Eastern art. One was a four-day exhibition and welcomed over sponsored by the Bahraini bank Addax, 28,000 visitors, successfully bridging the which was a private fund, and another by gap between the Dubai art scene and the Emirates National Bank of Dubai (ENBD), global contemporary art market. one of the largest banks in GCC. ENBD A further testament to the development entered into a strategic partnership with of the region was the opening of an investment and advisory house (the Sotheby’s international auction house Fine Art Group) to offer the bank’s U/ in Dubai. Its office and gallery space is HNWI clients the opportunity to acquire located in Dubai’s luxurious and modern art and create their own art collection. international financial district alongside With many great opportunities in this Christie’s and several other art galleries. emerging market, one may pose the Despite all the growth we are witnessing, question of how this type of investment the Middle-Eastern art market is still can be integrated into the ever-popular considered to be an emerging market. In sharia-compliant system. Dr. Hatim Tahir, the 2016 Art & Finance Report, experts leader of the “Deloitte ME Islamic Finance gave a neutral-to-positive outlook for Knowledge Center,” shares his knowledge the Middle-Eastern art market, with on this idea. greater downside risk due to geo-political tensions. Identifying and profiling Middle- In 2008, the market saw a trend Eastern art collectors can be challenging owing to the opaque nature of the art for the launching of various market in general, although there is evidence of over 10 families across the investment vehicles focusing on region that actively buy or maintain their art collections. One private banker Middle-Eastern art. suggests that approximately 10 percent liquidity is allocated to art when dealing with a seasoned art collector. These individuals are often seeking unique ways to diversify their financial portfolios. According to Salma Shaheem, Head of Middle-Eastern Markets and Joint Venture Partner at the Fine Art Group in Dubai, a new generation of art collectors has begun to emerge. Typically in their 81 81

82 Art & Finance Report 2017 | Section 1 - The state of the global art market Art & Finance Report 2017 | Section 1 - The state of the global art market Art usually exists as a tangible asset with an economic value and, when subject to sharia screening, it can certainly make a good underlying asset for a financing or investment structure. ٣ ٢ ا What is the place of art in the Islamic What is the definition of Islamic art? What is the definition of a sharia- tradition? Islamic art can be defined as the compliant investment? Islam has a great appreciation for collections or repositories relating to A sharia-compliant investment is an art, especially when it comes to the Muslims’ cultural and societal heritage. investment of goods and services in preservation of our cultural heritage. It might be embodied by any form or accordance with Islamic principles piece of work from architecture, design, The Islamic civilization has offered a and a code of commercial practice. valuable cultural legacy to the world, paintings, and dresses to the weapons For example, a sharia-compliant fund used during historic wars. Also, any from the eras of the Umayyad caliphate, will only invest in products, assets, or creation or achievement that contributes the Abbasid caliphate, and Al-Andalus services that do not conflict with Islamic civilization to the Ottoman Empire. This to the social good or the history of Islam principles in relation to investment and heritage includes, of course, mosque could be categorized under Islamic art. finance, and therefore cannot invest In saying this I am referring to science, design and architecture, paintings, kufi in what are largely viewed as “non- medicine, and mathematics, and even and other Arabic calligraphy, souvenirs, permissible” activities in the following and all sorts of art that trace the history handwritten historical agreements or proscribed sectors: of Islamic civilization. This heritage treaties. Islamic art is the combination Interest-bearing financial or investment • of all the above and the depository of belongs to the Ummah and is a source of products or services (Riba in Arabic) great pride. A large number of museums Muslim culture and history. around the world exhibit artwork with Weapons • Islamic heritage (in the Arabian Peninsula, Alcohol • Jordan, Turkey, Persia, Asia, Africa, Spain, etc.). • Pork • Gambling • Investment, financing, services, or goods that are considered to involve a high level of uncertainty and speculation 82 82

83 Art & Finance Report 2017 | Section 1 - The state of the global art market Art & Finance Report 2017 | Section 1 - The state of the global art market ٦ ٥ ٤ Is it compliant with sharia to use art In your opinion, is there any appetite What could make art investment more as an underlying asset for a financing for art investment in the MENA and GCC popular and affordable as an alternative instrument or fund? regions? asset class for the MENA and GCC Personally, I do not see any issues with I am confident that Islamic banks and regions? accepting art as an asset. Art usually other investment houses will be keen Key to the growth of this investment exists as a tangible asset with an to tap into this niche market. This is opportunity is creating the right products economic value and, when subject to particularly true for private banking and and services as well as making clients sharia screening, it can certainly make wealth management, where the interest and potential investors aware of the a good underlying asset for a financing from HNWI and family offices in art economic benefits. Financial services or investment structure. It is equally investment could be significant. firms can also play a key role in educating possible that other Islamic financing end-users and investors about the structures can be used to fund art potential alternative sharia-compliant projects, such as the renovation of old investment on offer. Generally, Islamic mosques or Islamic cultural properties. banks prefer financing “economic-related It is a very interesting area and I believe activities” (e.g., equipment for a factory, there are several possible investment or a car for a particular use). For art structures that banks and investment investment, we need to see more effort houses can develop to address the needs on the part of bankers and investors to and opportunities associated with art design products and services that will financing and investment in the region. add value to societies and individuals. Investing in art is a recent phenomenon But, in my opinion, art is an asset with a in the region, and art is a new asset class defined economic value. Therefore, there for MENA and GCC. are several possible ways of financing or linking investment products with Islamic art; for example, products such as the ijara or murabaha may be particularly suited to this purpose. 83 83

84 Art & Finance Report 2017 | Section 1 - The state of the global art market Europe US and Europe China India UK RUSSIA Russia South east asia Africa Middle east South asia Latin america Outlook 2017–2018 Russian modern and contemporary art market 2011–2015 Figure 16. Experts maintain a negative outlook for Auction sales (US$) based on Christie's, Sotheby's, and MacDougall the Russian modern and contemporary art market in 2017–2018 despite a positive start to auction sales in 2017: $72,5 19 percent of the experts surveyed by $63,2 ArtTactic in January 2017 (up from 16 $52,7 percent in January 2016) believed that the $45,5 Russian art market would see a positive $ $26,8 growth trend this year, with 35 percent $25,8 $ $20,3 $ predicting that the market would remain $17,4 $ $ $ flat. Furthermore, 46 percent of the $ $ respondents believe that the Russian art 13% 4% 7% 4% 21% 6% 6% 9% market could deteriorate in the coming 12 2012 2016 ( 2011 2013 2014 H1) H1) 2015 2017 ( 2016 months (compared to 43 percent in January 2016). Co ntemporar y % o f t he t otal ntemporar y Co Modern Source: ArtTactic Russia’s economic outlook improves: Russia is expected to grow at a rate of 1.3 percent in 2017 after a two-year recession and at a rate of 1.4 percent in 2018, with growth fueled by gains in consumption, according to a recent report by the World 52 Bank. Market review 2016 Sotheby’s dominates the Russian art Russian modern and contemporary art market: Sotheby’s retained its lead in the Wealth trends: Russia saw a 6.2 percent In sales decrease by 4 percent in 2016: Russian modern and contemporary art decrease in its UHNWI population in 2016 2016, sales of modern and contemporary market with 48.1 percent market share 53 These individuals according to Wealth-X. Russian art appear to have stabilized after (down from 55 percent in 2015), versus accounted for an estimated US$666 billion the free-fall in 2015 when the market Christie’s reported market share of 17.5 in wealth, down 7.2 percent from the dropped 63 percent. Russian art sold at percent (down from 20 percent in 2015). previous year. Russia’s UHNWI population auctions in London at Christie’s, Sotheby’s, MacDougall’s, the London-based auction is forecast to grow by 60 percent between and MacDougall’s totaled £25.8 million house, saw a substantial increase in market 2016 and 2026. (including premiums) in 2016, a year-on- share in 2016. Last year, MacDougall’s year decrease of 4 percent from 2015. reported a 34.4 percent market share; A recent wealth management survey by However, auction sales in the first half of this should be compared to 2015, when its 54 reported that 33 percent of Knight Frank 2017 suggests that the negativity in the market share came in at 25 percent. wealth managers said that their Russian market might be lifting, as sales for the first clients had a number of luxury investments six months of 2017 already stand at £20.3 (art, wine, classic cars, etc.). Furthermore, million, accounting for 78 percent of the 40 percent of the wealth managers said entire 2016 sales volume. that luxury investment had become more popular in the last year among their Russian clients. 52 Source: “World Bank - Global Economic Prospects - June 2017 - Global Outlook” 53 Source: “Wealth-X World Ultra Wealth Report 2017” 54 Source: “Knight Frank Wealth Report 2017” 84

85 | Section 1 - The state of the global art market Art & Finance Report 2017 STEPHEN WHITE CAKE KID © YINK A SHONIBARE MBE (2014), PHOTOGRAPHER: Experts maintain a negative outlook for the Russian modern and contemporary art market in 2017–2018 despite a positive start to auction sales in 2 0 17. 85

86 Art & Finance Report 2017 | Section 1 - The state of the global art market Europe China US and Europe India UK AFRICA Russia South east asia Africa Middle east South asia Latin america st African Modern & Contemporary Art (2009 -2017 1 Figure 17. Half) Auction sales (US$ millions) based on Sotheby's, Bonhams and ArtHouse $5,6 $4,3 $3,8 $3,7 $3,5 $2,9 $2,5 $ $2,3 $2,4 $ $ $ $ $ $ $0,9 $ $ $ 17 (H1) 09 20 10 20 11 20 16 (H1) 12 20 13 20 20 20 15 20 16 20 20 14 a Now' Sale s Bonhams 'Af ric ' Sale s dern and Contempora ry Art House 'Mo Art Sotheby's 'Mo dern and Contempora ry Af ric an Art ' Sale s Source: ArtTactic Market review 2016 Balance in the market shifting as Global initiatives setting the trend: Bonhams and Arthouse see increase Sotheby’s enters the market in 2017: With global initiatives such as the 1:54 in sales of contemporary African art: Sotheby’s launched its first African modern Contemporary African Art Fair in London Bonhams organized two sales dedicated and contemporary art sale in May 2017 and New York, The African Art in Venice to African modern and contemporary art in London. The auction house raised Forum organized for the first time this in 2016. Bonhams’ Africa Now auctions US$3.61 million in its inaugural sale, taking year, and Sotheby’s new sale dedicated to raised a total of US$2.8 million (£2.2 million) 64 percent market share in the first half African modern and contemporary art, the in 2016, up 11.6 percent from 2015. Also, of 2017. Based on this result, we could African art sector is enjoying an increasing the Nigerian auction house Arthouse see both Christie’s and Phillips following global exposure. Also, the Armory Show in Contemporary registered US$1.5 million suit with their own dedicated sales for this New York last year highlighted the African in overall auction sales in 2016 (up 14.1 region. continent with its focus section entitled percent from 2015). “African Perspectives.” Outlook 2017–2018 London consolidates its position as Positive outlook for the next 12 months: Economic outlook: Growth in Sub- the venue of choice for modern and 46 percent of the experts surveyed in Saharan Africa is forecast to reach 2.6 The total contemporary African art: January 2017 believe the African modern percent in 2017 and 3.2 percent in 2018 55 market in 2016 came in at US$4.3 million and contemporary art market will go up in These according to the World Bank. compared to US$3.8 million in 2015 the next 12 months (up from 39 percent forecasts are based on moderate rises in (up 12.5 percent from 2015). Bonhams in January 2016), 42 percent expect that commodity prices and reforms to tackle controlled 65 percent market share in 2016 the market will remain flat (down from macroeconomic imbalances. Nigeria is with its two sales in London. 50 percent 12 months ago) and only 12 forecast to move from recession to a 1.2 percent think that the market will come percent growth rate in 2017, gaining speed down in the next 12 months (versus 11 to 2.4 percent in 2018, whereas growth percent who expected the market to in South Africa is projected to rise to 0.6 decline in January 2016). percent in 2017 and accelerate to 1.1 percent in 2018. 55 Source: World Bank-Global Economic reports-June 2017-Global Outlook 86

87 Art & Finance Report 2017 | Section 1 - The state of the global art market BALLERINA WITH VIOLIN (GISELLE) © YINK A SHONIBARE MBE (2013), PHOTOGRAPHER: STEPHEN WHITE London consolidates its position as the venue of choice for modern and contemporary African art. Africa saw a 4.0 percent Wealth trends: decrease in its UHNWI population in 2016 56 These individuals according to Wealth-X. accounted for an estimated US$212 billion in wealth, representing a 4.7 percent fall from the previous year. Africa’s UHNWI population is forecast to grow by 33 percent between 2016 and 2026. A recent wealth management survey by Knight 57 reported that 32 percent of wealth Frank managers said that their African clients had a number of luxury investments (art, wine, classic cars, etc.). Furthermore, 55 percent of the wealth managers said that luxury investment had become more popular in the last year among their African clients, which was the second highest reading in the survey. 56 Source: “Wealth-X World Ultra Wealth Report 2017” 57 Source: “Knight Frank Wealth Report 2017” 87

88 Art & Finance Report 2017 | Section 1 - The state of the global art market Art & Finance Report 2017 | Section 1 - The state of the global art market ART & FINANCE 2017 THE AFRICAN PERSPECTIVE Rising global demand for African contemporary art is changing the narrative at international auction houses, galleries, art fairs, and biennales. Also in 2017, record-breaking African art goes global hammer prices recorded at auction The international auction house Bonhams for contemporary art were achieved now holds its renowned “Africa Now” sale by Nigerian artist Njideka Akunyili (focused on African contemporary art) Crosby, whose work sold for less than twice a year. Sotheby’s London joined the US$100,000 at auction in 2016. However, African art auction trend in 2017 with its less than a year later, the artist’s piece first auction focused purely on African “Drown” sold for a record-breaking contemporary art. It achieved total sales US$1.1 million at a Sotheby’s auction of over US$3.6 million and 79 of the 116 and a few months after that, her 2012 lots were sold. painting “The Beautiful Ones” sold for US$3.1 million at a Christie’s London Bola Asiru is the Deloitte West Africa auction. In other words, Akunyili Crosby’s Leader for Strategy & Operations. He also sales prices grew by over 3,000 percent leads the consulting financial services in a year. industry business in Nigeria and is the This positive trend is also consistent with Africa Art & Finance Coordinator. Bola has the growth of African art auctions in broad experience in delivering innovative major markets such as London: the city solutions to complex business problems experienced a 12.5 percent rise in African across multiple industries. He is also art auction sales between 2015 and 2016, the Founder of Red Door Art Gallery—a with Bonhams controlling a 65 percent leading gallery in Nigeria. market share. It is expected that other international auction houses will continue to focus on contemporary art of African origin in the near future. 88 88

89 Art & Finance Report 2017 | Section 1 - The state of the global art market | Section 1 - The state of the global art market Art & Finance Report 2017 This sentiment is in line with the International art fairs and biennales Future trends—how sustainable is the The international “1:54 Contemporary thoughts of the CEO of the Nigerian African art growth story? Stock Exchange, who also believes that African Art Fair” derives its name from International dealers and auction houses investment in art education, awareness, the art of the 54 African countries it like Bonhams and Sotheby’s are seeing a and capacity-building across the wishes to promote globally. The first fair gradual shift in the African contemporary was held in London in 2013, and by 2015, value chain is required in order to see art buyer base from mainly African ART & FINANCE 2017 the event had inspired annual shows continued value appreciation in the art collectors to a more international in New York with a Marrakech edition sector. He asserts that along with these and diverse group of art collectors. scheduled to debut in 2018. enabling institutions will come more Giles Peppiat, Director of African Art at THE AFRICAN credibility, price discovery, and improved Bonhams, describes this transition to price transparency. He envisages a future Aside from annual contemporary art mainstream art collectors as “few and where African contemporary art can fairs, the narrative of the global art far between” but emphasizes that it is be recognized as a viable security and world is typically shaped by major the “Holy Grail” that will enable African PERSPECTIVE alternative asset class. “Like every other events such as the Venice Biennale with art to reach its full potential in terms of investment vehicle, there is a need for its rich 122-year history. It is therefore value on the global stage. Mainstream regulatory input and for investors to interesting to note that eight out of the international art collector demand has a understand the fundamentals of an art- 54 African countries are represented at crucial role to play driving up the value of based security,” he notes. the 57th Venice Biennale in 2017, either contemporary African art. at country-specific pavilions or through In addition, the narrative of independent artists participating in the It is clear from recent trends that the contemporary African art has not been two key drivers for the continued growth International Art Exhibition. The Nigeria adequately reflected across the entire art of contemporary African art are (i) the pavilion also made its debut with a group value chain. The genre is still in its infancy establishment of strong infrastructure show that the New York Times described and growing fast, but is set to grow and supporting institutions (art schools, as “excellent.” exponentially when strong supporting museums, galleries etc.) across the institutions are established to underpin Who is collecting African entire value chain and (ii) sustained, the entire African art value chain. contemporary art? international, mainstream demand Within the African continent, the extending beyond the shores of the Yinka Shonibare MBE, a renowned British African continent and the diaspora of the greatest demand comes from High-Net- artist of Nigerian descent, believes that Worth Individuals from the two largest African art collector base. the most important prerequisites to economies on the continent—Nigeria and ensure that the sustainability of the South Africa. African art market reaches Western levels The increased demand is also being are strong infrastructure and institutions. driven by large African corporations. He says, “We need museums with References The Nigerian Stock Exchange (NSE), for trained curators, art critics, alternative 1. Interviews with Yinka Shonibare MBE 2. Interviews with Mr. Oscar N. Onyema—CEO of the instance, owns an impressive collection art spaces, project spaces, national Nigerian Stock Exchange of contemporary African art. The NSE and commercial galleries, art fairs, and 3. http://www.artnews.com/2017/03/07/christies-nets- 117-7-m-in-solid-london-postwar-sale-setting-records- CEO, Oscar N. Onyema, explained in an auction houses.” He further explains for-oehlen-crosby-tillmans/ interview with Deloitte that the collection that in order to support the growth of 4. https://www.nytimes.com/2017/05/22/arts/design/ was inspired by the desire to create a art as a viable asset class, the various venice-biennale-whose-reflection-do-you-see.html 5. http://www.bbc.com/news/av/in-pictures-37584306/ first-class working environment for staff. institutions must be capable of informing why-is-african-art-big-business-in-london Also, through the collection, the NSE and educating the general public on 6. http://www.harpersbazaararabia.com/art/news/ sothebys-first-african-art-sale encourages operators in the art industry the intrinsic value of art. According to 7. http://theartnewspaper.com/market/african-art- to leverage opportunities offered by the Shonibare, governments in Africa are yet hits-the-mainstream-market-but-will-collectors-be-con - capital market to promote growth and to appreciate the transformative power verted/ 8. Ar tTactic create durable wealth for stakeholders. of art on economies. He cites the example He also notes that “quite a number of of how the former industrial city of Bilbao companies listed on our exchange have in northern Spain was transformed into very impressive art collections.” a leading tourist destination with the Outside Africa, African contemporary opening of the Guggenheim Museum in art collections are also being fueled 1997. The museum now generates over by museums and large corporations. €400 million annually and has had a Examples include the Standard Chartered catalytic impact on the economy and GDP collection in London and museum of the city. Shonibare believes that similar collections such as the San Francisco investments need to be made across the Museum of Modern Art and the value chain by African governments and Smithsonian. the corporate social responsibility (CSR) initiatives of large African corporations in order to truly optimize the value of contemporary African art. 89 89

90 Art & Finance Report 2017 | Section 1 - The state of the global art market REFUGEE ASTRONAUT II © YINK A SHONIBARE MBE (2016), PHOTOGRAPHER: STEPHEN WHITE 90

91 Art & Finance Report 2017 | Section 1 - The state of the global art market A fresh look at LE FREEPORT Luxembourg 58 Opened in September 2014, the Luxembourg Freeport 59 located at Findel airport offers a high- (LE FREEPORT) secure and high-tech logistic hub within which high value goods may be handled, stored, conserved, traded, restored and exhibited. Exclusively dedicated to high- value goods–especially art, LE FREEPORT offers the perfect storage conditions in a tax-free environment. The concept of a freeport is not new, but in LE FREEPORT offers long-term leases Raphaël Glohr our view LE FREEPORT Luxembourg is one of larger dedicated storage areas who Partner - VAT of the most attractive ones. are managed by logistics and specialist Deloitte Luxembourg forwarders companies. Those storage An ecosystem exclusively dedicated to spaces are sublet to individuals and Cyrielle Gauvin high-value goods companies, which can benefit from its Tax and Art & Finance LE FREEPORT is an ultra-safe facility infrastructure and highly qualified staff Deloitte Luxembourg specialized in the conservation of high and structure, and it also offers an ideal value goods with a total surface of 21.000 place for the management of said goods; Adriano Picinati di Torcello 2 . Valuable objects, both of a physical m for instance, these goods can be bought Director nature (e.g. fine art, fine wines, classic cars, and sold between the different players Global Art & Finance Coordinator precious metal, jewels, cigars, etc.) and operating on the art market. Deloitte Luxembourg of an electronic and digital nature can be stored. This new state-of-the-art freeport is designed to function as a self- As such, LE FREEPORT intends to attract to contained ecosystem offering a wide Luxembourg potential “investors” present range of services including storage and in the globalized art world, notably financial warehousing activities, transport and professionals such as private bankers, logistics, packaging, framing, restoration, insurance companies, family officies, banks private exhibitions of artworks in one of and asset managers. It also constitutes eight showrooms, and a photography a key center of interest for artists, high studio. A number of professionals based net-worth collectors, galleries, corporate at the facility provide art valuation, art With the collaboration of collections and museums lacking space advisory, insurance brokerage, tax and Claude Herrmann and allowing as such an exchange between customs advisory, and art monetization Directeur administratif museums and art collectors from all over services. The facility also provides Fine Art Logistics Natural Le the world. certain guarantees of quality to its Coultre S.A. clients, especially in terms of climate and temperature control, power supply, safety, and monitoring. 58 LE FREEPORT is in a free zone created by a ministerial decree dated 30 November 2012, pursuant to a law dated 28 July 2011, amending the Luxembourg VAT laws. More info: www.lefreeport.lu is part of the European Union customs union. 59 LE FREEPORT 91

92 | Section 1 - The state of the global art market Art & Finance Report 2017 A world-class logistics and regulatory The Luxembourg customs authorities— LE FREEPORT , which is governed by platform in the center of Europe (ADA)—which Administration des Douanes the Luxembourg authorities, benefits Located in the heart of Europe, next to must be notified of the entry and exit of from a legal framework compliant with the cargo center at Luxembourg’s Findel all goods, have a physical presence at LE international standards to ensure the airport, this impressive logistics hub is FREEPORT as well as unlimited access and total traceability of all goods stored and all the epitome of Luxembourg savoir-faire the right to inspect declared goods and activities carried out therein. Each operator and a member of the World Free Zones storage rooms. The ADA supervises the is subject to Luxembourg anti money- 61 Organization. As such, it boasts direct air A meticulous and facility and, as such, its operators: namely, laundering legislation. and land access. Valuable goods may be mandatory inventory is kept of all goods prime logistics and specialist forwarding 60 delivered straight from the tarmac to LE entrusted to LE FREEPORT for storage, companies. , without any road transport FREEPORT through the Know Your Customer (KYC) costs and risk, thanks to Cargolux’s Such operators, direct customers of form applicable to beneficial owners. Data dedicated handling and logistics service for LE FREEPORT , must be duly licensed on inbound, stored, and outbound goods is fine art and LuxairCARGO. by the ADA. Once they have received thereby exchanged electronically with the their license, they are eligible to become ADA. At the time of writing, this system of long-term tenants of the facility and act transparency is unparalleled anywhere in as intermediaries between the ADA and the world and unprecedented for logistics the end users (i.e., family offices, banks, companies in general, and art logistics high net worth collectors, museums, etc.). companies in particular. The latter pay storage fees and other professional charges to the tenants for value-added services rendered. 60 These operators are particularly, or even exclusively, active in transportation, handling, and storage of high-value goods. 61 Grand Ducal Regulation of 5 August 2015, which amended the Grand Ducal Regulation of 1 February 2010, providing details on certain provisions of the AML Laws dated 12 November 2004. Private art collectors can use LE advantages and can be removed from LE to store EU goods (e.g., FREEPORT at any time. FREEPORT family heirlooms, pieces acquired from Case an EU gallery, etc.) in free circulation. For investment purposes, a private art They benefit from the suspension of collector may wish to benefit from a VAT VAT on the services provided to them suspension when purchasing an item by the licensed operator for storage, from a European gallery. They can do study 1 handling, or presentation in one of the so, provided the sale physically takes showrooms. The deferred VAT becomes . Regarding VAT on place at LE FREEPORT due on EU goods returning to a European the services, the VAT on the artwork will destination when leaving LE FREEPORT . fall due should the art collector decide Private If the owner decides to export the item to bring the artwork into the EU on a outside Europe (e.g., to sell it at auction permanent basis. If he or she decides to art collector— in New York), the suspension becomes export the artwork outside of the EU, no permanent. Art collectors can save VAT VAT will be due in Luxembourg. European costs and thereby increase their profits when the item is sold at auction outside Union goods of the EU. For EU goods in free circulation that return to the EU after storage at LE , VAT will only be due on the FREEPORT services, and not on the artwork itself. The artwork keeps its free circulation 92

93 Art & Finance Report 2017 | Section 1 - The state of the global art market A favorable value-added tax ("VAT") For both taxable and non-taxable persons, As such, the VAT suspension only applies to and customs duties regime import taxes are due in the country of . the services supplied inside LE FREEPORT LE FREEPORT offers a special VAT and import and not necessarily in their country For other European goods, which are not in customs duties suspension regime, of domicile or residence. This is particularly free circulation, customers may also benefit which applies as long as high-value goods beneficial to non-taxable persons, as they from the VAT suspension if they wish to do remain in the free zone. At the national may choose the lowest import VAT rate so. level, Luxembourg has enacted legislation for import into the EU. Art collectors must enabling the import of non-European pay particular attention to any indirect Regardless of the situation, all services Union goods into licensed free zones, taxes that may be due on the import of performed within LE FREEPORT on the such as LE FREEPORT , in a tax-suspension the artwork into the destination country. goods stored will benefit from the VAT 62 Under this favorable regime environment. We thus encourage all art collectors to suspension and are only subject to the (for which there is no time limit), VAT and work with their advisers when addressing applicable tax when they exit. 63 when the customs duties are suspended potential tax issues. Postponing VAT payments enables LE goods enter LE FREEPORT , and when any FREEPORT clients to improve their cash related transactions are carried out during Aside from these general rules, goods can flow. No guarantee is required by the the storage of the high-value goods in be temporarily removed from the storage tax authorities to secure the final tax question. Only once they leave the facility facility for up to an entire year under liabilities due to the presence of the to be marketed to end-users will said goods certain conditions (e.g., for an exhibition ADA on site. This is a major benefit in be subject to taxation. Import VAT will be in a museum or an art fair), and the tax comparison with bonded warehouses. If due in the case of permanent import for advantages applicable in the free zone customers of LE FREEPORT Luxembourg both taxable persons and non-taxable will continue to apply. European Union are neither established nor registered persons. Taxable persons should be goods also benefit from the favorable for VAT purposes in Luxembourg, pre- entitled to deduct all or part of the tax due. LE FREEPORT environment offered by . authorized operators can also act as tax These goods are considered to be in free representatives to facilitate administrative circulation and retain related advantages registration and clearance. when leaving LE FREEPORT . 62 Act dated 29 July 2011, supplementing the amended act dated 12 February 1976 on VAT. 63 The suspension exclusively concerns VAT and customs duties. This regime cannot apply to any other taxes, such as capital gains, corporate income tax, municipal business tax, wealth tax etc. Non-EU goods, also commonly called This suspended VAT will fall due when the “transit goods,” benefit from a suspension artwork is permanently imported into the of VAT and duties for as long as they are EU. As long as the artwork remains “in Case . They can also in storage at LE FREEPORT transit,” the art collector can permanently be removed temporarily for exhibitions suspend any outstanding VAT by simply or presented for sale without losing this shipping the artwork to another country, advantage. These so-called “temporary inside or outside the EU. study 2 admissions” place the artwork under the supervision of the Luxembourg customs authorities and are limited to a maximum 64 Private for a specific length of one year destination (museum, gallery, auction house, etc.). While the items are in art collector— storage at LE FREEPORT , the art collector benefits from a suspension of VAT on Non-European the services provided for the artwork in question (storage, handling, presentation, Union goods etc.). 64 It should be highlighted that each jurisdiction may have a specific regime applicable. This period of one year may be renewable. 93

94 | Section 1 - The state of the global art market Art & Finance Report 2017 European art galleries can use LE with a specific notice to apply the VAT to meet their storage and FREEPORT suspension. logistics needs for all their activities in Case the European market. They can also The gallery does not need to have a for presentations and use LE FREEPORT physical presence in Luxembourg or sales to their clients. All European VAT have its own Luxembourg VAT number to principles also apply at LE FREEPORT , with apply the VAT suspension. The licensed study 3 the added advantage of a unique VAT operators can act as tax representatives suspension regime for goods and services for the gallery to file the required supplied inside LE FREEPORT . VAT returns with the Luxemburg tax authorities, both for the transfer of goods European Galleries may choose LE FREEPORT to to Luxembourg and for their eventual sell an artwork to a buyer who wishes sale. art galleries to suspend VAT on the purchase, either because they are simply looking to invest in art or want to re-export the artwork at a later date. In order to benefit from the suspension regime at LE FREEPORT , the gallery must transfer the artwork to Luxembourg before finalizing the transaction so that the sale takes place in Luxembourg. The transfer can take place after the client has reserved and paid for the artwork; however, the final invoice needs to be issued in Luxembourg These types of vehicles benefit from the Structures that either have their own provides in LE FREEPORT advantages European VAT number or are established terms of asset preservation and logistics. outside of the EU can purchase artworks Case Regarding taxation, their advantages subject to a VAT suspension by using are similar to those enjoyed by private the reverse charge mechanism. It is art collectors. They can store both EU not necessary for the artwork to be goods and non-EU goods and benefit transferred to LE FREEPORT prior to study 4 from a VAT suspension on all services finalizing the sale. Licensed operators act provided for their collection (storage, as tax representatives for the structure handling, presentation, etc.). Non-EU to file the required VAT returns with goods can be stored indefinitely subject Private the Luxembourg tax authorities for the to a suspension of VAT and duties and purchase. The VAT is suspended for as benefit from temporary admissions for long as the artwork remains in storage at museums, exhibitions in galleries and museums. As LE FREEPORT . with all other clients, VAT is settled when corporate . the artworks leave LE FREEPORT structures, and other holding vehicles 94

95 Art & Finance Report 2017 | Section 1 - The state of the global art market As such, LE FREEPORT occupies a privileged Legal and regulatory developments are supporting this trend. In particular, the position on the Art & Finance market by offering an interface and providing financial Luxembourg parliament recently validated 65 allowing HNWIs wishing to invest a law services for high-value collectible assets. their funds in companies or banks located It is no coincidence that LE FREEPORT is in Luxembourg to benefit from a special located in Luxembourg; with an extensive 66 This visa, which is granted for three years. track record of art-sector knowledge and new measure is particularly favorable to expertise, the Luxembourg market is HNWIs collecting artworks or other high- perfectly positioned to become a hub for value goods, and seeks to encourage them wealth management services associated to view Luxembourg as their gateway into with high-value goods. Moreover, High-Net- the art world. Worth Individuals ("HNWI") are increasingly viewing artworks and high-value goods as 65 Law of 8 March 2017 amending the Law of 28 August viable alternative assets to diversify their 2008 on free movement and immigration. wealth while also enjoying the intangible benefits associated with owning such 66 Conditions notably include (i) an investment of at least €500,000 in a new company performing commercial, objects. artisanal, or industrial activities with a commitment to hire at least five employees within the first three years, or (ii) an investment of at least €20,000,000 as deposit in a Luxembourg financial institution within five years. LE FREEPORT intends to attract to Luxembourg potential “investors” present in the globalized art world, notably financial professionals such as private bankers, insurance companies, family officies, banks and asset managers. It also constitutes a key center of interest for artists, high net- worth collectors, galleries, corporate collections and museums lacking space and allowing as such an exchange between museums and art collectors from all over the world. 95

96 Art & Finance Report 2017 | Section 2 - Art and wealth management survey 96

97 Art & Finance Report 2017 | Section 2 - Art and wealth management survey Section 2 Art and wealth management survey REVOLUTION KID (FOX) © YINK A SHONIBARE MBE (2012), PHOTOGRAPHER: STEPHEN WHITE 97 97

98 Art & Finance Report 2017 | Section 2 - Art and wealth management survey HIGHLIGHTS More wealth managers offer art- • related services to their clients: 64 • Art & Wealth management services percent of wealth managers (67 percent starting to mature: After six years of private banks and 55 percent of family of closely monitoring key market offices) said they were actively offering stakeholders, this year’s report confirms services related to art and collectibles that art and wealth management is including entertainment and client part of a long-term industry trend. The hospitality. This was slightly higher than combined effect of a global art market the 63 percent seen in 2016. expansion and more wealth allocated to art and collectibles, together with • Client pressure on wealth managers: the wealth management industry's 55 percent of wealth managers (52 move towards a more holistic asset percent of private banks and 69 percent management approach, is underpinning of family offices) said that clients were the long-term demand and sustainability increasingly asking their private bankers for art & wealth management services. and wealth managers to help with art- related issues (up from 48 percent in • Stronger motivation to include art 2016). This was observed most frequently within wealth management: The most by the family offices surveyed, where recent survey shows an increase from 78 69 percent said that increasing client percent in 2016 to 88 percent in 2017 of demand was the most important reason wealth managers saying that they think for including art and collectibles as art and collectibles should be included as part of a service range, compared to 52 part of the array of wealth management percent for the private banks. solutions. • The increasing focus on “passion- A move toward a holistic wealth • based” investments: An estimated management model driving interest US$1.62 trillion of UHNWI wealth is in art and collectible wealth: This year’s allocated to art and collectibles, and an survey findings show that 85 percent estimated US$ 2.5 trillion by 2021, is a of wealth managers (86 percent of sign that wealth managers need to take private bankers and 77 percent of family a more emotional and holistic approach offices) believe that the move toward a to the way they work with their clients’ holistic wealth management model is assets (which are often linked to their the strongest argument for including art hobbies, such as classic cars, wine, race and collectibles in a wealth management horses, paintings, etc.) service range. This year’s survey findings show that 85 percent of wealth managers (86 percent of private bankers and 77 percent of family offices) believe that the move toward a holistic wealth management model is the strongest argument for including art and collectibles in a wealth management service range. 98

99 Art & Finance Report 2017 | Section 2 - Art and wealth management survey • Collecting art with a view to In accordance with the findings from last investment: In accordance with the findings from last year’s survey, a large year’s survey, a large majority (86 percent) majority (86 percent) of art professionals said that their clients buy art and of art professionals said that their clients collectibles for emotional reasons (passionate about collecting), but also buy art and collectibles for emotional focus on investment value; this was up from 79 percent in 2016. This implies reasons (passionate about collecting), but that art as a pure investment/financial product is only attractive to a small also focus on investment value. minority of art buyers (three percent), and that it is the emotional and social More investment and resources to be • aspects of collecting art combined with dedicated to art-related services in the potential to increase or safeguard the next 12 months: An average of 44 value (i.e. value protection), that seems percent of wealth managers reported to be the driving motivation among most that increasing focus and resources collectors on the art market (65 percent would be dedicated to art and wealth of collectors expressed this view). management services in the coming 12 months, up from 38 percent in 2016. This Art is increasingly becoming a lifestyle • is the highest reading since the launch For the third time since the product: of the survey in 2011, and is supported launch of the survey in 2011, the social by a positive trajectory for all art-related value associated with buying art was the products and services. primary motivation among art collectors according to art professionals (85 percent • An awareness of developments of the art professionals surveyed said Family around art as an asset class: so, up from 80 percent in 2016 and offices seem to be more aware than 72 percent in 2014) and 63 percent of their counterparts at private banks, with collectors said this was a key driver for 63 percent of the family offices saying their involvement in the art world (up they are aware/very aware of the key from 61 percent in 2016). A further 54 developments related to art as an asset percent of collectors said they viewed art class, compared to 56 percent of wealth as a luxury good (up from 51 percent in managers at private banks. Findings 2016), which confirms the findings from from this year’s survey also show that previous years suggesting that art is 69 percent of the wealth managers increasingly viewed by art professionals surveyed (63 percent of family offices and and collectors as a “lifestyle” product. 70 percent of private banks) said they expected their clients to want to include art and other collectible assets in their wealth reports. 54 • Art as a way to safeguard value: percent of wealth managers (up from 51 percent in 2016 and the highest reading since the survey was launched in 2011), increasingly see art as a way to safeguard value. 99 99

100 Art & Finance Report 2017 | Section 2 - Art and wealth management survey • Art and estate planning services Almost half of collectors surveyed • continue to gain traction in the wealth have yet to discuss their art-related Estate planning management sector: estate with their heirs: Although is viewed as the most important art the majority of collectors surveyed and wealth management service by have formal estate plans for their art wealth managers, art professionals, collection, 46 percent of collectors and collectors. With a massive transfer have yet to discuss these plans with of wealth from baby boomers to their heirs, although they intend to do millennials about to occur, art and so. It is important for wealth managers estate planning is likely to become an to foster the development of family increasingly important area for the governance and intergenerational wealth wealth management industry. It is also management that also involves art and one that plays to its existing strengths. collectible wealth. 89 percent of wealth managers said they European family offices seem to be • were offering advice around art and lagging behind their US counterparts estate planning; this is significantly higher in terms of collection management: than the 79 percent observed in 2016 The majority (61 percent) of family offices and the 64 percent seen in 2014. Despite (all US family offices and half of the family this, only 28 percent of private banks said offices from the rest of the world) stated that their clients had made adequate that their clients maintain an updated provisions for their art collections in their inventory of their collection allowing estate planning process. This stands them to administer the estate without in stark contrast to the family offices the art collector’s input. Again, in stark surveyed, where 72 percent said that contrast, only 13 percent of private banks their clients had adequately resolved the said the same. question of their art collection within the estate planning process. • Valuation services are becoming increasingly important, but are predominantly delivered by third- As art is increasingly party experts: considered to be an asset "class” and considerable financial risks are now tied to art, valuation services, which now seem to be a core component of this service range, with all of the family As the wealth management industry offices that responded to this year’s survey saying that they offered valuation continues to grow and expand its services (73 percent said they were providing this through a third party). investment in art-related wealth A high number (84 percent) of private banks also provided valuation services services, there is also a sense of for their clients, with 67 percent providing this through a third party. heightened concern regarding the lack of transparency in the art market (75 percent of wealth managers expressed this view). 100

101 | Section 2 - Art and wealth management survey Art & Finance Report 2017 Private banks and family offices are • Estate planning focusing on art advisory services: 83 percent of wealth managers said they is viewed as the offered art advisory services (this was up from 79 percent in 2016 and 67 percent most important in 2014), and 47 percent of these were delivered in-house, which suggests an art and wealth increasing number of private banks and family offices are adding art advisory management services to their existing solutions. Collection management and wealth • service by wealth 78 reporting are likely to converge: percent of wealth managers said that managers, art they offered art collection services; this was up from 59 percent in 2016. 50 professionals, and percent said that art collection services were delivered by third parties (the same collectors. as in 2016). With a more holistic approach to art-related wealth and with 69 percent of wealth managers saying that their clients are looking for art wealth to be • Lack of art market transparency integrated into their wealth reporting, remains a key hurdle to the future we are likely to see increasing demand development of the Art & Finance for integration between art collection As the wealth management industry: management software and banks’ industry continues to grow and expand existing reporting systems. This would its investment in art-related wealth offer the wealth management sector an services, there is also a sense of opportunity to be more proactive, to heightened concern regarding the lack support estate planning, and to better of transparency in the art market (75 monitor and protect art-related wealth. percent of wealth managers expressed Meanwhile, clients could enjoy both this view). the financial aspects of the collection, • Regulation remains an important and the ability to access and share their challenge: With financial institutions collection anytime and anywhere. facing increasing regulatory scrutiny More wealth managers offer • and pressure, 65 percent of the wealth assistance on art and philanthropic managers surveyed this year said that 72 percent of the wealth topics: the unregulated nature of the art and managers surveyed this year said they collectibles market remains the biggest offer services related to art philanthropy challenge for incorporating art into their and individual giving to the arts service offering (up from 62 percent in (gifts, donations, help with setting up 2016). foundations, etc.). This was up from 64 Finding and developing talent • percent in 2016, and suggests that art is and expertise: 55 percent of wealth now playing a bigger role in the spectrum managers said that finding the right of philanthropic activities that clients are expertise remains one of the key seeking their wealth managers’ advice challenges in building an art-related and help on. service offering (up from 46 percent in 2016). 101 101

102 | Section 2 - Art and wealth management survey Art & Finance Report 2017 Art and wealth management Current situation Holistic advisory relationships with clients as key for performance Art and wealth management is not a new concept. For many decades, private banks and wealth managers have helped 85% of surveyed Wealth Managers their clients with their art and consider holistic advisory relationships collectible wealth. as key for their future business performance However, with the value of art increasing, 10 and with an estimated US$1.62 trillion in art and collectible wealth held by UHNWIs alone in 2016, and an estimated 11 by 2026, a more strategic US$2.7 trillion and holistic approach to art and wealth management is required in order to fully meet clients’ needs and expectations. 85% 10 Based on an estimate from the “Knight Frank Wealth Report 2017” (six percent of global UHNWIs invest in art and collectibles; pp. 63) and the fact that Wealth-X reported total UHNWI wealth of US$27.035 trillion in 2017, this gives an estimated US$1.62 trillion in art and collectible wealth. 11 The ten-year estimate is based on the Wealth-X forecast of US$27.035 trillion in UHNWI wealth in 2016. We have assumed that UHNWIs wealth (US$) grows at the same growth rate as the expected growth in the Consider holistic advisors as key for performance UHNWI population according to Knight Frank Wealth Report 2017. Knight Frank Wealth Report 2017 reports Do not consider holistic advisory as key for performance that 47 percent of wealth managers having noted lux- ury investments increasing in popularity among their clients. Based on this, we assume that the allocation of wealth toward art and collectibles rises from six Source: Deloitte Luxembourg & ArtTactic Art & Finance report 2017 percent to seven percent as a global average, then an estimated US$2.706 trillion would be allocated to art and collectibles by 2026. 102

103 | Section 2 - Art and wealth management survey Art & Finance Report 2017 According to a recent report entitled According to the Deloitte “Innovation in Private Banking & Wealth Management - Embracing the Business Switzerland report’s findings, while Model Change” by Deloitte in Switzerland, wealth management has now reached a digital wealth management is point where a mental shift has become essential. The profitability of European growing, face-to-face advice is not wealth managers has declined steadily in recent years, with profit margins falling by expected to become obsolete. 40 percent between 2000 and 2015. Over the same period, the size of the private banking industry, measured in terms of the bankable assets of European millionaire households, grew by more than 60 percent. This widening gap between profitability and market size shows that wealth managers In this and the following section we will are increasingly failing to serve clients take a closer look at the opportunities and successfully with their existing business challenges facing the wealth management models of an integrated value chain— industry when it comes to developing the either from a revenue or cost side, or, even four core art and wealth management worse, from both. service areas (see page 37). One of the primary drivers behind the When we talk about art wealth push toward the holistic approach management services, we are referring mentioned above is competitive pressure to a full range of services addressing the within traditional wealth management, four core areas. According to our definition as well as growing competition from the of art wealth management services, FinTech sector and its focus on digital we consider art-related entertainment wealth management aimed at disrupting and corporate collections as peripheral three core areas: connecting, advising, activities to wealth management, but and investing. However, according to the believe that they can play an important role Deloitte Switzerland report’s findings, while in onboarding and promoting a broader digital wealth management is growing, face- spectrum of art wealth management to-face advice is not expected to become services within an organization. Finally, obsolete. For example, skilled financial developing an art wealth management advisers can create value for their clients offering can be naturally extended to cover and offer them tailored recommendations, other collectible assets. particularly where decisions are more complex or involve higher value transactions. We believe that art and collectibles belong to this category. 103 103

104 Art & Finance Report 2017 | Section 2 - Art and wealth management survey Sample by geography 2% 4% 6% 4% 3% 4% 2% 6% 11% 55% 63% 45% 78% 37% 35% 31% 16% Art p rofessional s ks Privat e b an llectors ily o Fam ffi Art Co ces Latin A merica Others Europe Middle E as t USA Asia Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 Stakeholder analysis: bridging the The wealth management industry is wealth industry, art professionals, and increasingly prepared to embrace art- art collectors related wealth In this section of the report, we present In the previous Art & Finance reports, the the survey findings from 69 private banks, wealth management community appeared 27 family offices, 155 art professionals, hesitant to embrace the role of art in a and 107 art collectors, who were surveyed wealth offering potential management between May 2017 and July 2017 on a wide because of concerns about the complex range of topics and issues related to art nature of the art market, particularly and wealth management. This section of regarding issues related to effective risk the report focuses on the preservation, management and valuation, and also protection, and conversion of art-related concerns about the business practices wealth to income, as well as the issues and the unregulated nature of certain related to estate planning and the transfer segments of the art market. However, this of wealth to the next generation. year’s findings continue to build on the increasing confidence displayed among As in previous editions of the Art & wealth managers in the 2016 results. Finance Report, the aim is to gain a better After six years of closely monitoring understanding of the motivations, current key stakeholders in the market, we involvement, and challenges facing each feel confident in confirming that the of the stakeholders, in order to be able development of art wealth management to identify priority areas that will help the services for UHNWIs is part of a long- Art & Finance industry more effectively term industry trend. address existing challenges and fulfill its true potential. A new addition this year is that we will also highlight some of the differences between private banks and family offices in their attitudes toward and involvement in art and collectible wealth. 104

105 | Section 2 - Art and wealth management survey Art & Finance Report 2017 68 We cannot ignore the fact that the yearly trends could Figure 18. Do you think that art and collectibles should be part of a wealth management offering? be a result of the changes and growth in the sample. (% answering Yes) The first art and wealth management survey was conducted in 2011 and included 17 private banks from 88% Luxembourg. In 2012, the sample was increased to 30 private banks, including banks from Poland and Spain. 82% 78% In 2014, the survey included 35 banks predominantly 76% from Europe, the US, and Asia (with no participation 80% 77% from Poland), and an additional 14 family offices from 63% 62% Europe and the US. In 2016, the sample included 53 70% private banks and 14 family offices, while the 2017 66% 57% 53% survey included 69 private banks and 27 family offices. 55% 57% 57% 56% 69 This survey question aims to capture the level of 53% 53% awareness among wealth managers when it comes to developments and trends in the Art & Finance industry. 43% The figures here are based on the percentage of individ - uals who answered “aware” and “very aware” (i.e., only 33% option 4 and 5 on a Likert scale of 1 to 5). 70 This is a weighted average: 56 percent of private banks (rated this question 4&5) and 63 percent of family offices rated it 4&5. The private bank figure is based on 69 responses and the family office figure is based on 27 responses. 20 11 20 12 20 14 20 15 20 17 ware ness among wealt h manage rs Art professionals Strong a rs nage Wealt h ma co lle ctors Art Source: Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 2011 Sample 2017 2015 2014 2012 67 Private banks 19 30 35 53 69 Family offices 27 14 0 0 14 90 Art collectors 48 81 94 107 112 14 0 155 Art professionals 126 12 2 The aforementioned trend is underpinned The most recent survey shows an increase exposure (slightly down from 73 percent 69 around issues from 78 percent in 2016 to 88 percent in by growing awareness in 2016, but still significantly up from 58 68 of wealth managers saying that and developments related to art as an 2017 percent in 2014 and 40 percent in 2012). they think art and collectibles should be asset class among wealth managers. This This shows that the wealth management included as part of the wealth management awareness has increased steadily since industry is facing ongoing pressure from 70 offering. On this point, both private 2011, with 57 percent of wealth managers their clients to integrate art and collectible stating that they are aware/very aware of banks and art professionals registered assets in their existing wealth reporting, developments in the Art & Finance industry their highest reading since the launch of which is a critical component in terms (the same level as in 2016, but up from 53 the survey in 2011. Private banks were of how the industry thinks about and percent in 2014 and 43 percent in 2012). significantly more positive about this manages art-related wealth. Staff at family offices seem to be more development than family offices, with aware than their counterparts at private 94 percent saying there was a strong Integrating art into wealth reporting offers banks, with 63 percent of family offices argument for including art in the wealth clear benefits for wealth managers, as saying they are aware/very aware of key management offering, compared to 68 it encourages a proactive rather than a developments related to art as an asset percent who said the same among the reactive approach to art-related wealth. By class, compared to 56 percent of wealth sample of family offices. As in 2016, wealth having a proper overview of these types of managers at private banks. managers were more convinced about the assets, a more strategic plan with regards value proposition around art and wealth to monetization, wealth transfer, and asset The findings from this year’s survey also management than both art professionals protection can be put in place. indicate that 69 percent of the wealth and collectors, where 80 percent of art managers surveyed (63 percent of family professionals and 66 percent of collectors Issues related to the integration of art- offices and 70 percent of private banks) in 2017 stated the importance of including related wealth in the wealth management said they expected their clients to want art as part of a wealth management offering will be further discussed to include art and other collectible assets strategy and offering. throughout this report, supported by in their wealth reports in order to have survey findings as well as opinions from key a consolidated overview of their overall professionals operating within the worlds 67 Among the 69 private banks, 5 are art-secured lenders wealth and a better overview of their of Art & Finance. players (specialized boutiques). 105 105

106 Art & Finance Report 2017 | Section 2 - Art and wealth management survey GAP ANALYSIS: What ‘Art & Wealth Management Services’ that art professionals and collectors view as Figure 19. most relevant and what the wealth management industry is currently offering. 78% 59% Colle ctio n Ma Art ment nage 60% 71% 72% 64% Art Phila nthro py | Indiv idual Giv in g 45% 61% 89% Estate pla nnin g (tax, in herit ance 79% and successio n pla nnin g) 69% 80% 76% 62% Ma atio n Art rk et Researc h & Inform 72% 71% 87% 69% Art Valu atio n 74% 74% 83% 79% vis e on buyin g art Ad 57% 76% nage Wealt h ma 7 offering r 201 67% 69% Wealt h ma 6 offering nage r 201 lo ans & fi n ance (usin g art as a colla tera l) Art 46% 53% lle ctor relevance Art co 34% 41% fessio nal relevance pro Art | Colle ctibles Investment Funds Art 37% 43% % % 30 % 20 % 10 0% % 50 60 % 70 % 80 40 % 90 % Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 Wealth Managers: Which of the art related services do you offer in-house vs offered by a third party? Figure 20. Clie nt ate vie ws, Entert ainment (Priv 75% 25% Fair s, Mu ib it io ns) Art seum Exh g art ) Art Ad vis ory (buying/s ellin 47% 53% Art Valu atio n 21% 79% Sponsors hip 93% 7% Clie nt Educatio n (semin ars, 73% 27% confere nces on art / art mark et) Inherit ance and Successio n Pla nnin g 77% 23% Colle ctio n Ma ment Art nage 50% 50% /C olle ctib le s Investment Funds Art 11% 89% Fin ance (usin g art as a coll atera l for lo ans) Art Lendin g/ 58% 42% Art Phila nthro py/I ndiv id ual 74% 26% Giv ing to the art s (gif ts, donatio ns etc) O liv ere d by a 3rd part y De ered in -house ff Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 106

107 Art & Finance Report 2017 | Section 2 - Art and wealth management survey Both collectors and art professionals see collection management as an important remit of a wealth manager (60 percent and 71 percent said so respectively). The wealth management industry is banks and all of the family offices who offer • Collection management and wealth increasingly responding to clients’ need art-related services). In her article, Maria reporting: Both collectors and art for art-related services (page de Peverelli from Stonehage Fleming professionals see collection management In this year’s survey, 64 percent of wealth talks about the role of the collection 110 ) as an important remit of a wealth managers (and 67 percent of private manager within a family office setting, and manager (60 percent and 71 percent banks and 55 percent of family offices) how the management and administration said so respectively). This specific client said they were actively offering services of a collection fits within a wider family need has caught the attention of the related to art and collectibles including office strategy. Her article also discusses wealth management community in the entertainment and client hospitality; this the role of the collection manager as an last 18 months, and this year’s findings was slightly higher than the 63 percent independent and neutral strategic adviser, show that 78 percent of wealth managers reported in 2016. The fact that two-thirds not driven by their own agenda, and hence are providing collection management of the private banks surveyed were already addresses some of the concerns around (up from 59 percent in 2016). Half of offering art-related services (including conflicts of interest, a lack of transparency, the wealth managers use third-party client entertainment and hospitality) is a and secret commission—all issues services, while the rest have focused strong testament to the importance that discussed in more detail in Section 6. on developing these tools in-house. the wealth management industry now There are differences across the various places on products and services linked to A similar point is made by Melanie Damani categories of wealth manager, with 91 art-related wealth. from Edmond de Rothschild ( p a g e 112 ) , who percent of family offices offering this in- looks at the benefits for clients of working house, versus only 35 percent of private In last year’s report, we identified a with their wealth manager rather than an banks saying the same. As highlighted number of areas where there were visible independent art adviser. earlier, the increasing focus on this area gaps between client demand for specific is likely to stem from the observation art-related services and what the wealth Art valuations have also seen a significant that 69 percent of wealth managers in management industry was offering at increase in terms of the number of wealth 2017 said that their clients wanted to the time. There were signs that wealth managers offering these services (up from include art and other collectible assets managers predominantly focused on 69 percent in 2016 to 88 percent in 2017), in their wealth reports, in order to have traditional wealth management services, predominantly through partnerships a consolidated overview of their wealth. while art collectors were looking to their with third-party providers (79 percent This is an important finding and it shows wealth managers for specific art-related expressed this view). See 20 Figure for that the wealth management industry services such as art valuation and art the breakdown between in-house and is acting, and increasingly recognizing collection management. This suggests that third-party services provided. The use the fact that wealth allocated to art collectors also see their wealth managers of third-party services illustrates that we needs to be managed and included as their trusted independent advisers are already seeing closer collaboration in overall wealth reporting. This also for art-related activities. It is interesting between art professionals and the wealth offers the wealth management sector to note in this year’s findings that the management community. an opportunity to be more proactive, to percentage of wealth managers offering support estate planning and to better art collection management services has monitor and protect art-related wealth, increased from 59 percent in 2016 to 78 and for clients to enjoy both the financial percent in 2017 (72 percent of the private aspects of the collection as well as the ability to access and share their collection anytime and anywhere. 107 107

108 | Section 2 - Art and wealth management survey Art & Finance Report 2017 Wealth management and art advisory: • • Valuation, art market research, Estate planning: The wealth • This year’s results show that 57 percent and information are priorities for management industry is facing a US$30 73 wealth transfer from baby of collectors believe that art advisory collectors: It is interesting to note that trillion 72 should be offered as part of boomers to millennials in the US alone. services in this year’s findings, 74 percent of a wealth management service (up from This is a process that is expected to occur collectors (up from 62 percent in 2016) 52 percent in 2016). We are starting to over the next 30 years. With art-related and 74 percent of art professionals (up see an increasing trend within the wealth wealth accounting for an estimated six from 69 percent) said that valuation was 74 it is management sector of incorporating percent of global UHNWI wealth, important/very important. Art research clear that art and collectibles will naturally art advisory services. A recent example and information services were also seen fall within the remit of traditional estate of this is the acquisition of OmniArte by as important by 72 percent of collectors planning in the years to come. From this Stonehage Fleming, the largest Multi- (down from 75 percent in 2016) and 71 year’s survey findings, it is evident from Family Office in the EMEA region and percent of art professionals (up from 67 both art collectors (69 percent, up from one of the largest in the world. When percent in 2016). It is likely that the wealth 68 percent in 2016) and art professionals client demand has reached a certain managers’ perceived neutrality in the (80 percent, up from 65 percent in 2016) critical mass, there are clear advantages art market would give more credibility that issues related to estate planning are to bringing the advisory function in- to both their art valuation and market increasingly becoming a priority. Again, house as opposed to outsourcing it to a research. That is not to say that wealth there is now heightened awareness of third party. The most obvious benefits managers should offer valuation in- this demand among wealth managers, are client confidentiality, relationship house, but they could play a key role in with 89 percent of wealth managers (88 management, and the ability to better ensuring that the appropriate processes percent of private banks and 91 percent integrate art-related wealth into the are in place when it comes to providing of family offices) currently offering overall wealth management service fair, unbiased, and accurate valuations. advice and services related to estate offered to the client (see collection Again, this year’s findings suggest that planning (up from 79 percent in 2016). management above). This does mean the wealth management industry has This implies that more wealth managers that banks would not use third-party taken note, and 87 percent said they are responding to their clients’ growing art-related services, however, but were currently offering valuation services estate planning needs in key areas rather that these activities are often (79 percent would offer this through a related to art and collectibles, particularly better coordinated through a dedicated third party). All of the family offices that with regards to valuation, taxation, resource within the bank or family office responded to this year’s survey said they inheritance, and succession planning. with access to a network of vetted art offered valuation services (73 percent The growth in private museums in recent professionals and knowledge of the said they were providing this through a 75 privately years (with a reported 317 particularities of the art market. third party). The highest ever number (84 funded contemporary art museums percent) of private banks also provided in the world, 70 percent of which were valuation services for their clients, with founded after 2000), suggests that there 67 percent providing this through a third is an increasing demand for structuring party. This is significantly higher than the and preserving art and collectible wealth 69 percent of wealth managers who said for future generations. they were offering this service in 2016 (74 percent of these services were offered 71 ). through a third party 71 Wealth managers who say they offer valuations in- 72 Art advisory covers a broad spectrum of services - 73 http://www.marketwatch.com/story/americas-tril house are likely to do this through an in-house expert/ mainly related to buying and selling art and collectibles lion-dollar-wealth-transfer-how-to-prevent-a-genera - adviser, who either provide valuations themselves or on behalf of clients. Although other services, such tion-of-entitlement-2017-04-25 know how to obtain a valuation (i.e., through a third as collection management and valuation, could be 74 Source: “Knight Frank Wealth Report 2017” party). When answering this question, it is possible that defined as an art advisory service, for the purpose of 75 “Private Art Museum Report,” Larry’s List and AMMA wealth managers might not know if the valuation is this report we have separated this out as a stand-alone (Art Market Monitor of Artron), 2015 outsourced to a third party or carried out by someone service. in-house. 108

109 Art & Finance Report 2017 | Section 2 - Art and wealth management survey • With the US art- Art-secured lending: • Wealth managers remain reluctant All of the family secured lending market estimated to to embrace art investment products: be worth US$17-20 billion in 2017—up 34 percent of the wealth managers who offices that 13.3 percent from 2016—it is clear that said that they offered art-related services collectors and art professionals are said they offer or have access to art and responded to increasingly looking to extract equity collectible investment fund products from their art collection or inventory. (down from 41 percent in 2016). 30 this year’s survey The survey of art collectors and art percent of wealth managers said they had professionals shows that 46 percent of noticed an uptick in demand from clients said they offered the collectors surveyed said they would for art investment products (up from 27 be interested in using their art collection percent in 2016 and 20 percent in 2014); valuation services. as collateral for a loan (this was down however, issues related to valuation (lack from 57% in 2016), and 53 percent of art of mark-to-market valuation), difficulties professionals said the same (this was in carrying out due diligence, and a the same as in 2016). Again, the wealth general lack of experience in this asset management community seems to be class remain key obstacles. responding, with 67 percent of wealth managers (70 percent of private banks However, perceptions among art and 55 percent of family offices) offering professionals were more positive, with this service to their clients (42 percent say 43 percent (up from 34 percent in 2016) they use a third-party service). This was saying that their clients would potentially marginally lower than the 69 percent of invest in art funds, while 37 percent of wealth managers who said they offered collectors (up from 35 percent in 2016) art-secured lending products in 2016 said they had noticed increasing demand (48 percent of these were through third- for art investment products. With the party providers). art market generating significant wealth for many collectors in recent years, the desire to look for investment return in art continues to be a motivation. However, with only three percent looking to buy art as a pure investment, it is clear that the traditional art fund model should be reviewed, so that greater emphasis can be placed on the collecting aspect (social and emotional). With a notable difference between what the wealth management industry is prepared to offer and the apparent demand for art investment products, the challenge is predicting how the art investment industry is likely to evolve. With the regulated financial industry shying away from investment products related to a much-less-regulated art market, the risk is that the art investment industry will increasingly move underground. 109 109

110 Art & Finance Report 2017 | Section 2 - Art and wealth management survey EXPERT OPINION The fine art of managing an art collection within a family office Maria de Peverelli Executive Chairman - Art Management But owning a collection involves a wide Collecting works of art can be Stonehage Fleming array of practical concerns: initial due diligence, lending to museums, maintaining a passion, a pleasure, or an an inventory, transport, storage, insurance, addiction: each art collector valuations, the structure through which the collection is owned, scholarly cataloguing has a unique perspective on of the collection, strategic planning for the this activity in which he or she future (including inheritance planning), and more. All of these aspects require specialist chooses to invest time, money, knowledge and skills on the part of those knowledge, and expertise. who manage and oversee a collection. It is inevitable that the time will come when the collection has become so vast, and the transactions so complex and numerous, that the art collector realizes that he or she needs assistance and guidance to address Owning and managing day-to-day matters as they arise, conduct necessary research, solve problems, provide and coordinate expert input, and (should he or she wish) even assist in an art collection is planning for the future. It is at this stage that collectors might a complex pursuit consider what kind of expertise they require. Should they ask their personal assistant or their art adviser to help, or requiring frequent should they look instead for a collection manager? Or even a collection manager within a family office? advice from a variety of experts. 110

111 | Section 2 - Art and wealth management survey Art & Finance Report 2017 Collectors’ precise needs vary enormously, Part of the reason for choosing an A collection manager, by definition, has depending on the nature and number experienced collection manager within a broader knowledge and knows where to of artworks, their location, their value, family office is to integrate a plan for the find the right expertise. Some aspects of the number of annual transactions, the management and administration of the managing the collection—such as specific objectives of the art collector in terms collection with a view to family inheritance art historical research, conservation, of making the collection available to the into the wider family inheritance strategy. or legal and tax advice—will demand public, and the involvement of external significant specialized professional input advisors. They might wish to look primarily Deciding on the need for a collection that a seasoned collection manager can for administrative support, or they might manager is, therefore, typically driven easily draw upon. decide that they also require assistance by the realization that the day-to-day in terms of major decisions and long-term management of a collection is a task that He or she will therefore care for a collection strategy. exceeds the capacity of the individual in a holistic way, thinking about its past, art collector. This discussion, however, present and future. He or she must be able The fiduciary obligations incumbent often begins with the need to think to identify risks, offer suggestions, and upon trustees have also increased, and about the future of the collection, and bring a degree of knowledge, experience, careful management will help mitigate the this also increases the need for a more and consideration: in other words, he or many risks to which artworks are subject, formal decision-making process and she is tasked with making the complex from the most obvious (e.g., inadequate administration of all assets. simple. insurance, physical security, packing, and transport) to those inherent in the buying The decision about what type of assistance Thoughtfulness and sensitivity toward and selling process. is required must start with a thorough and the works of art and the individual art honest appraisal of both the art collector collector’s needs are paramount for Owning and managing an art collection and the collection’s needs. A team working an independent collection manager. A is a complex pursuit requiring frequent alongside the art collector to offer art collection manger will often become advice from a variety of experts. Many of management infrastructure as well as indispensable, allowing the art collector to these experts will have their own agendas, expertise, experience, and—crucially— focus on his or her passion without having and, unlike investment management, the continuity, might meet their needs most to continually worry about the details. art world is much less regulated at an effectively. Crucially, a collection manager will provide international level. Independent strategic peace of mind and allow the art collector advice is not easy to secure. to own the collection, rather than the collection owning the art collector. Art advisers tend to focus on the transaction itself. They may advise on the If the collection manager works within acquisition of specific artworks to fill gaps the context of a family office, where the in the collection, expand the collection, or focus is as much on the collection as on give it a specific focus (areas where their the art collector, a collection manager expertise may lie), and might also offer will also recognize that the long-term post-sale assistance with logistics and preservation of an art collection across fee negotiations: areas in which they will multiple generations, and decisions about often have limited experience. They will the future of the collection, are far more generally be focused on the now, rather dependent on the art collector and his or than the lifecycle of the artwork after the her family than on the collection manager. transaction. He or she will also recognize that just as the art collector has an impact on the collection, so the collection has an impact on the art collector and his or her family: there is little point in passing down a collection if the beneficiaries do not share the same passion. 111 111

112 Art & Finance Report 2017 | Section 2 - Art and wealth management survey EXPERT OPINION Melanie Damani The role of wealth Attorney-at-law (LL.M. Berkeley) Art Services – Family Advisory managers in managing Edmond de Rothschild (Suisse) SA. art and collectibles and the transmission of a collection to the next generation The banking industry is facing important challenges. The classic business model of private banks, focused on the allocation of liquidity to financial products, is therefore no longer sustainable. 112

113 | Section 2 - Art and wealth management survey Art & Finance Report 2017 Would they be interested in keeping These institutions now aim to move toward while others would be happy simply to be them? Are the parents willing to sell their managing the broader wealth of their shareholders. The wealth manager’s role collection while they are still alive? In the clients, which may include real estate, art, is also to educate the younger generation, very few instances where both parents and collectibles, to differentiate themselves provide curation advice on the collection, and children know the answers to these and excel in areas of expertise other than set up a dedicated vehicle to manage questions, the wealth manager’s role is pure finance—just as a family office would. or hold the art, etc. The transmission to provide the family with estate planning In addition, clients continue to express a arrangements for each collection need advice. However, the family has not desire to receive a consolidated overview of to be tailored, but, in many cases, the usually discussed the future of the older their assets in a bank report that includes wealth manager’s role, besides providing generation’s collection. In these cases, art and collectibles. In that sense, private the aforementioned services, is to act as a the family members should consider the banks need to be capable of managing mediator between the two generations. Art following options for the art collection to clients’ broader portfolios, and the role of is an emotional asset and triggers a highly make sure the transmission is planned wealth managers is thus to expand their personal response. It is not always easy successfully. services to encompass these asset classes for collectors to open up to others on this in order to generate benefits for collectors topic—even to their own children. However, and the private bank alike. an empathetic wealth manager can serve The management of art and collectibles as a bridge for communication between the within private banks usually relies on two generations. collaboration between a relationship manager, in charge of the client/bank Reflecting on the role of wealth managers in the management of art and collectibles, it is legitimate to ask what the benefits With the transmission of an art collection are for clients of working with their wealth manager rather than an independent from one generation to the next, the art adviser, for example. First, clients have established a strong trust-based wealth manager’s role is to assist the relationship with their bank. Unlike other parties, such as a law firm, which clients younger generation in viewing the only tend to contact when they are faced with problems, clients work with banks on collected items as assets rather than positive topics such as generating returns on investment. Clients can also benefit merely an art collection. from banks’ risk culture, which can be extended to protect their art collection. In addition, the client-bank relationship The usual pattern for an art enthusiast relationship, and in-house or external is a long-term partnership—not just is to be passionate about a specific type art specialists. Wealth managers usually an association for a specific mandate. of art, and then for this passion to turn focus on collection structuring and estate Moreover, the wealth manager is most into a collection. With the transmission of planning, art lending, art funds, logistics, likely best-placed to assist clients with the an art collection from one generation to etc., and request external advisers’ management of their collection within the next, the wealth manager’s role is to assistance with valuation, authentication, the broader context of their extended assist the younger generation in viewing and broader collection management. More portfolio, because they can harmonize the collected items as assets rather than specifically, the wealth manager advises the funds allocated to their portfolio, merely an art collection. If the children clients at every stage in the life cycle implement cash flow logistics based upon perceive their parents’ collection in this of their art collection—i.e., acquisition, their assets, and manage their collection way, they will be more inclined to keep holding, and transmission. In the specific appetite. Finally, it seems that clients tend the collection and manage it rather than case of the transmission of a collection, one to turn to their bank for advice on art and selling or simply ignoring it. To assist the of the main issues is how it can be passed collectibles when the bank possesses family with this, the wealth manager can onto the next generation. The younger certain specific attributes such as having help implement a family governance plan generation may often not appreciate a major network of collectors or in-house for the art collection, whereby each family the items collected by their parents or expertise rather than just a network of member has a role to play vis-à-vis the may simply have no interest in art. As a external experts. At such institutions, the collection. As with the transmission of a result, when it comes to bequeathing art bank remains the key point of reference, family business, certain children would be collections, the process starts with a few providing continuous support to its clients, actively involved in working in the business simple questions for family members. Do and the wealth manager’s role also benefits the children like their parents’ collections? the bank by strengthening the institution’s relationship with its clients. 113 113

114 Art & Finance Report 2017 | Section 2 - Art and wealth management survey Art & wealth management services Future directions General motivation and perception among wealth managers, art professionals, and collectors. Figure 21. Future Services - Which services will you focus on in the next 12 months? 70% 70% 65% 67% 64% 60% 44% 43% 42% 42% 43% 38% 40% 40% 40% 33% 33% 34% 36% ndin g Art cure d le se 30% 31% 33% 31% in vestment fu nds Art 28% 24% 26% ila nthro py Art & ph 23% 22% 23% vis ory ad Art Estate pl annin g 12% 13% 10% 13% tert ain ment en Art Art & Fin ance co n fi d ence in dic ator 20 16 20 20 14 20 12 20 11 17 Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 would be dedicated to art and wealth A. Private bank and family office most important area of focus for wealth management services in the coming key survey findings 2017 managers in the coming year. Although year, up from 38 percent in 2016. Art & Finance Future Indicator – this might be considered a “soft” service, which services will wealth managers This is the highest reading since the it could be an effective education tool focus on in the near future? launch of the survey in 2011, and is and a vehicle for raising awareness of In the next 12 months, our survey supported by a positive development current or future art-related services for all activities. One particular focus findings reveal that wealth managers and initiatives, and bring attention to are likely to focus on and invest in a area for the wealth management art and collectible wealth that has not industry, besides estate planning, is broader range of art-related services, been discussed in a wealth management offering an art advisory service; this is paying particular attention to estate setting before. It is also an opportunity planning, client entertainment, art best understood as a competence or to forge closer links with the non- knowledge umbrella encompassing all advisory, art and philanthropy, and commercial sector and to tap into the art-secured lending. On average, 44 other art-related services. The interest vast knowledge that these organizations in client entertainment (often linked to percent of wealth managers reported have, as discussed in Priority 9 (page 32). art sponsorships) remains the second that increasing focus and resources 114

115 Art & Finance Report 2017 | Section 2 - Art and wealth management survey | Section 2 - Art and wealth management survey Art & Finance Report 2017 One particular focus area for the wealth management industry, besides estate planning, is offering an art advisory service; this is best understood as a competence or knowledge umbrella encompassing all other art-related services. 115 115 115 115

116 Art & Finance Report 2017 | Section 2 - Art and wealth management survey Figure 22. What do you consider the strongest arguments for including art and collectibles in traditional wealth management/private banking? *Three new motivations were added to this year’s survey Need to develop a holistic advisory relationship 85% with our clients (look at all assets of your clients) Art is accounting for a larg er share 73% 45% of clie nts’ overa ll asset valu e/w ealt h 36% Increasing competition in the Private Banking 72% 51% sector forces new ideas, products and solutions 38% To be able to manage the extended wealth 65% of their clients (not only traditional portfolio) Clients are increasingly demanding their 55% 48% bankers to help with art related issues 38% 55% Clie nt en tert ainment 41% 36% Client demand: Economic situation, investors 55% 49% looking for new investment opportunities 34% 54% is a store of valu e Art 51% 35% The value of art is increasing, triggering a need for bank 54% 40% related services to protect, enhance or monetise the value 33% 48% Art and colle ctible s o ff er port folio and asset div ers i fi catio n 54% 43% Art could generate higher return on investment 25% than some traditional investments 15% in st in fl a tio n Art o ff er pro tection aga 30% 15% 60 % 70 % 80 % 90 % 0% 10 % 20 % 30 % 40 % 50 % 14 16 20 17 20 20 Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 Among the most important motivations for including art in wealth management are the rising valuations seen on the art market and the fact that art is accounting for a larger share of the clients’ overall wealth. 116

117 Art & Finance Report 2017 | Section 2 - Art and wealth management survey Motivations & rationale Increasing competition in the wealth A holistic approach to wealth management sector is fueling management: One of this year’s providers’ desire to differentiate primary motivations for including art themselves from the competition: and collectibles in traditional wealth One of the primary impulses behind management is a need to develop a the drive toward the holistic approach holistic advisory relationship with clients mentioned above is the competitive (i.e., to consider all types of assets), pressure within traditional wealth which again is a consequence of fierce management. 72 percent of wealth competition in the wealth management managers (79 percent of private banks sector. This year’s survey findings show and 38 percent of family offices) see that 85 percent of wealth managers services around art and collectibles as (86 percent of private bankers and a way of differentiating themselves from 77 percent of family offices) believe their competitors in an increasingly that the move toward a holistic wealth congested and competitive marketplace management model is the strongest (this was up from 51 percent in 2016). argument for including art and The increasing focus on “passion- collectibles in a wealth management based” investments is a sign that service offering. This is linked to 65 wealth managers need to take a more percent of wealth managers saying that emotional and—as mentioned earlier—a their primary motivation for including art more holistic approach to the way they and collectibles is to be able to manage work with their clients’ assets (which the extended wealth of their clients (not often are assets linked to their hobbies, only a traditional portfolios of assets), such as classic cars, wine, race horses, which demonstrates a broader trend paintings, etc.). toward a more holistic approach to wealth management (see the Priorities Asset diversification and inflation for further discussion on this point). protection are losing importance as motivations: 48 percent of wealth Art is accounting for a larger share managers (47 percent of private : Among the most of individual wealth banks and 54 percent of family important motivations for including art offices) said the strongest argument in wealth management are the rising for including art and collectibles in a valuations seen on the art market and wealth management context was the the fact that art is accounting for a larger opportunity for portfolio and asset share of the clients’ overall wealth. This diversification offered by art and view was expressed by 73 percent of collectibles (this was down from 54 wealth managers (72 percent of private percent in 2016). In the current low banks and 77 percent of family offices), inflation environment, only 15 percent up from 45 percent in 2016. 54 percent of wealth managers (15 percent of of wealth managers feel that as the private banks and 16 percent of value of art is rising, the need for bank- family offices) said that the strongest related services to protect, enhance, or argument for including art was that it monetize these assets will increase in offers protection against inflation (this the future (up from 40 percent in 2016). was down from 30 percent in 2016). 117 117

118 Art & Finance Report 2017 | Section 2 - Art and wealth management survey Art as a way to safeguard value: Art offers an alternative client More than half (54 percent of wealth 55 percent of entertainment tool: managers, 57 percent of private the wealth managers (60 percent banks, and 38 percent of family offices) of private banks and 31 percent of increasingly see art as a means to family offices) surveyed said that client safeguard value. This is up from 51 entertainment was one of the most percent in 2016 and represents the important motivations for including highest reading since the survey was art and collectibles as part of a wealth launched in 2011. The ability of the management offering (up from 41 art market to weather economic and percent in 2016). This is also one of the political turbulence during the financial key areas that wealth managers say crisis in 2009 and the uncertainty they are likely to focus on in the next and tougher economic climate that reflecting the 12 months (Figure 21), followed provide some credence to the high emotional and social value that argument that art and collectible assets collectors place on being involved with are worthwhile as a means to safeguard art and the art world. This presents value. an opportunity for event-based art organizations, such as art fairs and Increasing demand for alternative museums, to develop innovative investments: In this year’s survey, new collaborations that go beyond 55 percent of wealth managers (47 traditional sponsorships. percent of private banks and 31 percent of family offices) said that their clients were looking for alternative investment opportunities and that this was a key motivating factor for considering art and collectibles (up from 49 percent in 2016). Geopolitical risk in the Middle East, uncertainty surrounding Brexit, and the uncertainty around the US presidency The ability of the art could increase volatility in financial markets in the coming years. It is likely market to weather that the appetite for art and collectible assets will have been strengthened by economic and political the track record of the global art market in the last years ( page 176) for market turbulence during the analysis and trends). financial crisis in 2009 Client pressure on wealth managers: 55 percent of wealth managers (52 and the uncertainty and percent of private banks and 69 percent of family offices) said that tougher economic climate clients are increasingly asking their private bankers and wealth managers that followed provide some to help with art-related issues (up from 48 percent in 2016). This was felt credence to the argument more strongly among the family offices surveyed, where 69 percent said that that art and collectible increasing client demand was the most important reason for including art and assets are worthwhile as a collectibles as part of their service offering, compared to 52 percent of means to safeguard value. private banks. 118

119 Art & Finance Report 2017 | Section 2 - Art and wealth management survey Wealth Ma nagers: What do you see as the biggest challenge in o ering art related services/products? ff Wealth Managers: What do you see as the biggest challenge in offering art related services/products? Figure 23. 75% 60% atio n and re search on these Tra nspare ncy - Lack of in form 79% mark ets 70% 61% 55% 46% ert is e - Di c ffi Exp ert is e ht exp d the rig n fi ult to 54% 57% 50% 65% 62% 20 17 la ted nature of the art and colle ctib le s mark et Unre gu 83% 57% 20 16 72% 14 20 43% 35% Costs/Benefit –Easy to measure the costs, but difficult 12 20 41% to measure the benefits 50% 11 20 39% 45% 39% Lack of in tern al exp ert is e 45% 40% 44% 51% 26% Lack of in tere st in tern all y in focusin g on art re la ted serv ic es 36% 33% 28% % % % 20 80 % 90 % % 50 % % 60 30 10 % 70 0% 40 Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 Challenges 1. percent of family offices) see this issue and 42 percent of family offices) said The ranking of the most important as the biggest challenge when offering that finding the right expertise remains challenges facing wealth managers art-related services and products to one of the key challenges in terms of when incorporating art into their their clients (up from 60 percent in building an art-related service offering service offering remains largely the 2016). Lack of transparency is also (up from 46 percent in 2016). This same as that reported in the first perceived to be one of the greatest pertinent issue is discussed in greater survey in 2011. However, as interest in threats to the overall reputation of the detail by Celine Fressart and Harvey art and wealth management grows, an art market and is one of the areas that Mendelson in the 1858 Ltd Art Advisory apparent lack of senior management regulation could address. contribution entitled “Art wealth support for developing these initiatives management: who can you trust?” (page seems to be creating a greater sense of Regulation remains a major Another 45 percent of wealth 12 2). frustration among the wealth managers With financial institutions challenge: managers (51 percent of private banks surveyed this year. facing increasing regulatory scrutiny and 26 percent of family offices) said and pressure, 65 percent of the wealth that the lack of internal expertise was a Lack of art market transparency managers surveyed this year said key hurdle (up from 39 percent in 2016). is a key obstacle to the future that the unregulated nature of the art development of the Art & Finance and collectibles market remained the 51 Lack of management support: industry : As the wealth management biggest challenge for incorporating percent of wealth managers said that industry continues to grow and expand art into their service offering (up from lack of interest internally was a major its investment in art-related wealth 62 percent in 2016). For a broader challenge, up from 26 percent in 2016. services, there is also a heightened discussion of the issues surrounding This could suggest that as interest sense of concern regarding the lack of regulation, see Section 5. in art and wealth management is transparency in the art market. This gaining momentum, there is a lack of year, 75 percent of wealth managers Finding and developing talent leadership support for these types of (77 percent of private banks and 68 55 percent of wealth and expertise: initiative. managers (59 percent of private banks 119 119

120 | Section 2 - Art and wealth management survey Art & Finance Report 2017 Figure 24. Do you expect your clients to want to include art and other Reporting 2. collectible assets in their wealth reports to have a consolidated view on their Better reporting on art and collectible client wealth and have a better view on the client exposure? assets could help the drive towards a more holistic wealth management approach: 69 percent of wealth 2011 managers (70 percent of private banks and 63 percent of family offices) expect 2012 their clients to want to include art and 2014 collectibles as part of their overall wealth reporting (slightly down from 73 2016 percent in 2016, but still significantly higher than 58 percent in 2014 and 2017 40 percent in 2012). This represents a continuation of the upward trend 69% seen in the last five years. The ability 22% to report on and monitor art and collectible wealth could present an 73% opportunity and an effective way of providing value-added services to 40% clients. By increasing awareness of the 58% financial value and risks associated with their clients’ art and collectible wealth, wealth managers could enhance Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 their understanding of their clients’ total assets, which is a prerequisite for developing a holistic wealth management strategy. This issue is also discussed further in the article by Celine Fressart and Harvey Mendelson from 1858 Ltd, who addresses the wealth managers’ increasing need to obtain an overview of their clients’ art assets and to consider the most appropriate collection management framework. The same argument is made in a broader context by Melanie Damani from Edmond de Rothchild, who states that private banks need to be capable of managing clients’ broader portfolios, and stresses that the role of wealth managers is to expand their services to encompass these asset classes and generate benefits for collectors and the private bank alike. 120

121 Art & Finance Report 2017 | Section 2 - Art and wealth management survey | Section 2 - Art and wealth management survey Art & Finance Report 2017 By increasing awareness of the financial value and risks associated with their clients’ art and collectible wealth, wealth managers could enhance their understanding of their clients’ total assets, which is a prerequisite for developing a holistic wealth management strategy. 121 121 121 121

122 Art & Finance Report 2017 | Section 2 - Art and wealth management survey EXPERT OPINION Art wealth management Who can you trust? The financial community is often at a loss Finding the right trusted partner is not when it comes to discussing art matters always easy. Over the last two decades, with clients. This is understandable, as we have witnessed a tremendous rise in the market is an unregulated and opaque the number of qualified and unqualified industry, where there are more unwritten advisers. Today’s market consists of practices than there are written codes. many so called “advisers.” Some market themselves as advisers but are actually In almost two decades of providing gallerists/advisers or auctioneer/advisers. art advisory services to the wealth Harvey Mendelson , Of course, they can provide “advice,” but management community, we have Managing Director their intrinsic business models render this increasingly seen the successful union of 1858 Ltd Art Advisory advice biased. art and wealth management. This is partly due to the fact that in recent years the art Celine Fressart A good question to ask when selecting the market has become a heavyweight industry Head of Special Projects “right” adviser is this: does this person have on a global scale. 1858 Ltd Art Advisory a commercial interest in the work of art being offered for sale? As is the case with Top collectors are competing for bragging financial transactions, a trusted adviser rights on pieces worth in excess of US$100 who is truly independent and impartial million. Major auction houses have will be able to provide market intelligence. developed their financial services and art This will enable the client to make informed fairs have become highly skilled in the art of decisions with complete transparency at all M&A. Even luxury brands have jumped on junctures of a transaction. the bandwagon and are seeing the dollar signs with lucrative artist collaborations. The financial community, traditionally skeptical of the art world, also seems With all of this activity, it is not surprising to have shifted opinion. Whereas art to see that private banks are also trying was once seen as an expensive hobby, to forge ever-closer bonds with the art it is now viewed as a powerful tool to world. This may take the form of art funds, increase wealth, diversify into alternative art finance solutions, or establishing their investments, and pass assets on to the own clubs of collectors and training their next generation. teams to identify prospective clients with an interest in art. As a result, it is now increasingly important for wealth managers to obtain an overview The main stumbling block for wealth of their clients’ art assets and consider the managers remains the fact that the art most appropriate collection management industry continues to heavily rely on market framework. expertise and trusted networks. So, who can they call upon? 122

123 | Section 2 - Art and wealth management survey Art & Finance Report 2017 This should include protecting the assets inherited collection into an opportunity by checking that the correct insurance for the future. What should be done with coverage is in place, ensuring accurate an inherited collection of old masters’ valuations for the works are recorded, and paintings, when all one dreams about making other arrangements regarding is street art? What is the relevance of exhibitions, restoration, cataloguing, numismatics to someone raised with framing, crating, safe transportation bitcoins? These are the questions to be of works, and so on. When managed asked and the problems we endeavor to correctly, a collection’s value can be solve. enhanced and holding costs minimized. Effective collection management also benefits heirs when the collection is passed on. Knowledgeable and effective wealth managers will be involved with the A good question to collection over time, ensuring they are at the center of all of their clients’ activities. The financial community is starting to ask when selecting the appreciate that art is highly emotive and can potentially build or burn the bridge between intergenerational relationships “right” adviser is this: and vested wealth. Most banks now provide educational programs for the next generation, aiming not only to prepare does this person have the next generation to handle financial matters relating to their inherited wealth, but also to create a relationship of trust a commercial interest with millennials and future generations. In an increasingly competitive financial market, it is vital for wealth managers to in the work of art being provide comprehensive solutions that will assist in retaining clientele across multiple generations. offered for sale? Art is the cornerstone of well-conceived next generation programs. The best programs contain a module on the preservation of alternative assets and how to transform the burden of an 123 123

124 Art & Finance Report 2017 | Section 2 - Art and wealth management survey In this year’s survey, estate planning was the art and wealth management service viewed by art professionals, collectors, and wealth managers as the most relevant. Wealth planning with respect to a future art legacy can be complex. The issues that need to be confronted are often far easier to avoid than to address. But effective planning can Art and reduce the likelihood of family conflict as well as the possible tax burden associated with the estate passing of a loved one. Regardless of the size of an art- related estate, a basic estate plan is planning an essential step toward addressing fundamental issues such as the disposal of assets, charitable bequests, and responsibilities for carrying out the express wishes of the deceased. For wealthy individuals with large art collections, the estate plan becomes the roadmap from which a legacy will be established and implemented. The article by Micaela Saviano, Mark Stokes, and Cyrielle Gauvin on page 128 aims to raise awareness of the risks to a collection during estate settlement and highlight the need for specialized planning tailored to an art collection. (page 146). Emilie Villette from Christie’s discusses the need for wealth managers to seek a 360 degree overview of their clients’ assets to provide them with a tailored service, inform and assist collectors in managing their collections as patrimonial assets, and provide a framework for how this can be done. 124

125 | Section 2 - Art and wealth management survey Art & Finance Report 2017 Private banks and family offices— clients maintain an updated inventory Again, a high number (39 percent) of survey findings of their collection (a description of the private banks had not had this discussion Significant growth potential with regards object, its location, and its minimum) with their clients. However, there are to art and estate planning: Art and estate allowing them to administer the estate signs that some private banks are acting, planning has been one of the growing without the art collector’s input. Again, with eight percent saying that they areas of art-related services within the in stark contrast, only 13 percent of the were actively working with their clients wealth management industry, and this private banks said the same, with 21 to establish a collection management will remain a core focus for private banks percent saying that their clients had such system, and 11 percent considering and family offices in the next 12 months a system in place, but that it was likely to implementing one in the future. according to this year’s survey. Despite be outdated. the fact that 89 percent of private banks said they offered art and estate planning services, only 28 percent said that their clients had made adequate provisions for Wealth managers: Do my clients have estate plans that sufficiently address their art collection? Figure 25. their art collections in their estate plans, and 31 percent said that their clients had not addressed their art collections in their estate plans at all. A further 41 percent Fam ily O ces ffi 72% 17% 11% of private bankers said they are unsure about their clients’ level of preparedness when it comes to their art collection Art and and estate planning. This stands in stark ks Privat e B an 31% 41% 28% contrast to the family offices surveyed, where 72 percent said their clients had made adequate provisions for their art 50% 70% 30% 20% 10% 0% 80% 90% 100% 40% 60% and estate planning needs. These findings Yes No Not S ure could signal that art and estate planning estate is more of a token service at the moment, but that there is significant untapped Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 potential for the private banking industry to take a more proactive approach to art- related wealth and estate planning in the Figure 26. Wealth managers: Do my clients maintain an inventory of their collection that at a planning future. minimum identifies each piece, its present location and its approximate value so that we could help to administer the estate without the art collector's input? The aforementioned findings could also be a sign that art-related wealth has some distance to go in terms of being fully I'm n ot s ure, 11% understood and integrated into overall we h av en't d iscussed i t 39% wealth management, and that there is still No, an d w e ar e 0% a certain amount of complacency within tak ing c ar e o f i t 8% the wealth management industry when d No, w e’ve discussed it an it comes to art and collectible wealth. 0% hav e d ecided not t o d o i t r ight now 7% However, this provides a significant opportunity for the private banking No, b ut we’re t hinking 11% out d oing that ab 11% industry to initiate a broader and more holistic discussion around art and wealth Yes, b ut it’s 17% management with their clients. probab ly outdat ed 21% Yes, an d w e 61% When it comes to collection management keep i t u pdat ed 13% and estate planning, it is once again the clients of family offices that seem to have 40% 30% 20% 10% 0% 60% 50% their house in order. The majority, i.e., ks Privat e B an Fam ily O ffi ces 61 percent, of family offices (all of the US family offices and half of the offices from Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 the rest of the world) stated that their 125 125

126 Art & Finance Report 2017 | Section 2 - Art and wealth management survey Art collectors survey findings When it comes to public donations, only While the majority of private banks five percent said that their collection have yet to discuss or address their would go to a public museum and only clients’ needs in respect to art and one percent said it would be sold and go estate planning, the survey findings primarily to charity. The risks associated for collectors indicate that the majority with private donations to public (69.4 percent) have already taken steps museums are discussed in greater detail to formalize the long-term plan for the (page 239), in Section 6 which explores collection (44.6 percent through their the role wealth managers can play in family office, and 24.8 percent through the development of best practices. their estate planning adviser, although Donations to museums and charities they have yet to involve the family office). are also discussed by Micaela Saviano, A further 19.8 percent of collectors say Mark Stokes, and Cyrielle Gauvin in their they are thinking about formalizing the article on p a ge 128 . plan for their art collection, but it is not yet documented. Only 10.9 percent of collectors surveyed have no plans or see no purpose in planning for such an event. When it comes to public 67 percent of the collectors who have made formal arrangements for their collection in their estate plan say that only five donations, the art will primarily go to the family, 14 percent said that the art would be percent said that their sold and that the proceeds would go to the family, and 13 percent said it would go to their private foundation. On collection would go to p age 132 , Javier Lumbreras talks about the innovative Charitable Museum a public museum and Endowment Fund, focusing particularly on artistic patronage and how to harmonize finance and culture. only one percent said it would be sold and go primarily to charity. 126

127 Art & Finance Report 2017 | Section 2 - Art and wealth management survey Art collectors: Do you have a long-term plan for your collection? Figure 27. d eal w ith i t y executor c an No, m 5, 0% No, I hav en’t gotten ar ound to it ye t, b ut 5, 9% intend to ffi ily an y f am ily o d fam Yes, m ce professional s ar e i nformed t o h an dle t he 44, 6% disposition Yes, I have worked with my estate planning 8% 24, advisors to formalize it in my estate documents, but I haven’t informed my family or family office ind, b ut i t i s n ot d ocumented Yes, i n my m 8% 19, 30% 40% 50% 0% 10% 20% Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 Art collectors: If you have made formal arrangements for your collection in your estate plan where will the art go? Figure 28. The ar t w ill b e s old, t he p roceeds w ill g o 1% primar ily t o c har ity t w ill b e s old, t he p roceeds w ill g o The ar 14% o m primar ily t ily y f am y p The ar t w ill g o p rimar ily t o m rivat e 13% foundat ion o a p ublic m The ar useum t w ill g o p rimar ily t 5% o m t w ill g o p rimar ily t The ar y f am ily 67% 70% 0% 10% 20% 30% 40% 50% 60% Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 Art collectors: If you intend to leave some or all of the collection to your heirs, have you discussed it with them? Figure 29. y spouse w ill o utlive m d h e/s he e an No, m 6% t d ecide w hat t o d o w ith t he ar can y executor c an No, m d eal w ith i t 4% No, n ot ye t, b ut I i ntend t o 46% eaving t hem s ome ar now I am l Yes, t hey k t 28% Yes, they understand what pieces they will 17% receive and have the means to care for the art 50% 40% 30% 20% 10% 0% Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 127 127

128 Art & Finance Report 2017 | Section 2 - Art and wealth management survey EXPERT OPINION Leaving a legacy that lasts A high-level look at the risks of estate planning (or lack thereof) to your collection An art collector’s motivations for starting Most obvious is the fact that collectibles and growing a collection are likely to be are (almost always) physical items and as unique as the pieces that they own. one-of-a kind objects to which collectors And yet, what everyone comes to learn is generally have a strong emotional Micaela Saviano that care and maintenance are required attachment. Additionally, within a complete US Tax Private Wealth to preserve the collection. Most collectors collection, each individual piece may have and US Art & Finance work carefully with art advisers and a vastly different, and ever-changing value. Deloitte US other specialists to address the many This generates a multitude of challenges. risks linked with the preservation of the Mark Stokes collection—risks such as provenance, Estate planning is ultimately a legal UK Private Client and restoration, conservation, transportation, matter and there are issues that are Family Office Tax and valuation. While the 2017 survey unique to each jurisdiction depending Deloitte UK found that more than half of the collectors on where the art collector is resident surveyed have taken steps to address the and domiciled. Because this publication Cyrielle Gauvin disposition of their collection within their is tailored to a global audience, we will Luxembourg Tax and estate, many collectors have yet to address cover only high-level issues associated Art & Finance this profound risk to the collection. with planning in relation to tangible assets Deloitte Luxembourg with significant financial value. What we In the event of an art collector’s death, one hope to accomplish is to raise awareness of three things can occur to a collection: of the risks to a collection during estate it can pass to heirs, be transferred to settlement and highlight the need for charity, or be sold. Most collectors have a specialized planning tailored to a collection. preference, but there are many who have We encourage all collectors to work with not formally addressed the matter and their advisers when addressing the tax and written this into a tailored estate plan. legal issues of their estate. Several characteristics differentiate art and collectibles from other assets in an estate. 128

129 | Section 2 - Art and wealth management survey Art & Finance Report 2017 Perhaps the art collector did intend to Bequeath to family/friends Do the beneficiaries want the collection, leave the collection to his or her surviving Passing the collection to family or friends have enough interest in it, or have the spouse or children, in which case this kind may be perceived as a way of preserving resources available to properly maintain of general provision for tangible property the collection for the future, but there and care for the works? would be fit for purpose. However, as noted are common pitfalls that require careful earlier, it is important to remember that consideration. Alternatively, an art collector may choose an art collection often consists of one-of- to transfer unique pieces of interests in the a-kind items and that these items, in many First, many individuals’ estate plans collection to the desired beneficiary or to a cases, are significantly more valuable when include very generic provisions for tangible trust during their lifetime. In a jurisdiction held as a single collection that may have personal property; it often transfers first with an estate or inheritance tax, proactive taken years to curate. Defaulting to the to the surviving spouse and if none, to the lifetime planning can significantly reduce tangible property provisions could result in deceased’s children. While this is generally the tax burden on a collection. A transfer the unintended division of the collection. reasonable for household furnishings and also removes the asset from the art other chattels, it may not be the intended collector’s taxable estate, shifting future In the context of a family, there are any result for a valuable collection. appreciation in the art to the trust or number of situations that could create individual(s) receiving it. Equally, the art issues. For example, if the collection is to The art collector may have assumed collector can control and monitor that the be divided up among the family, could this that the collection would be passed on transfers are completed according to his result in conflict between the beneficiaries? in accordance with the more extensive or her wishes. The art collector may also Unique pieces that may be comparable terms of his or her estate plan, but failed value seeing family members enjoying the in value now could have significantly to discuss the collection with his or her artwork and/or reconsider future gifts if the different values in the future—is the family estate planning adviser. Even worse, the family is less engaged or appreciative than comfortable with that possibility? art collector may be living with an outdated expected. estate plan, drafted before the collection ballooned in value. Leave to charity pleased to have a specific piece, if the Similar to lifetime transfers to family or Some collectors wish to donate their opportunity were presented. Collectors trusts, lifetime transfers to charity may collection to a museum or charity upon would be wise to have initial discussions yield tax and personal benefits. Some their death. In some jurisdictions, this will with the museum(s) to confirm that the jurisdictions, such as the US, offer income result in tax relief for their estate. While collection will ultimately find a suitable tax deductions for lifetime charitable gifts many collectors assume that their prized home. of artwork. Collectors may enjoy seeing possessions will be highly coveted by their their prized collection in a public institution favorite museum, this is often not the Another alternative may be to leave a where their legacy can be enjoyed by the case, as modern museums have storage collection to a private foundation. However, public. rooms full of high-quality artwork, more this brings its own challenges in terms of and more gifts are being turned away. the maintenance of the collection, funding Meanwhile, many alternative museums or for the organization, and specific tax other charitable institutions may be quite and legal considerations in the relevant jurisdiction. 129 129

130 | Section 2 - Art and wealth management survey Art & Finance Report 2017 name an art adviser in their documents or Sell the collection highlighted that each jurisdiction may have preemptively appoint an auction house to The third approach is to sell the collection. a specific regime applicable to sales of sell the collection. More fundamentally, the One might assume this is the easiest artworks, and art advisers and executors executor or family may not know what the option, yet many people fail to realize that must be aware of those details if they collection encompasses. Most collectors selling a collection is a daunting and time- are to manage collectors’ estate planning are now aware that they should have an consuming task for the average executor. most efficiently. For example, some inventory system for their collection, but The executor may not be familiar with countries such as France offer preferred the process is often postponed due to the the collection or the nuances of selling tax treatment on the sale of artworks by a complexity. In many cases, an inventory collectible assets. It can be challenging for French tax resident. may exist, but is not effectively maintained executors to maximize the value of the with current asset value estimates, collection for the estate, given the specialist locations or other critical information. nature of an art collection. It is also important to be attentive to the Executors may not be aware of what residence and domicile of the art collector they have or how to realize its true value. when planning for a sale. It should be Accordingly, some collectors chose to SOLUTION Artists face unique challenges when it breakdown between the various Building a collection is a lifelong pursuit comes to ensuring their legacy. Unlike ownership elements, according to for many people. The care and attention collectors, artists own a set of various the prospective heirs, the artist’s that goes into building a collection intellectual property rights, which wishes and goals, and the local laws. should also be applied to planning for a exist separately from the ownership Any estate planning measures should collection upon the art collector’s death. of the physical artwork. Far too also focus on the preservation of the A collection can ultimately go to family, often, artists actively deal with the artist’s reputation. charity or the auction block. Each art transfer of their physical goods, but collector must decide for himself or completely ignore the transfer of the herself what is best for the family and intellectual property rights attached the collection. As noted above, pitfalls to such artwork. Developing an estate abound, but with some careful planning, plan can help preserve and develop regular review of the plan and collection the legacy of an artist. Specialized details and the assistance of specialist attorneys, accountants, and valuation advisers, an art collector can develop a experts can work together with the legacy that lasts. artist to address the appropriate 130

131 Art & Finance Report 2017 | Section 2 - Art and wealth management survey Art & Finance Report 2017 | Section 2 - Art and wealth management survey PLAN AHEAD Sell Charity Descendant Family Have you discussed your • Does your current If the collection will be sold, • • If you will leave the • collection to charity, have collection with your family? estate plan (or local law) does your executor know accomplish your wishes for you already discussed it with Are you sure that they want what to do? of it? all your collection? the charitable organization Does your executor know • and are sure that they want • where all the assets are • Have you evaluated it If you’re leaving it to your of it? All it? under different family and located and what they are spouse, what happens to economic scenarios? the collection upon his/her worth? • Do you have a gift agreement in place? death? • Have you named an art • If your first choice • Would your plans change if adviser in your estate plan? organization doesn’t want you determined that your Have you coordinated with • some or any of the art, family did not intend to keep an auction house to sell the is there an alternative the art after your death? collection? organization you want to • Is there a plan in place for support? your family to divide the Will you leave a cash gift to • artwork if multiple people help support operations to will inherit it? sustain the collection? An art collector’s motivations for starting and growing a collection are likely as unique as the pieces that they own. Yet, what all will learn is that care and maintenance are required to preserve the collection. 131 131 131 131

132 Art & Finance Report 2017 | Section 2 - Art and wealth management survey CASE STUDY The Charitable Museum Endowment Fund Artistic patronage Javier Lumbreras CEO The Charitable harmonizing finance Museum Endowment Fund, L.P. and culture Javier and Lorena Lumbreras had a dream; rescuing a splendid 16th -century Jesuit school, Saint Nicholas Church and other adjacent buildings in a state of ruin and disrepair, along archaeological medieval and Roman findings, located in Arévalo, Spain. Scheduled to open in 2020, COLLEGIUM The key motivation behind is the creation will be one of the first museums to of COLLEGIUM, a place destined to integrate the cultural and economic generate social change, sustainable structures of its locality with its values intellectual stimulation, the perpetuation and operative system. This project will not of community well-being while building only become the permanent home of the a legacy for their family. The ambitious Adrastus Collection—which comprises scope of the project led to the creation over 600 artworks by 150 artists from five of The Charitable Museum Endowment continents curated by Patrick Charpenel— Fund, an open-ended hedge fund that but will also create an exchange platform aims to reduce or permanently eliminate with the region’s public museums as a museum’s dependency on its founder’s announced by the government and resources, while also creating a network summarized in a protocol signed last June. through which museums can share The guiding principle behind COLLEGIUM resources and innovations. The following is critical museology where the aim is to case study explores the creation of Spain’s capture the radical nature of the most most ambitious private museographic st century art important manifestations of 21 project of the 21st century since the and the history of the site. Thyssen-Bornemisza Museum in Madrid, along with the investment vehicle that will render this endeavor financially stable. 132

133 Art & Finance Report 2017 | Section 2 - Art and wealth management survey Render of COLLEGIUM © Tatiana Bilbao Studio The following case study explores the creation of Spain’s most ambitious private museographic project of the 21st century since the Thyssen-Bornemisza Museum in Madrid, along with the investment © Fundación Lumbreras-Colección Adrastus vehicle that will render this endeavor financially stable. 133 133

134 | Section 2 - Art and wealth management survey Art & Finance Report 2017 innovative programs, stimulating projects As a laboratory of experiences, and maintaining programs and acquisitions and educational events that encourage research center, COLLEGIUM depicts a for permanent collections, expansion, or social well-being. With the creation of over society of revitalized communities where renovation schemes; improving visitor 317 contemporary art museums in the all people—local residents and visitors services; and even balancing budget last 15 years, the competition for grants alike—are inspired by the transformative deficits. from governments and private foundations power of art to shape our understanding has never been tougher, and this has now of ourselves and improve our collective The Charitable Museum Endowment become a serious concern among most quality of life. Fund’s assets are being invested in a well- private and public museum endowments diversified portfolio of fine art pieces by 2 will around the world. Some performance- A total surface area of 12,020m universally recognized artists. The main house COLLEGIUM’s ambitious program, limiting factors in fundraising are: (i) a lack investment objective of the partnership 2 of exhibition space, comprising 4,000m of governmental and private donors, (ii) is to earn an attractive rate of return 2 2 of archive of public space, 1,300m 3,300m aging boards, (iii) rising operational costs and seek capital appreciation for socially 2 for workshops and research areas, 750m associated with recruiting and retaining responsible, community-minded members. 2 for and artists’ residencies, 2,000m top talent, and (iv) the escalating price of The Master Fund is expected to run into other facilities (including a specialized ambitious art programming. That is why the billions of dollars and will maintain a 2 for the conservation center), and 250m Javier Lumbreras created The Charitable diversified portfolio of wholly and partially foundation’s hub. The project will create Museum Endowment Fund. owned art investments with varying a connected space in which the thread of holding periods. history is woven into the reality of modern culture. This experimental museographic The Master Fund is expected to run into concept projects itself into the 21st century breaking away from the traditional the billions of dollars and will maintain white-cube appearance by blurring the boundaries between the exhibition, a diversified portfolio of wholly and production, conservation, and research areas and creating a dynamic relationship partially owned art investments with among them. varying holding periods. Designed by the acclaimed Mexican architect Tatiana Bilbao, the museum aspires to be part of a multicultural and plural experience in which the city of With a strong background in art and The Master Fund’s capital is being invested Arévalo is the jewel in the crown. finance, and a deep concern to build a in artworks from artists with proven track self-sustaining mechanism for his own records from the late 19th and early 20th The Fundación Lumbreras—Colección foundation’s sake, Lumbreras decided to centuries, including artistic categories such Adrastus soon realized that this create a charitable investment vehicle to as Impressionism, Post-Impressionism, undertaking would be highly challenging. assist collections, foundations and existing and Modernism. In addition, a significant Not only because it involves the laborious museums in the creation and funding of percentage of the Master Fund’s portfolio restoration of 16th century ruins – their respective permanent endowments. also comprises blue-chip Post War and amongst the new building additions– but Contemporary art with a solid secondary also because the time and financial With over 30 years of experience in the art market. The Charitable Museum resources available could not be forever market, and having successfully launched Endowment Fund provides a much-needed capable of subsidizing the operational and closed the Artemundi Global Fund collaboration to artistic patronage aiming expenses and financing the ambitious (17.02 percent average return per annum), to increase social welfare. program planned for COLLEGIUM in the Lumbreras realized that it was time for absence of its founders. Museums are the art market to give something back to becoming more than mere places to the art world. The Charitable Museum exhibit objects. Nowadays, they act as Endowment Fund’s main objective is to agents of change and development in produce investment returns to fund non- the community through the creation of profit endowments for museums and other cultural institutions. The uses of resources include, but are not limited to, creating and 134

135 Art & Finance Report 2017 | Section 2 - Art and wealth management survey Render of COLLEGIUM © Tatiana Bilbao Studio Render of COLLEGIUM © Tatiana Bilbao Studio 135 135

136 Art & Finance Report 2017 | Section 2 - Art and wealth management survey As more family offices contributed to this year’s Private banks vs. report, we have added a new comparison between family offices private banks and family offices with regards to their attitudes, actions, Comparative and expectations when it comes to the role trends 2017 of art and collectibles in a traditional wealth offering. management It is important to keep in mind when looking at the results that more private banks (69) participated in the survey than family offices (27). Overall, family offices and private banks not surprisingly have quite a similar approach to art wealth management services. The main highlights are: 04 01 02 03 Private banks and family Family offices seem better Family offices typically seem Although private banks and offices recognize the need prepared to offer art wealth to have greater room for family offices can be in direct to develop a holistic range of management services. When a maneuver when developing art competition when it comes to wealth management services, family office has to deal with an wealth management service managing wealth, there are as art can represent a sizeable art collection, it provides the offerings. areas highlighted below that portion of the total wealth of services to protect the wealth suggest there is also scope for their clients. allocated to the art collection. collaboration, particularly in areas such as leverage and risk management. 06 08 07 05 Family offices seem a bit Client entertainment and Estate planning is the primary Private banks are much more more aware of the financial sponsoring are less of a priority service that private banks and involved in sponsorship and dimension of art collection as for family offices. family offices will focus on in client entertainment: part of portfolio management. the next 12 months. 136

137 Art & Finance Report 2017 | Section 2 - Art and wealth management survey ces: Aw Private Bank s vs Family O ffi ctations xpe tion and E pa ss, Ada arene Figure 30. Private Banks vs Family Offices: Awareness, Adapation and Expectations 120% 60% 20% 40% 0% 80% 100% How aware are you of developments linked to art as an 56% asset class? 63% Does the bank/family o ffi ce currently o er any kind of ff 67% services when it comes to art and collectibles (including 55% entertainment)? % saying 'Yes' Do you feel that there are strong arguments for including art 94% and collectibles in traditional wealth management? % saying 68% 'Yes' Do you expect you r clients to want to include art and other collectible assets in their wealth reports to have a 70% consolidated view on their wealth and have a better view on 63% their exposures? % saying 'Yes' How important is it to develop a holistic advisory 72% relationship with your clients (look at all assets of your 100% clients)? % saying important/very important? Family O ffi ces Private Banks Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 Industry competition and a move When family offices have to deal with toward a holistic wealth management art, they are 100 percent committed model encourage private banks to to art advisory, valuation services, take a more proactive approach and collection management to protect when it comes to offering art-related the familial wealth invested in art: services: Among the family offices surveyed that 67 percent of the private banks surveyed provide art-related services, all provided percent of family offices) (compared to 55 art advisory services (compared to 79 said they offered art-related services. Also, percent of private banks), valuation 94 percent of private banks stated that services (compared to 84 percent they felt there were strong arguments for of private banks), and art collection incorporating art and collectibles in their management (compared to 72 percent wealth management offering, compared of private banks). Despite comparatively family offices. This could to 68 percent of lower readings from private banks, this imply that the private banking community year’s readings show a significant increase is taking a more proactive approach as in private banks offering these services the industry starts to move toward a compared to 2016, which suggests that more holistic wealth management model private banks are starting to act. (72 percent of private banks said having a holistic advisory relationship with clients was very important, compared to 100 percent of the family offices who expressed this view). The private banking community is taking a more proactive approach as the industry starts to move toward a more holistic wealth management model. 137 137

138 | Section 2 - Art and wealth management survey Art & Finance Report 2017 you o ffi ces: W er? ff t art related services do s vs Family O ha Private Bank Private Banks vs Family Offices: What art related services do you offer? Figure 31. 80% 0% 20% 40% 60% 100% 120% 30% Art/Collectibles investment funds 45% 79% Art advisory (support buying/selling art transactions) 100% 84% Art valuation 100% 70% Art secured lending (using art as a collateral for loans) 55% Art philanthropy/individual giving to the arts (gifts, 72% 73% donations, etc) 72% Art collection management 100% 88% Estate planning (incl. inheritance and succession planning) 91% Clien t entertainment (private views, art fairs, museum 95% 91% exhibitions) 77% rs, conferences on art/art market) Client education (semina 73% 84% Sponsorship 55% ces Private Banks Family O ffi Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 / family nk ces: H ow likely is the ffi s vs Family O Private Bank ba ffi ce to get inv olved in the following ne o xt 12 services in the Figure 32. Private Banks vs Family Offices: How likely is the bank/ family office to get involved in the following services in the next 12 months? ? (likely/very likely) mont hs (likely/very likely) 10% 0% 20% 30% 40% 50% 60% 70% 80% 90% 13% Art/collectibles investment funds 16% 39% Art advisory (support buying/selling art transactions) 58% 36% Art valuation 42% 41% Art secured lending (using art as collateral for loans) 11% Art philanthropy/individual giving to the arts (gifts, 45% 21% donations, etc) 30% Art collection management (inventory management) 58% 67% succession planning) Estate planning (incl. inheritance and 79% Client entertainment (private views, art fairs, museums 73% 32% exhibitions) 55% Client education (seminars, conferences on art/art market) 26% 56% Sponsoring 16% ffi Private Banks Family O ces Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 The increasing value of art-related wealth is motivating private banks to take a proactive approach. 138

139 Art & Finance Report 2017 | Section 2 - Art and wealth management survey What do you consider the strongest arguments for including Art and Collectibles in traditional Wealth Management? Figure 33. Need to develop a holistic advisory relationship 77% 86% with our clients (look at all assets of your clients) is accounting for a larg er share Art 77% ealt h of clie nts’ overa ll asset valu e/w 72% Increasing competition in the Private Banking 38% 79% sector forces new ideas, products and solutions To be able to manage the extended wealth 54% of their clients (not only traditional portfolio) 67% Clients are increasingly demanding their 69% 52% bankers to help with art related issues 31% Clie nt en tert ainment 60% Client demand: Economic situation, investors 31% looking for new investment opportunities 47% 38% Art is a store of valu e 57% The value of art is increasing, triggering a need for bank 38% related services to protect, enhance or monetise the value 57% 54% catio n er port folio and asset div ers i ff and colle ctible s o Art fi 47% Art could generate higher return on investment 38% than some traditional investments 22% 15% Art o ff er pro tection aga in st in fl a tio n 16% % 90 % 10 0% 0% 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 ffi c es Family O ate Bankin g Priv Art and estate planning remains a Private banks are taking the lead on management. There is a stronger sense strong focus for both private banks art-secured lending: among family offices (69 percent of those and family offices: 70 percent of the private banks who surveyed) that their clients expect wealth 88 percent of private banks and 91 stated they offered art-related services managers to assist with art-related issues, percent of family offices said they said that they offer their clients the compared to 52 percent of private banks offered estate planning services. 67 opportunity to use their art collection that said the same. percent of private banks and 79 percent as collateral for a loan, compared to 55 of family offices said they would focus percent of family offices who said they Private banks are experiencing on this service in the next 12 months. offered their clients art-secured lending competitive pressure: 79 percent of This suggests that one of the key battle services. There is significant scope for private banks said that increasing grounds in the wealth management collaboration between private banks and competition in the wealth management industry is and will continue to be around family offices when it comes to offering sector was a key driver for offering estate planning. art-secured lending services. clients new and innovative products and solutions, including art and collectibles. Private banks are much more Only 38 percent of family offices felt this involved in sponsorship and client was a key argument. Another driver for entertainment: private banks is client demand for new 95 percent of private banks and 91 investment opportunities: 47 percent percent of family offices offer client of private banks expressed this view, entertainment services (exhibitions, compared to 31 percent of family offices. private viewing, etc.), and 84 percent of private banks offer art-related The increasing value of art-related wealth sponsorship, compared to 55 percent of is motivating private banks to take a family offices. Significantly more private proactive approach: 57 percent of the banks than family offices said that they private banks surveyed felt a more acute would invest in these areas in the next 12 need to address the increasing value of art months. and the need to offer services to protect, enhance, and monetize this value. Only A holistic wealth management model 38 percent of the family offices felt that is a key driver: Both private banks (86 this was a key argument for including art percent) and family offices (77 percent) and collectibles as part of their wealth see the need to develop a holistic advisory management offering. 57 percent of relationship with their clients as the private banks also viewed art as a means strongest argument for including art of safeguarding value, compared to 38 and collectibles within traditional wealth percent of family offices who said the same. 139 139

140 Art & Finance Report 2017 | Section 2 - Art and wealth management survey B. Art professional and Art collector Emotions vs. investment Fig. 22 Emotion vs Investment: Why do your clients buy art? (art professionals) key survey findings 2017 Why do your clients buy art ? (art professionals) Figure 34. Collecting art with a view to investment: 17 20 3% 11% 86% As per last year’s survey findings, a large majority (86 percent) of art professionals said their clients buy art and collectibles 20 16 4% 17% 79% for emotional reasons (i.e., because of a a. in vestment purpose passion for collecting), but with a view to b. colle ctin g purp ose investment value (not only investment return, but also art as a means of c. coll ectin g purp ose but wit h an in vestment 14 20 9% 10% 81% vie w safeguarding value); this was up from 79 percent in 2016. Only three percent of the art professionals surveyed said that 20 12 0% 23% 77% their clients buy art purely for investment reasons (down from four percent in % 60 % 40 0% 20 0% % 80 10 % 2016 and nine percent in 2014), and 11 Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 percent said their clients bought art for Fig. 23 Emotion vs Investment: Why do your buy art? collecting purposes only (down from 17 Why do you buy art ? (art collectors) Figure 35. (art collectors) percent in 2016). Although the hierarchy of motivations remains the same for art 20 17 3% 32% 65% collectors, a higher portion (32 percent) of art collectors say that they are driven by “pure” collecting, where the investment aspect is not a concern (up from 22 20 16 6% 22% 72% a. in vestment purpose percent in 2016 and 21 percent in 2014). b. colle ctin g purp ose 65 percent of art collectors (down from 72 c. coll ectin g purp ose but wit h an in vestment 14 20 3% 21% 76% percent in 2016 and 76 percent in 2014) vie w said that they bought art for collecting purposes with a view to investment. This trend could suggest that the financial 12 20 7% 40% 53% aspect of buying art is now slightly less important to many art collectors than % 90 0% % 10 10 0% % % 20 % 30 % 40 % 50 % 60 % 70 80 it was in previous years, although the Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 majority of art collectors still buy art with financial considerations in mind. It is worth noting that 42 percent of US art collectors It is the emotional and social aspects of said that they bought art for “collecting” purposes only, versus 28 percent of art collecting art combined with the potential collectors from the rest of the world. It is interesting to note the difference between for increasing or safeguarding value, what art professionals say are their clients’ motivations for buying art versus what the i.e., value protection, that seems to be art collectors themselves say. the driving motivation among most art This implies that art as a pure investment or financial product is only attractive collectors in the art market to a small minority of art buyers (three percent), and that it is the emotional and social aspects of collecting art combined with the potential for increasing or safeguarding value, i.e., value protection, that seems to be the driving motivation among most art collectors on the art market (65 percent of art collectors expressed this view). 140

141 | Section 2 - Art and wealth management survey Art & Finance Report 2017 Art is increasingly becoming Art collectors are focusing on the This year’s a lifestyle product: “soft” value of art: This year’s survey findings indicate that 79 percent of art collectors (up from 71 a large majority of art professionals percent in 2016) still feel that emotional survey findings believe that “social value” is becoming the value remains the primary reason for dominant motivation when their clients buying art, followed by social value, with indicate buy art (85 percent said so in 2017, up 63 percent of art collectors saying this was from 80 percent in 2016 and 72 percent a key driver for their involvement in the that a large in 2014). This was followed by 75 percent art world (up from 61 percent in 2016). A who said that “emotional value” was a further 54 percent said they viewed art as majority of art key factor in their buying decisions (down a luxury good (up from 51 percent in 2016), from 79 percent in 2016). In terms of the which confirms the finding from previous professionals financial aspects of art collecting, art years that art is predominantly viewed by professionals were generally slightly less art professionals and art collectors as a believe that convinced about these motivations this “lifestyle” product. However, this does not year, with 44 percent of art professionals mean that the financial aspect of buying saying their clients were driven by art is not important, just that it is not the “social value” “investment returns” (the same as in driving factor. This is an important finding 2016). Meanwhile, 39 percent saw it as a and needs to be considered when wealth is becoming diversification tool (down from 47 percent) managers design their art and wealth and 27 percent said they saw art as a “safe management products. the dominant haven” (down from 33 percent). Investment value motivations are motivation reverting to historic trends among art collectors: when their After seeing an increase in motivations involving “investment returns” in 2016, this clients buy art. has dropped back to 2014 levels according to art collectors surveyed this year. Half of the art collectors said investment returns were a key motivation in 2017 (down from 64 percent in 2016). It is likely that tougher art market conditions in 2016 have muted art collectors’ expectations about investment returns this year, combined with improved performances for other financial asset classes in the last 18 months. 141 141

142 Art & Finance Report 2017 | Section 2 - Art and wealth management survey Fig. 25 Art professionals: Which of the following motivations are most important in buying art? Art professionals: Which of the following motivations are most important in buying art? Figure 36. 75% Emotio nal Valu e 79% 65% 85% Socia l Valu e 80% 72% 67% Luxu ry Good 68% 62% 20 17 39% fi c atio n Port foli o Div ers i 47% 16 20 54% 20 14 44% Investment Re turn s 44% 59% 27% Safe haven 33% 28% 23% In fl a tio n Hedge 20% 25% 50 80 % 70 % % % % 90 % 40 % 30 % 20 % 10 0% 60 Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 Fig. 26 Collectors: Which of the following motivations are most important in buying art? Art collectors: Which of the following motivations are most important in buying art? Figure 37. 79% Emotio nal Valu e 71% 78% 63% Socia l Valu e 61% 61% 54% ry Good Luxu 51% 44% 20 17 36% fi c atio n Port foli o Div ers i 51% 20 16 37% 20 14 50% turn s Investment Re 64% 47% 30% Safe haven 32% 33% 21% In fl a tio n Hedge 30% 34% % % % 80 % 70 % 60 % 50 90 40 % 30 % 20 % 10 0% Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 142

143 Art & Finance Report 2017 | Section 2 - Art and wealth management survey Portfolio diversification and art as There is an overall consensus a “safe haven” remain important motivations this year: 36 percent of the art collectors surveyed between art professionals and said that portfolio diversification was an important motivation when buying art art collectors in terms of the art this year, down from 51 percent in 2016. In terms of art as a “safe haven,” 30 percent said this was an important motivation this wealth management services year (about the same as the 32 percent seen in 2016). Although not the primary that they would like to be offered reason for buying art, the fact that more than a third of art collectors see portfolio diversification benefits from owning by their wealth managers. and holding art as important, is another reason why integrating art-related wealth into traditional wealth reporting continues to be a key priority for the Art & Finance industry. t to your clients? ost relevan ement services m ag ich of the ar t weal th man Art Professional s: Wh Figure 38. Art Professionals: Which of the art wealth management services are most relevant to your clients? 53% Art S ecured Lending 53% 44% 74% Art V al uat ion/A pprai sal 69% 69% 76% visory Art ad 64% 68% 71% d I nformat ion ar ket R esear ch an Art M 67% 61% 80% 17 20 ning Art & E stat e p lan 65% 57% 16 20 71% llection m an agement Co 66% 54% 20 14 61% Art P hilan throphy 59% 48% 43% Investment f unds 34% 41% t to you? ement services ar e most r elevan ag ich of the ar t weal th man Collectors: Wh 20% 50% 60% 0% 30% 10% 70% 40% 80% 90% Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 Collectors: Wh ich of the ar t weal th man ag ement services ar e most r elevan t to you? 46% Art S ecured Lending 57% Art collectors: Which of the art wealth management services are most relevant to you? Figure 39. 48% 74% 46% Art V al uat ion/A pprai sal Art S ecured Lending 62% 57% 48% 67% 74% 57% Art V al uat ion/A pprai sal 62% visory Art ad 52% 67% 30% 57% visory Art ad 52% 72% 30% ar ket R esear ch an d I nformat ion Art M 75% 61% 72% Art M d I nformat ion ar ket R esear ch an 75% 61% 69% ning Art & E stat e p lan 68% 57% 69% ning Art & E stat e p lan 68% 57% 60% 17 20 llection m agement Co an 61% 60% 52% 20 17 llection m Co agement an 61% 52% 20 16 16 20 45% 45% throphy Art P hilan 50% 14 20 Art P hilan throphy 50% 46% 20 14 46% 37% 37% Investment f unds 35% Investment f unds 35% 28% 28% 80% 30% 20% 10% 0% 70% 60% 50% 40% 70% 80% 0% 10% 20% 30% 40% 50% 60% Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 143 143

144 Art & Finance Report 2017 | Section 2 - Art and wealth management survey 76 : Art valuation and value appraisal are Art and estate planning: Art advisory perceived as a core art and wealth 57 percent of art collectors believe 69 percent of art collectors said that art that wealth managers should offer art management service: and estate planning was a sought-after advisory services (up from 52 percent 74 percent of the art professionals and necessary service (up from 68 percent in 2016 and 30 percent in 2014). This surveyed stated that art valuation in 2016). 80 percent of art professionals trend suggests that art collectors see art was the most important art wealth agreed with this (up from 65 percent in advisory services as an integral part of management service for their clients (up 2016). 45 percent of art collectors said any art and wealth management offering. from 69 percent in 2016). 74 percent of that wealth management services around It is clear that the largely unregulated art collectors also said that valuation art and philanthropy would be important services were the most important art advisory profession is of concern to to them (down from 50 percent in 2016). services (up from 62 percent in 2016), and art collectors, since 48 percent of art This trend was supported by 61 percent collectors said that a “Lack of standards these ranked at the top of art collectors’ of the art professionals surveyed (up from priorities ahead of art market research around professional qualifications in the 59 percent in 2016). This implies that art is art market” was of major concern (See also and art and estate planning for the first increasingly becoming important in legacy time. As noted earlier in Section 2, wealth Section 6: Regulation & Risk Management). planning for HNWIs. Wealth managers are managers have responded to this need, Moving art advisory services under the actively responding to the demand for art with 88 percent of wealth managers umbrella of a regulated financial entity is and estate planning, and 70 percent of the offering valuation services this year likely to improve the credibility of these wealth managers surveyed said this was (up from 69 percent in 2016). The vast services in the eyes of the art collector. going to be a focus area in the next majority (79 percent) of wealth managers 76 percent of art professionals (up from 12 months. 64 percent in 2016) said that their clients said valuation services were outsourced would like to see art advisory services as to a third party. This could signal that art Art collectors’ interest in art collectors and art professionals now see part of a wealth management offering—an investment products remains around opportunity for increasing collaboration the wealth management industry as a the same level as in 2016: between art professionals and wealth neutral party when it comes to providing 37 percent of art collectors said that valuation services. managers. art investment fund products would be useful to them (up from 35 percent in Art market research and information Increasing potential for software 2016), although only 14 percent of wealth development companies and is an area for further investment and managers said they would offer access to growth: collection management systems to be such a product. Despite the reluctance integrated with wealth reporting: 71 percent of the art professionals (up for the wealth management industry to from 67 percent in 2016) and 72 percent 60 percent of art collectors and 71 percent offer art investment products, this does of the art collectors surveyed (down of art professionals believe collection signal interest among art collectors in the slightly from 75 percent in 2016) said that management is a service that should opportunity to gain financial exposure to market research and information is a be offered by the wealth management art through an investment vehicle. The product they would like to see included in industry, and this corresponds with the same view was echoed among 43 percent wealth managers’ view that more clients a wealth management offering. This is an of art professionals (up from 35 percent in area that most wealth managers have yet want to see their art integrated into overall 2016) who said they believed their clients wealth reporting. to explore, and it could be combined both would be interested in art investment with valuation services as well as internal products. education and efforts aimed at increasing in-house art-market knowledge. With 50 percent of art collectors motivated by financial returns when buying art, there is clear potential for the right type of art investment product or service—particularly as art collectors are looking for services that can combine art market access, improved valuation, expertise, and a more regulated investment environment. 76 Art advisory covers a broad spectrum of services mainly related to buying and selling art and collectibles on behalf of clients. Although other services such as collection management and valuation could be defined as an art advisory service, for the purposes of this report we have separated this as a stand-alone service. 144

145 Art & Finance Report 2017 | Section 2 - Art and wealth management survey | Section 2 - Art and wealth management survey Art & Finance Report 2017 Moving art advisory services under the umbrella of a regulated financial entity is likely to improve the credibility of these services in the eyes of the art collector. 145 145 145 145

146 Art & Finance Report 2017 | Section 2 - Art and wealth management survey EXPERT OPINION Emilie Villette Business Development Art & wealth Director Christie’s France management A win-win combination Over the past 15 years, the art market has entered a new era. It has undergone radical transformations. Among these can first be mentioned the unprecedented globalization of the art market players, as well as a new market’s geography initiated by the rapid rise of China. The emergence of new fortunes worldwide (in particular in Asia, India, Latin America, and the Gulf countries) is significant, so as the expansion of the market for modern and contemporary art and the number of multi-million auction record prices for masterpieces. 146

147 Art & Finance Report 2017 | Section 2 - Art and wealth management survey STEPHEN WHITE MAGIC LADDER KID IV © YINK A SHONIBARE MBE (2014), PHOTOGRAPHER: Moreover, the safe-haven status, attributed to works of art and collectibles (including wine, jewelry, watches, etc.), their inclusion in wealth investment and diversification strategies, or also the development of the online art market, highlight the nature of these structural changes. The accumulative effects of these drivers of growth have allowed the art market to rapidly recover from the 2008–2009 financial crisis and reach, in the intervening years, both historically unprecedented global sales totals and price levels. Art and collectibles have a unique role to play in the increasingly precise and complex structures used to organize the asset portfolio of wealthy individuals. Art as an asset class: a self-evident diagnosis? As artworks have increased their value, so have financial stakes inherent to art ownership. The so-called “investments of passion” represent a rising proportion of the asset portfolio of HNWI/UHNWI. This demonstrates, as if it were still necessary, that art has become an entirely distinct asset class, all the more attractive as it epitomizes the kind of tangible “investments” that have been so highly prized by individuals since the crisis. Art as an asset class, however, has a very specific profile. The risk, liquidity, as well as the tangibility and the pleasure linked to the possession/sale/transmission of artworks make them atypical assets. Buying a work of art is and must be first and foremost a matter of desire and pleasure, and thus also a question of choice. 147 147

148 Art & Finance Report 2017 | Section 2 - Art and wealth management survey Undoubtedly, the encounter between an art collector and a work of art—this moment out of time—is the first “revenue” that art can offer: an emotional revenue! In some cases, it may remain the buyer’s only reward. However, artistic assets are not always included in families’ overall wealth management strategies. Whether a collection stems from personal passion or is the result of an inheritance, it is an area that often remains “outside the scope” of advice. Art and collectibles have a unique role to play in the increasingly precise and complex structures used to organize the asset portfolio of wealthy individuals. More than ever, wealth managers must seek a 360° view of their clients’ assets to provide them with complete and relevant advice as part of a truly tailored service. They will thus be able to inform and assist art owners in dynamically managing their collections as patrimonial assets to: • Anticipate and plan for certain problems related to family matters, such as inheritance planning, divorce, moving, change of country of residence, etc.; • Conduct arbitrage, with a view on tax planning, project financing, or “good governance”, taking advantage of any market opportunities, changing trends or price fluctuations; • Protect and, in certain cases, monetize these assets; • Ensure the preservation of all or part of the collections across generations, where necessary. This rather rational and economic approach of art as part of a family wealth does not diminish the initial quest for pleasure and meaning that inspires many art collectors. It is, on the contrary, a complementary approach, as many countries have specific tax laws in relation to art, which may prove beneficial. HIGH TEA III © YINK A SHONIBARE MBE (2015), 148 PHOTOGRAPHER: JONATHAN BASSETT

149 Art & Finance Report 2017 | Section 2 - Art and wealth management survey • What are the objectives of the Here are several typical questions that More than ever, next generation concerning these could help wealth managers to understand, artworks? in the first instance, the history and the wealth managers – What is the level of interest, characteristics of a specific art collection: attachment, and involvement of the must seek a 360° next generation? How and when was this art collection • amassed? view of their clients’ Each of these questions can rise more or – Is it through personal purchases less significant and often complex legal (artworks acquired proactively), or assets to provide and tax considerations regarding the art from a legacy (artworks inherited/ collector’s country of residence. Take the owned passively)? In the latter case: them with complete example of the tax considerations involved does the client have a strong emotional in the resale of a work of art. For many art connection to the artworks? Does the and relevant advice collectors, it is often necessary to resell client have precise/approximate/non- artworks in order to continue to make existent knowledge of the value of the as part of a truly further purchases. In other cases, reselling works and their history? works is motivated by changes in the art – Is the client a new or a seasoned art tailored service. collector’s taste or a direction change in collector? his collection focus. Gains on the resale – Has there already been any resale of From why to how of artworks are exempt from tax when particular works? Is the collection still If the answer to the question “why” include achieved in a private wealth management growing or is it stable? art in a family wealth management strategy context in Belgium, Italy, Singapore, and seems obvious, then the question “how” Hong Kong. In Luxembourg and Germany, • What are the objectives and has no single solution. however, the exemption only applies at expectations in relation to the art the end of a short holding time, from six collection? What is the objective value of the months to one year. A French tax resident – Is personal enjoyment paramount, or artworks owned? Answering to this first may either be charged to a flat rate of do financial considerations or a desire issue is a necessary step to begin with 6.5 percent on the full resale price for for asset diversification come into play? in any wealth management plan, putting any artworks sold in excess of €5,000, or And to what extend? numbers to models and thus enabling alternatively, opt for the standard form – Collection versus decoration: does the possible arbitrage. Listing, appraising, of capital gains tax (34.5 percent on a collection contain a limited number of and estimating are the fundamental basis equal to the difference between target acquisitions, e.g., to decorate an prerequisites involved in managing an art the resale price and the acquisition price indoor space (the notion of lifestyle and collection from a patrimonial perspective. with a 5% discount per year of holding works of art to mark success and social The frequent valuations of artistic assets beyond the second year). There is status), or is it the result of a process made by established art professionals, therefore a full exemption after 22 years of befitting a passionate art collector? as the valuation of a stock portfolio, are ownership. This two-option system is still – Does the client have any aspiration necessary in order to have a consolidated advantageous, nevertheless, compared regarding the preservation of the and dynamic assessment of their value. to Spanish, US, or UK taxation schemes. art collection and, if so, should this A case-by-case analysis is therefore be achieved through inheritance or 77 Moreover, collectors have different necessary. patronage or through philanthropic practices, tastes, and ways of research. activities (donations to museums or They also have diverse objectives, and charitable organizations, the creation these undoubtedly change over the lifetime of a family foundation, etc.)? of a collection as it takes time and practice to develop what can be called a “good eye.” It is therefore just as important for wealth management professionals to identify their For a complete analysis of comparative law on the 77 international taxation of art, please see the feature clients’ or prospects’ motivations and their article appearing in the Journal des Arts, n°479, pages objectives relating to art. 36 to 39 HIGH TEA III © YINK A SHONIBARE MBE (2015), 149 149 PHOTOGRAPHER: JONATHAN BASSETT

150 Art & Finance Report 2017 | Section 2 - Art and wealth management survey The very structure of certain art collections The desire to may also complicate their transmission. This is the case, for example, of collections collect art is made of a very large number of items, especially when the inheritors are unable not necessarily or unwilling to keep such a volume of pieces. It is also the case for art collections passed down that are imbalanced in value: for example, when a single painting accounts for a large from generation to proportion of the total value of the whole collection, making any credible sharing generation. impossible or awkward. It may sometimes Finally, there are significant differences in inheritance taxes from country to country. be effectively In many cases, a combination of solutions will ultimately be chosen: some artworks transmitted but may be kept by the heirs, while others will be sold and others donated. Estate only crystallize in a planning relating to art is thus becoming increasingly relevant. On one side, single inheritor or appropriate legal and tax assistance is needed. On the other side, art market within a different professionals can advise on the value and level of liquidity of the works, and design artistic discipline. an appropriate sale strategy tailored to their typology, answering to the family’s constraints and objectives. All of this Ars longa, vita brevis must be carried out meticulously, without However, the pivotal moment in the life rushing, in order not to make decisions in of any art collection is undoubtedly the haste. time of its transmission. Anticipating this transition is fundamental. When it comes to the transmission of an art collection, if wealth managers/advisors and Contrary to popular wisdom, the creation art-market specialists work hand in hand, of a collection is often an adventure started it will undoubtedly provide added value to by an individual, sometimes a couple and the art collector and his family, creating the more rarely a full family. The desire to conditions of true legal security, optimal collect art is not necessarily passed down tax management, and maximized economic from generation to generation. It may results, while preserving a degree of sometimes be effectively transmitted but serenity in decision making and familial only crystallize in a single inheritor or within peace as much as possible. a different artistic discipline. Nonetheless, tastes and lifestyles change, not to mention Building bridges and strengthening the growing international dispersion the collaboration between the wealth of children and potential unequal levels management and the art market of wealth. communities seems more necessary than ever, with the legal, tax, and financial For families, art and collectibles are often a expertise of the former complementing very emotional asset class. It might be that the artistic knowledge and the command an art collection requires more time and of the market, its prices and trends of a psychological understanding, that the the latter, for the greatest final benefit other assets categories may not need. of art collectors. This is surely a win-win combination. 150

151 Art & Finance Report 2017 | Section 2 - Art and wealth management survey | Section 2 - Art and wealth management survey Art & Finance Report 2017 Contrary to popular wisdom, the creation of a collection is often an adventure started by an individual, sometimes a couple and more rarely a full family. 151 151 151 151

152 Art & Finance Report 2017 | Section 3 - Art-secured lending 152

153 Art & Finance Report 2017 | Section 3 - Art-secured lending Section 3 Art-secured lending EMANCIPATED WOMAN © YINK A SHONIBARE MBE (2015), PHOTOGRAPHER: STEPHEN WHITE 153

154 Art & Finance Report 2017 | Section 3 - Art-secured lending HIGHLIGHTS Risk management a key challenge: • Issues around risk management, liquidity, • US art-secured lending market grows valuation, and regulation remain key The an estimated 13.3 percent: challenges for the future growth of this art-secured lending market in the US market. reached an estimated US$17-20 billion in 2017, which represents a 13.3 percent New developments in the European • growth from 2016. art-secured lending industry: New products have recently come to the Two thirds of wealth managers • market, permitting lending transactions surveyed say their institutions offer using high-quality artworks transferred art-secured lending services: The as collateral without taking physical art-secured lending market in the US possession of the artworks. These new has grown at a relatively consistent rate, art financing methods could be a game- attributable to a persistently attractive changer for the European art-secured market, and increasing comfort from art lending market. collectors and lenders alike. In this year’s survey, 67 percent of wealth managers Art-secured lending providers call for • said their institution now offered art- more regulation: The lack of a regulated secured lending services (slightly lower framework around the way art is bought than the 69 percent seen in 2016, but up and sold, the lack of central title registry, from 48 percent in 2014). and issues regarding provenance are currently restricting the art-secured New accounting requirements for • lending market, according to Borro. They New accounting art-secured lending: suggest that regulation would create new requirements stipulate that provisions to expand and democratize opportunities for credit losses will no longer have to be the art market—and banks and wealth recorded with an incurred loss model, managers would be able to put their but rather with an expected loss model. full weight into the market, which is This will have significant implications for something they are simply unable to do risk models and risk management with now. regards to art-secured lending. Art-secured lending may be viewed as an effective way to enable art collectors to access the equity value in their artworks without having to sell them. 154

155 | Section 3 - Art-secured lending Art & Finance Report 2017 Art-secured lending may be viewed as an effective way to enable art collectors to The US has taken access the equity value in their artworks without having to sell them. Art-secured lending makes it possible to reinvest their the lead in the capital in the form of new art acquisitions or attractive business opportunities, or to refinance existing loans. international The US has taken the lead in the international development of art-secured lending, taking advantage of the favorable development of art- legal environment provided by the Uniform Commercial Code (UCC), tax provisions, and also a different attitude toward the secured lending, financial aspect of collecting art. The UCC allows the art collector to keep possession of the artworks while the loan is still taking advantage of outstanding—a strong attraction for most borrowers. However, as outlined in the 2016 edition of the Art & Finance Report, the favorable legal the situation in Europe is quite different, where banks and specialist lenders often have no choice but to take possession environment provided of the collateral in order to perfect their security interest. With several European 78 having introduced a register countries 79 and with of charges against chattels, by the Uniform 80 entering the new insurance products market, one would anticipate the European art-secured lending industry to start Commercial Code catching up with its US counterpart. In this section, we continue to monitor the wealth management community, art professionals, (UCC), tax provisions, and collectors in terms of their attitudes and actions toward art-secured lending. and also a different attitude towards the financial aspect of 78 France introduced a register of pledges over chattels in 2006, and Belgium has followed a similar model. Spain allows pledges without dispossession but these collecting art. must be registered in the Spanish register for moveable property (Registro de bienes muebles) 79 The word “chattel” is a legal term meaning an item of tangible, movable property—something you can both touch and move. Your personal possessions will normally be chattels, such as household furniture, paintings, antiques, items of crockery and china, plate and silverware, motor cars and motorcycles, etc. 80 These products are variously known as collateralized art lenders’ insurance or art-lending fidelity insurance. Insurers and insurance brokers who have announced products include Hiscox, Willis, and RT WP Longreach in the UK. US-based company Aris specializes in defec - tive title insurance for artworks. 155

156 Art & Finance Report 2017 | Section 3 - Art-secured lending EXPERT OPINION Art-secured lending A U.S. market update Phillip Ashley Klein We currently estimate the overall outstanding value of U.S Art & Finance art-secured loans to be US$17 – US$20 billion, which Coordinator Deloitte Consulting represents a 13.3 percent growth from 2016. We have LLP seen consistent growth over the past year, and the market’s size now well exceeds the lower end of our revised 2016 estimate. Persistently attractive conditions have aided this expansion, making this an opportune time to highlight important industry developments on both the demand and supply sides of the equation. Lenders are more comfortable lending unlock for other investments. Additionally, credit is commonly used to unlock capital Private banks traditionally against art. an important growth driver is the provision from this tangible trove and pay down provided the service as an accommodation of credit facilities by lenders to those draconian estate taxes.” Applying these for wealthy clients, but they have rapidly collectors (including third party guarantors) strategies is a mixture of: 1) those who moved up the experience curve in art seeking the big ticket items at auction. did not buy their art for financial benefits, market understanding, underwriting, These collectors range from purely profit- but who now suddenly see it as an estate and risk management. Although private driven hedge funds to avid collectors planning arbitrage play, and 2) a more banks dominate the market, boutique emulating those hedge funds through market-driven segment, many of whom are lenders—both existing players and new application of this available capital. career finance professionals that see art as market entrants—are growing at an a natural progression in investment. When increasing rate. Many of these boutiques Art collectors are increasingly there is a need for liquidity, we often see are applying data methodologies in the sophisticated in employing their collectors favor unlocking capital through lending process to better understand and art. Our Deloitte Art & Finance Survey credit versus sale, driven by the perceived manage risk. Interestingly, since our 2016 has shown over the years that collectors complexities of the consignment process analysis where loan-to-value (LTV) rarely increasingly view their art with an eye and the uncertainty of auction results. surpassed 50 percent, we now observe on investment. This cultural shift is a set of private banks offering up to 55 congruent with the rapid expansion and percent, with one boutique lender offering professionalization of the art market more as much as 70 percent LTV. As lenders broadly. We see collectors increasingly become increasingly comfortable, with using structured credit vehicles as a monetary defaults few and far between, component of overall estate planning higher LTV has become an important strategy. Evan Beard, National Art Executive competitive attraction for collectors who with US Trust Bank of America Private seek to maximize the capital they can Wealth Management noted, “Structured 156

157 | Section 3 - Art-secured lending Art & Finance Report 2017 | Section 3 - Art-secured lending Art & Finance Report 2017 Collectors are increasingly sophisticated in employing their art. Lenders are more comfortable lending against art. 157 157

158 Art & Finance Report 2017 | Section 3 - Art-secured lending STEPHEN WHITE BALLERINA WITH VIOLIN (GISELLE) © YINK A SHONIBARE MBE (2013), PHOTOGRAPHER: Recent non-US initiatives Fine Art Group: In October 2016, the Fine PassionProtect® PassionProtect®: In China, Bank of Weifang established Art Group (UK) launched a new art loan positions itself as a privileged partner to its art finance department in 2013. Since operation called Fine Art Financial Services wealth managers, family offices, and private its inception, the pledge financing business (FAFS). It will be using its own invested banks, enabling them to offer innovative in respect of art has progressed on a equity capital, and rely on its in-house team and differentiating solutions using their regular basis with standardization and of art experts. The company offers up to clients’ passion assets. scale development. The types of art they 50 percent of the value of the assets on a accepted range from calligraphy and single artwork or group of artworks valued Based on a Luxembourg securitization painting to jewelry, jade, and porcelain. from US$250,000 to US$20 million. Loans platform, PassionProtect® enhances Meanwhile, Bank of Weifang has its own are available with maturities ranging from collectors’ liquidity through Art Secured warehouse through which it provides an three months to three years. The type of Financing while providing investors with optimal art storage service and contributes collateral considered for a loan includes a new standardized alternative asset to the development of art storage artworks dating from 1400 to present day class: PassionBonds. This new asset class across the whole society. Besides this, from all major auction categories, and high- allows qualified and institutional investors they also provide art curation and artist value jewelry. The collateral will be stored to diversify their investments, using an recommendations, thereby extending the in one of the specialist storage facilities in asset backed fixed-income instrument in service chain of art finance. A Chinese art London, Geneva, New York, Hong Kong, or a standard bond format with limited risk finance database has been established Singapore. while offering a competitive return. based on China’s Art & Finance magazine. Most recently, the bank has established a In June 2017, Griffin Art Partners: Privatbank Berlin 1929 AG has chain of services, including art financing, Griffin Art Partners, a Luxembourg-based developed an insurance and legal solution art storage, artist recommendations and securitization platform designed to that permits lending transactions using curation, and research studies covering Art provide non-recourse loans collateralized high-quality artworks transferred by & Finance among other topics. According by works of fine art, announced its new way of collateral without taking physical to the latest update in 2017, the Bank of lending platform. Griffin has appointed possession of the artworks as a pledge. Weifang has provided more than 300 LINK Management as its investment and page 162 to read an article on recent See clients with art lending worth over CNY 6 collateral adviser and REYL Private Office developments in this regard. billion. (Luxembourg) as its administrative agent. Griffin Art Partners is based in Luxembourg and aims to become one of the leading independent art lenders in Europe by offering a competitive and flexible non- recourse financing solution. 158

159 Art & Finance Report 2017 | Section 3 - Art-secured lending Survey findings Fig. 21 What do you feel is the main hurdle for providing Art Lending/Art as a collateral to the banks current clients? Figure 40. What do you feel is the main hurdle for providing Art Lending/Art as collateral to the bank's current clients? 71% 70% Difficult to assess the risk 69% 83% 78% 73% 67% Lack of liquidity 81% 83% 78% 63% 60% Due diligence 54% 77% 67% 73% 2017 71% Valuation – lack of mark-to-market valuation 78% 77% 2016 78% 2014 71% 64% Unregulated market 58% 2012 70% 67% 2011 44% 41% Legal aspects 46% 63% 39% 29% 29% Secure Storage 38% 60% 28% 66% 59% Lack of knowledge about the art market 56% 60% 78% 10% 70% 90% 80% 20% 30% 40% 50% 60% 0% Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 Private banks are building up in-house of the risks associated with particular biggest hurdle. A further 71 percent said art-secured lending capabilities: aspects of art-secured lending. However, that the challenges around assessing Among the wealth managers who three quarters of the stakeholders risk was among the biggest hurdles actively offer art-related services, 67 surveyed still rank valuation, difficulties when it came to offering this service percent said they provided art-lending in assessing risk, and liquidity in the (up slightly from 70 percent in 2016). and art-financing services (slightly down art market as the main challenges for In an interview with Ben Williams from from 69 percent in 2016). By type of providing art-secured lending. (page 160), he highlights that JP Morgan wealth manager, 70 percent of private the biggest risk in art-secured lending banks and 55 percent of family offices Increasing concern about liquidity is valuation variability, as valuation said they offered art-secured lending risk: The issue of liquidity remains an transparency and consistency are key services. In the case of family offices, 67 increasing concern among 73 percent of factors when providing loans. Claire percent of these services were provided wealth managers (up from 67 percent Hillier from Borro also indicates the through third parties, while 63 percent in 2016). A more challenging art market need for more regulation to support the of private banks said they offered this climate in 2016, with a significant drop development of the art-secured lending service in-house (up from 52 percent in in global auction sales, could have market Further issues around (page 168). 2016). contributed to this concern. valuation and risk management, and also new accounting requirements where This trend could imply that private Risk management and a lack of mark- provisions for credit losses will no longer banks have increased their capacity to-market valuation are worrying have to be recorded with an incurred and willingness to provide art-secured wealth managers: loss model, but rather with an expected lending services in the last 18 months. As in 2016, valuation and risk loss model, will be discussed by Adrien assessment issues remain among the Chiarelllo (page 164). Challenges related to art-secured biggest hurdles standing in the way of lending art-secured lending. 73 percent of wealth In the six years since this report was managers in 2017 (up from 71 percent in first produced, we have noticed a 2016) considered valuation and the lack small improvement in the perception of mark-to-market valuations to be the 159

160 | Section 3 - Art-secured lending Art & Finance Report 2017 Art & Finance Report 2017 | Section 3 - Art-secured lending Art-secured lending By Victoria Kisseleva Assistant Director Financial Advisory Deloitte UK Art & Finance Coordinator Deloitte LLP (UK) How long has J.P. Morgan been lending against art? We have been providing art-secured lending to clients for more than 10 years. INTERVIEW WITH Have you noticed increased demand for liquidity using art as collateral among your clients in the last few years? Ben Williams There is no question that as our clients’ financing needs have grown in sophistication, we have developed our Managing Director, Head product range accordingly. We endeavor to understand our clients’ balance of Lending Solutions in sheet holistically to better manage and the UK & Nordics for J.P. grow their wealth. Art-secured lending has steadily gained in importance as Morgan Private Bank a solution to help meet clients’ needs. The professionalization of art-market support services has helped improve transparency, which is beneficial for art- secured lending. 160 160

161 | Section 3 - Art-secured lending Art & Finance Report 2017 | Section 3 - Art-secured lending Art & Finance Report 2017 Are there any particular art periods What do you see as the biggest risk you feel most comfortable lending when providing art-secured lending to against? your clients? We lend against a variety of periods The biggest risk in art-secured lending and have no particular affinity for any is valuation variability. Since valuation single era or style. The key variables transparency and consistency are key when providing a loan include the factors when providing loans, we rely number of pieces, their value, and on the knowledge of experts to assess diversification. One of our largest loans the value of a client’s art. However, even was against an Old Masters collection. the best experts are frequently obliged Some contemporary artists have good to value individual artworks within a characteristics (Gerhard Richter, for range. Additionally, while price certainty example) and we will happily lend is a function of liquidity, we do not against them. control the liquidity of the art market. On the other hand, transparency and How has J.P. Morgan’s corporate art provenance are less of a concern when collection evolved? pieces can be associated with a clear David Rockefeller initially amassed history and central registers. There has the collection in the late 1950s, 1960s, recently been a series of high-profile and 1970s, during a time of corporate cases in which auction houses have had extravagance when such practices were to refund buyers for fraudulent pieces. becoming increasingly common. Firms The fact that more instances of this are can now sometimes see amassing a entering the public arena suggests we corporate art collection as indulgent are moving toward a healthier, more in these times of austerity, and some transparent art market. Are you happy to hold the debt on your have sold their art collections since the balance sheet or do you prefer to use financial crisis. We are proud to have Have you ever had to take possession third-party providers to meet your been able to continuously build our of a client’s collection? clients’ needs? art collection over nearly 60 years with Never to date. We structure our loans Given the overall strength of our interesting, up-and-coming artists, and very conservatively—not because we balance sheet, we do not syndicate the to have filled the gaps in the current have to, but because we choose to. debts of private clients. Instead, we collection. American folk art and Our conservative risk appetite typically hold debt on our balance sheet with no photography, for example, are more matches the risk appetite of our clients internal cap allocated for art-secured relevant to us today than Old Masters. and their needs. Our holistic approach lending and no maximum loan size. to managing client relationships means Our clients’ appetite typically reaches we have a fiduciary responsibility to a cap before we encounter budget care for the health of our clients’ overall restrictions. As long as the art collateral balance sheets, even when providing is diversified and high quality, the client loan financing. has a strong balance sheet, and the loan complies with our risk policy, we are in a position to lend. 161 161

162 | Section 3 - Art-secured lending Art & Finance Report 2017 EXPERT OPINION The ease of art lending Shirin Kranz European borrowers can Head of Art Lending Privatbank Berlin v. 1929 AG now retain possession of collateralized works In response to A pledged Dan Flavin in overwhelming client the hallway, a pledged Lisa demand, Privatbank Berlin Genzken in the dressing v. 1929 AG has taken on room, a pledged Andy the challenge of bringing Warhol in the gallery—until art-secured lending up now, this was only possible to its full potential in in the USA; in Europe, the Europe. Artworks loaned beautiful collateralized as collateral can now artworks had to languish in remain in the borrower’s storage. possession, and as a result there is greater flexibility for art collectors and gallerists who reap the many benefits this kind of brings. financing 162

163 | Section 3 - Art-secured lending Art & Finance Report 2017 Art lending allows art collectors and gallerists to realize liquidity without having Art lending allows to make unfavorable sales to satisfy short- term cash-flow concerns. Through this form of bridge financing, collections can art collectors and be expanded and investment returns can be optimized through leverage effects. The loans are non-recourse, exclusively secured gallerists to realize by high-quality artworks; the borrower does not assume liability other than legal title in the artworks and their authenticity. Possible risks such as embezzlement, theft liquidity without or damage are covered by insurance. Two leading art lending markets have having to make prevailed over the last few years: firstly, the US market, which is dominated by major banks and auction houses, and secondly unfavorable sales to the European market, primarily served by specialized providers of art financing. The basic principle is the same. However, satisfy short-term the difference so far has been that the US art lending market can use the artworks as security regardless of where they are cash-flow concerns. located so that the works may remain in the possession of the borrowers. Not so in Europe: owing to the different legislative regimes, gallerists or art collectors have needed to relinquish be made available to clients worldwide; must be treated individually with a physical possession of the artworks that initial international client cases have proven tailored solution considering customer served as collateral and the lender would to be a success. requirements and the respective legal then store them in the warehouse of a fine situation. art shipper and packer. There were some This new art financing method will be a exceptions to this, for example in the UK game changer for the European art lending Expert knowledge in all areas is essential, artworks could at least be displayed at loan market and will surely lead to considerable along with trustworthy and long-term exhibitions in a non-commercial context. growth. client relationships and balanced risk Art lenders have been working on a management. The offering of Privatbank solution for a long time to create a balance The advantages are obvious: borrowers Berlin includes fixed and variable loans between competitive advantage and risk do not have to part with any artworks and credit facilities, from €500,000 to management. from their collection, gallery owners can more than €20 million. Loans are secured still choose collateralized items from their by high-quality works of renowned Privatbank Berlin v. 1929 AG has taken inventory for art fairs and investors can contemporary artists. The loan to value up this challenge and has developed an showcase their works of art in international ratio is usually around 40 percent and the insurance and legal solution that permits exhibitions, which will increase the value of terms range from six months to five years. lending transactions using high-quality the pieces. Furthermore, fragile works and artworks transferred by way of collateral bulky sculptures are no longer exposed to In summary, the nascent market for art- without taking physical possession of risky transportation and can remain in situ. secured lending is growing steadily and the artworks as a pledge. In contrast to meeting the demands of the art market for the UCC Filing in the USA and the chattel Art-secured lending will never be a mass professional financing. Clients can now use mortgage in the UK, this set-up does market product. The individual financing this leverage and are still able to enjoy their not require entry into a public register needs of each borrower will always be Dan Flavin or Andy Warhol at home or in for transactions outside of the United different, and of course their collections will the gallery. States and the United Kingdom. Based on all be unique; art lending is therefore not thorough legal processes, the offering can a standardized process. Each transaction 163

164 Art & Finance Report 2017 | Section 3 - Art-secured lending EXPERT OPINION The relevance of risk assessment in art- secured lending Adrien Chiariello Senior Consultant Deloitte Luxembourg Why assess risk in the context of art- When it comes to risks, art-secured lending secured lending essentially entails a wide array of risks that Recent data has shown that art-secured may be categorized into financial risks, in lending has been gaining in prominence in common with any other regular lending the art world. In fact, it is safe to say that activity; and operational risks associated it offers synergies with common lending with the underlying collateral, in common activities that could lead to economies of with any other transaction on the art scale. In this context, newcomers (even market. With this observation in mind, it is those without clear links to the art industry) essential for art-secured lenders to have can attempt to enter this niche market access to the data they need in order to and win over UHNWI clients seeking to use monitor their risks. For instance, the level their artwork as collateral when borrowing of concentration in a specific style of art or funds, provided that such companies have artist may be a key factor in the decision- the right amount of expertise. While the making process. activity is becoming increasingly attractive, 71 percent of wealth managers in 2017 considered the difficulty inherent in assessing risk as a hurdle to providing art- secured lending to their clients. Recently issued standards all stress the need for lenders to assess future credit risk, rather than focus exclusively on a specific past fact pattern. 164

165 Art & Finance Report 2017 | Section 3 - Art-secured lending When best practices meet accounting These two accounting standards essentially requirements share the same philosophy: provisions Recently issued standards all stress the for credit losses will no longer have to be need for lenders to assess future credit recorded with an incurred loss model, risk, rather than focus exclusively on a but rather with an expected loss model. specific past fact pattern. In other words, the prominence of what On one hand, the Financial Accounting is likely to happen to the borrower will be Standards Board (FASB) issued the as important, if not more important than “Accounting Standards Update (ASU) what has happened. As the standards are 2016-13, Financial Instruments – Credit applied in future, lenders will have to book Losses (Topic 326),” on 16 June 2016, which a provision for expected credit loss (ECL) will be effective for all entities reporting right from the loan inception, based on loss in US GAAP issuing after 15 December expectations for the coming 12 months 2021 (application for public entities will be (stage 1). This period extends to the lifetime effective from 15 December 2019). On the of the loan if a significant increase in credit 81 This other hand, the International Accounting risk arises (stage 2); see Figure 41. concept is key, as the profit and loss impact Standards Board (IASB) issued “IFRS 9 of a 12-month ECL, versus a contract- Financial Instruments,” on 24 July 2014, lifetime-ECL could be dramatically different. which will enter into force for annual periods beginning on or after 1 January 2018. Impairment–staging Figure 41. Change in credit risk and impact on the loss allowance Change in credit risk since initial recognition Significant Objective STAGE 2 STAGE 3 increase in evidence for STAGE 1 i o Ini t gn n t i a l rec o i credit risk? impairment? Lifetime expected Lifetime expected 12-month expected Loss allowance credit losses credit losses credit loss Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 81 The last stage (3) will occur in the event of a greater increase in credit risk and will imply interest revenue to be calculated on the net carrying amount of the asset (i.e., the value of the asset, less the ECL). 165

166 Art & Finance Report 2017 | Section 3 - Art-secured lending Challenges and applications Under both standards, when determining • The application of these standards brings the ECL, the fair value of the collateral its own set of challenges: reducing the projected loss needs to reflect the future value of the collateral • The ECL calculation must account for but also consider the impact of the forward-looking information about both cost of sales of the collateral (if used for the borrower and the collateral, which Figure 42. repayment); see Additionally, is not always easily available on the art the standards will also affect full-recourse market. and non-recourse loans. In the context of • The concept of a significant increase in a full-recourse loan, this implies a much credit risk, which triggers the extension more complex and diverse forward- of the length used for the ECL calculation, looking valuation. implies not only setting a threshold The standards also allow for the • measuring its significance, but also determination of the parameters of careful monitoring of forward-looking the ECL model and the thresholds for information to foresee this increase. significant credit risk increases, for a Therefore, to achieve consistency pool of loans sharing the same risk between ECL measurement and the characteristics. In essence, a portfolio assessment of significant increases in could then be split between homogenous credit risks, the same reasonable and populations, for the ECL to then be supportable forward-looking information calibrated using internal or market should be taken into consideration, data pertaining to such a homogenous where relevant. population only. In some cases, such tasks could become a tedious datamining process. The Impairment model–staging Figure 42. The introduction of three “stages” in creditworthiness of the various positions has an impact on the modelling and related ECL provisioning Loss allowance can t Signi fi lt Defau Full increas e in credit risk d or p as t due* > 90 ECL imp ai rme nt d or p as t due* > 30 exposure m imu Max EAD to l osses ral ect of c ollate ff E (less costs of obtai ning LGD an d s elling) m imu exposure Max ral to l osses considering collate Lifetime ECL Cli e ff ect of ff switc hing to lifeti me expecte d l osses 12 month ECL one Day expecte d Stage 1 Stage 3 Stage 2 losses in g Under - perf orm Non - perf orm in g Perf orm in g PD terioration in credit quality De ve issues ti * actual past due related to solvency issues, not related to technical or administra comparing to initial recognition EAD = exposure at default ECL = expected credit loss LGD = loss given default PD = probability of default Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 166

167 Art & Finance Report 2017 | Section 3 - Art-secured lending In this journey toward risk assessment, Deloitte has designed an art-secured lending dashboard, providing useful analytics regarding the content of the loan portfolio. Wisely used, it could ease the process of classifying loans into homogenous buckets. Such a tool could fully leverage market data on specific artists or artworks in the form of forward-looking information. Hence, this dashboard could outline the following interesting characteristics: When aiming for the standardization of In this journey toward risk assessment, this proof-of-concept, along with other techniques deployed risk assessment, on a transactional level, and leveraging 82 could be valuable to decision algorithms Deloitte has designed makers in the art world, but also to newcomers seeking guidance. Major an art-secured lending players in the art market have already recognized the rising appeal of big data in dashboard, providing the art market, and thus, such concepts, coupled with the right set of data, could useful analytics make it an even more powerful tool from a risk management and industry regarding the content of development standpoint. the loan portfolio. Special thanks to Monica Carabajal Zamora, Capital Markets Manager, and her team, as well as Jean-Philippe Peters, Risk Advisory Partner at Deloitte Luxembourg, for their dedicated work and advice on this project. 82 Mitigating risk in the art market – Laura Patten and Borna Emami (page 260). 167

168 Art & Finance Report 2017 | Section 3 - Art-secured lending EXPERT OPINION Risk in the Claire Hillier Managing Director - Global Originations art market Borro Art valuation methods at Borro have over 100 years’ collective experience Borro has valued over 60,000 assets with the likes of Bonham’s across a variety overall since launching in 2009. While we of assets. Their tailored expertise and always aim to lend as much as possible to opinions on likely movements for specific our clients, as a company we must ensure artists, genres, media, and the art market that individual assets can be sold on the overall, together with the data, ultimately secondary market if clients cannot repay help to determine pricing and the adequate their loans. Therefore, the correct valuation provenance for each particular asset. is critical and there is significant risk around provenance as well as pricing. Our valuers perform rigorous online and offline processes to identify fraudulent or Each asset we value must have the stolen paintings, including online registry appropriate provenance to protect us checks, examining provenance, and, of against forgery or ownership disputes. course, examing the piece itself. These Without this, the asset almost becomes practical inspections are critical—our worthless—we would be unable to sell it specialists in New York once realized a and recover what is owed. piece was a forgery after analyzing the materials used. The materials were found To mitigate this risk, we value assets using to include newspapers dated after the year a combination of personal knowledge the piece was said to have been produced. and data insight—a method that offers 88 percent accuracy based on asset It is important to remember that sale prices, a percentage that compares provenance will not be similar for all artists. favorably to auction houses. It could take the form of certification from a foundation (e.g., the Warhol foundation), Our data insight draws upon a historical inclusion in a catalogue raisonée, or view of liquidity and price trends from purchase receipts from an auction house. millions of auction sale records. This data is All help trace the piece from the artist to then considered by our expert valuers, who the current owner. 168

169 Art & Finance Report 2017 | Section 3 - Art-secured lending REVOLUTION KID (FOX) © YINK A SHONIBARE MBE (2012), PHOTOGRAPHER: STEPHEN WHITE 169

170 | Section 3 - Art-secured lending Art & Finance Report 2017 The art market needs to adapt to show A classic example of the lack of true value Many of these issues are rooted in a true valuations in the art market is Damien Hirst’s For the lack of regulation Although we are pleased to see that the Love of God—a piece that was put up for Currently, there is no regulated, structured days of price fixing are over, problems sale at £50 million. With a lack of buyers way to buy or sell art, or declare ownership with art auctions persist. Two particular willing to buy at that price, the artist bought or transferal of ownership, and provenance difficulties driving mistrust, both among it himself, claiming that a third of the work remains a highly subjective matter. There buyers and artists themselves, are private had been sold to private investors. This is still no set definition or standard for deals made on works sold at auction raises the question—can a piece truly be what makes up “good provenance” and and estimates that are made for the worth £50 million if the artist bought it this is often assessed through a random sole purpose of driving prices up and himself? assortment of documents, photographs, encouraging bidding activity. For the buyer and other source materials that collectively especially, it is difficult to recognize a good In addition to valuation discrepancies, allow the history of an artwork to be pieced deal, or whether, in fact, the artwork has private sales make tracing provenance together. It is therefore easy to understand achieved its true value. more complicated, and high-value pieces, how those who are not heavily involved in such as those by Jackson Pollock, are often the market have difficulty understanding a Looking at private sales specifically, there the subject of disputes. Art foundations piece’s true value. is confusion due to a lack of transparency can also refute or refuse to recognize sales and regulation. The Alfred Taubman sale as the sale of authentic works by an artist. At Borro, we strongly believe that defining demonstrated this perfectly, whereby An clear example is the 2014 case against “good provenance” and introducing Sotheby’s sales figures were below the the Calder Foundation brought by Patrick additional regulation in this area is key to guarantee, although this was not overtly Cramer, which centered around a piece his mitigating the risk of forgery. The current mentioned. Subsequent private sales for father bought privately from the artist that lack of regulation is restricting the market other pieces achieved the expected value, the foundation said was only a fragment of and maximizing the need for specialists but this means there are a number of a larger work. who can truly appraise value. Even at pieces without a public record of their sales Borro, where our in-house valuers have price. considerable experience in auction houses, we have a supplementary network of 300 appraisers to help supplement and cross- check our valuations. Regulation would create new opportunities to expand and democratize the art market—banks and wealth managers would be able to put their full weight into the market, something they are simply unable to do now. In addition to tighter controls and definitions, we need to allow the market to expand technologically. There are significant opportunities to use new innovations in technology to provide more The current lack standardized procedures for valuations. The success of Artnet in digitizing art sales and knowledge is a step in the right of regulation is direction and yet, even then, correctly interpreting the data they make available requires significant knowledge. restricting the In order to grow and thrive, it is imperative the market becomes more accessible for market. those without an Art degree or years of experience in the market. To really do this, regulation needs to come from outside; self-regulation is likely not going to be enough unless the whole market can come together and agree on stringent standards. 170

171 | Section 3 - Art-secured lending Art & Finance Report 2017 | Section 3 - Art-secured lending Art & Finance Report 2017 At Borro, we strongly believe that defining “good provenance” and introducing additional regulation in this area is key to mitigating the risk of forgery. 171 171

172 Art & Finance Report 2017 | Section 4 - Art as an investment 172 172

173 Art & Finance Report 2017 | Section 4 - Art as an investment Section 4 Art as an investment BOY SIT TING BESIDE HIBISCUS FLOWER © YINK A SHONIBARE MBE (2015), PHOTOGRAPHER: THOMAS LIU 173

174 Art & Finance Report 2017 | Section 4 - Art as an investment HIGHLIGHTS The Chinese art fund industry • is declining because of tougher Art market returns have recovered • regulations: The decrease in the overall in the last 12 months: Six out of AUM in the art fund market since 2012 is seven artnet art price indices recorded largely due to the Chinese art fund and positive returns between April 2016 and art trust business winding down over April 2017, with impressionist art and the last four years. The estimated AUM contemporary art accounting for the for the Chinese art investment fund/ highest annual returns of 10.50 percent trust business has fallen from US$1.48 and 7.45 percent respectively. billion at the peak in 2012 to an estimated 85 in 2016, and US$373 million US$483 In terms of correlation across all asset million in the first half of 2017. classes, it is clear that safe haven art Art investment fund products remain • categories (impressionism and old Only 11 percent of a niche service: masters) are highly correlated with the wealth managers surveyed offer an safe haven asset types (bonds, real art investment fund product as part of estate), whereas riskier movements 86 (down from 18 their in-house offering (contemporary, Chinese art etc.) exhibit percent in 2016), however more banks greater correlation with riskier asset are able to offer art investment funds types (stocks, commodities). through a limited number of third- • The art fund market is struggling to party providers. However, in terms of gain momentum: The overall art fund art-related services, art fund products 83 in the first half of 2017 was market remain niche and this corresponds with conservatively estimated to be worth the limited growth in the number of 84 down from US$1.03 US$834 million, public art fund providers in recent years. billion in 2016 and US$1.2 billion in 2015. However, there are signs, particularly in Europe and the US, that new art investment funds are seeking to enter the market. 83 Measured in terms of assets under management (AUM). 84 A conservative estimate of US$461 million of this total is based on art investment funds in Europe and the US that reported their AUM. US$420 million of this is ac - counted for by the Fine Art Group. The Chinese art fund and art investment trust market was worth an estimated US$483 million in 2016, and an estimated $373 million in the first half of 2017 based on publicly available information. 85 This figure is based on conservative estimates about the size and maturity of different art investment trusts, drawing on information that was publicly available in July 2017. However, many Chinese trust companies are no longer marketing or publishing information about their art-related trust investment activities and it is not possible to know whether these funds have been wound up early or are still active. Our estimates are based on the limited publicly available information as of July 2017, and it is likely that our numbers are underestimated as many art investment vehicles are not official investment vehicles. 86 We believe this finding could be a matter of definition of what is considered in-house vs. third party services. Very few banks to our knowledge offer art investment products that are originated in-house, and we believe these findings also reflect the fact that several wealth managers offer the opportunity for their clients to invest in art through partnerships with existing art fund providers. We do believe respondents may consider these products as an in-house offering, although they are delivered by external third-party providers. 174 174

175 Art & Finance Report 2017 | Section 4 - Art as an investment Although art funds have struggled to gain a proper foothold among investors, few new art investment products are being developed to address many of the shortfalls associated with art investment funds, such as liquidity and price transparency. • Challenges around the art fund • Art funds remain a low priority for market remain the same: After tracking wealth managers: Only 13 percent of wealth managers’ attitudes toward wealth managers said they were likely to art investment funds for six years, the offer their clients such a service in the obstacles preventing the incorporation of coming 12 months, which makes this these products in a wealth management the art-related service wealth managers offering remain the same. viewed as the lowest priority. The global art investment fund industry’s 79 percent of Pre-investment process: • lack of critical mass and track record the wealth managers surveyed said that continues to undermine the credibility due diligence and assessing art funds’ of art investment products from the viability and credibility were among the perspective of wealth managers. main obstacles (up from 77 percent in 2016). This challenge is linked to other • New art investment products: aspects of the art fund industry and Although art funds have struggled to the art market, such as the lack of track gain a proper foothold among investors, record for art funds, and the unregulated few new art investment products are nature of the art market. being developed to address many of the shortfalls associated with art investment Post-investment monitoring: • funds, such as liquidity and price 85 percent of wealth managers cited transparency. Most of these efforts are the lack of mark-to-market valuation driven by technological innovation, and as a major challenge preventing the the adaption of existing technology, such incorporation of art into the wealth as blockchain. management offering (this was up from 77 percent in 2016). Securing an improved valuation framework using both historic and forward-looking price and valuation data combined with expert opinions should therefore be a priority. 175

176 Art & Finance Report 2017 | Section 4 - Art as an investment EXPERT OPINION The performance of the art market as a whole and among 87 collecting categories Fabian Bocart Vice President of Analytics artnet Yoage Wang Business Analyst In the global auction market, scarce Meanwhile, the sell-through rate increased artnet supply—18 percent fewer lots were to 66.8 percent in the first half of 2017 consigned year-over-year globally—led from 63.9 percent last year. The total sales to a drop in the quantity of works sold at volume in the first half of 2017 amounted auction, despite an increase in prices. The a 4.7 percent billion, experiencing to US$2.7 first half of 2017 saw the global auction increase as the contemporary market market increase in value to US$5.1 billion, pivoted towards higher-value lots. compared to US$4.7 billion in the first half of 2016. In the United States and Other collecting categories were not Europe, sales increased by 26 percent affected by the same trends. According to and 7 percent, respectively, thanks to artnet indices, the Modern Art market was significantly higher prices at auction fueled the only market to experience deflation by strong demand and weak supply. In Asia, in the first quarter of 2017—a global however, the total sales value decreased downward trend that began in 2015. As in by 18 percent in the first half of 2017 as previous years, prices for European Old compared to the same period last year, Masters remained stable across the board. as prices could not compensate for the 12 percent drop in supply. As a result, the Future growth in the art market will largely United States now has more than twice the depend on macroeconomic conditions. global market share of Asia. The first quarter of 2017 saw sluggish consumer spending in the United States, Contemporary art remained bullish around while the Federal Reserve scaled back its 87 Previous editions of the Art & Finance Report have used data and indices from Mei Moses. However, Mei Moses the world as prices increased by 20 percent quantitative easing program and pursued was acquired by Sotheby’s in October 2016. This year year-over-year. In the first half of 2017, rate hikes to meet its inflation target. As we have collaborated with artnet, and analyzed their new set of indices, developed by a team headed up by 47,052 lots sold out of the 70,473 offered a result, this may negatively affect asset Fabian Bocart, who was previously with Tutela Capital. at auction in this category, down from prices in the future, including those of art. More about the index methodology can be found in this paper: onlinelibrary.wiley.com/doi/10.1002/ 88,986 lots offered in the first half of 2016. 176 176

177 Art & Finance Report 2017 | Section 4 - Art as an investment Figure 43. artnet Price Index: European Old Masters 600 500 400 According to artnet 300 indices, the Modern 200 Art market was 100 the only market 0 to experience 1 Jul 03 1 Jul 08 1 Jul 13 1 Jan 01 1 Jan 06 1 Jan 11 1 Jan 16 1 Jun 01 1 Jun 06 1 Jun 11 1 Jun 16 1 Oct 04 1 Oct 09 1 Oct 14 1 Apr 02 1 Apr 07 1 Apr 12 1 Apr 17 1 Feb 03 1 Feb 08 1 Feb 13 1 Sep 02 1 Sep 07 1 Sep 12 1 Aug 05 1 Aug 10 1 Aug 15 1 Dec 03 1 Dec 08 1 Dec 13 1 Nov 01 1 Nov 06 1 Nov 11 1 Nov 16 1 Mar 05 1 Mar 10 1 Mar 15 1 May 04 1 May 09 1 May 14 Source : artnet deflation in the first artnet Price Index: Global Impressionist Art Figure 44. quarter of 2017—a 250 global downward 200 trend that began in 150 2015 . 100 Economic growth in Europe continues to 50 improve with GDP growth of 1.5 percent forecast for Germany. The political climate 0 has largely recovered after the shock of Brexit in 2016, and this rebound is an 1 Jul 03 1 Jul 08 1 Jul 13 1 Jan 01 1 Jan 06 1 Jan 11 1 Jan 16 1 Jun 01 1 Jun 06 1 Jun 11 1 Jun 16 1 Oct 04 1 Oct 09 1 Oct 14 1 Apr 02 1 Apr 07 1 Apr 12 1 Apr 17 1 Feb 03 1 Feb 08 1 Feb 13 1 Sep 02 1 Sep 07 1 Sep 12 1 Aug 05 1 Aug 10 1 Aug 15 1 Dec 03 1 Dec 08 1 Dec 13 1 Nov 01 1 Nov 06 1 Nov 11 1 Nov 16 1 Mar 05 1 Mar 10 1 Mar 15 1 May 04 1 May 09 1 May 14 important factor for stability in the art Source : artnet market as continental Europe is a net exporter of art. In Asia, China’s National artnet Price Indices: Modern Art Figure 45. Bureau of Statistics declared that the Global vs. European vs. American economy had maintained momentum from 250 the second half of last year, saying it was “getting off to a good start in 2017, and laying a solid foundation for accomplishing 200 the whole year growth target” of 6.5 percent. 150 100 50 0 1 Jul 12 1 Jul 09 1 Jul 10 1 Jul 11 1 Jul 03 1 Jul 13 1 Jul 14 1 Jul 15 1 Jul 16 1 Jul 04 1 Jul 05 1 Jul 06 1 Jul 02 1 Jul 08 1 Jul 01 1 Jul 07 1 Jan17 1 Jan 04 1 Jan 14 1 Jan 08 1 Jan 15 1 Jan 01 1 Jan 16 1 Jan 05 1 Jan 03 1 Jan 10 1 Jan 06 1 Jan 11 1 Jan 02 1 Jan 12 1 Jan 07 1 Jan 13 1 Jan 09 American European Global Source : artnet 177

178 Art & Finance Report 2017 | Section 4 - Art as an investment Figure 46. artnet Price Indices: Post-War Art Global vs. European vs. American Although 400 this analysis 350 300 documents 250 200 some variations 150 in performance 100 50 across the various 0 1 Jul 03 1 Jul 08 1 Jul 13 1 Jan 01 1 Jan 06 1 Jan 11 1 Jan 16 1 Jun 01 1 Jun 06 1 Jun 11 1 Jun 16 1 Oct 04 1 Oct 09 1 Oct 14 1 Apr 02 1 Apr 07 1 Apr 12 1 Apr 17 1 Feb 03 1 Feb 08 1 Feb 13 1 Sep 02 1 Sep 07 1 Sep 12 1 Aug 05 1 Aug 10 1 Aug 15 1 Dec 03 1 Dec 08 1 Dec 13 1 Nov 01 1 Nov 06 1 Nov 11 1 Nov 16 1 Mar 05 1 Mar 10 1 Mar 15 1 May 04 1 May 09 1 May 14 fine art collecting American European Global Source : artnet segments in artnet Price Indices: Contemporary Art Figure 47. Global vs. European vs. American the short term, 600 the long-term 500 400 performance over 300 a period of 15 200 years indicates 100 0 positive annual 1 Jul 09 1 Jul 01 1 Jul 03 1 Jul 02 1 Jul 04 1 Jul 16 1 Jul 05 1 Jul 15 1 Jul 06 1 Jul 14 1 Jul 07 1 Jul 13 1 Jul 08 1 Jul 12 1 Jul 11 1 Jul 10 1 Jan17 1 Jan 04 1 Jan 12 1 Jan 09 1 Jan 13 1 Jan 08 1 Jan 14 1 Jan 07 1 Jan 15 1 Jan 06 1 Jan 16 1 Jan 05 1 Jan 10 1 Jan 01 1 Jan 11 1 Jan 02 1 Jan 03 returns for all Global American European Source : artnet art price indices Figure 48. artnet Price Indices: Chinese Art Fine Chinese Paintings and Calligraphy vs. 20th-Century and Contemporary monitored in this 1000 900 report. 800 700 600 500 400 300 200 100 0 1 Jul 06 1 Jul 09 1 Jul 01 1 Jul 10 1 Jul 02 1 Jul 11 1 Jul 03 1 Jul 12 1 Jul 05 1 Jul 13 1 Jul 07 1 Jul 14 1 Jul 04 1 Jul 08 1 Jul 16 1 Jul 15 1 Jan17 1 Jan 05 1 Jan 15 1 Jan 14 1 Jan 04 1 Jan 13 1 Jan 12 1 Jan 03 1 Jan 11 1 Jan 16 1 Jan 10 1 Jan 01 1 Jan 06 1 Jan 07 1 Jan 09 1 Jan 08 1 Jan 02 Fine Chinese Paintings and Calligraphy 20th-Century & Contemporary Source : artnet 178 178

179 | Section 4 - Art as an investment Art & Finance Report 2017 Table 2. Art market returns by time period 1 Art market price index returns—1, 5, 10, and 15 years based on artnet indices Last 12-month 15-year CAGR 5-year CAGR 10-year CAGR return 3.69% European Old Masters 1.72% 1.72% 2. 21% -2,07% -0.78% 1.5 4% 10.50% Global Impressionist Art -2.50% -2.43% 4.05% 3.62% Global Modern Art 1.29% -0.98% Global Post-War Art -1.26% 7.12 % Global Contemporary Art 7. 4 5 % 4.09% 2.04% 8.54% 0.67% Fine Chinese Paintings & Calligraphy -0.59% 9.17 % 11. 5 0 % 3 .19 % 1.10 % 3.74% 14 .10 % 20th-Century & Contemporary Chinese Art Source : artnet The returns are nominal and do not include transaction fees. The 12-month return is from April 2016 to April 2017. Although this analysis documents some Over a five-year period 5-year period: years, had the third highest CAGR with 2.04 variations in performance across the from August 2012 to August 2017, percent measured over a 10-year period. various fine art collecting segments in the Contemporary Art saw the highest CAGR Impressionist Art, Modern Art, and Post- short term, the long-term performance of 4.09 percent, followed by Old Masters War Art all experienced negative annual over a period of 15 years indicates with a 1.72 percent annual return over the returns over the last decade. positive annual returns for all art price last five years. Impressionist Art, Modern indices monitored in this report. Previous Art, and 20th-Century and Contemporary 15-year period: Between 2002 and analysis shows year-over-year changes Chinese Art all recorded a negative annual 2017, artnet art market indices show in the performance of the art market as return in this period, according to analysis positive annual returns of between 1.54 a whole, as well as the various fine art by artnet. percent and 14.1 percent. The three best- collecting segments in the first half of performing art categories for this period 2016 as compared to the same period of 10-year period: Despite an overall weak were 20th-Century and Contemporary 2017. This suggests that, in addition to the performance during the last five years, the Chinese Art with a 14.1 percent CAGR, Fine diversification benefits of including art in highest annual return for the last decade Chinese Paintings and Calligraphy with an an overall portfolio (as outlined below), was achieved by Fine Chinese Paintings 11.5 percent CAGR, and Contemporary Art investors also enjoy positive returns over a and Calligraphy, which saw a 9.17 percent with an 8.54 percent CAGR. horizon. long investment CAGR in this period. This was followed by Chinese Modern Art along with 20th- 1-year period: Six out of seven art Century and Contemporary Chinese Art, markets monitored by artnet for this report which registered an annual return of 3.19 saw a positive compound annual return percent during the same period. According (CAGR) during the 12-month period from to a recent report by artnet, increasing August 2016 to August 2017. Impressionist demand from Chinese buyers, coupled Art saw the strongest annual return of with a 14 percent increase in overseas 10.5 percent, followed by Contemporary sales of Chinese art and antiques in 2015, Art with a 7.45 percent annual return, are driving this trend. Although the total 20th-Century and Contemporary Chinese sales of Chinese art and antiques overseas Art with a 3.74 percent annual return, and declined in 2016, it still accounted for 14 Modern Art with a 3.62 percent annual percent of all art sales outside of mainland return. The Post-War Art category was the China—a much larger share than in 2009 only category that registered a negative (8 percent). Contemporary Art, which saw return of -0.98 percent over the last 12 the strongest return over the last five months. 179

180 Art & Finance Report 2017 | Section 4 - Art as an investment Table 3. Risk and Correlation 1 Based on artnet indices Correlation with Volatility Correlation with Correlation US Equities (S&P Global Equities with Equities in 500 between (MSCI World Developed and 2002–2016) Index between Emerging Markets 2003–2016) (MSCI ACWI IMI between 2003– 2016) 13.53% -17.16 % 14.06% European Old Masters 21.0 0% 20.75% 12. 28% 35.85% Global Impressionist Art 23.77% Global Modern Art 15.6 6% 32.02% 25.36% 42 .13 % 31.27% 59.57% Global Post-War Art 15.5 4% 49.05% Global Contemporary Art 19.80% 16.73% 14.51% 29.60% Fine Chinese Paintings & Calligraphy 29.01% 42.48% 39.50% 41.33% 29.31% 20th-Century & Contemporary Chinese Art 38.85% 15.9 6% 21.68% Correlation with Fixed Correlation with Real Correlation with Estate (MSCI World Commodities (S&P GSCI Income (S&P 500 Bond Index between 2008– between 2008–2016) REITs 2007–2016) 2016) 16.52% European Old Masters 20.69% 24.45% Global Impressionist Art 5 7. 4 4 % 7. 0 8 % 69.01% 30.83% 36 .61% 3 6 .13 % Global Modern Art 16.55% 52.03% Global Post-War Art 28.95% -4.23% 5.48% Global Contemporary Art 25.66% 61.72% 29.91% Fine Chinese Paintings & Calligraphy 27.7 8 % 20th-Century & Contemporary Chinese Art 27. 9 3 % 71.68% 21.93% Source : artnet In addition to return, relative risk is Impressionist Art index and Modern Art Interestingly, the Contemporary Art index another important measure of financial index, however, have relatively low volatility has a loose negative correlation with performance. The risk associated with and are correlated with the S&P 500 bond MSCI World REITs, demonstrating that traditional assets is enhancing the index, due to the fact that both bonds and Contemporary Art is treated less like REITs appeal of using art to ensure optimal Impressionist and Modern Art are widely and more like other liquid commodities. portfolio allocation. The correlation matrix perceived as low-risk investments with By contract, Chinese art indices have here above outlines the diversification stable returns. higher volatility than the other art price opportunities between the various indices. They show strong correlation with collecting categories and other asset The Post-War Art index also has low the S&P GSCI, suggesting that investing classes. volatility among all art price indices. This in Chinese art shares some similar index is correlated with MSCI World REITs, features with investing in the most liquid The Old Masters price index does not indicating that investing in Post-War Art is commodities. have a clear correlation with any of the to some extent treated as an investment financial indices listed in the chart. The vehicle similar to REITs. 180 180

181 | Section 4 - Art as an investment Art & Finance Report 2017 | Section 4 - Art as an investment Art & Finance Report 2017 The risk associated with traditional assets is enhancing the appeal of using art to ensure optimal portfolio allocation. 181 181

182 Art & Finance Report 2017 | Section 4 - Art as an investment Art investment funds Global Art Investment Fund Market (AUM) 2011 – H1 2017 Figure 49. 2011 - 2017 1st half ket (AUM) Global Art Investment Fund Mar The global art investment fund Estimated assets under management (AUM) in US$ market is struggling to gain s $2.500 momentum after five years of llion Mi $2.000 decline 88 The overall art fund market in the first $1.500 half of 2017 was conservatively estimated 89 down to be worth US$834 million, $1.000 from US$1.03 billion in 2016 and US$1.2 $1.481 $914 billion in 2015. The US and European art $483 $653 $500 $373 $1.318 $857 fund market continues to decline, and $651 $640 $550 $550 $417 $417 $461 fundraising has taken place predominantly among existing art funds. The decrease - 2014 2013 2011 2017 1st Half 2016 2015 2012 in the overall AUM in the art fund market d U S Europe an China over the last five years is largely due to the Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 Chinese art fund and art trust business winding down since 2013. 88 Measured in terms of assets under management (AUM). 89 A conservative estimate of US$461 of this total is based on art investment funds in Europe and the US that reported their AUM. The Chinese art fund and art investment trust market was worth an estimated US$483 million in 2016, and an estimated US$373 million in the first half of 2017 based on publicly available information. 90 This figure is based on conservative estimates about size and maturity of different art investment trusts, drawing on information that was publicly available in July 2017. However, many Chinese trust companies are no longer marketing or publishing information about their art-related trust investment activities and it is not possible to know whether these funds have been wound up early or are still active. Our estimates are based on the publicly available information as of July 2017. - 91 This is a conservative estimate and is based on art investment funds in Europe and the US that reported their AUM and are operating with a public profile. The Fine Art Group account ed for the lion’s share of the European and US total with a reported US$420 million in AUM. A number of art fund providers included in last year’s figures did not submit their AUM and are therefore not included in the above total. Fine wine and collectibles funds are also excluded, as are private, family wealth-oriented art funds that do not raise funds from external investors. Also, it is highly likely that the actual size of the art investment fund industry is considerably larger, if one were to consider art investment products, vehicles, and companies without any public profile. However, with no transparency in this part of the market, an estimated figure would be hard to establish. 92 In 2016, we learned that The Art Agency, Partners, which was acquired by Sotheby’s in January 2016, established an art fund that held about US$52 million in capital. This was an art fund that was only known to a small number of insiders and investors, and there are likely to be many more of these private, under-the-radar investment structures. 182 182

183 Art & Finance Report 2017 | Section 4 - Art as an investment Lack of industry transparency a major hurdle for the art investment fund market. The estimated AUM for the Chinese art art market: a lack of transparency. As characterized by a conviction that past investment fund/trust business has fallen art collector demand for art investment valuations of such works can be restored from US$1.48 billion at the peak in 2012 products exists (37 percent of art by implementing a precise, specific 90 in 2016, to an estimated US$483 million collectors this year said they would be strategy in terms of museum exhibitions and US$373 million in the first half of 2017. interested in art investment funds), there and catalogue publications. This is likely to It is very difficult to ascertain the level of is an opportunity for wealth managers be the first regulated art fund under the art investment fund or trust activity in to play a bigger role in bringing greater European Alternative Investment Fund China at the moment, as very few trust transparency to the art fund industry. By Directive, and it could pave the way for companies are currently marketing these implementing certain industry standards, more art funds to follow a similar path. For products openly. This could indicate that such as an art fund industry rating system more information, see the interview on art investment fund activity is increasingly or guidelines on how to carry out due page 186. taking place under the radar, and away diligence, such developments could from public and government scrutiny. encourage more investors to consider Lack of industry transparency these products, while forcing the art fund a major hurdle for the art investment The US and European art fund market also industry to emerge from the shadows. fund market saw a decline between 2016 and 2017, with One thing is clear: the art fund industry As noted in previous editions of this report, 91 of assets an estimated US$461 million is unlikely to evolve until transparency, the actual size of the art investment under management in July 2017, down from credibility, and trust are restored in this fund market is likely to be considerably 92 US$550 million in January 2016. However, market. This requires further collaboration larger than the publicly available data suggests. The high costs associated with there are signs, particularly in Europe, that between the main stakeholder groups, regulatory compliance and the complexity new art investment funds continue to enter such as wealth managers, financial associated with setting up art investment the market. One of the recent additions regulators, art professionals, and art funds is increasingly forcing the industry to the art fund landscape is the IN ART collectors, to develop an industry to consider “lighter,” more cost-efficient FUND, based in Luxembourg. The fund framework and standards to govern this structures. The risk associated with aims to secure long-term uncorrelated investment product category. this trend is that it seems to move art returns through investments in collections investment underground and away from of original artwork by post-war and the scrutiny of the public eye. Although contemporary artists. What makes the this may have certain advantages in concept behind the IN ART FUND different terms of anonymity and discretion, it is that it acquires the entire collection of heightens what most stakeholders view an artist selected with the approval of an as the greatest risk associated with the academic council. The fund’s strategy is 183

184 | Section 4 - Art as an investment Art & Finance Report 2017 | Section 4 - Art as an investment Art & Finance Report 2017 The actual size of the art investment fund market is likely to be considerably larger than the publicly available data suggests. 184 184 184 184

185 Art & Finance Report 2017 | Section 4 - Art as an investment CASE STUDY Art investment funds: historic net asset value (NAV) for the Fine Art Invest Fund and the Tiroche DeLeon Collection 93 Q4 2015 and Q4 2016 are reductions in mark-to- Below is one example of an art investment fund that is actively focusing on market valuations provided by external parties on 31 market transparency by making performance figures available to the public. December of each year. The biggest single contributor to these drops has been Ai Weiwei who was also a major contributor to rises in value in the early years of the Example of an art investment fund’s structure and performance Table 4. fund. The fund holds two major works and the value has fluctuated significantly in the last two years. Tiroche DeLeon Collection (Art Vantage PCC Limited) Launch year 2012 10 years Term Contemporary art from Investment objective developing markets. 21.70 percent (since Jan. 2011) Total return US$500,000 Minimum subscription US$20.17 million (June 2017) AUM Website www.tirochedeleon.com Gibraltar Domicile of fund Fig 30 Art Investment Fund (Historical NAV calculation) 93 Figure 50. Tiroche DeLeon Collection (Art Vantage PCC Limited) - Historical Net Asset Value 50 12 1225, 00 12 1208, 1193, 46 1180, 6 1166, 50 11 71 1.154, 22 1.140, 1138, 2 1124, 1.122, 00 11 25 1.104, 45 83 1.088, 1086, 1 80 1.073, 1071, 1.068, 10 50 31 95 1.048, 55 1041, 8 01 1027, 01 1024, NAV- Art Vantage 1012, 10 00 08 1003, 32 63 65 71 99 0 95 0 90 Source: http://www.tirochedeleon.com/about/investors/ 185

186 Art & Finance Report 2017 | Section 4 - Art as an investment Art & Finance Report 2017 | Section 4 - Art as an investment You recently launched an art fund. Could you briefly describe the structure of the company and the motivation behind it? FUND IN ART In terms of legal structure, the ART FUND was set up as a limited société en commandite partnership ( simple ), qualifying as an Alternative Investment Fund (AIF) within the meaning of article 1(39) of the 2013 Act on Alternative Investment Fund Managers (AIFM Act). The fund is managed by the general partner (INVICTAS S.A.), which is registered with the Commission de Surveillance du Secteur Financier (CSSF) as an AIFM. The IN ART FUND was created by INVICTAS, an AIFM company. The IN ART FUND relies upon the experience and knowledge of IN ART S.A., which is the INTERVIEW WITH fund’s adviser entity. IN ART S.A. manages museum Violaine Remacle, collections, for example a collection of Picasso’s photography, and works with museums from Barcelona to Beijing. IN ART Managing Partner, The main benefits of this legal structure are the competitive cost structure and fast set-up process. It offers a flexible Alain Balanzategui and effective framework combined with general contractual freedom, paving & Miguel A. Muñoz the way for the development of specific strategies in tangible assets and in particular in innovative art strategies. INVICTAS’s board (Alain Balanzategui, Violaine S. Remacle & Miguel A. Muñoz), 2017 (Photographer J. Verhoeft) 186 186 186 186

187 | Section 4 - Art as an investment Art & Finance Report 2017 Art & Finance Report 2017 | Section 4 - Art as an investment The company is lightly regulated as Could you briefly introduce the art Value will be created promoting and an AIFM—what does that mean in fund, its performance objective, and marketing the collection in the world’s practice? What is the nature of the the strategy used to achieve this finest galleries and museums. Our CSSF supervision to which it is subject? performance? target is for the artwork to reach its AIFMD (the Alternative Investment The IN ART FUND, based in Luxembourg, former value after three years and we Fund Manager Directive), introduced in is a pioneer in innovative art expect performance to double between 2013, provides a freer regime for AIFMs strategies, focused on securing long- year three and five. of funds with less than €100 million term uncorrelated returns through in assets under management. This investments in collections of original The target is to continue to boost the threshold rises to €500 million in cases artwork by post-war and contemporary attractiveness and performance of the where the AIFM is unleveraged or does artists. The selected artists are of artist’s global collection by working not allow redemptions for five years, the exceptional quality and are generally with leading auction houses such as period that is usually required for the deceased. Christie’s, Sotheby’s, and others. development of the specific strategies in Interest in art as an alternative asset private equity or alternative investment What makes the concept behind the IN class has grown in recent years, in strategies in tangible assets. AIFMs ART FUND unique is that it acquires the tandem with the emergence of new art are required to register to access this entire collection of an artist selected investment strategies and opportunities freer regime as opposed to the stricter with the academic council’s approval. created by new art portfolio structures. authorization criteria that usually apply Moreover, the fund is characterized by Art is increasingly prevalent in the to retail investors. a conviction that past valuations of such portfolios of investors searching for works can be restored by implementing alternative assets that offer risk- Thus, the general partner of the limited a precise, specific strategy in terms of adjusted returns uncorrelated with partnership (INVICTAS S.A.) is exempt museum exhibitions and catalogue more traditional investments. from strict requirements other than its publications. reporting obligations to the CSSF. The IN ART FUND, domiciled in In practice, this means for example that Luxembourg and audited by an external the artwork of Matt Lamb (an IN ART ), may auditor ( réviseur d’entreprises FUND artist) will regain the attractive be subscribed by well-informed/ art-market valuation it had 15 years professional investors (in kind or cash) ago. This will be achieved through the and marketed in the EU in accordance implementation of profile-boosting with applicable national private strategies including holding exhibitions, investment rules. producing monographies, and managing the artist’s image through media and print campaigns. IN ART S.A. manages museum collections, for example a collection of Picasso’s photography, and works with museums from Barcelona to Beijing. 187 187

188 Art & Finance Report 2017 | Section 4 - Art as an investment Art & Finance Report 2017 | Section 4 - Art as an investment Do you have any specific experience Annual valuation of the art has These include, for example: been outsourced to a prestigious in the investment management of art Prof. Serena Baccaglini, Arte ed • independent company that has been collections? Economia, Universita Cattolica del monitoring major international auctions Our capabilities and experience Sacro Cuore di Milano for many years. This company uses guarantee a successful outcome. scientific algorithms and methods Mrs. Ana Chilova, Curator of • for optimal price estimation and to IN ART S.A., an adviser entity for the International Art Projects, Cologne, ascertain fair market values based on a fund, has an extensive global network Germany prudent approach. of contacts and works closely with the Dr. Joan Abello Juanperre, Director of • best players in the art market including Reial Cercle Artistic, Barcelona, Spain The initial pictorial work appraisal of experts and members of the academic the IN ART FUND collections is based council (all of whom have an excellent • Prof. Patricia Pellegrini, President of the on both the artwork replacement prices amazing track record), and scholars at Museo Escuela de Arte, Buenos Aires, and valuations, and on the artworks the world’s best universities. Argentina held within the collection. Prof. Deborah Bell, artist and • international auction expert, New York, USA. 188 188 188 188

189 | Section 4 - Art as an investment Art & Finance Report 2017 | Section 4 - Art as an investment Art & Finance Report 2017 A practical example of IN ART’s activity is the promotion of a major photography collection by Picasso over the past two years. We have achieved value growth of nearly 80 percent and outstanding performance over an 18-month period. This is mainly due to our successful exhibitions across China (from Shanghai to Beijing) accompanied by national press campaigns, museum catalogue publications, and hundreds of thousands of paying visitors. www.inartfund.lu What makes the concept behind the IN ART FUND unique is that it acquires the entire collection of an artist selected with the academic council’s approval. The IN ART FUND collection at the Luxembourg Freeport showroom, 2017 (Photographer J. Verhoeft) 189 189

190 | Section 4 - Art as an investment Art & Finance Report 2017 findings Survey Fig. 31 How relevant is Art Investment vs. % of wealth managers focusing on this service in the next 12 months Figure 51. How relevant is Art Investment vs. % of wealth managers focusing on this service in the next 12 months 50 % % 45 43% 41% 41% 40 % 37% 35% % 35 34% 30 % 29% 28% 28% fessio nals Art Pro 26% % 25 Art Colle ctors 23% 23% % 20 rs Wealt h Ma nage 15 % 13% 12% 10% 10 % 5% % respondents saying 'relevant/ very relevant (4&5)' 0% 20 17 20 16 11 14 20 12 20 20 Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 Only a small minority of banks are investment products would be relevant/ planning to offer art investment fund very relevant. Almost half (48 percent) of products to their clients in the coming art collectors would be interested to know the recent survey of wealth 12 months: more about existing art and collectible managers shows that only 13 percent investment products, while 68 percent of (13 percent of private banks and 16 percent art professionals said the same. This is a of family offices) see it as likely that they clear signal that there is market demand will offer their clients art investment fund and curiosity for these types for alternative products over the next 12 months (this is investment, but that current vehicles and up from 10 percent in 2016). The limited art investment products might not be appetite among wealth managers for appropriate for generating wider consumer offering art and collectible investment and investor interest. New innovations in products stands in contrast to the current the art investment space have emerged demand among art professionals and their at regular intervals for some time, and clients, as 43 percent of art professionals Marcelo García Casil, CEO of Maecenas, stated that art investment funds were a who is building a global art blockchain relevant/very relevant service for their market where assets are traded quickly clients. In addition, 37 percent of art and fairly on a liquid exchange, discusses collectors said that these types of art page 19 4 . this in greater depth on 190 190

191 Art & Finance Report 2017 | Section 4 - Art as an investment Neutral outlook for the art fund Wealth managers are increasingly industry: 30 percent of the wealth keen to know more about the existing managers surveyed said they have noticed art fund industry: 49 percent of wealth an increase in demand for such investment managers wanted to know more about products from their clients (up from 27 existing art funds (up from 44 percent in percent in 2016 and 20 percent in 2014). 2016). The interest was greater among This increase corresponds to the art the private banking community, where collector trend outlined in where Figure 51, 54 percent said they were interested in 37 percent of art collectors see art funds knowing more about collectible investment as a relevant art and wealth management products. This could signal an opportunity service. for the art fund industry to start working more closely with the wealth management industry, in particular with regards to how to address the challenges outlined in the section below. Figure 52. What do you feel are the main hurdles for incorporating Art Investment Funds as part of the bank's current client offering 79% 77% Due d iligence - D i ffi cult t o as sess 82% 80% ility the a rt f und v iab 83% 72% 72% 78% Lack o f l iquidity 77% 78% 85% 77% 69% m ar k-to-market valuation Valuation - lac k of 77% 78% 74% 71% Lack o f t rac k r ecord f or t his 70% 70% t f unds as set c las s / ar 44% 72% 75% 70% Unregulat ed m ar ket 67% 61% 59% 49% till t oo s mal l nd i ndustry s Art fu 58% 63% t f unds) (not e nough ar 39% 56% 60% Lack o f an t i nvestment c ouncil i ndependent ar 55% 60% romote g uidelines izat ion t hat p organ 56% 51% 54% 52% out t he ar Lack o f k nowledge ab t m ar ket 53% 67% 80% 70% 60% 40% 30% 20% 50% 0% 90% 10% 2016 2014 2012 2011 2017 Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 191

192 Art & Finance Report 2017 | Section 4 - Art as an investment | Section 4 - Art as an investment Art & Finance Report 2017 Despite several attempts to create associations and self-regulated bodies to promote and provide guidelines for the art fund industry, it is yet again the small size of this market (i.e., the small number of art funds currently in the market) that makes these organizations hard to sustain. 192 192 192 192

193 Art & Finance Report 2017 | Section 4 - Art as an investment Challenges Post-investment monitoring: 85 percent After tracking wealth managers’ of wealth managers cited the lack of mark- attitudes toward art investment to-market valuations as a major challenge funds for six years, the challenges preventing the incorporation of art into the preventing the incorporation of these wealth management offering (this was up products in a wealth management from 77 percent in 2016). The importance offering remain the same. of securing an improved valuation framework using both historic and forward- Existing art funds have failed to looking price and valuation data combined create an industry: 59 percent of wealth with expert opinions is discussed in greater managers said that the small size of the page 28. depth in the Priorities section on art fund industry meant that there was As in the art-secured lending market, art insufficient depth to this investment market liquidity was cited as a major risk market (up from 49 percent in 2016) to factor, with 72 percent of wealth managers make it a viable investment alternative. describing this as a major challenge (the The small art fund industry is clearly in same percentage as in 2016). a catch-22 situation: the lack of track record and transparency regarding the 72 percent of Unregulated market: performance of existing art investment wealth managers cited the unregulated funds makes it harder for new art funds to nature of the art market as the main enter the market, preventing the industry hurdle preventing the incorporation of art from growing, learning, and building on investment funds into their wealth service other funds’ success and failures. Despite offering (down slightly from 75 percent in several attempts to create associations 2016). As we have seen earlier, regulation and self-regulated bodies to promote is increasingly becoming an issue and and provide guidelines for the art fund concern in the art market and among industry, it is yet again the small size of this the wealth management community market (i.e., the small number of art funds (see section 6 on Risk management and currently in the market) that makes these regulation). organizations hard to sustain. This does not mean that they are not needed, and 56 percent of wealth managers this year said that such an independent organization could help to foster trust and transparency in this market. 79 percent of Pre-investment process: the wealth managers surveyed said that due diligence and the effort required to ascertain the viability and credibility of an art fund were among the main obstacles (up from 77 percent in 2016). This challenge is linked to other aspects of the art fund industry and the art market such as: 1) lack of track record for art funds (74 percent said this was important, up from 71 percent in 2016), and 2) the unregulated nature of the art market (72 percent said this was an important aspect, down from 75 percent in 2016). 193

194 Art & Finance Report 2017 | Section 4 - Art as an investment Art & Finance Report 2017 | Section 4 - Art as an investment Maecenas: A new art investment platform INTERVIEW WITH Marcelo García Casil Founder & CEO of Maecenas Jérôme Croisier is our Chief Art Officer, Could you please outline who is behind who has been instrumental in terms of the Maecenas project and describe shaping Maecenas to truly address the their background? key problems within the Art & Finance Maecenas is a young company, but it is industry. Jérôme is a renowned art growing fast. At the time of writing, we adviser and art historian, and has 20 have 15 people in our team and have years of art market experience. His art offices in London, Geneva, Singapore history research has been published and Buenos Aires. This is our founding in a variety of books and publications. team: Miguel Neumann is a founding partner I am the CEO and founding partner of of Maecenas. He is a business manager Maecenas. I come from an investment specializing in financial innovation banking background, having designed and he has a background in branding and built mission-critical systems and marketing. He has over 15 years for a number of large multinational of experience leading international banks including Crédit Suisse and projects and teams, and has been Barclays Capital. For the last four years, involved in fine art for over eight years, since founding the company, I have including several exhibitions and specialized in blockchain technology. successful sales. 194 194 194 194

195 | Section 4 - Art as an investment Art & Finance Report 2017 Art & Finance Report 2017 | Section 4 - Art as an investment Federico Cardoso is our CTO and co- Can you please describe the current Through a process founder. He is highly regarded as a state of play with the project? What blockchain and security expert and is has already been done? What still has called asset a strong supporter of the open source to be addressed? Do you already have movement. He actively contributes a launch date planned? tokenization, to projects related to blockchain and We embarked upon this venture more cryptography. His experience working than three years ago and, in that time, Maecenas creates for large corporations like IBM and we have made a tremendous amount Telecom Argentina has equipped of progress. Maecenas is a very shares in artworks Federico with the skills required to ambitious project that involves build and support a global platform like cutting-edge technology, financial that can be traded Maecenas. structuring, and cross-jurisdictional legal frameworks that make it quite in real-time on Please tell us briefly about the vision sophisticated in nature. behind Maecenas, and the market our art exchange needs it sets out to address. At this point, we have an alpha version Our goal is to create the largest and of our platform that we are testing platform. most trusted art investment platform internally and privately with some in the world. We love art and we want potential partners and clients. We have to address the fundamental issues that made strides in terms of designing the have plagued this industry for years. financial and legal structures required A lack of transparency is probably the for Maecenas to operate. biggest one in people’s minds, but equally important are a lack of access We believe that we are about six months to this market due to inefficiencies, and away from completing the outstanding high fees that prevent a large number of work and therefore we aim to launch players from participating. We believe our beta version to a select audience in that an open and global platform like the first quarter of 2018. Maecenas can create the necessary liquidity and transparency to completely Transparency and liquidity are two transform the art market and trigger an factors that are cited among the most investment revolution. significant challenges when it comes to art as an asset class. How does Ultimately, Maecenas is about the Maecenas plan to improve these? emergence of a new asset class—a liquid Our ultimate goal is to eliminate art- and efficient vehicle that offers investors market intermediaries that add no controlled exposure to fine art in their value to the process and take advantage portfolios. We leverage blockchain of information asymmetry to charge technology to create tamper-proof exorbitant fees or unnecessarily mark provenance records for every piece of prices up, or even worse to deal with art, and use smart contracts to remove pieces that are either not authentic or intermediaries and run financially have unverifiable origins. sensitive processes in a trustworthy way. Through a process called asset Using a cryptographic and decentralized tokenization, Maecenas creates shares platform like blockchain enables us in artworks that can be traded in real- to run our financial processes in a time on our art exchange platform. fully transparent manner, where all participants can independently verify In addition, our platform aims to transactions and where trust is achieved become an efficient source of financing through an unbreakable computational for art collectors, galleries, and process and does not depend solely on museums alike looking to raise cash the counterparty’s trustworthiness. against their existing collections at Comprehensive information about a lower rate than those offered by traditional lenders. 195 195

196 Art & Finance Report 2017 | Section 4 - Art as an investment | Section 4 - Art as an investment Art & Finance Report 2017 the listed artworks will be put into the auction process via smart contracts What are the signs that the market is blockchain, including their provenance to provide a fair and transparent ready for a platform like Maecenas? record, condition report, authenticity price discovery mechanism that gives There are a number of trends that certificate, past exhibitions, literature investors greater control and visibility validate and reaffirm our business references, and insurance certificate; over the investment process. model: and these will be available to the The shared economy: Crowdfunding • investors at all times. Once in the As blockchain transactions are platforms have seen exponential blockchain, the information can be cryptographically protected and cannot growth worldwide since they trusted as reliable as it cannot be be amended, each bid submitted launched. Maecenas allows investors altered by anyone, even Maecenas into the system can be audited and to syndicate and jointly own a piece itself. This ensures transparency for the trusted, therefore this greatly reduces of art. We also issue collateralized investor. the opportunity for bad actors to loans that draw upon the uptick in P2P manipulate prices. lending platforms. Using the same technology, Maecenas creates digital units or shares for each Maecenas is building a global art Cryptocurrencies: Investment in • work of art listed on the platform. This blockchain market, but why was cryptocurrencies and crypto-assets process creates liquidity thanks to blockchain chosen? has seen meteoric growth this year. our art exchange where investors can Blockchain is often called the “internet The market is now worth US$160 instantly buy and sell their holdings with of trust” because it enables parties to billion and it continues to rise. each other. execute and settle financial transactions Maecenas offers cryptocurrency without having to rely on a trusted investors a great way to divest their Issues around price manipulation intermediary. In addition, because portfolio. are also a major concern on the art blockchain records are tamper-proof, it • Investment in art finance innovation: market—what are Maecenas’ solutions also makes an ideal secure repository Investment in art-related startups is to this problem? for certificates, which Maecenas uses at an all-time high and new deals are Two factors that enable price to keep track of provenance records. now struck worth nearly US$1 billion manipulation are privileged access and This makes blockchain technology the annually. poor transparency over the investment perfect solution for the art market process. Maecenas implements a Dutch problems that we are trying to solve. • Art as collateral: Art & Finance is expected to grow significantly. The US art-secured lending market has grown an estimated 15 to 20 percent annually for the last five years. Self-investment: Over the coming • years, more and more money will be passed on to younger generations, Ultimately, Maecenas is who are actively looking to participate in the process of making decisions regarding their investments. The about the emergence of a behavior of this digital-native generation favors digital-first new asset class—a liquid platforms and the ability to self-invest. Millennials will be the largest adult segment by as soon as 2020. and efficient vehicle that • Alternative investments: The younger generation of investors favours offers investors controlled tangible assets over traditional capital market products, such as government exposure to fine art in bonds and stocks. These products are currently offering negative or very low interest rates, making alternative their portfolios. assets even more attractive. What are the key factors that will ensure that the platform is successful, 196 196 196 196

197 | Section 4 - Art as an investment Art & Finance Report 2017 Art & Finance Report 2017 | Section 4 - Art as an investment i.e., how do you aim to encourage and its kind, we know that we will face incentivize people to use the platform? competition from copycats and other At its very core, Maecenas is a existing startups sitting at the junction marketplace. The lifeblood of a of ArtTech and FinTech. marketplace is its liquidity, and therefore that is one of our top The initial feedback we have received priorities. We have a significant number from traditional art-market players of qualified artworks in the pipeline has been very positive and we see that will be listed on our platform when them more as collaborators than as we launch. Likewise, we have a growing competitors. Maecenas brings net number of investors who are signing positive value to the art market as a up to take part in our beta phase early whole and existing players seem to next year. This will ensure that our recognize that. We look forward to marketplace is the right size and has building fruitful partnerships with many enough players and assets when we of them. start; two key aspects that will increase our chances of success. The idea of dematerializing art objects into tradeable certificates or units has As we secure more artworks and been tried before (e.g., SplitArt, which register more investors, we will continue we covered in our first Art & Finance to expand to new markets and to Report in 2011)—what are you offering establish strategic partnerships with that is different? Why do you think you existing key players. will succeed where others have failed? What are the lessons learned? We anticipate having to subsidize market The market today is very different makers to operate in our secondary from what it was back in 2011. When market. In addition, we will run revenue- launching new ventures, timing is sharing schemes with selected partners absolutely key. There are countless that will help us reach out to our target examples of companies that executed audience in key segments. an idea too early and failed. Survey findings show that people’s There are many advantages that we motivations for buying art extend have now that did not exist back in far beyond financial considerations, 2011 when SplitArt started. The most with the emotional and social aspects significant boost we have is definitely of collecting art ranking as the most the regulatory landscape. significant. What is Maecenas doing to address these key non-financial With the advent of FinTech, financial motivations? regulators today are much more open We like to think of Maecenas as a and flexible with regard to enforcing decentralized art gallery. To realize that regulation on startups. They have vision, we will set up viewing facilities come to the realization that innovation within art vaults worldwide that are is very positive for their industry and purposely tailored to exhibitions, with therefore they have demonstrated that the aim scheduling events to let our they are willing to bend some rules and clients view and enjoy the artworks accommodate some others to allow they own. They could even arrange for innovative startups to operate without their family and friends to join them. regulation being a huge burden on We see this as a great way to add value them. A prime example of this is the by helping art investors to emotionally myriad of crowdfunding licenses that connect with their collections. have been issued in many large financial centers globally. These licenses have Who do you see as your main much lower capital requirements and competitors on this market? Are your reporting duties are simplified and rivals other technology companies or definitely more lightweight than those traditional art-market players? applied to traditional players. Even though Maecenas is the first of 197 197

198 Art & Finance Report 2017 | Section 4 - Art as an investment | Section 4 - Art as an investment Art & Finance Report 2017 Applying data to art funds INTERVIEW WITH Madelaine D’Angelo Founder & CEO of Arthena Arthena builds investment funds What makes art an attractive backed by art assets using quantitative alternative asset? strategies. Through modeling and In many cases, investors seeking simulation, Arthena provides financial uncorrelated returns, portfolio analysis comparable to mainstream diversification, or alpha compromise investment opportunities. Our models too easily on the expected returns of are able to impose tight statistical those investments, given the benefits bounds on the performance and they bring in offsetting the risk of the volatility of the art market. broader portfolio. We use data science to evaluate At an aggregate level, the art market investment opportunities. By combining does not move closely in step with our quantitative model with human mainstream financial markets, and intelligence to analyze the art market, thus serves to diversify an investor’s we identify works with strong growth portfolio. Artnet’s latest estimates of potential and a low rate of volatility in correlation with the S&P 500 range order to deliver returns to our investors. from -17 percent for old masters, to 32 Ultimately, we consider and evaluate our percent for modern art—all well below products in the same rigorous and data- other alternative asset choices like REITs driven way as a fund manager of any or hedge funds. The figures for art can other alternative financial product. be broken down one stage further to reveal the individual artists and types of 198 198 198 198

199 | Section 4 - Art as an investment Art & Finance Report 2017 | Section 4 - Art as an investment Art & Finance Report 2017 Fine art is a centuries-old asset class that has long offered solid returns and portfolio diversification, but the high barriers to entry have deterred many from participating. Personal collections rarely end up work with sales values demonstrating from participating. Art funds enable truly diversified, as they are skewed low correlation even at the most a broader spectrum of investors to granular level. In focusing on this by the personal tastes of the investor, engage, which ultimately means more latter group, it is possible to construct or the areas in which the art adviser money entering the art market as a has the greatest expertise, the desire portfolios with correlations as near to whole, benefiting artists and other for a collection that can be viewed zero as possible. existing stakeholders. and enjoyed as a coherent whole. In terms of returns, investments in post- Funds can only be truly diversified and Art funds offer a variety of benefits war and contemporary art, for example, agnostic to the extent to which they are that address the historical barriers to have generated 10.7 percent annualized liberated from aesthetic or emotional entry to the asset class. Not least, they 94 , with a returns over the past 20 years considerations. solve the apparent conflict between standard deviation of 12.9 percent, while conventional art market wisdom art funds have returned 8.8-12.5 percent Investment via an art fund structure encouraging investors to “buy the best on average. The S&P 500 returned 8.3 also alleviates the need to develop in- they can afford,” versus the financial percent in the same period, with 19.3 house expertise, build trust with a team maxim that you should not “hold all your percent standard deviation. of advisers and dealers, and navigate eggs in one basket.” By pooling capital the operational requirements for across multiple positions, art funds are Why invest in a fund instead of buying handling, storing, and placing works for able to diversify a portfolio of assets art directly? divestment. In combination this reduces across genres, artists, rates of return, Fine art is a centuries-old asset class investor overhead and maximizes and volatilities. that has long offered solid returns and returns. portfolio diversification, but the high barriers to entry have deterred many © ® World and Collecting category indexes Mei Moses 94 199 199

200 Art & Finance Report 2017 | Section 4 - Art as an investment | Section 4 - Art as an investment Art & Finance Report 2017 with their values. Similarly, auction What led us to develop a quantitative it is possible to view previous public houses keep their ear to the ground strategy? transactions for the same work. In real on private sales when generating If art is ever to be considered a true estate, the comparable figure is 90 95 This renders conventional estimates for a lot. The interplay of financial investment option, there percent. “repeat sales” estimates of value growth these dynamics creates a market that needs to be the same level of analysis unreliable: 85 percent of data points remains relatively in step, across both of art assets as there is for any would have to be omitted, and the the auction and private sale spheres. other investment opportunity. Our remaining 15 percent are unlikely to be quantitative strategy and methodology representative, since works that are While it may sound complex, at a enable us to offer this. particularly good or bad are more likely fundamental level the application 96 to be resold. of data science simply replicates the Data science has enabled substantial conventional assessments of art advancement across a spectrum of Our answer to this at Arthena is the advisers in evaluating works. But industries—from baseball to retail— application of hedonic regression, which beyond this mathematical rigor, the key and the same is true for art. breaks down the individual attributes difference is in speed and scale: it allows of each work (artist, medium, style, near-instant evaluation across the entire Data-backed methodologies make it material, size, and so on) and evaluates field of available works. possible to identify and evaluate trends how each influences artwork values and on a wider number of dimensions, and volatilities over time. On this basis, the across a broader body of works than historic dataset is rich enough to draw could readily be tracked by a team of statistically significant conclusions. human advisers or analysts. While no method is free from error or risk, we can identify and focus on the How can data be applied to attributes that provide the greatest the art market? reliability and predictive potential, and There are two major obstacles to avoid attributes that prove less reliable. applying data science to art. The first These findings can then be used to is the availability of data, as art sales extrapolate into the future, to assess happen less frequently than financial the expected future value of a work trades and often take place behind available for sale. closed doors. The other is that each work of art is different, making it difficult Effective analysis requires the to compare one piece with another. application of mathematical regressions as well as an expert understanding The effective use of data science of the value drivers of the asset class, requires a dataset which is: 1) large allowing Arthena to view investments enough to draw statistically significant through a lens comparable to that used conclusions, and 2) sufficiently for more standard financial instruments. representative of trends occurring across the market, including areas As to whether auction data is where data is unavailable. representative of the overall market, the worlds of auctions and private sales In art, there is an abundance of public are intertwined: since auction data is auction data spanning multiple decades, publicly available, it is hard for dealers but fewer than 15 percent of these data to justify valuations that do not align points represent repeat sales where 95 artnet — See What Experts Have to Say About Sotheby’s Acquisition of the Mei Moses Art Indices 96 Chanel, Olivier, Louis-André Gérard-Varet, and Victor Ginsburgh. “The Relevance of Hedonic Price Indices.” Journal of Cultural Economics 20, no. 1 (03, 1996): 1–24. doi: http://dx.doi.org/10.1007/s10824-005-1024-3. 200 200 200 200

201 | Section 4 - Art as an investment Art & Finance Report 2017 | Section 4 - Art as an investment Art & Finance Report 2017 If art is ever to be considered a true financial investment option, there needs to be the same level of analysis of art assets as there is for any other investment opportunity. 201 201

202 Art & Finance Report 2017 | Section 5 - Art and technology 202

203 Art & Finance Report 2017 | Section 5 - Art and technology Section 5 Art and technology DAVID (AFTER MICHELANGELO) © YINK A SHONIBARE MBE (2016), PHOTOGRAPHER: MARK BLOWER 203

204 Art & Finance Report 2017 | Section 5 - Art and technology HIGHLIGHTS • Auction and dealer markets Increasing converging online: Technology is increasingly playing • competition is already forcing online art a key role in the evolution of the platforms to embrace new strategies to art market: Art-technology startups expand their business and diversify their (ArtTechs) are building new digital income streams. Among the auction business models aimed at enabling and aggregators, Invaluable has ventured supporting traditional art businesses, into the gallery and dealer space by rather than replacing them. Technological allowing visitors to buy directly from innovations are aimed at increasing trust galleries through fixed-price offers. Artsy, and transparency, but also supporting a platform predominantly targeting data-driven valuation methodology, galleries, has held several online auctions building social capital, and transforming in partnership with Phillips and Heritage the backbone of the art market over the last 12 months, and it raised ecosystem. a further US$50 million in July 2017 to • Online art sales continue to grow: expand its auction business. Despite a challenging year for the global • Improved data and analytics art market in 2016, with global auction infrastructure in the art market: 97 in 2016, the sales falling by 19 percent A number of existing and new players online art market continued to show are pushing for further developments, resilience and further growth. According new data, and new analytical tools for to the “Hiscox Online Art Trade Report the art market, and we are starting 2017,” online art market sales reached an to see the emergence of a new and estimated US$3.75 billion in 2016, up 15 improved industry as it relates to data percent from 2015. This gave the online and analytics. This is an important art market an estimated 8.4 percent development and it could contribute share of the overall art market, up from toward improving the transparency, 7.4 percent in 2015. valuation accuracy, and risk management Traditional art businesses responding • of art-related wealth. to the online challenge: The lion’s share Blockchain could revolutionize the • of online art market growth between The art industry is one art industry: 2011 and 2014 was recorded by online- of the world’s most opaque business only platforms, boosted by significant sectors, with a multitude of middlemen venture capital funding and first-to- between the creator and the consumers market advantages. However, growth has of art. Blockchain could revolutionize the picked up among the traditional auction art industry by resolving questions of houses in the last two years. Sotheby’s provenance, and improving transparency, expanded its online business (online copyright, and ownership issues. Seeing bidding and online-only auctions) to the potential, art startups are already US$155 million, an increase of 19 percent building real-world applications based on in 2016, and Christie’s increased its blockchain. online activities (bidding and online-only auctions) by 34 percent from US$162 million in 2015 to US$217 million in 2016. 97 Source: “TEFAF Art Market Report 2017” 204

205 | Section 5 - Art and technology Art & Finance Report 2017 | Section 5 - Art and technology Art & Finance Report 2017 The lion’s share of online art market growth between 2011 and 2014 was recorded by online- only platforms, boosted by significant venture capital funding and first-to-market advantages. 205 205

206 Art & Finance Report 2017 | Section 5 - Art and technology EXPERT OPINION A digital art world The intersection of art, wealth, and technology Phillip Ashley Klein U.S. Art & Finance While the fine art industry is often viewed as old- Coordinator Deloitte Consulting guard and slow to change, technology is quickly LLP taking a front seat in its evolution. Today’s consumers Kevin Ye expect convenience, personalization, and contextual Consultant transparency, and the industry is looking to technology Deloitte Consulting LLP to deliver that experience. From art-technology startups (ArtTechs) to traditional incumbents, players are starting to look toward digital business models as a way to win in the contemporary art world. Transparent valuation methodologies In a series of recent discussions with are increasing transaction comfort and industry luminaries, they provided their investment opportunities perspectives on the intersection of art, Traditionally, valuation has been considered wealth and technology. From auction more of an art than a science. While houses to startups to wealth managers, historical data points and comparatives are numerous leaders representing different employed, much of the final result lies in aspects of the industry expressed their the experience of professional appraisers thoughts: how is technology evolving in and advisers. The influencing factors (and the art market? What technologies are how they drive an artwork’s value) are changing how art is viewed, purchased, not always obvious or made clear to art and analyzed? What will the future hold? collectors, and this can create friction and market inefficiencies. 206

207 Art & Finance Report 2017 | Section 5 - Art and technology A handful of industry pioneers are seeking institutions to better evaluate and monitor The development of to improve the valuation process through their risk pools, driving increased loan a more structured and transparent volume on more favorable terms. more quantitative, methodology. Christopher E. Vroom, CEO of CollectorIQ, Inc. is one of those The establishment and adoption of these transparent spearheading the charge. He explains that valuation methods can also open the “by aggregating nearly 100 million distinct door for advanced financial instruments, methods for attributes covering over $100 billion in increasing exposure to art market art sales, we’re able to assess the value economics and serving as a barometer for valuations has a impact of a wide range of selling choices investment choices. Although art indices such as auction house or location, time currently exist, they are not without their positive impact for of year and the like while assessing the criticisms; they are often limited by the contribution to value of both primary quality and availability of data. financial services, and secondary object characteristics. Ultimately, structuring data is the key to Real-time algorithmic valuations could particularly wealth understanding value." The immediate goal enable a more sophisticated, accurate, is not necessarily to create a pin-perfect and timely index that satisfies the needs managers. algorithm-based valuation, as this challenge of investors. These same algorithms could may be too great given the subjective also potentially drive the development of nature of art and the social capital element art exchange traded funds (ETFs), which that drives the underlying value. However, would provide a financial instrument Collective—a social art-recognition increased transparency into the different through which investors can gain exposure platform and marketing tool for art components and weighting that determine to market economics. venues—believes that galleries are realizing value could instill more trust in the process, social media is the best way to target the bringing increased comfort to buyers and Social media as a builder of social middle market, and a lot of the focus is sellers alike. capital and platform for art industry now shifting toward these buyers. “Middle professionals market transactions might not have The development of more quantitative, Social media is influencing the creation headliner prices, but the sheer scale and transparent methods for valuations has of art, serving as both subject matter quantity of this market is starting to have a a positive impact for financial services, and marketing channel. With exhibits lot of appeal for sellers,” said Campbell. 98 99 and Infinity Mirrors particularly wealth managers. A key such as Rain Room Perhaps the most popular platform drawing massive crowds seeking that obstacle that high-net-worth clients face is currently used is Instagram, often viewed perfect photo to post online, the social the lack of sophisticated data and sufficient as the social media of choice for the art media “friendliness” of a piece can make reporting that enables an investment- community. a considerable difference to the branding oriented evaluation. Art collectors are and performance of an artist, gallery, or more commonly seeking the same level of museum. sophistication from their auction house as from their investment bank. As pricing Beyond just influencing the types of works becomes more transparent and high-net- created, social media is also serving as a worth consumers get more comfortable low cost distribution channel for artists. with transactions, demand for art-related In many ways, it is disintermediating wealth management services should the artist-gallery paradigm by allowing grow. As it relates to art-secured lending these creatives to showcase their work and financing, these algorithmic valuation directly to millions of potential buyers. methodologies could remove human bias / Joshua Campbell, a Sotheby's Institute of error and enable banks / financial Art alumnus and co-founder of Canvas 98 Rain Room is an immersive environment piece created by Hannes Koch and Florian Ortkrass of Random International in 2012 99 Infinity Mirrors refers to a number of Yayoi Kusama’s infinity mirror installations that have been made available to the public throughout the course of her artistic career 207

208 | Section 5 - Art and technology Art & Finance Report 2017 While it may be surprising to those who directly connecting high quality shippers believe that the profile of an “insider” with customers, ARTA is now turning to would suggest a slow or reluctant adoption APIs that can connect seller and buyer of social media (due to their typical systems directly, bypassing the manual demographic), current observations pen-and-paper processes that are typically suggest the opposite, with a significant required to complete a transaction. number of active art collectors using the app on a consistent basis. Technology is also starting to address the challenges of provenance, tracking, Dan Desmond, of Morgan Stanley’s Blue and security, all of which are major Rider Group, emphasizes the criticality of risks and concerns. For example, the this development and its importance for idea of a unique, reliable, and tamper- wealth managers and financial services proof tracker for artwork can have professionals who are looking to be many positive applications: simplified well informed on what is happening in collection management, enhanced contemporary art. To truly develop deep security monitoring, improved provenance and meaningful relationships with art accuracy, and monitored condition collectors, it is not enough to merely management. With technology like this, understand the financial metrics and institutions and buyers can eliminate many data of art, but to share an interest in the steps that are currently being used to work itself and the community of artists, establish provenance and authenticity, and curators, scholars, and dealers that are these benefits can ultimately translate into the core of the community. Social media cost savings and improved confidence in can provide a convenient and valuable the shipping and storage process. channel for advisers to do just that, offering A handful of firms are working on solutions a window into shows happening all over the to this problem, including Steven and world. Anne Halliwell (founders of ID4Arts and managing directors of the Art collectors Technology is transforming Fund), who believe that technology using “the backbone” of the art ecosystem RFID transponders could be the solution. From collection management to security to These developments will also likely transportation, these ancillary services act have important implications for wealth as the backbone of the industry, ensuring management services as the issues of art is exactly where it needs to be, when provenance, tracking, and security are it needs to be there, and arriving in the solved. same condition in which it left. While these services are acknowledged as crucial, how The next frontier in trust and they are evolving through technology can transparency: primary market data frequently be overshadowed by more high- It is widely regarded that one of the most profile industry developments. impactful industry developments has been Adam Fields, CEO of ARTA, highlights that data transparency. While negotiating power while the industry is often generalized and access to art have traditionally been as antiquated and resistant to change, reserved for insiders, improved access and logistics and other ancillary services that analysis of data has made it easier for a enable the daily operations for fine art can variety of stakeholders to venture into the be considered even more old-fashioned. art world. Secondary market data is readily For example, electronic payment available, and the understanding of fine art processing and currency conversion, movements and financials has improved capabilities that are taken for granted in drastically as a result, giving art collectors most other industries, can be considered more confidence to engage in transactions. relatively new developments that many art shippers and service-providers are starting to adopt. Having found success with 208

209 Art & Finance Report 2017 | Section 5 - Art and technology Conversely, a significant percentage of asymmetries and lowers the barriers for the global market value lies in the primary market entry; however, it is important market, and the data on these transactions to recognize that the same technology is not readily available or understood. provides opportunity, as it enables more Shedding light on this data could have accessibility and comfort in transactions. enormous implications, as it provides the As Hugo Liu of Artsy articulates: “You last major piece for a complete picture. As shouldn’t look at ‘ArtTech’ as threatening Pip Deely of Wolfram Ventures suggests, your slice of the pie. You should see it as “What it’s going to take to see this change a way to grow the entire pie overall.” The happen is for the holders of primary firms that can adopt and adapt will likely be market data to understand the value of able to tap into a more expansive market sharing their data.” Art insiders inherently than they have ever seen before. want to amass as much primary sales data as possible because they understand the The nucleus of the market adopting value that this information asymmetry technology innovation will continue has in both influence and negotiating to expand as prices become more power. However, Deely believes dealers are transparent and demand better matches starting to understand that their data is not supply. However, there is broad agreement going to stay private forever and it’s in their that the art industry has an intangible best interest to tell richer stories and better quality that can never be replaced or co- justify their prices. opted by technology. Much of the personal satisfaction and appeal can be derived Although the issue of primary market from the “romance” of the in-person data opacity is very much alive, the need experience, and it’s not expected that any for transparency is becoming more and of these elements will ever be phased out more compelling. There is no doubt entirely. Technology can go far in improving that technology will play a critical role in the access and convenience of art, but the unlocking this part of the market, and it will nuances surrounding the experience of art be exciting to see what the future holds. may never vanish. Technology is here to enable and support businesses, not replace them While technology may invariably change While technology may invariably how business is done, it does not necessarily mean that traditional jobs are at risk. Instead, incumbents will likely have change how business is done, it to evolve to adapt to the technology. Those who are willing to transform can learn to does not necessarily mean that engage the market in more compelling ways. For example, an art appraiser can embrace data-driven algorithms and traditional jobs are at risk. Instead, marry them with the traditional appraisal process to provide a more compelling value incumbents will likely have to proposition for a specific price point. They can also play a role in the development and fine-tuning of the algorithms. evolve to adapt to the technology. The major role of technology within the industry will likely be to reduce friction, improve access, and instill confidence in the underlying processes. Margins for certain businesses and players may suffer as technology eliminates information 209

210 | Section 5 - Art and technology Art & Finance Report 2017 Trends Online art market continues to grow, but competition intensifies According to the “Hiscox Online Art Trade Despite a challenging Report 2017,” online art market sales year for the global art reached an estimated US$3.75 billion in 2016, up 15 percent from 2015. This gave market in 2016, with the online art market an estimated 8.4 global auction sales percent share of the overall art market, 1 100 in 2015. Tefaf up from 7.4 percent falling by 19 percent reported in 2017 that more than US$1 in 2016, the online art billion of art and antique dealer sales in 2016 were taking place online, which market continued to show accounted for approximately 4 percent resilience and further of the overall dealer market. growth. Online Sales 2013 - 2016 ($US billion) Figure 53. 8.4% 7.4% 6% 4% 2,64 1,51 3,27 3,75 2015 2014 2016 2013 Online ar t sa les (USD billions) rket (TEFAF Report) % Online share of gl obal ar t ma Source: “Hiscox Online Art Trade Report 2017” 210 100 Source: “TEFAF Art Market Report 2017”

211 | Section 5 - Art and technology Art & Finance Report 2017 Traditional Art Auction Houses: Online Sales in $US Million Figure 54. 400 348,5 344 300 217 162 200 155 130 100 0 Sotheby's Christie's Heritage 2016 2015 Source: “Hiscox Online Art Trade Report 2017” Despite the global decline in auction sales, The “Hiscox Online Art Trade Report 2017” The “Hiscox Online Sotheby’s expanded its online business reported that the majority of online art (online bidding and online-only auctions) platforms expected to see more industry Art Trade Report to US$155 million, i.e., an increase of 19 consolidation. Among the online art percent in 2016, and Christie’s increased platforms surveyed, 71 percent said they 2017” reported its online activities (bidding and online- expected more consolidation to occur. 48 only auctions) by 34 percent from US$162 percent of companies surveyed felt that that the majority of million in 2015 to US$217 million in 2016. (companies mergers” “horizontal operating Online-only auctions saw particularly in the same space such as Paddle8 and online art platforms strong growth at Christie’s, with an 84 Auctionata) will be the most common, percent jump in sales last year. Heritage while 53 percent believe “vertical mergers” expected to see Auction reported that 41 percent of its are more likely, i.e., companies operating auction sales were now conducted online, in different parts of the value chain. more industry with US$348.5 million in sales reported in There is also evidence that online art 2016 (up 1.3 percent). business models are converging toward consolidation. a one-stop shop template. Increasing While the lion’s share of online art competition is already forcing online art market growth between 2011 and 2014 platforms to embrace new strategies to was recorded by online-only platforms, expand their business and diversify their boosted by significant venture capital income streams. Among the auction funding and first-to-market advantages, aggregators, Invaluable has ventured growth has picked up in the last two years into the gallery and dealer space by among the traditional auction houses, allowing visitors to buy directly from which are rapidly investing and adapting galleries through fixed-price offers. Artsy, to the digital age. a platform predominantly targeting galleries, has held several online auctions The failure of the high-profile online in partnership with Phillips and Heritage auction house Auctionata (announced over the last 12 months, and raised a 101 in January 2017), casts doubt upon the to expand the further US$50 million ability of new online-only players to grow auction business. These trends suggest fast enough and become profitable in an we could see more consolidation in the increasingly congested marketplace. On industry over the coming years. the other hand, the growth in online-only auction sales from traditional auction houses such as Christie’s suggests that the power balance might be shifting back 101 The round of financing was raised in July 2017 to the incumbent art-market players. from 56 investors led by Avenir Growth Capital 211

212 Art & Finance Report 2017 | Section 5 - Art and technology Art data & analytics providers Table 5. AMA/Art Products artnet Artprice A r tTac tic Mutualart Pi-eX Artfacts.net Analytics Art Analytics do not own any ArtFacts.Net compares "Pi-eX has a clean and exhaustive database With price analysis, auction results and ArtTactic has developed a proprietary auction artnet has a database of Artprice.com covers 30 Art price auction records dating database million prices and indices price database itself. price and price forecasting database for of fine art auction sales results since 2007 exhibition careers and event listings for over 300,000 artists, the for 630,000 artists. The data back to 1985. The database around 1,300 modern and contemporary auction trends using data from the top three auction houses. The data MutualArt database offers an objective and comes from 6,300 partner provided by Mutualart.com includes withdrawn, unsold and guarantee contains over 11 million artists. This data can be accessed via extensive view of the global art market. bespoke projects and reports. color-illustrated fine art, auction houses and covers information." design, and decorative auctions from 1962 to the art auction results with present day. complete lot descriptions. Art price A new family of art price Artprice produces price Pi-eX believes that the disparate nature indices of fine art and the relatively low level indices per artists as part of indices launched in their artist analytics service. autumn 2017, showing the of transactions do not allow for the representative prices of art construction of accurate price indices. To obtain better benchmarking, Pi-eX developed market sectors and artists. These indices help users to a buyer/seller behavioral analysis, switching the focus from the artwork to the collectors. track the evolution of prices. Primary ArtFacts.Net is the MutualArt does not offer an index based on ArtTactic artist reports map the AMA covers extensively all leading provider of data auction prices, however they do offer their characteristics and structure of the primary art market art market news including market for an artist using a mix of gallery, subscribers the MutualArt Index, which uses fairs, biennials, events, analysis and analytics related to a comprehensive proprietary algorithm to museum and gallery exhibition information. exhibition, museum, media, social media and exhibitions. ArtFacts.Net produces a collector sentiment data. rank artists. MutualArt's extensive primary market data is featured in their subscriber set of rankings for artists, galleries and art fairs. newsletter, where they highlight key exhibitions, and is a primary source for their The Artist Ranking is an mobile app, which uses geo-location to alert indicator of the cultural users to nearby exhibitions of their favourite value of an artist career. It is calculated by quantifying artists. This data is also used in the MutualArt Index (as described above). the exhibition success of an artist, acting as an important counterbalance to the formation of prices in the art market. Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 212

213 | Section 5 - Art and technology Art & Finance Report 2017 Although the majority of the financing Art market data, research, has gone into e-commerce-related art and new analytical tools businesses, we are also seeing more Many of the art data analytics companies activity in the art services and art have existed for more than 15 years and infrastructure space. In this section, we have developed analytical tools to offer have highlighted a number of new and both quantitative and qualitative analysis recently launched initiatives in the art aimed at improving the understanding of and technology space, which may have a risk and performance in the art market. real impact on the Art & Finance market The following table illustrates some of in the future, and many of the key issues these companies: discussed in this report. Mutualart AMA/Art Products Pi-eX A r tTac tic Artprice artnet Artfacts.net Analytics Art Analytics do not own any artnet has a database of Artprice.com covers 30 "Pi-eX has a clean and exhaustive database ArtTactic has developed a proprietary auction Art price ArtFacts.Net compares With price analysis, auction results and database auction records dating exhibition careers and event listings for over 300,000 artists, the million prices and indices price database itself. price and price forecasting database for of fine art auction sales results since 2007 for 630,000 artists. The data around 1,300 modern and contemporary back to 1985. The database MutualArt database offers an objective and auction trends using data from the top three auction houses. The data includes withdrawn, unsold and guarantee artists. This data can be accessed via comes from 6,300 partner contains over 11 million extensive view of the global art market. provided by Mutualart.com information." bespoke projects and reports. color-illustrated fine art, auction houses and covers auctions from 1962 to the design, and decorative art auction results with present day. complete lot descriptions. Artprice produces price A new family of art price Art price Pi-eX believes that the disparate nature of fine art and the relatively low level indices indices per artists as part of indices launched in their artist analytics service. autumn 2017, showing the of transactions do not allow for the construction of accurate price indices. To representative prices of art obtain better benchmarking, Pi-eX developed market sectors and artists. a buyer/seller behavioral analysis, switching These indices help users to the focus from the artwork to the collectors. track the evolution of prices. Primary ArtTactic artist reports map the AMA covers extensively all MutualArt does not offer an index based on ArtFacts.Net is the characteristics and structure of the primary leading provider of data art market art market news including auction prices, however they do offer their and analytics related to subscribers the MutualArt Index, which uses fairs, biennials, events, analysis market for an artist using a mix of gallery, exhibition, museum, media, social media and a comprehensive proprietary algorithm to exhibition information. museum and gallery collector sentiment data. ArtFacts.Net produces a exhibitions. rank artists. MutualArt's extensive primary set of rankings for artists, market data is featured in their subscriber galleries and art fairs. newsletter, where they highlight key The Artist Ranking is an exhibitions, and is a primary source for their indicator of the cultural mobile app, which uses geo-location to alert value of an artist career. It users to nearby exhibitions of their favourite artists. This data is also used in the MutualArt is calculated by quantifying Index (as described above). the exhibition success of an artist, acting as an important counterbalance to the formation of prices in the art market. 213

214 Art & Finance Report 2017 | Section 5 - Art and technology Artfacts.net artnet Artprice A r tTac tic AMA/Art Pi-eX Products Mutualart Analytics artnet can use its new art ArtFacts.Net Pi-eX standard methodology provides clear ArtTactic produces bespoke risk analysis offers Artprice regular market Risk analysis dynamic career charts indicators of liquidity,performance and reports inform about indices to calculate market and due-diligence reports on individual artist markets. ArtTactic is also using its for over 500,000 artists. historic trends and market volatility for specific artists, locations, auction volatility and correlation with houses, price ranges, etc. This unique career trend risks. Artprice artist analytics Artforecaster platform to crowd-source for other asset classes. analysis can be used to make forward looking data, which is then imbedded allows users to compare the in market risk analysis and expected loss informed decisions about performance of the market with other asset classes. the likelihood of an artist scenarios. to become historical and offers vital information when estimating risk value. Art Analytics produces on- The performance of single artworks can MutualArt's art experts have over 30 ArtTactic offers this as a bespoke service Valuation / Artprice offers an estimate and sits within the family of artist research Analysis of demand artwork valuation service called Artpricing. years of experience in art appraisal and be viewed in comparison to other relevant single art This is not an appraisal, but artworks sold or bought by collectors of the and analyses. These very authentication, assisting private collectors, reports. These reports would analyse the same artist, at the same auction, in the same corporations, insurance companies and detailed (up to 50+ pages) works value of a single art work in the context of will provide an estimated location, etc. the overall market for the artist, and analysis legal professionals to valuate artworks. reports focuses only on range of the work's current around current value and future (12-months) the valuation and market value based on the detailed Their experts are members of International value are provided. Fine Art Appraisers (IFA A) and have worked auction results for at least research. Art Analytics does for leading art auction houses including not provide any type of two comparable artworks. Sotheby's and Christie's. forensic or artistic analyse. ArtTactic produces monthly artists reports Art Analytics produces Analytics to track an artist's Reports to track an artist’s MutualArt provides subscribers with detailed Pi-eX artist reports focus on analyzing "ArtFacts.Net provides Artist the behavioral trends of art buyers and reports on individual on important Post-War and Contemporary reports auction performance analyses including: auction market performance auction market performance numerous artist reports for AMA’s readership as well value and volume of lots offered and sold, artists. It also offers bespoke artist reports and trends. artists breaking down their sellers for that particular artist. Data and trends over time, or on any artist, and provides a holistic look at against any other from as for third-party medias. It performance against estimate, relative value standardization and visualization allow for exhibition and primary also produces on-demand compared to related artists and price band easy understanding and comparison. artnet's database of over the market using a mix of primary market, art market performance 130,000 artists. auction market, media/social media and artists reports for art market data over time. This comparisons. They also provide links to professionals. includes global and local exhibitions (past and upcoming), articles and collector sentiment data. other information about the artist. artist rankings, peer artist comparisons, exhibition type and location. ArtFacts.Net also creates customised ranks on artists according to gender, artistic movement, country and fair participation, among others. " ArtTactic produces weekly, monthly, quarterly Artprice publishes the annual AMA produces specific event- Pi-eX market and sector reports focus on MutualArt produces seasonal auction Art market analysis on various Art market ArtFacts.Net has been contributing data to the Art collecting categories and and annual market reports on different & sector analyzing the behavioral trends of art buyers related reports (auction, fairs, summaries; sale week summaries (i.e. post- global auction report, as well and sellers for that particular market or sector. Basel Art Market Report since regional sectors based on developed and emerging art markets, with reports Frieze week sales); individual artist spotlights etc.). Art Analytics produces as half-year reports on the 2 017. global auction market. It also and collecting guides. Data standardization and visualization allow for its comprehensive database. macro-level reports for specific specific focus on Modern and Contemporary Art. The in-depth analysis shows sectors: tribal art, bought ins, easy understanding and comparison. In 2017, ArtTactic launched a new set of market publishes special reports on etc. the evolution of market and reports on Old Masters and Impressionist & the contemporary art auction Modern Art. ArtTactic is also partner in several includes experts' insights into market, as well as regional reports on Asia. research projects such as the annual Hiscox the rational behind changes. artnet publishes yearly auction Online Art Trade Report, Deloitte Art & Finance reports on the Chinese art Report and the South Asian Art Market Report. market and in partnership with art fairs. Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 214

215 Art & Finance Report 2017 | Section 5 - Art and technology AMA/Art artnet Artprice A r tTac tic Mutualart Pi-eX Products Artfacts.net Analytics artnet can use its new art offers ArtFacts.Net Risk analysis Pi-eX standard methodology provides clear ArtTactic produces bespoke risk analysis Artprice regular market and due-diligence reports on individual indices to calculate market reports inform about indicators of liquidity,performance and dynamic career charts volatility and correlation with for over 500,000 artists. historic trends and market artist markets. ArtTactic is also using its volatility for specific artists, locations, auction other asset classes. This unique career trend Artforecaster platform to crowd-source for risks. Artprice artist analytics houses, price ranges, etc. forward looking data, which is then imbedded allows users to compare the analysis can be used to make informed decisions about in market risk analysis and expected loss performance of the market with other asset classes. scenarios. the likelihood of an artist to become historical and offers vital information when estimating risk value. Art Analytics produces on- The performance of single artworks can Valuation / ArtTactic offers this as a bespoke service Artprice offers an estimate MutualArt's art experts have over 30 and sits within the family of artist research demand artwork valuation be viewed in comparison to other relevant Analysis of years of experience in art appraisal and service called Artpricing. This is not an appraisal, but single art artworks sold or bought by collectors of the reports. These reports would analyse the authentication, assisting private collectors, and analyses. These very detailed (up to 50+ pages) works corporations, insurance companies and will provide an estimated same artist, at the same auction, in the same value of a single art work in the context of reports focuses only on the overall market for the artist, and analysis range of the work's current legal professionals to valuate artworks. location, etc. Their experts are members of International the valuation and market value based on the detailed around current value and future (12-months) Fine Art Appraisers (IFA A) and have worked value are provided. research. Art Analytics does auction results for at least two comparable artworks. not provide any type of for leading art auction houses including Sotheby's and Christie's. forensic or artistic analyse. Analytics to track an artist's ArtTactic produces monthly artists reports "ArtFacts.Net provides Art Analytics produces Artist Reports to track an artist’s MutualArt provides subscribers with detailed Pi-eX artist reports focus on analyzing auction market performance numerous artist reports for auction market performance reports the behavioral trends of art buyers and reports on individual on important Post-War and Contemporary auction performance analyses including: artists. It also offers bespoke artist reports sellers for that particular artist. Data AMA’s readership as well and trends. and trends over time, or artists breaking down their value and volume of lots offered and sold, against any other from exhibition and primary as for third-party medias. It standardization and visualization allow for performance against estimate, relative value on any artist, and provides a holistic look at also produces on-demand compared to related artists and price band easy understanding and comparison. artnet's database of over the market using a mix of primary market, art market performance 130,000 artists. artists reports for art market data over time. This auction market, media/social media and comparisons. They also provide links to collector sentiment data. includes global and local exhibitions (past and upcoming), articles and professionals. artist rankings, peer artist other information about the artist. comparisons, exhibition type and location. ArtFacts.Net also creates customised ranks on artists according to gender, artistic movement, country and fair participation, among others. " Art market ArtTactic produces weekly, monthly, quarterly MutualArt produces seasonal auction AMA produces specific event- Artprice publishes the annual Pi-eX market and sector reports focus on Art market analysis on various ArtFacts.Net has been related reports (auction, fairs, collecting categories and analyzing the behavioral trends of art buyers contributing data to the Art global auction report, as well summaries; sale week summaries (i.e. post- & sector and annual market reports on different and sellers for that particular market or sector. as half-year reports on the Frieze week sales); individual artist spotlights Basel Art Market Report since reports etc.). Art Analytics produces regional sectors based on developed and emerging art markets, with global auction market. It also 2 017. its comprehensive database. and collecting guides. Data standardization and visualization allow for macro-level reports for specific specific focus on Modern and Contemporary Art. publishes special reports on The in-depth analysis shows sectors: tribal art, bought ins, easy understanding and comparison. In 2017, ArtTactic launched a new set of market reports on Old Masters and Impressionist & etc. the evolution of market and the contemporary art auction Modern Art. ArtTactic is also partner in several includes experts' insights into market, as well as regional research projects such as the annual Hiscox the rational behind changes. reports on Asia. artnet publishes yearly auction Online Art Trade Report, Deloitte Art & Finance Report and the South Asian Art Market Report. reports on the Chinese art market and in partnership with art fairs. 215

216 Art & Finance Report 2017 | Section 5 - Art and technology artnet’s new Insights platform Pi-eX develops analytical Based on artnet’s database of auction and financial tools results, the newly launched artnet Insights Over the past four years, Pi-eX has platform allows users to understand an focused on building analytical and financial artist’s market performance, with reports tools that help fine art collectors better that can be filtered by medium, artwork understand and manage risk and volatility series, and more. The platform makes use in the fine art market. While developing of artificial intelligence powered by a new the first derivative instrument based on virtual device (please see the contribution fine art, Pi-eX built a proprietary database page 220. on of auction sales results and developed a systematic methodology for analyzing liquidity, performance, volatility, and hedges against volatility. Please see the contribution on page 226. A new initiative to foster the role of science in the world of the art market and cultural heritage: The Seracini Foundation Award winning scientist and art ArtTactic launches new art market diagnostician, Maurizio Seracini, has tracking and market confidence tools secured funding and is expected to Over the last 12 months, ArtTactic has open in 2018 in Luxembourg the Seracini expanded its in-depth art market coverage Foundation, a non-profit organization and market tracking tools. This includes dedicated to furthering the role of applied a weekly, monthly, and quarterly auction science and technology to conservation, tracking barometer (RawFacts), as well as preservation, discovery and dissemination regular in-depth analyses and reports on of Cultural Heritage and to authentication specific artists and collecting segments for the art market. such as the old masters, modern and impressionist art, and post-war and The Foundation will set-up a world class contemporary art. Data and analysis lab and will use its findings to educate covering regional art markets in Africa, the general public as well as train the the Middle East, and South Asia are also next generation of art researchers and provided. Furthermore, ArtTactic continues scientists. Additionally, it will develop an to monitor the role of financial guarantees online database of over 3,500 scientific at auction, and with more than 5,000 studies making it available to scholars individuals surveyed on a weekly basis, and and art professionals worldwide and constant monitoring of changes in buyers’ further develop the “Clinical Chart for taste, preferences, and sentiment. Art”, establishing international certified Please see the contribution on page 222. standards for the scientific study and authentication of art. 216

217 | Section 5 - Art and technology Art & Finance Report 2017 | Section 5 - Art and technology Art & Finance Report 2017 Although the majority of the financing has gone into e-commerce-related art businesses, we are also seeing more activity in the art services and art infrastructure space. 217 217

218 | Section 5 - Art and technology Art & Finance Report 2017 New infrastructure developments 1. Art valuation used to generate crowd-based market having been acquired by ValueMyStuff: valuations (current and expected value in the now-defunct Auctionata in 2015, but 12 months), as well as developing scenarios subsequently bought back by the founder to assess the probability of downside risk Patrick van der Vorst in 2017, ValueMyStuff over a 12-month period. The current shift (VMS) will now exclusively focus on in accounting regulations around art- expanding its valuation business and in (discussed on page 164), secured lending capabilities. With mobile traffic accounting which forward-looking data is prioritized for 38 percent of its business dealings, over historical data for risk management fresh efforts to redevelop the website and purposes, means that new types of data launch a new app at the end of the year are and models will be required, and this is aimed at increasing mobile conversions. an area that Artforecaster is currently ValueMyStuff has also been developing addressing. software for their website over the last five years, amassing over 500,000 clients and 2. Blockchain performing over 1.2 million valuations to smArtchain is a recently smArtchain: date. From October this year, this software launched not-for-profit initiative at will be ready to be shared with third-party blockchainhub.net, which showcases art businesses as a white-label service. This projects and art startups using blockchain would, for example, allow auction houses technology. The aim is to draw attention to outsource their online valuations, and to case studies involving the use of focus their valuation efforts only on objects blockchain, smart contracts, DAOs, and that they would consider for a sale. VMS is ICOs by artists and the art industry alike. moving from simply providing valuations Please see the contribution on page 232. to integrating their valuation expertise and software platform into existing art- Ar tTracktive: Deloitte Luxembourg has related businesses. In doing so, it hopes to developed a technological alternative to increase effectiveness, reduce costs, and the paper trail that normally proves the allow these businesses to focus on their provenance and movements of an artwork. strengths. The firm’s blockchain development team revealed the application during the ICT the market prediction ArtForecaster: spring summit in Luxembourg in May 2016. and valuation gamification platform The Deloitte ArtTracktive proof-of-concept launched by ArtTactic in 2014, has tested provides a distributed ledger for tracking its first crowd-based valuation, risk, and the provenance and whereabouts of market analysis service with a number works of fine art. The blockchain-based of art-secured lenders and insurance application manages the interactions companies over the last 12 months. between all parties involved, from the artist ArtForecaster is unique in that it offers or the owner of the piece of art, through users the opportunity to identify specific freight forwarders, customs, art galleries, groups of forecasters with particular museums, and all the way to potential skills based on their past forecaster buyers. performance. This unique data has been 218

219 | Section 5 - Art and technology Art & Finance Report 2017 3. Tagging and authenticity management model. This represents an 5. Technology and logistics Tagsmart uses DNA tagging Tagsmart: opportunity for existing art collection the company connects high-quality Arta: technology to identify artworks alongside management providers to collaborate shippers with customers, and seeks to a unique system for issuing secure more closely with the wealth management address the inefficient, fragmented and certificates of authenticity. These services industry in developing solutions that opaque high-end art shipping and logistics are fully integrated with a provenance addresses their concerns regarding client market. The service aims to streamline the record that enables artists to verify the confidentiality and discretion. However, process by creating a one-stop shop for authenticity of their artworks and create with the landscape currently fragmented fine art shipping. ARTA allows customers an accredited ownership history over time. between new and incumbent providers to find the best shipping option by tapping With over 15,000 artwork records stored with different legacy systems and solutions, into a network of selected art transporters, on its platform, Tagsmart has tagged it is still not clear whether technology will compare pricing, transact and pay online more than 5,000 artworks in its first year. be the dominant competitive factor, or (which streamlines the invoicing process), It is now also providing its API to online whether the ability to provide tailored and manage an entire logistics operation. It platforms including ArtRepublic (launched solutions will suit the wealth industry is essentially a Kayak or Expedia for fine art in August 2017), enabling end-users to b e t ter. shipping. The company is also working on instantly request secure certificates of developing APIs to connect seller and buyer authenticity, and establish provenance systems directly, bypassing the manual records for works sold via their website. pen-and-paper processes that are typically ArtTracktive: Tagsmart recently announced its next- required to complete a transaction. generation range of products and services, Deloitte including location security for artist studios Artrunners: this is an online comparison and a new method for establishing proof and contracting service striving to be Luxembourg of ownership. Tagsmart is also working the new benchmark in specialized art with leading material scientists at the logistics services such as crating, packing, has developed University of Surrey in the development transport, and installation, anywhere in of highly secure, uncopiable materials to the world. The service is currently in a live a technological work alongside their existing synthetic DNA beta version, and aims to give other art solutions, as well as exploring other forms lovers, collectors, and art professionals alternative to the of tagging, including limited-edition books. a simple and efficient solution, enabling them to choose from a diversity of service paper trail that 4. Art collection management: new vs. providers and make informed decisions. incumbent providers Artrunners tackles the complexity of art normally proves the The last 10 years have seen significant logistics using its proprietary technology so activity in the art collection management that users can save time. It has developed provenance and industry. Artbinder raised US$3.17 million a proprietary algorithm that matches your in Series A funding in July 2014, and shipping requirements with the specific movements of an other new providers, such as Collectrium capabilities of each of its service providers. (founded in 2009) and ArtCloud There is also a strong community element, artwork. (founded in 2012), joined the traditional whereby community member reviews market of existing providers such as enhance transparency and satisfaction for Artsystems (1989), ArtLogic (formally customers and service providers alike. incorporated in 1999), and Artbase (set up in 1993). Christie’s reported the US$16 million purchase[1] of Collectrium in 2015, signaling that the art industry was increasingly seeing art collection management as an attractive customer service tool, and a potential platform on which to integrate other services (such as valuation, insurance, and shipping, as well as a potential platform for buying and selling). It is clear from this year’s survey findings that consolidated wealth reporting incorporating art and collectible wealth is a key priority for both clients and wealth managers, particularly as the wealth management industry is increasingly moving toward a holistic wealth 219

220 Art & Finance Report 2017 | Section 5 - Art and technology CASE STUDY artnet Insights case study Fabian Bocart Vice President of Pablo Picasso Analytics artnet Established in 1989, artnet Pablo Picasso is one of the most liquid is dedicated to bringing artists at auction, and thus a prime transparency to the art world with a range of products that candidate for any serious art investor. ensure easy access to the Over the last 12 months, global auction latest art market information and news online. More than sales for Picasso works totaled US$401 ever, the world of million—2,675 lots were offered, with Art & Finance would benefit considerably from an accurate, 77 percent successfully sold. According quantifiable, and reliable to the trend of the artnet Picasso price metric to assess art as an asset. artnet Insights comes index, the sale price of his paintings saw as the latest development in a decrease in 2016, but increased by 38 the field of analytics for Art & Finance. percent during the first half of 2017. The total sales volume in 2016 had dropped sharply from its peak level of US$572.5 million in 2015. Picasso works are now back on the rise again, and look set to make a strong recovery in 2017. 220

221 | Section 5 - Art and technology Art & Finance Report 2017 Market-wise, Christie’s New York has had artnet Insights has also introduced a artnet has also employed another much-needed metric in the art world: the largest market share of Picasso’s new development in the field of art auction market history over the last market shares of auction houses per data analysis: artificial intelligence three years, totaling US$610.5 million and artist. At a glance, users can identify which powered by a new virtual device—a auction houses occupy the top positions accounting for 38.36 percent of the total groundbreaking addition to the field of in consigning works by a given artist, which sales value—followed by Sotheby’s London art data analysis. This tool will analyze a can help determine the right partner for (23.98 percent), and Sotheby’s New York set of works produced by an artist: an an auction sale. Similarly, this option gives (19.08 percent). With the data pulled from algorithmically generated group of works auction houses the capability to identify artnet Insights, prospective investors can that are variations on a theme or otherwise their strengths and weaknesses in the either choose the right partner for an resemble one another. For each series, a auction sale or select from a list of over 200 market for any artist. price index is generated different to identify galleries for a private sale. trends among the various groupings by the same artist. For example, the algorithm artnet Insights automatically differentiates and analyzes These types of analyses are highly sought- Pablo Picasso’s male portraits and then after on the art market. Based on artnet’s indicates the performance of that specific database of auction results, the newly series. launched artnet Insights platform allows users to understand an artist's market Figure 55. artnet Insights performance, with reports that enable them to filter by medium, artwork series, and more. Covering a total of over 103,000 artists, it provides an up-to-date price index for any given artist, which can be used to compute the estimated potential return on investment. The tool also allows for data to be downloaded directly in CSV—a format that is compatible with most data analysis software packages, including Microsoft Excel. This new approach allows dealers, money managers, hedge fund managers, and private bankers to use artnet’s indices to easily obtain an indicative update on the value of their stock or their client’s collection without the risk of sharing confidential information. Naturally, all other traditional metrics are readily available as well, including total auction sales, number of lots offered, sell-through rate, and volume. Auction volumes can be filtered by medium, such as paintings, works on paper, photographs, sculpture, and design, allowing users to directly focus on the medium of interest to them. 221

222 Art & Finance Report 2017 | Section 5 - Art and technology EXPERT OPINION Market A r t Tac tic : sentiment analysis— understanding the risk Anders Petterson Founder ArtTactic Ltd associated with market fashions and tastes in the contemporary art market The ArtTactic Art Market Confidence Survey was launched in May 2005, and covers a range of art markets and specific artists. This unique dataset covers changes in market sentiment and confidence among key experts and stakeholders in the market. The survey findings are made available every six months and are based on a sample of 120-130 key international collectors, curators, auction houses, dealers, and art advisers. The relationship between the short-term and long-term confidence indicators tell us something about how fashion, one of the greatest risks in the contemporary art market, can be better monitored, analyzed, and understood. In the following brief example, we take a closer look at how this data has been utilized in the context of the market for a specific artist: namely, Damien Hirst. 222

223 Art & Finance Report 2017 | Section 5 - Art and technology ArtTactic Damien Hirst Confidence Indicator 2006 - June 2017 Short-term market confidence Figure 56. Damien Hirst Market vs. Overall Market Confidence Short-term confidence in the Damien Hirst market experienced a substantial drop in 2008, ahead of and after the $250 100 ns ground-breaking single-artist auction 94 94 93 at Sotheby’s in September 2008. This 87 Millio 95 90 93 sale raised £111 million over two days, 90 80 in the midst of the outbreak of the 80 $200 75 74 73 financial crisis. Although the auctions 79 70 68 were a financial success, the market’s 67 75 70 65 interpretation of the events was very 70 61 59 58 58 different, with confidence falling 25 56 56 60 $150 55 51 percent leading up to the event, and 48 55 46 50 a further 85 percent after the auction had happened. Although confidence 49 45 45 40 $100 has recovered from its lowest ebbs, the 43 43 42 41 41 40 market has remained in limbo since 2010, 38 37 28 30 with a lack of consensus as to where 31 28 the market will be heading next. In the 27 20 $50 most recent reading from June 2017, 20 11 17 the confidence indicator came in at 41 10 (a reading below 50 signals that there is 11 more negative than positive sentiment 0 $0 in the market), down from 45 in January 2017. This could imply that Hirst’s long-anticipated and highly publicized exhibition in Venice has had little positive Mar ket Co dence ien H irst fi Dam ien H irst A uction S al es n Dam short-term impact on the market’s Source: ArtTactic perception of where the market is going next. confidence has Although recovered from its lowest ebbs, the market has remained in limbo since 2010, with a lack of consensus as to where the market will be heading next. 223

224 | Section 5 - Art and technology Art & Finance Report 2017 Long-term market confidence Figure 57. ArtTactic Hirst Market Survey March 2017 Question: How important do you believe Damien Hirst's Market will be in 10 year's time? In addition to measuring experts’ perceptions regarding short-term confidence (next six months), the 100% 0% 0% 0% 0% 1% 3% 4% 4% 6% 7% 7% 8% 8% 9% confidence survey also looks at 12% 90% respondents’ perceptions about their 31% 35% 36% 23% long-term outlook. Despite negative short- 80% 35% 22% 33% 40% 43% 32% 39% 37% 43% term sentiment, the market has remained 42% 70% 41% more confident about Damien Hirst’s long- 60% term importance. Based on the recent survey findings, 40 percent 50% of market experts believe the artist will 40% be of high importance and a further 70% 69% 69% 65% 43 percent believe the artist will be of 64% 63% 63% 61% 30% 59% 57% 56% 55% 53% medium importance in ten years’ time, 50% 48% 20% which suggests that the majority think the artist's market will survive and play an 10% important role in the future. Accordingly, 0% only 17 percent believe that the market will be of low importance. Jun 13 Jan 13 Jun 12 Jan 12 Jun 11 Jan 17 Jun 10 Dec 09 Jun 15 Jan 16 Jun 15 Jan 15 Jun 14 Jan 14 Dec 10 High Medium Low Source: ArtTactic ArtTactic Hirst Market Survey March 2017 Figure 58. Confidence in object-specific Question: Which period(s) do you consider to be his most important? characteristics Overall short-term and long-term confidence can help us to understand 10% 20% 0% 30% 40% 70% 60% 50% the market’s perception of a particular artist in broad terms. This, in turn, may 1990-1994 give an indication as to where the market and prices could be heading next, and 1994-1999 to what extent this trend is sustainable. However, the confidence survey also aims to extract more granular details regarding 2000-2005 perceptions of the artist’s specific oeuvre. The analytical tools, see Figures 58 & 59, 2006-2012 depict the market’s perception of the period and series of works believed to be of the greatest importance at the time of 2013-2017 the survey. Source: ArtTactic 224

225 Art & Finance Report 2017 | Section 5 - Art and technology ArtTactic Hirst Market Survey March 2017 Figure 59. Question: Which series do you consider the most important? 40% 0% 10% 20% 30% 50% 60% 70% 80% 90% e Formal dehyd 81% Butter lour P aintings fl y Co 75% inets Medicine Cab 74% inets Pill Cab 72% Spot P ai ntings 70% Diam ond S kulls 68% Spin Pai ntings 61% inets Entomology Cab 59% eidoscope P ai ntings Kal 57% Diam binets ond Ca 54% inets Instrument Cab 52% ai ntings Entomology P 50% Vitrines 50% Ci garette Cab inets 45% Diam lour P ai ntings ond Co 34% The L as t S upper 29% Mental E sc ology ap 28% lour Ch Co ar ts 26% ai ntings Remedy P 21% After B eau tiful P ai ntings 20% Blac k S cal pel P ai ntings 19% llag es Co 19% ai ntings Visual Can dy P 17% d S culptures ai ntings an Fly P 17% Pie Ch ar ts 16% Fac t P ai ntings 14% Poison P aintings 10% e P ai ntings Scal pel B lad 10% When L ogics D ie 10% ai ntings Ashtray P 7% ai ntings Biopsy P 7% Source: ArtTactic Despite negative short-term sentiment, the market has remained more confident about Damien Hirst’s long-term importance. 225

226 Art & Finance Report 2017 | Section 5 - Art and technology EXPERT OPINION Pi-eX: A new approach to art data analysis Christine Bourron CEO Shifting the focus from the Pi-eX Ltd artwork to the collectors At a time when Big Data has become a buzz phrase for many industries, providing new opportunities to analyze data and understand market trends, the art market continues to struggle with data. This was clearly demonstrated earlier this year when simply sizing the art market proved a challenge, as shown by the wide discrepancies between the 2017 TEFAF report and the 2017 Art Basel report. The discrepancies not only highlighted the based on fine art, Pi-eX built a proprietary lack of transparency in the fine art market, database of auction sales results and but also the absence of widely established developed a systematic methodology for methodologies and analytical standards on analyzing volatility, performance, liquidity, the research side of the fine art industry. and volatility hedges. As in the traditional finance world, especially when dealing with Does this mean that the art market risk assessment and management, Pi-eX should remain forever a world where all uses a behavioral analysis approach to gain that matters is emotions and feelings as insightful information on the dynamics opposed to quantitative, objective data of the fine art market. By focusing on and rational analysis? Not necessarily, but the behavioral trends of art buyers and it clearly shows that art is a unique asset sellers rather than specific artworks or class that requires a new approach to data styles, Pi-eX strives to provide valuable analysis and communication. market-focused information to those interested in better understanding liquidity, Over the past four years, Pi-eX has performance and volatility in the fine art focused on building analytical and financial market. tools that help fine art collectors better understand and manage risk and volatility Here is some of the rationale behind Pi-eX’s in the fine art market. In the process of new approach to art data analysis. developing the first derivative instrument 226

227 Art & Finance Report 2017 | Section 5 - Art and technology Why, in the era of Big Data, is the fine multiple comparable items. By mixing too art market still struggling with data? many loosely related items, one may lose Various elements contribute to this track of the particularities of the original struggle: a lack of trade transparency, analysis. Does this mean that no data lack of industry standards, the multiple analysis can be done? Not at all, but it distribution channels, and − of course − certainly means that the analysis should the unique nature of the trade of fine always link back to specific works of art to art in which each item is unique and non allow the reader to see and understand the fungible, making it extremely difficult to impact of every single artwork involved in truly compare like for like. Even the same the analysis. exact item sold at different times after belonging to different collectors can hardly be used as a point of comparison. While it would be easy today Is Big Data analytics the solution for the fine art market? to browse through millions While it would be easy today to browse through millions of art sales records, the of art sales records, the reality reality of analyzing art data is often very similar to comparing apples to oranges. In fact, when looking at the historical trends of analyzing art data is often for a particular artwork, the researcher rarely finds more than three or four very similar to comparing relevant data points. We can therefore forget any correlation or regression analysis, variance calculation, Sharpe apples to oranges. Ratio, etc. With only three dots, it is often challenging to discern any historical trends. As for predictions of the future based on these historical trends, one might as well Shifting from an artwork-focused resort to Paul Klee’s creative definition that analysis to a collector-focused analysis “a line is a dot that went on a walk.” In a Smart Data analysis, one way to overcome the challenge of a small data Recognizing and accepting that art is a set at the artwork level is to switch the particular asset class, for which standard focus from the artwork to the collectors. analytical solutions do not perfectly apply, Specifically, rather than trying to analyze is an important step. In this regard, we at repeat sales for one particular artwork, Pi-eX strongly believe that the solution for the focus should be on the collectors of fine art does not reside in Big Data, but artworks, thus analyzing behavioral trends rather in Smart Data. between sellers and buyers. While data for collectors’ behaviors is not available across What is Smart Data? all art distribution channels, there is one Smart Data is about finding creative channel where there is a profusion of data: ways to deal with the unique challenges public auction sales. In fact, this channel presented by the fine art market. A offers all the prerequisites for systematic Smart Data analysis starts by recognizing behavioral analysis of art buyers and that any analysis can only be based on sellers. a small dataset. Consequently, it is not meaningful to look at the data exclusively through averages or indices, as any type of aggregation could be disproportionately influenced by the fate of just a single artwork and thereby minimize the importance of others. The other important thing to recognize is that the small dataset cannot easily be extended by adding 227

228 | Section 5 - Art and technology Art & Finance Report 2017 Why is behavioral analysis relevant to the fine art market? Fernand Léger: 2007 - 2016 The value of a work of fine art goes far ti Total HP versus LE & HE of auc oned artworks ti at Sotheby's and Chris e's in London & NY evening sales beyond its intrinsic value: the cost of the $120 M canvas, the oil, or the time spent by the artist creating the artwork represent a ti mates (LE) Total Low Es $100 M mere fraction of the price eventually paid. ti Total H igh Es mates (HE) What mostly drives the value of an artwork $80 M Total H ammer Price (HP) is at which price sellers are willing to sell their works and buyers are willing to pay. $60 M In the end, the sale price of an artwork is a fragile equilibrium between the $40 M expectations of both sides. If no common ground is found between the two sides, $20 M the artwork does not reach the reserve price and it is unsold or “bought-in”. $ M Behavioral analysis of buyers and sellers 2011 2015 2010 2009 2008 2007 2016 2014 2013 2012 deals with understanding this critical price point at which sellers and buyers may or The Pi-eX graph above shows the combined performance of all Fernand Léger’s may not meet. It is the analysis of where collectors who bought or auctioned artworks at evening sales at Sotheby's, this price point has been historically and Christie's, and Phillips in London and New York from 2007 to 2016. The grey lines where it could be in the future. are the sums of the Low Estimates (LE) for the auctioned artworks, i.e., the total expected low valuation that sellers hoped to receive, while the blue lines are the How does behavioral analysis help sums of High Estimates (HE) for the same works, i.e., the levels of high valuations with the small dataset challenge? that the sellers again hoped to receive for the works they were selling. Against these While historical sales for a particular expectations, contrast the gold dots that represent the total Hammer Prices (HP) for artwork generate very little data, the same works, showing what the buyers were willing to hammer for these works behavioral analysis of buyers and before additional fees and commissions. Looking at the results year after year, one sellers can be based on abundant data can get a good understanding of where buyers and sellers stood regarding the across many years, different locations, Fernand Léger trade of artworks sold at evening sales. and numerous artworks, especially when dealing with collectors buying at Source: Pi-eX Ltd public auctions. Thanks to the annual regularity of public auction sales, one can systematically analyze year after year what collectors like to buy or sell, where they prefer to do so, how their tastes evolve, what their critical price points are, which artists they are confident in or not, etc. 228

229 Art & Finance Report 2017 | Section 5 - Art and technology Frank Stella: 2007 - 2016 ti oned artworks at Sotheby's, Chris ti Total LE of auc e's and Phillips $25 M ti orks with es New York & London evening sales (w ma tes only) $20 M $15 M $10 M New York New York $5 M New York New York New York New York New York New York New York London London New York $ M 2010 2011 2012 2013 2014 2015 2016 2007 2008 2009 Frank Stella: 2007 - 2016 Total HP of sold artworks at Sotheby's, Chris e's and Phillips ti $25 M tes only) ma ti orks with es New York & London evening sales (w $20 M $15 M New York $10 M New York New York $5 M New York New York New York New York New York London London $ M 2014 2015 2016 2007 2008 2009 2010 2011 2012 2013 As an example, the top Pi-eX chart shows the total sum of the Low Estimates (LE) chosen by sellers for Frank Stella’s artworks auctioned at evening sales at Sotheby's, Christie's, and Phillips in London and New York from 2007 to 2016. An immediate conclusion is that sellers of Frank Stella artworks clearly prefer New York as a public auction trading place. The chart above shows the total sum of the Hammer Prices (HP) obtained from buyers for Frank Stella’s artworks sold at evening sales at Sotheby's, Christie's, and Phillips in London and New York from 2007 to 2016. By comparing both charts, one can conclude that while sellers had a hard time obtaining the value they desired for their Frank Stella works from 2008 to 2012, 2013 to 2016 have been good years for sellers as they have generally obtained more value than their LE, especially in New York in 2015 and 2016. Source: Pi-eX Ltd 229

230 Art & Finance Report 2017 | Section 5 - Art and technology What else can be done to make data more relevant to the fine art market? e's & Phillips ti oned lots at Sotheby's, Chris ti Lucio Fontana: auc orks with es HP/LE results year by year: 2007 - 2016 (w ti ma tes) When looking at the behavioral analysis London and New York evening sales of art collectors, one should never forget 600% that these collectors are buying unique artworks. Therefore, while there certainly HP>LE are some trends that can be identified, there will always be a few outliers that will not and cannot fit the trends because 500% they are so unique. How to identify and showcase these outliers is critical in a Smart Data analysis. A successful way to do so is through granularity and visuals. 400% 1. Granularity Instead of just producing indices or averages, a granular approach makes sure to always represent the various 300% components of the market. Specifically, for art, the analysis should map specific artworks according to the criteria chosen for the analysis. 200% HP=LE 100% HP

231 Art & Finance Report 2017 | Section 5 - Art and technology 2. Visuals Conclusion While art is considered by many as an Traditional analytical tools available to alternative investment opportunity, it fine art collectors usually offer limited certainly cannot be reduced to a number or value-add to the risk assessment and an index. Along the same line, art analysis investment decision process when buying could not just be a ratio. It requires its own art. As interest in art as an asset class has visual representation that talks both to the grown recently, a new analytical approach left and right parts of our brain. to the fine art market based on a Smart Data approach and the behavioral analysis Pi-eX was shortlisted for the Best of art buyers and sellers not only makes Innovation in the Data category for the sense, but also offers a completely new 2017 UK Financial Innovation Awards. The perspective on the market, especially in company was selected for the work it has regards to risk analysis and assessment done developing a new methodology to during the investment decision process. analyze trends and opportunities in fine art as described here. ool: 2007 - 2016 Christopher W oned at Sotheby's, Chris ti P - LE) for lots auc Total (H ti e's & Phillips according to their HP/LE performa nce in London and New York evening sales $20 M $15 M $10 M $5 M $ M -$5 M -$10 M -$15 M -$20 M -$25 M -$30 M 2008 2009 2010 2011 2012 2013 2014 2015 2016 2007 Under LE Over LE Bought-In LE The Pi-eX chart above visually represents the overall mood of buyers and sellers of Christopher Wool artworks at evening sales at Sotheby's, Christie's, and Phillips in London and New York from 2007 to 2016. From 2010 to 2015, buyers of Christopher Wool work were clearly competing to acquire works as shown by the blue bars representing the total positive difference between the achieved Hammer Prices (HP) and the Low Estimate (LE). The mood clearly changed in 2015 and 2016. As value of bought-Ins and artworks selling below their LE increased, buyers were less willing to pay above the LEs set up by sellers. Source: Pi-eX Ltd 231

232 Art & Finance Report 2017 | Section 5 - Art and technology EXPERT OPINION Blockchain Case studies Dr. Shermin Voshmgir in the art industry Founder blockchainhub.net blockchainhub.net is and beyond an information hub and think tank advocating blockchain, smart contracts and the decentralized web. 102 We recently launched the smArtchain initiative at blockchainhub.net, where we showcase art projects and art startups using blockchain technology. Our aim is to draw attention to case studies involving the use of blockchain, smart contracts, DAOs, and ICOs by artists and the art industry alike. Furthermore, we have forged a partnership with Lensbased— Hito Steyerl’s class at Berlin University of the Arts—where we critically examine the role of blockchain in society. As blockchainhub.net, we are also collaborating with Propellor Film Tech Hub—a joint venture between the Berlinale Film Market and Rotterdam Film Festival. Art-industry case studies without relying on cloudy and sometimes The art industry is one of the world’s most still paper-based systems of recording opaque business sectors, with a multitude provenance. Blockchain could revolutionize of middlemen between the creators the art industry by resolving questions of provenance, and improving transparency, and the consumers of art. Each of these middlemen takes a cut of the revenue and copyright, and ownership issues. Seeing the potential, art startups are already passes along the rest, with the leftovers typically reaching the artists themselves building real-world applications based on months, if not years, later. Blockchain could blockchain. help keep track of an artwork’s movements 232

233 | Section 5 - Art and technology Art & Finance Report 2017 Blockchain as a creative tool ICOs, artist tokens, and crowd funding Ascribe.io, for example, offers artists a Blockchain is much more than a tool to Blockchain and smart contracts can also platform for uploading their digital works, make the art industry more efficient. be used by artists to fund their projects securing their attribution, and selling them. Blockchain technology could also serve as through token sales, creating their own In 2015, the Museum of Applied Arts (MAK) a new creative medium for artists to use artist coins or using it as a crowdfunding or in Vienna acquired several editions by to push the boundaries of creation and crowd-investing tool. the artist Harm van den Dorpel that had society, as we can see with Plantoid and been authenticated by Ascribe. MAK also Terra0. Tatiana Moroz pioneered this field in 2014 showcased an exhibition of the work of by issuing the first artist currency, Tatiana Valentin Ruhry, an artist and the cofounder 103 108 is a self-owned forest. It is an a scheme that exhibits Terra0 Coin, long before ICOs and token sales of Cointemporary, works online that are available for purchase ongoing art project by two students of became a mainstream application. Owners in bitcoin. Berlin University of the Arts, who are of TCs could redeem them for members- seeking to set up a prototype of a self- only rewards including autographed utilizing piece of land. A smart contract Blockai is a startup that seeks to memorabilia, advanced copies of music, on the blockchain allows the forest to democratize access to copyright merchandise, and access to exclusive become an autonomous piece of land that protection, allowing artists to claim events, and also custom music, house manages itself in accordance with the rules copyright on their work instantaneously concerts or sponsorship opportunities. established in the smart contract. With and see where it is being used. Blockai With Ethereum, token issuance and sales Terra0, the forest is able to sell licenses to also acts as a fraud deterrent. If someone have become easier, and we are likely to log trees through automated processes. tries to claim somebody else’s work, there see more artist coins emerge in the future. The forest thereby accumulates capital. will be a permanent record of this on the A shift from valuation through third parties blockchain. to self-utilization makes it possible for the forest to procure its real exchange value, Chainmark, on the other hand, is a startup and eventually buy and own itself. that seeks to bridge the gap between The augmented autonomous forest is physical art and blockchain. Combined then in a position to buy more ground and with tagging technology, chainmark is a therefore to expand. mixture of materials of varying colors that can be placed on the side of a painting. Another art project using smart contracts This produces a unique fingerprint that can 109 —the plant equivalent of an is Plantoid then be hashed onto a blockchain. Other References android. It is an autonomous blockchain- A missing chainmark could reveal that a http://theartnewspaper.com/ based lifeform that is able to reproduce work has been tampered with. news/blockchain-how-the- itself through a smart contract. Plantoid revolutionary-technology-could- is a hybrid creature that lives both in the Grammy-award winning singer-songwriter 104 change-the-art-world/ has pioneered Mycelia, a physical world, as a mechanical contraption Imogen Heap think tank to empower a fair, sustainable, made up of recycled steel and electronics, http://financeandsociety.ed.ac. and vibrant music industry ecosystem. and in the digital world, as a piece of uk/article/view/1724/2238 105 is attempting The startup Artlery software deployed on top of a blockchain- the same thing for physical art such as based network. http://www.coindesk.com/ sculptures and paintings. blockchain-technology-inspiring- It is autonomous, self-sustainable, and art/ Earlier this year, music streaming company capable of reproducing itself through a Spotify acquired blockchain startup combination of blockchain-based code 106 an open-source Mediachain Labs, and human interactions. Contributions platform that seeks to enable creators to are made through the bitcoin blockchain, https://blockchainhub.net/smartchain 102 103 https://cointemporary.com attach information to projects and create a by simply sending funds to the Plantoid’s http://myceliaformusic.org/2016/05/14/ 104 record on the bitcoin blockchain stored on bitcoin wallet. Once a Plantoid has proven - imogen-heap-decentralising-the-music-indus try-with-blockchain/ the distributed file system, IPFS. its worth by accumulating a sufficient 105 https://artlery.com/ quantity of bitcoins, it will enter into 106 - http://www.coindesk.com/mediachain-block In the entertainment industry, the reproductive phase, initiating a chain-tech-next-spotify/ and http://www.coindesk. 107 com/spotify-acquires-blockchain-startup-mediachain/ is working on a blockchain- SingularDTV procedure whereby the Plantoid will look 107 https://medium.com/@SingularDTV/anatomy-of-sin - based digital content management and for humans willing to help it in the process - gulardtvs-code-centrally-organized-distributed-enti ty-cd7285d63549 distribution platform. The vision is to of reproducing itself—physically building http://digital.udk-berlin.de/?/students/kolling-paul/ 108 the entertainment industry decentralize another Plantoid in exchange for bitcoins. projects/ss16.terra0/ so that creative individuals can profit from 109 http://okhaos.com/plantoids/ the films, videos, games, and art they help to make. 233

234 Art & Finance Report 2017 | Section 6 - Risk management and regulation 234

235 Art & Finance Report 2017 | Section 6 - Risk management and regulation Section 6 Risk management and regulation MISS UTOPIA © YINK A SHONIBARE MBE (2013), PHOTOGRAPHER: CHRISTIAN GLAESER 235 235

236 Art & Finance Report 2017 | Section 6 - Risk management and regulation HIGHLIGHTS • Strong calls for modernization: As the art industry continues to grow, and art values climb to record levels, expectations will emerge in respect of market conduct. In this year’s survey, 73 percent of wealth managers, 74 percent of art professionals, and 64 percent of collectors said that the art market needed to modernize its business practices to meet the expected standards of a transparent, trustworthy, and developed marketplace. As in other markets and business sectors, different forms of regulation could play an important role in achieving this. • Self-regulation preferred over government intervention. Over 77 percent of art professionals and 76 percent of collectors prefer a self-regulated approach to establish trust and credibility in the art market. However, wealth managers feel that more government regulation is required. However a mixed approach seems recommended to support a sound growth of the art market. • Wealth managers see authenticity issues, lack of provenance, forgery, and attribution as the greatest threats to the reputation of the art market: 83 percent of wealth managers see authenticity, provenance, and attribution issues as the greatest risks in the art market. Art professionals are echoing this sentiment, with 81 percent saying that these are major risks to the art market. Some of the biggest threats to the reputation of the art market from the perspective of wealth managers, collectors, and art professionals are issues linked to price manipulation, insider trading, and other anti- competitive behaviors. 236

237 | Section 6 - Risk management and regulation Art & Finance Report 2017 The Responsible Art Market Initiative (RAM) published its first set of guidelines to tackle the threats of money laundering and terrorist financing in the art market in January 2017. • Undisclosed conflicts of interest: • Approved reform to the existing • Money laundering regulations will 65 percent of wealth managers, 63 regulations governing the Italian art 65 percent of affect the art market: percent of collectors, and 69 percent In Italy, a new reform aimed at market: the wealth managers surveyed (up from of art professionals see issues around the existing Cultural Heritage Code is 56 percent) felt that money laundering undisclosed conflicts of interest as a set to improve Italy’s competitiveness in is a serious threat to the credibility of problematic topic in the art market. the international art market. On 29 June the art market. With tighter anti-money Increasing focus must be placed on due 2017, the Italian house of representatives laundering rules currently entering into diligence in art transactions. ) approved five Camera dei Deputati ( force around the world, the art world amendments to a bill aimed at fostering will be forced to comply with these new Lack of standardization regarding • competition regulations. professional qualifications in the 65 percent of the wealth art market: • Guidelines around money laundering managers surveyed (up from 52 percent launched to assist art businesses: in 2016) feel that the lack of standardized The Responsible Art Market Initiative professional qualifications in the art (RAM) published its first set of guidelines market is a real issue, as it complicates to tackle the threats of money laundering the search and selection of individuals and terrorist financing in the art market or firms with the appropriate knowledge in January 2017. The guidelines are and skills. tailored to art transactions and focus on three areas of enquiry: the client, the • Price manipulation and other anti- artwork, and the transaction. RAM sees competitive behavior: Some of the this practical, self-regulatory approach biggest threats to the reputation of as complementing existing regulations the art market from the perspective of imposed by states. wealth managers, collectors, and art professionals are issues linked to price • New regulations around the import of manipulation, insider trading, and other cultural goods in Europe: In July 2017, anti-competitive behaviors. a new European Commission proposal 110 was on the import of cultural goods Lack of market transparency: • published. The new rules could enter 79 percent of wealth managers and 62 into force as early as 2019, and they are percent of collectors see this issue as one part of a broader plan to fight terrorist of the key issues within the art market. financing. The new rules are aimed at Most of the problems outlined above ensuring consistency and clarity as boil down to the fact that the art market regards the types of restrictions and continues to operate as an opaque and control measures proposed by the non-transparent market, and the duty European Commission to tackle the illicit and obligation to be transparent have trade in cultural objects. largely been circumvented. However, high-profile court cases and legal disputes have pushed this issue to the top of the agenda. 110 Proposal for a Regulation of the European Parliament and of the Council on the Import of Cultural Goods. Publication. Vol. SWD (2017) 263 Final. Brussels: European Commission, 2017. 237 237

238 Art & Finance Report 2017 | Section 6 - Risk management and regulation Art & Finance Report 2017 | Section 6 - Risk management and regulation In last year’s report, we launched a new section on regulation in response to a number of issues threatening the reputation of the art market and hence also the development of the Art & Finance industry. The report initiated a debate on the best way forward in terms of regulating certain practices and aspects of the art market, and regarding the extent to which the art market should move toward greater self-regulation or pursue a path of government intervention. REGULATION PRIORITIES Transparency in Transparency around Transparency around Transparency in valuation and pricing transactions skills and knowledge object-specific risks Money laundering • Lack of international • Price manipulation • Authenticy • standards around Lack of title register • Undisclosed interest • • Lack of providence professional qualifications • Secret comissions Insider trading • • Forgery and attribution in the art market • Confidentiality • Auction guarantees around the buyer's and seller's identity Source: Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 238 238 Defau lt Full in creas e in credit risk or p as t due* > 90 d ECL ai rme imp nt r p as t due* > 30 d o ect of c ollate E ff ral (less costs of obtai ning d s elling) an

239 | Section 6 - Risk management and regulation Art & Finance Report 2017 However, it is not only the art market that All of the aforementioned risks present an In this year’s edition, we continue the is affected by a lack of regulation and opportunity for wealth managers to work debate by inviting a number of key challenges in relation to risk management. with the public museum sector in areas of stakeholders to express their opinions and A recent report by the National Audit best practice to consider when responding experiences on the theme of regulation 112 on the risks associated Office in the UK to the risks associated with private and we have also added a closely related with private donations to public museums donations. theme of risk management in the art world. shows that this is a much broader cause for concern. The following section is based on the One of the key initiatives this year, covered findings from surveys conducted among in greater depth in this report, was the This report states that private donations legal professionals, wealth managers, launch of the Responsible Art Market present different risks to other sources of art professionals, and art collectors. The Initiative (RAM), which was formally revenue for the museums and cannot be purpose was to identify a set of priorities launched on 26 January 2017 in Geneva. managed in the same way as commercial among these stakeholders when it comes The aim of the initiative is to issue a set transactions. The report highlights a to issues that pose the greatest threat to of guidelines aimed at rebuilding trust number of risks: the reputation and functioning of the global and credibility without undermining the art market. These findings are provided commercial interests of the art industry. alongside opinions and comments from Its guidelines are designed to be accessible —if accepting a donation Legal risk • experts working closely with the art market to the entire art market, including small were to breach legislation such as the today. art businesses, and individual dealers and Proceeds of Crime Act 2002 (for example, collectors. RAM’s first set of guidelines where the donor has generated the tackle the threats of money laundering and underlying fund through illegal activity). terrorist financing in the art market. This could expose a charity to legal or regulatory challenges Like the majority of the stakeholders Financial risk • —if the donor cannot surveyed this year, RAM argues strongly for honor the donation in full or in part. a self-regulated approach in the art market This would be most damaging where the (page 246). As the threats and challenges to receiving institution was heavily reliant the art market and Art & Finance industry on the anticipated donation to fund key evolve, initiatives such as RAM offer a strategic expenditure forum and collaborative model to address and tackle these issues, and thereby • —if accepting the Reputational risk increase transparency, public trust, and donation were to create an association confidence in the market. As mentioned with an individual or entity that is by the founders of RAM, international perceived to be inappropriate or collaboration and engagement on the unethical by other stakeholders. This issues faced by the art market, not just would include the perception of the within the art market itself but also public, employees, and other significant with other stakeholders, such as law donors • Money laundering enforcement and state authorities, will be Lack of title register • —if accepting the • Dependency risk very important for the future success and donation were to give the donor an development of the Art & Finance market. • Secret comissions undue level of influence over a charity • Confidentiality and its trustees In this regards, it is interesting to mention around the buyer's and that Art Basel, owned by Basel-based seller's identity MCH Group, has issued new exhibitor regulations that will go into effect with Art Basel Miami Beach in December 2018. Changes are aimed at improving professionalism and shoring up buyer confidence in the wake of growing litigation 111 . in the art world 111 The Art Newspaper 29 September 2017 112 “Due diligence processes for potential donations” by 239 239 the National Audit Office, July 2017.

240 | Section 6 - Risk management and regulation Art & Finance Report 2017 Survey findings Which of the following issues do you feel are the most threatening/damaging to the reputation of the art market? Figure 60. ich of the following issues do you feel ar e the most Fig. 39. Wh on of the ar t mar ket? ti ng to the reputa agi threatening/dam 83% tribution Authenticity, l ac k o f p rovenan ce, f orgery an d at 63% 81% 79% Lack o f t ran spar ency 62% 76% P ti-c ompetitive b ehav iour rice m ipulat ion an d o ther an an 82% 71% 69% Lack o f t itle r egister/u nique i denti fi er f or o bje cts 52% 58% cat ions i n Lack o f i nternat ional s tan dar ds a round p rofessional q ual i fi 65% 48% t m ar ket the ar 58% 65% Money l aundering 49% 61% 65% fl icts o f interest Undisclosed c on 74% 69% 63% Secret c ommissions 57% 61% Insider d ealing 66% 59% 47% fi dentiality ar ound t he s eller’s an Co d b uye r’s identity n 32% 41% 28% tees Auction g uaran 32% 35% 90% 10% 50% 70% 30% 20% 80% 40% 60% 0% Weal th M an ag ers 2017 Co llectors 2017 Arts P rofessionals 2017 Source: Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 Undisclosed conflicts of interest: same as in 2016), and 71 percent of art There is consensus across different 65 percent of wealth managers (down professionals (down from 73 percent in stakeholders (collectors, art professionals, from 77 percent in 2016), 63 percent 2016) see price manipulation and other and wealth managers) when it comes to the of collectors (down from 72 percent in anti-competitive behaviors as a major issues that constitute a real threat to the 2016), and 69 percent of art professionals damaging factor to the reputation of the reputation and the functioning of the art (down from 70 percent in 2016) see issues global art market. market. around undisclosed conflicts of interest as a problematic issue in the art market. The This view was also supported by 66 percent These concerns notably include role of intermediaries in the art market of collectors who said that insider dealing authentication and provenance issues, remains a gray and unregulated area. The was a major threat to the reputation of price manipulation, conflicts of interest, relationship between intermediaries and the art market (up from 64 percent in lack of transparency, and secret the seller/buyer is often fraught with a lack 2016). The majority (59 percent) of art commissions, where nearly three quarters of transparency and potential conflicts professionals (down from 66 percent in of wealth managers, collectors, and art of interest. As long as the art market is 2016) and 61 percent of wealth managers professionals share these views. wedded to a commission-based revenue (down from 62 percent in 2016) said the model, the problem of conflicts of interest same this year. These are critical factors Price manipulation and other anti- is unlikely to go away. These issues around and they have the potential to undermine 76 percent of competitive behaviors: conflicts of interest and how to manage this confidence in and the credibility of any wealth managers (up from 73 percent risk is discussed by Deborah Gunn, Senior given price (and hence also the data being in 2016), 82 percent of collectors (the Adviser, Faurschou Foundation on page used to assess risk and performance in the 264. art market). All stakeholders continue to feel strongly about this particular aspect of the market. 240

241 | Section 6 - Risk management and regulation Art & Finance Report 2017 ich of the following issues do you feel ar e the most Fig. 39. Wh on of the ar t mar ket? ti ng to the reputa agi threatening/dam Figure 61. Art Professionals: Which of the following issues do you feel are the most threatening/damaging to the reputation of the art market? 81% tribution Authenticity, l ac k o f p rovenan ce, f orgery an d at 76% Lack o f t ran spar ency 69% 71% ipulat ion an Price m an d o ther an ti- competitive b ehav iour 73% 58% er f or o bje cts fi Lack o f t itle r egister/u nique i denti 59% Lack o f i nternat ional s tan dar ds a round p rofessional q ual i fi cat ions i n 58% 38% the ar t m ar ket 61% Money l aundering 47% 69% fl icts o f interest Undisclosed c on 70% Secret c ommissions 68% 59% Insider d ealing 66% 41% Co fi ound t he s eller’s an n d b uye r’s identity dentiality ar 35% 35% Auction g uaran tees 32% 0% 90% 80% 70% 60% 50% 40% 30% 20% 10% Arts P rofessionals 2016 Arts P rofessionals 2017 Source: Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 Fig. 39. Wh ich of the following issues do you feel ar e the most threatening/dam agi ng to the reputa ti on of the ar t mar ket? Wealth Managers: Which of the following issues do you feel are the most threatening/damaging to the reputation of the art market? Figure 62. 83% Authenticity, l ac k o f p rovenan ce, f orgery an d at tribution 76% 79% Lack o f t ran spar ency 73% 76% Price m ipulat ion an d o ther an ti-c ompetitive b ehav iour an 73% 69% fi Lack o f t itle r egister/u nique i denti er f or o bje cts 62% dar ds a round p rofessional q ual i fi Lack o f i nternat ional s tan cat ions i n 65% 52% t m the ar ar ket 65% Money l aundering 56% 65% fl Undisclosed c on icts o f interest 77% 63% Secret c ommissions 69% 61% Insider d ealing 62% 47% d b uye r’s identity dentiality ar fi n Co ound t he s eller’s an 29% 28% Auction g uaran tees 34% 50% 40% 30% 90% 10% 0% 70% 80% 60% 20% an ag ers 2017 Weal th M an ag ers 2016 Weal th M Source: Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 241 241

242 | Section 6 - Risk management and regulation Art & Finance Report 2017 ich of the following issues do you feel ar e the most Fig. 39. Wh on of the ar t mar ket? ti ng to the reputa agi threatening/dam Figure 63. Art collectors: Which of the following issues do you feel are the most threatening/damaging to the reputation of the art market? 63% Authenticity, l ac k o f p rovenan ce, f orgery an tribution d at 71% 62% Lack o f t ran spar ency 69% 82% Price m an ipulat ion an d o ther an ti-c ompetitive b ehav iour 82% 52% fi er f or o bje cts Lack o f t itle r egister/u nique i denti 54% Lack o f i nternat ional s tan dar ds a round p rofessional q ual i fi cat ions i n 48% 42% t m ar ket the ar 49% Money l aundering 40% 74% Undisclosed c on icts o f interest fl 72% 57% Secret c ommissions 57% 66% Insider d ealing 64% 32% dentiality ar ound t he s eller’s an d b uye r’s identity n Co fi 29% 32% tees Auction g uaran 40% 10% 60% 50% 80% 90% 70% 0% 20% 40% 30% Co llectors 2017 Co llectors 2016 Source: Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 Lack of market transparency: Linked Lack of standardization regarding Money laundering: 65 percent of the to the above is the issue of a lack of professional qualifications in the wealth managers surveyed (up from 56 transparency in the art market. 79 percent art market: 65 percent of the wealth percent) felt that money laundering was of wealth managers (up from 76 percent in managers surveyed (up from 52 percent a serious threat to the credibility of the 2016) and 62 percent of collectors (down in 2016) feel that the lack of standardized art market, and 61 percent of the art from 69 percent in 2016) see this issue as professional qualifications in the art professionals surveyed (up from 47 percent one of the key issues within the art market. market is a real issue, as it complicates in 2016) and 49 percent of the collectors Most of the problems outlined above the search and selection of individuals surveyed (up from 40 percent in 2016) boil down to the fact that the art market or firms with the appropriate knowledge felt the same. However, with tighter anti- continues to operate as an opaque and and skills. However, different art industry money laundering rules currently entering non-transparent market, and the duty and associations, such as the Association into force around the world, the art world obligation to be transparent have largely of Professional Art Advisors (APAA), the will be forced to comply with these new 113 This issue is discussed been circumvented. However, high-profile Association of Art & Antique Dealers regulations. in more detail by Mathilde Heaton and court cases and legal disputes have pushed (LAPADA), Le Comité Professionnel Sandrine Giroud from RAM (page 246), this issue to the top of the agenda. des Galeries d’Art, and the Appraisers David Heurtevent and Adrien Chiariello Association of America, have all been from Deloitte Luxembourg (page 256), and Wealth managers see authenticity set up to raise standards and promote by Rebecca Jennings from The Fine Art issues, lack of provenance, forgery, and adherence to a code of ethics among (page 268). Group attribution as the greatest threats to the its members. It is important that these 83 percent reputation of the art market: associations improve the dialogue with the of wealth managers (up from 76 percent wealth management community to ensure in 2016) see authenticity, provenance, and that their members are part of the process attribution issues as the greatest risks to create a common platform for the Art & in the art market. Art professionals are Finance industry. 113 “As of 1 January 2016, the Anti Money Laundering law echoing this sentiment, with 81 percent of Switzerland (AML A) will also apply to traders, i.e., (up from 76 percent in 2016) saying this is a individuals and legal entities that commercially trade in movable goods and in this context, accept payment major risk to the art market. of cash (source: http://www.caplaw.ch/2015/anti-mon - - ey-laundering-implemention-of-the-revised-fatf-rec ommendations/). 242

243 | Section 6 - Risk management and regulation Art & Finance Report 2017 Figure 64. Arts Professionals: Which regulatory approach do you favor when it Government intervention or comes to establishing trust and credibility in the art market? self-regulation? nagers: Which regulatory approach do you favour when Fig.41: Wealth Ma Over 77 percent of art professionals it comes to establish trust and credibility in the art market? and 76 percent of collectors prefer a self-regulated approach to establish 40% trust and credibility in the art market, i.e., gu la tio n Govern ment Re they believe that the threats to the art 36% market are best addressed from within nage 17 Wealt h Ma rs 20 the art industry itself rather than through rs 20 16 nage Wealt h Ma government intervention. However, wealth 60% Self -re gula tio n managers feel that more government 64% regulation is required, with 40 percent of the wealth managers surveyed this year feeling strongly about more government % 0% 40 % 50 % 60 % 70 % 20 % % 10 30 intervention (up from 36 percent in 2016). Source: Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 Fig.41: Collectors: Which regulatory approach do you favour when it Fig.41: Collectors: Which regulatory approach do you favour when it This is one aspect of the Art & Finance industry that could pit the two industries against one another. 24% 24% Govern ment Govern ment As this year’s findings suggest, there is gu Re gu la tio n Re la tio n 28% 28% strong consensus among the different Art C olle ctors 2017 Art C olle ctors 2017 stakeholders (wealth managers, collectors, and art professionals) on Art C olle ctors 2016 olle ctors 2016 Art C 76% 76% what the problems are, although there Self -re gula tio n Self -re gula tio n is less agreement about the best tools 72% 72% to address these risks. While 40 percent of wealth managers call for more % 50 0% % 10 0% 10 0% 0% 50 government regulation, many question Source: Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 the effectiveness of such regulations and Fig.41: Arts Professionals:Which regulatory approach do you favour when is sufficiently whether the government it comes to establish trust and credibility in the art market? equipped to deal with the complexities of the art market. Such doubts were magnified when participants considered 23% la tio n gu Govern ment Re the global nature of the art market. The 24% risk is that this type of regulation could Art Pro fessio nals 20 17 impose higher costs on companies, forcing them to shift resources toward meeting Pro fessio nals 20 Art 16 77% compliance requirements, arguably at the Self -re gula tio n expense of other activities. This might not 76% be a problem for the biggest and most financially powerful operators in the art % 20 10 0% % 80 % 60 0% % 40 market, but for the thousands of smaller Source: Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 companies and individuals, increased government regulation could make their businesses unviable. However, government regulation can support the development of the art market such as in Italy with the reform on the circulation of artworks discussed byf or to tackle (page 248), Giuseppe Calabi illicit trafficking of artworks through new European Commission rules discussed by (page 252). Famke Schaap 243 243

244 | Section 6 - Risk management and regulation Art & Finance Report 2017 The majority of respondents (including wealth managers) see self-regulation as a more appropriate framework to address the threats facing the art market. The majority of respondents (including Does the art market need to wealth managers) see self-regulation as a modernize its business practices? more appropriate framework to address In this year’s survey, we extended our the threats facing the art market. Self- research around issues linked to how regulation is an essential part of today’s well-equipped the art market is to meet global economy, and widely adopted across the demands of a rapidly changing market a range of industries, such as health care, place. The responses have been clear: 73 fashion, advertising, and professional percent of wealth managers, 74 percent sports, as well as the art market. These of art professionals, and 64 percent of industries rely on self-regulation to address collectors said that the art market needed a range of issues, from establishing to modernize its business practices. industry standards, to developing and applying codes of professional ethics, to ensuring confidence. consumer However, the fragmented nature of the art market and art industry means that there is no one body at the moment that could speak on behalf of the industry as a whole, as each self-regulatory body defends and promotes the interest of its members, which means that getting the art industry to adhere to a set of common guidelines and principles could be difficult to practically implement and enforce. 244

245 | Section 6 - Risk management and regulation Art & Finance Report 2017 Some of the key reasons why modernization is required are listed below: Lack of transparency threatens the The art market has become an Art transactions must adhere to integrity of the art market: industry and participants expect KYC and anti-money laundering The issue around transparency has professionalism: regulations: come up throughout the report, and As the global art market is generating The increasing burden of anti-money is clearly a key priority across the more than US$50 billion in annual laundering (AML) regulation is likely different stakeholder groups. turnover, like in other industries, to have an effect on the global art the highest level of professionalism market, with high-value dealers is expected in all areas of the art already falling under AML regulation. market. The issues highlighted in this If these powers were widened to a report suggest that the art market broader segment of the art market, still has some distance to go before it there would be a need for new skills can define itself as a fully modern and and services to bring the art market professional industry. into compliance with the regulatory requirements. The increasing burden of anti-money laundering (AML) regulation is likely to have an effect on the global art market. 245 245

246 Art & Finance Report 2017 | Section 6 - Risk management and regulation EXPERT OPINION Taking the initiative The Responsible Art Market Initiative 114 Self-regulation or external regulation? Supporting responsible Mathilde Heaton This question has been hotly debated Lawyer and art art-market players in art-market circles in recent years. Rebuilding trust and credibility without law consultant Researcher at the undermining the commercial interests of Previous editions of this report have University of Geneva’s the industry in a way that promotes fair and efficient competition for future growth— highlighted that a lack of transparency and Art-Law Centre and RAM’s task force this is the challenge the art market faces issues of authenticity are undermining coordinator today. trust and credibility in the art market. At the same time, the legal and regulatory 115 framework within which art businesses Sandrine Giroud RAM is a direct response to this challenge. 117 Partner with are required to operate is becoming Formed in Geneva in November 2015 under the auspices of the Geneva-based LALIVE, Switzerland increasingly complex. Several countries Art Law Foundation (ALF) and the Board member of the have imposed anti-money laundering University of Geneva’s Art-Law Centre Art Law Foundation requirements on art dealers as part of (ALC), this non-profit initiative is the first of and member of RAM’s ongoing efforts to protect the market from its kind. task force abuse. Globalized and complex, the art market is also evolving. Art is increasingly It exists to support art-market players being sold online and collected as an by providing them with a practical and investment as well as ethical compass to navigate an increasingly for its intrinsic aesthetic, cultural, complex and fragmented legal framework. or historical value. It aims to do this by: To contribute to the discussion on best practices and compliance in the art market, • Raising awareness among art-market the Responsible Art Market Initiative players of the risks they face as they do 116 (RAM) , together with its online platform, business was launched on 26 January 2017. • Consolidating and sharing existing industry best practices • Providing practical guidelines and tools that can be easily understood and implemented 246

247 | Section 6 - Risk management and regulation Art & Finance Report 2017 RAM sees this practical, self-regulatory The guidelines are supplemented by The future approach as complementing existing a Quick Reference Guide and Red Flag The response to RAM’s launch has been regulation imposed by states. Its guidelines Lists, catering for art professionals who positive and has generated global interest. are designed to be accessible to the entire are on-the-move attending an art fair or More work remains to be done in raising market, including small art businesses, visiting a client, and Country Guides giving awareness among art-market players of the individual dealers and collectors who do an overview of the anti-money laundering risks they face and actions they can take to not have the financial resources to spend regimes that apply in different jurisdictions. protect themselves and the reputation of on large compliance departments or the art market. As the threats to the global expensive lawyers. Can self-regulation in the art market economy and art market evolve, initiatives make a difference? such as RAM aim to offer a means of Taking the initiative By adopting a cooperative approach to For a market as complex, diverse, and tackling them, reducing risk for art sharing and implementing best practices constantly evolving as the art market, businesses and collectors alike and thereby throughout the industry, RAM aims to have a self-regulatory approach is widely increasing public trust and confidence in a greater impact when it comes to reducing recognized as having several advantages the market. International collaboration and risks for art businesses and collectors over externally imposed state regulation. engagement on issues faced by the art The Responsible Art alike, thereby increasing public trust and These include: market, not just within the art market itself confidence in the market and combatting but also with other stakeholders, such as —Industry • Flexibility and speed the negative public perceptions that have law enforcement and state authorities, are guidelines can be developed and arisen in recent years. important for success. Market Initiative updated more quickly than state- imposed legislation, which takes time to What makes RAM unique is its In keeping with its unerring goal of be approved and adopted. This results collaborative, interdisciplinary, and identifying and sharing responsible in greater operating efficiencies for art cross-industry approach. RAM’s founding practices in the art market, RAM will compliance in turn minimizing businesses members span the entire spectrum be organising annual conferences and costs of the art market, from international publishing further materials on topics of auction houses (Christie’s) to individual • Better adaptation —Greater technical specific concern to the art industry and dealers (Seydoux & Associés) and service and industry expertise can be achieved collectors. providers (the Geneva Freeports and SGS through industry-developed guidelines art services). These players have joined striking that critical balance between For its latest project RAM is preparing a forces with specialist art lawyers and achieving the desired goal whilst not comprehensive due diligence toolkit for art academics from the Geneva based Art Law stifling the market so that it cannot transactions, focussing on the client, the Foundation and the University of Geneva’s operate artwork and the transaction as a whole, Art-Law Centre as well as law enforcement including source of funds. —Conflicts • Increased collaboration to ensure issues are addressed holistically of interest are mitigated through the from various perspectives. The toolkit will be launched at RAM's next participatory design process annual conference which will be held in Guidelines —Unlike territorial • Global scope Geneva, Switzerland on 2 February 2018. RAM’s first set of guidelines tackle the legislation, guidelines and codes threats of money laundering and terrorist of conduct can transcend national For more information: 118 They adopt financing in the art market. boundaries, resulting in a more flexible http://responsibleartmarket.org a risk-based approach and emphasize the approach better adapted to serving a importance of art businesses identifying global market such as the art market risks, knowing their clients, and being alert to red flags. The guidelines are tailored to art transactions and focus on three areas of enquiry: the client, the artwork, and the 114 [email protected] transaction. 115 [email protected] - 116 RAM's website is available at: http://responsibleart Remaining close to the market, RAM market.org/ 117 RAM is the outcome of a conference organized by submitted its first draft for public the Art-Law Centre of the University of Geneva and the consultation and reached out to key art- Geneva based Art Law Foundation entitled “Money Laundering in the art market. A reality?”, available at: market stakeholders to improve, simplify, http://artlawfoundation.com/fda-events/blanchiment/ and enrich the set of principles laid down 118 The full guidelines can be downloaded from RAM’s website available at http://responsibleartmarket.org. in the guidelines. 247 247

248 | Section 6 - Risk management and regulation Art & Finance Report 2017 EXPERT OPINION International circulation of artworks: Avv. Giuseppe Calabi An important reform Studio Legale CBM & Partners approved by the Italian parliament The Italian legal framework Hence, the export control does not reflect the actual monetary value of The Italian art market is characterized by a regulatory system that dates back to Uffici the artwork, while Export Offices ( 119 ) follow subjective criteria Esportazione 19 0 9. and decide with utmost discretion Today, the main legal framework is the whether an artwork is “rare” or whether Decreto Legislativo 22 gennaio 2004, n. 42 its “quality” prevents the owner from (Cultural Heritage Code). The provisions exporting it. Furthermore, private of the Cultural Heritage Code concerning collectors frequently do not receive the art market are, by the same token, adequate explanations of the grounds anachronistic and highly protectionist. for export denials, in particular in The Cultural Heritage Code sets forth relation to why a certain artwork is of several limits to the circulation of artworks, interest in terms of national cultural including: heritage. 120 01. The “declaration of cultural interest” The general criteria upon which export preventing the owners of “classified” licenses are granted are set forth in a artworks from exporting them on circular issued by the Public Education a permanent basis. Furthermore, 122 The criteria give Ministry in 1974. the state is entitled to exercise a rise to a very high level of uncertainty preemption right when such artworks and discretion, insofar as they focus are sold. on factors such as the “aesthetic importance” or “rarity” of a particular 02. The requirement of a license ( attestato artifact, without specifying when an di libera circolazione ) to export any artwork is to be deemed “important” artworks of cultural interest, with the or “rare.” sole exemption covering works created by living artists or created fewer than 50 years ago. There is no monetary threshold exempting items with a market value below a certain amount 121 from state control. 248

249 | Section 6 - Risk management and regulation Art & Finance Report 2017 How the market is affected In the first eight months of 2016, there Both Italian and by the current legal framework were 75 denials of export licenses out of 124 This ratio shows that the The current Italian regulations lead to 9,816 requests. foreign collectors administrative system is overloaded by an market uncertainty and limited sales. unjustified number of export applications, The ban on exporting artworks declared prefer to buy and with two negative effects: (i) the public to be of cultural interest represents a officers in charge of export controls (whose huge deterrent for the sales of such sell art in other number has decreased in recent years as a artworks. Studies on the economic effects result of the public spending review carried of the “declaration of cultural interest” countries, where out by the government) need to process demonstrate that such a declaration hundreds of files with an inevitable impact decreases the commercial value of an they are sure that on the quality of their assessment; (ii) the artwork by about 40 percent. Furthermore, Italian art market cannot compete with if an unclassified artwork is sold and the the artworks they more efficient foreign markets, not only buyer wishes to export it, there is always with respect to high-value artworks, but the risk that the export license will be buy can be moved also with respect to those with medium or denied, with the consequent automatic low value. declaration of public interest. This situation without restrictions. creates uncertainty in the market and is a Furthermore, local soprintendenze across strong deterrent for foreign collectors from Italy adopt different criteria, which makes purchasing art in Italy. Consequently, both the management of ordinary matters (such Italian and foreign collectors prefer to buy as imports and exports) extremely difficult and sell art in other countries, where they for art professionals. are sure that the artworks they buy can be moved without restrictions. As a result of these differences, Italian collectors and shipping agencies frequently The regulation also leads to administrative choose Export Offices that they believe congestion. Any artwork created more are more “liberal” than others (known as than 50 years ago by a nonliving artist— “forum shopping”) and this creates further for which an export license is requested— uncertainty as to the interpretation of has to be physically inspected by a 12 3 Italian export law. commission at the local soprintendenza . Notwithstanding the independence of the local authority in the final decision, the file must be submitted for advice to a central administrative body, which must reply within a 10-day term. However, this obligation is rarely fulfilled: certain intermediaries have reported that they have had to wait for several months before obtaining an export license. This procedure is applied across the board, whether the artwork in question is a 119 Legge Rosadi, 20 June 1909, no. 364. 120 Art. 13 Lucio Fontana masterpiece or a piece by 121 Art. 65 paragraph 3 (a) and (b) and Art. 68 an unknown artist, and regardless of the Cultural Heritage Code commercial value of the artwork and its Circolare del Ministero della Pubblica 12 2 Istruzione, prot. n. 2718 final destination, whether in the EU or 123 Local authority acting on behalf of the Cultural outside the EU. Heritage Ministry. 124 Sole 24 Ore, Plus 24, 17 September 2016. 249 249

250 Art & Finance Report 2017 | Section 6 - Risk management and regulation The international circulation Works of art made less than 70 years • 125 reform project ago or with a declared value below the On 29 June 2017, the Italian house of minimum monetary threshold may be representatives (Camera dei Deputati) exported on the basis of the owner’s approved five amendments to a bill aimed unilateral declaration certified by the at fostering competition (Disegno legge ministry. concorrenza: hereafter called DDL), which However, for works of art whose age • had already been approved by the senate. falls within the 50 to 70-year bracket, the Once approved by the Senate, the bill will ministry shall be entitled to ascertain be published in the official gazette and whether they have an exceptional enter into force. artistic, historical, archaeological, or ethnoanthropological interest for the The DDL includes relevant provisions integrity of the national cultural heritage. that may have a positive effect on the If this is the case, within 60 days of international circulation of artworks. The the date of the filing of the unilateral reform was advocated by the major art declaration, the state can officially classify market stakeholders, including Sotheby’s the work, which will be ineligible for and Christie’s, the Italian Association of export as a result. Should the 60-day Antique Dealers, the Italian Association of timeframe expire, the state will have no Auctioneers, and the Italian Association of right to block the export of the relevant Modern and Contemporary Art Dealers. item. Here is an outline of the reform: • An export license will be required for all Within 60 days of the date of the entry into artworks made more than 70 years prior force of the DDL, a decree of the Ministry to the export date by nonliving artists. As of Cultural Heritage will: mentioned above, since 1909 the relevant • Review the Export License Guidelines for timeframe is 50 years from creation of Export Offices (the Italian equivalent of the relevant artwork (in Germany this is the UK Waverly Criteria) 70 years and in Spain it is 100 years.) The differences in the relevant timeframes Introduce a “passport” for works of art, • for heritage protection in European facilitating their import and export and jurisdictions is a critical factor that with a validity term of five years hinders the free circulation of cultural property in Europe. • For older works (excluding archaeological items), a minimum monetary threshold of €13,500 applies for all cultural property. Regarding circulation within the EU, the Italian ministry did not accept the value thresholds specified in Council Regulation (EC) 116/2009 for export of objects from the territory of the EU (e.g., i.e., €15,000 for photographs and drawings, €30,000 for watercolors, and €150,000 for paintings). 125 On 4 August 2017 the Italian senate approved the law 124/2017, whose provisions are outlined in this section and have become effective as of 29 August 2017. 250

251 Art & Finance Report 2017 | Section 6 - Risk management and regulation | Section 6 - Risk management and regulation Art & Finance Report 2017 Studies on the economic effects of the “declaration of cultural interest” demonstrate that such a declaration decreases the commercial value of an artwork by about 40 percent. 251 251 251 251

252 Art & Finance Report 2017 | Section 6 - Risk management and regulation EXPERT OPINION Tackling illicit trafficking of artworks Famke Schaap Director Global Trade Advisory through new European Deloitte Belgium Commission rules On 13 July 2017, a new European Commission proposal 126 was published. The on the import of cultural goods new rules are part of a broader EU action-plan to fight terrorist financing, and could enter into force as early as 2019, subsequent to discussion in and approval by the European Parliament and the Council of the EU. For the art market and its various stakeholders, the new rules would bring consistency and clarity on the types of restrictions and control measures proposed by the European Commission in tackling the illicit trade in cultural objects. Imports of cultural objects made over 250 years ago into the EU will be forbidden if they are illegally exported from the source country. The Global Trade Advisory team, together with the Legal practice in Deloitte Belgium, were requested by the European Commission to prepare the ‘Study on Fighting illicit trafficking of cultural goods: analysis of customs issues in the EU’ (forthcoming), which served as inputs into the EU’s own Impact Assessment for this proposal. 252

253 Art & Finance Report 2017 | Section 6 - Risk management and regulation and which was put up for public auction. The lack of artwork provenance and origin Background The artifact was returned to Iraq in 2012. Antique trading has been thriving since certification continues to complicate the the 1970s. Europe is the continent with daily business of legitimate art dealers, Given the impact of the ad hoc measures auction houses, and buyers. the largest volumes of art exports, totaling currently in place, it is clear that customs US$14.59 billion, and the second largest administrations are currently facing volume of imports after the Americas, with What regulations are in place for a challenging task. They often find US$11.5 billion of art and antique imports cultural good imports at the national themselves going beyond the resources into and between European countries. The and international level? available to establish provenance, age, and European market for classical antiques In its current form, regulation on cultural legitimate owner after seizing artifacts. and ancient art represented a total value good imports consists of different and of US$66.7 million in 2016, whereas fragmented instruments across the the auction market for other antiques international, EU, and national levels. generated US$807.5 million in sales. The year 2017 has so far seen a patchwork The average price of lots consigned in of measures covering the movement of continental Europe surged to US$43,109 in cultural property (i.e., import, transfer, and 2016 from US$13,168 in 2015, according to export). 127 the 2017 TEFAF Art Market report. At the international level, the 1970 UNESCO Imports of artworks, collectibles, and Convention remains the most widely used antiques to Europe account for around instrument for international cooperation in 54 percent of global trade in the sector. this area. This convention has brought the 128 indicates that the Eurostat data international community’s much needed legitimate import of antiques into the EU attention to the ongoing looting of cultural generated €11.8 million in 2015. artifacts, consequently leading to an increase in policies at the national level. In parallel, illicit trafficking of cultural artifacts (sometimes referred to as Since 1995, the UNIDROIT Convention has “blood antiques”) has also grown. Despite built and expanded upon the UNESCO increased awareness around the issue, Convention, regulating the restitution of the looting of historic sites and illegal stolen cultural artifacts and the return of excavations currently continue in Iraq, illegally exported ones. Syria, areas stretching the Mediterranean basin, Africa, and beyond. This activity In aiming to combat illicit trafficking of is currently playing a crucial role in the cultural goods in the EU, the UNIDROIT financing of terrorism. Convention is somewhat hindered by the absence of three EU member state Similarly, illegally exported cultural objects signatories (Ireland, Malta, and Lithuania), continue to be offered and sold on the among 131 signatory states across the European art market through traditional world. channels and e-commerce platforms. 126 Proposal for a Regulation of the European High-profile cases involving illegally traded At the EU level, there have so far been two Parliament and of the Council on the Import of Symes Becchina and antiquities, such as the ad hoc measures in place for Iraq (since Cultural Goods . Publication. Vol. SWD(2017) 263 Final. Brussels: European Commission, 2017. cases, continue to plague the art industry. 2003 - Regulation No. 1210/2003) and Pownall, Rachel A.J., comp. 127 TEFAF Art Market 129 In the United States, the recent discovery Syria (since 2012 - Regulation No. 36/2012), 2017. Rep. Helvoirt: European Fine Art Report Foundation, 2017. of illegal artifact imports by the arts and placing specific restrictions on the 128 http://ec.europa.eu/eurostat/statistics-explained/ crafts chain Hobby Lobby brought the movement of cultural property from these images/3/39/Imports_of_cultural_goods_by_ group_of_products%2C_2015.png matter back to the fore once again. areas—with some exceptions. In practice Kinsella, Eileen. "Did Hobby Lobby Buy Up Iraqi 129 however, only a limited number of seizures War Loot in Its Quest to Amass Biblical Artifacts?" Customs administrations' seizures of goods under these ad hoc measures have been . Artnet News, 06 July 2017. Artnet News 130 "Patrimoine Culturel - Saisie De Deux Bas-reliefs illegally imported into the EU have been detailed by British, German, French, and France Diplomatie Par Les Douanes Françaises." frequent of late. One recent example is Dutch tax authorities and other pending : Ministère De L'Europe Et Des Affaires 130 étrangères . 29 Sept. 2016. of two the French customs’ 2016 seizure cases. For example, the German criminal Kami, Aseel. "Sumerian Gold Jar, Other Relics 131 bas-relief pieces obtained from the looting police seized a Sumerian clay cuneiform Reuters . Thomson Reuters, 30 Returned to Iraq." 131 of Iraqi origin, dating from 2049 BC of Syrian cultural heritage sites. J an. 2012. tablet 253 253

254 Art & Finance Report 2017 | Section 6 - Risk management and regulation At the national level, the past three years What does the EU propose in the new While the same legislative have brought new legislation to combat the regulation on cultural good imports? framework will apply to the illicit trade of cultural goods across various The European Commission’s 13 July 2017 countries, both inside the EU (Germany, proposal acknowledges the importance import of cultural goods France, Austria, and the Netherlands) of protecting cultural goods from two in all EU member states, it or outside it (the United States and different angles. Switzerland in particular). Consequently, is important to recognize an export certificate from the source From a national perspective, the EU has that penalties resulting country is required to allow entry of proposed new rules acknowledging the cultural goods into France and Germany, importance of cultural goods to national from infringements are with additional due diligence obligations heritage, as well as the artistic, historical, likely to differ across on buyers of these goods (attesting and archaeological value to their country legitimate provenance). In Austria and the of origin. EU member states, as Netherlands, the import of cultural goods these remain a national that have been illegally exported out of From an international perspective, the EU their country of origin is forbidden. proposal emphasizes the negative effects competency. and risks of illegal trading in the art market, Since 2005, Switzerland required persons where valuable artworks, sculptures, and importing or placing cultural property archaeological artifacts are often illegally in transit to provide information on the obtained, sold, and imported into the EU customs declaration about the object from conflict zones. This illicit trafficking is type, a description of its place of origin and believed to be linked to terrorism finance, a declaration that the export of cultural tax avoidance, and money laundering. property from the source country is not subject to a permit under local laws. The proposed rules on the import of Additional measures were introduced in cultural goods provide a strong incentive 2016 for all imports into Swiss freeports, for the art market to exercise due diligence requiring an official audit for every regarding the legality of cultural goods archaeological object offered for storage. imported into the EU. Together, these measures have shown While the new rules would add an to lack consistency, efficiency, and additional burden on the side of EU effectiveness, especially within the context importers of antiquities, they seem of needed harmonized action within the EU relatively straight-forward in terms of customs union. proposed scope and control mechanisms. Whereas the rules remain pending for Under the currently disjointed regulatory approval, their content includes the framework, the risk that cultural good following. imports will receive inconsistent treatment in different EU member states is all too real. The geographical coverage is global. In This can potentially harm the protection contrast to the ad hoc measures for Syria of cultural goods in source countries and and Iraq, the new regulation applies to all allow continued terrorist financing through source countries. The laws of the exporting illegally-traded cultural goods. country (whether source or intermediate) will prevail in determining the legality of import into the EU. coverage product In terms of , the proposed regulation only applies to artworks listed in the UNIDROIT Convention on Stolen or Illegally Exported Cultural Objects. The annex to the EU proposal provides a list of all categories in scope. Unlike UNIDROIT, an additional age threshold is added, meaning that from the listed categories, only objects older than 254

255 | Section 6 - Risk management and regulation Art & Finance Report 2017 250 years upon their import are in scope. requirements on cultural goods. Generally, To prevent artifact seizure, importers of the regulation and the control mechanism antiquities are therefore pushed toward compliance it introduces may improve additional prudency, specifically with the European art market’s reputation and regards to age determination. credibility. requirements documentary In terms of , Looking at the ongoing Brexit negotiations, the EU proposal introduces a new licensing the question is whether the new rules mechanism. The proposed regulation would apply in the United Kingdom, which requires the importer to prove that the currently stands as the primary importer item was legally exported from the source of antiques into the EU (over half of EU country. The proposal distinguishes imports arrive in the United Kingdom, between two categories of cultural which according to the 2017 TEFAF Art goods, imposing different documentary Market Report, imports US$6.275 billion requirements on the person planning to in art, collectibles, and antiques). As import them: it currently stands, the rules will likely become applicable in the UK until the exit An import license would be required • agreement enters into force. It remains for archaeological objects, parts of uncertain whether the UK government monuments, rare manuscripts, and will thereafter decide to transpose these incunabula, providing proof of the goods’ EU rules to the new post-Brexit legislative legal export from the source country framework. • A signed importer statement together with an Object ID (in a standardized format), certifying that the goods were Looking at the ongoing Brexit legally exported out of the source country, would be required for all other negotiations, the question is whether goods falling within the proposed regulation’s scope the new rules would apply in the While the same legislative framework will United Kingdom, which currently apply to the import of cultural goods in all EU member states, it is important to stands as the primary importer of recognize that penalties resulting from infringements are likely to differ across EU antiques into the EU. member states, as these remain a national competency. What does it mean for you? While the entry into force of the proposed The actual implementation and EU regulation on the import of cultural enforcement of the new rules on the goods is pending European Parliament import of cultural goods will depend, to a and Council approval, the proposal’s text large extent, on the competent authorities paves the way for improved monitoring and in EU member states. Controls will require combat against illicit trafficking of cultural specific expertise and sanctions will need goods. A first discussion on the proposed to be determined. In the meantime, the regulation is scheduled in the Council of the proposal incentivizes both buyers and EU committees at the end of September sellers to exercise due diligence and act 2 0 17. prudently with respect to the provenance of any cultural object. For the art market, the proposed EU regulation promises greater consistency, additional clarity, and transparency in a regulatory landscape that was already moving toward increased (national) regulation, with tightened import 255 255

256 Art & Finance Report 2017 | Section 6 - Risk management and regulation EXPERT OPINION Addressing Money Laundering and Terrorism Financing vulnerabilities in art and collectibles David Heurtevent Manager Forensic & The fight against Islamic State of Iraq and the Levant may be Restructuring, Deloitte a turning point in the history of regulations in the Art and Luxembourg Collectibles market. On 13 July 2017, the European Commission Adrien Chiariello presented measures to crack down on the traffic of cultural Senior Consultant Deloitte Luxembourg goods in an effort to cut funding to terrorist groups. The EU tax commissioner Pierre Moscovici stated at a press conference 132 . that "terrorists are well and truly artwork traffickers" The EU commission wants the measures including a new licensing system for imports to enter into force in 2019. These measures follow a call of the UN to stop illicit trade of cultural goods from Iraq and Syria. It also follows a call of G20 leaders on 7 July 2017 on all countries to “address all alternative sources of financing of terrorism, including dismantling connections, where they exist, between terrorism and transnational organized crime, such as the diversion of weapons including weapons of mass destruction, looting and smuggling of antiquities, kidnapping for ransom, drugs and human 133 trafficking.” 256

257 | Section 6 - Risk management and regulation Art & Finance Report 2017 G7 Action Plan on In May 2016, the “ bullae from a supplier in the UAE despite Governments, law 13 4 Combatting the Financing of Terrorism” the warning of an expert on cultural already asked countries to “consider the extent property law retained by the company enforcement and to which art dealers in cultural artifacts are that “ such objects may have been looted vulnerable to terrorist financing ”. from archaeological sites in Iraq ”. Some businesses are The statement identified several shipments were without proper customs vulnerabilities such as “ the lack of shipping labels that declaration and bore “ searching for the transparency in transactions, the use of falsely and misleadingly described their Freeports and Free Trade Zones to transfer ” and false origins. The DoJ went contents best strategy to and store antiquities, highly mobile goods so far as to describe these acquisitions that can be easily converted into cash, and as “ fraught with red flags ”. Vanity Fair had address Money limited knowledge of the threat among some raised the question “ Did Hobby Lobby’s CEO 135 141 . It urged countries market participants ” unknowingly sponsor terrorism? ” . Laundering and to take coordinated and targeted action, In September 2016, Reuters also to increase awareness of the risk, to share Terrorism Financing questioned the potential storage of looted information and to strengthen regulatory goods in storage sites following seizure of requirements. vulnerabilities when 142 . In 2015, Turkish and Italian antiquities the FBI had already warned dealers and Thus, governments, law enforcement and dealing with cultural collectors about terrorist loot and cultural businesses are searching for the best 136 property being removed from Syria and strategy to address Money Laundering goods. 137 143 . vulnerabilities and Terrorism Financing Iraq and hitting the U.S. market when dealing with cultural goods. In The “Hobby Lobby” case shows a failure Luxembourg, the licensed operators of the in deal due-diligence: Luxembourg Freeport already are subject to Anti-Money Laundering provisions since • The artwork’s provenance was lightly or the law of 24 July 2015. In Switzerland, falsely documented whereas the source the Responsible Art Market initiative and country had been a recent conflict zone the appointment of service providers to The dealers did not pay attention to law • monitor antiquities entering the Geneva 138 from September 2016 are part enforcement warnings Freeport 139 draws on of the response. This article https://euobserver.com/justice/138522 132 133 http://europa.eu/rapid/ recent enforcement cases to feature some Yet, deal due-diligence processes could press-release_STATEMENT-17-1955_en.htm issues and approaches to address the have been set up to identify the parties 134 The plan was adopted at the G7 Finance Ministers and Central Bank Governors’ Meeting. vulnerabilities at the private sector level. involved in the transaction. Searches 135 http://www.fsa.go.jp/inter/etc /20161011-1/01.pdf through public records, including advanced Money Laundering is the concealment of the origin of 136 Looted antiquities from Syria web searches, could have been used to illicit funds and their integration in the licit economy. Terrorism Financing is the funding of terrorism 137 The recent “Hobby Lobby” case highlights be aware of law enforcement concerns activities. the vulnerability of arts and collectibles and detect the potential involvement of 138 https://www.arts-franc.ch/copie-de-procedure-pfeg-fr to terrorism financing. Hobby Lobby, an the parties in criminal activities, Money Special thanks to Edouard Delfosse (Senior 139 Consultant) and Guillaume Jacquot (Consultant) for American arts and craft chain of retail Laundering or Terrorism Financing. The their contribution to researches. stores, agreed in July 2017 to forfeit results of such analysis may have helped https://www.justice.gov/usao-edny/pr/unit 140 - ed-states-files-civil-action-forfeit-thousands-an - thousands of artefacts from Iraq and pay raising questions whether the transactions cient-iraqi-artifacts-imported a $3 million fine to settle a civil action were lawful or not. 141 http://www.vanityfair.com/news/2015/10/ brought by the U.S. Department of Justice hobby-lobby-ceo-antiquities-terrorism http://www.reuters.com/article/ 142 (DoJ) against the company following a us-swiss-freeports-idUSKCN11S1OL 14 0 . Hobby Lobby four year-investigation https://www.fbi.gov/news/stories/ 143 purchased cuneiform tablets and clay isil-and-antiquities-trafficking 257 257

258 | Section 6 - Risk management and regulation Art & Finance Report 2017 Money laundering conspiracy The Philadelphia magazine reported that The risks arising from the lack in Pensylvania prior to this sentence, Mr. Isen, a dealer of traceability with over 30 years of experience on the The “Isen” case in Philadelphia highlights The international investigations into the vulnerability of arts and collectibles to Philadelphia market, had questionable 1Malaysia Development Berhad (1MDB) money laundering. reputation regarding the authenticity of highlight the risks arising from the lack of the artwork sold and had ties to a man traceability particularly when dealing with who had received 5-year in federal prison In August 2015, the Philadelphia magazine Politically Exposed Persons (PEP) and gifts. 14 8 He had sold over US$1 on drug charges. reported that Nathan “Nicky” Isen, “one The 1MDB case focuses on “ up to US$6bn million in art to the drug dealer, including a of Philadelphia’s most prominent gallery that was allegedly skimmed from the sovereign 14 4 149 145 and a museum curator The artworks were sold at fake Picasso. owners” fund and allegedly used to support the lavish a low value. Most were print series of blue- had received three years’ probation and lifestyles of several men connected to the 150 chip artists. a US$25,000 sentence from a Judge at Malaysian Prime Minister, Najib Razak ”. Authorities in Switzerland, the United the U.S. Federal Court in Pennsylvania States, Malaysia, Hong Kong, Thailand, on money laundering charges. This This case shows a failure of the dealer Singapore, Australia and Luxembourg have sentence followed an indictment by the to avoid money laundering due to the been investigating suspected corruption Eastern District of Pennsylvania in January lack of identification of the origin of the 14 6 after an investigation by the U.S. and money laundering related to this case. 2015 funds used to buy the artworks. This case Immigration and Customs Enforcement’s reminds us that: (ICE) Homeland Security Investigations In July 2016, the U.S. DoJ filed a complaint Money Laundering can be perpetrated • (HSI). ICE sent an undercover officer and seeking to seize US$1 in a federal court “ over a long time span even in a series of Mr. Isen “allegedly sold 12 pieces of art billion that they say was diverted from 1MDB low value transactions work in exchange for US$20,000 in cash for into luxury real estate in New York, Beverly the purpose of laundering cash he believed Hills and London; valuable paintings; and a Acquaintance is not a proper form of • 151 147 A Van Gogh painting and two to be drug proceeds”. ”. private jet Due Diligence Monet paintings were seized at a European 152 Freeport. In June 2017, a famous movie actor returned a US$3.2 million Picasso and a US$9 Million Basquiat to the U.S. Government that he had received as gifts 153 Depending upon the extent These after cooperating with the U.S. DoJ. gifts were allegedly received to include of regulatory changes, the them in an annual charity auction to 15 4 benefit his eponymous foundation. strengthening of regulations on The global 1MDB case highlights the actors in the art and collectible reputational and litigation risks faced by any player involved in buying, selling, markets envisioned by the EU, the donating, receiving, storing or benefiting from assets derived from illegal proceeds: G7 and the G20 may have a direct Collectors (i.e. private foundations, • family trust and estates) and non-profit or indirect impact on other type organizations (i.e. museums, foundations, estates) are at direct risk of being sued of businesses handling high value to recover such assets. Working for the general interest is insufficient to protect goods, whether financial institutions, them from being sued or facing public scrutiny DNFBPs or other entities. Storage facilities and financial • professionals dealing with high net worth individuals (i.e. private banks and family offices) can end up with an indirect reputational damages from dealing with such client 258

259 Art & Finance Report 2017 | Section 6 - Risk management and regulation design, implement, evaluate or review their The online art market's exposure Professionals should pay particular customer and transaction due-diligence to money laundering attention to the recommendations, risk The impact is not limited to the physical procedures for these markets. assessments and results of country world. Online art sales are increasing evaluations issued by the FATF/GAFI, rapidly (US$3.75 billion in 2016 versus A wealth of experience in managing proper the inter-governmental body aimed US$1.51 billion in 2013) and these business lines of defence could be borrowed from at developing Money Laundering and models exhibit specific money laundering the historical experience and expertise of Terrorism Financing policies. Until now, vulnerabilities. the financial industry in combatting Money only dealers in precious metals and Laundering and Terrorism Financing. stones have been categorized by FATF 155 40 According to the 2017 Hiscox report, as “designated non-financial businesses percent of the online galleries surveyed and professions” (DNFBP), the broader have reported that they do not see their category of non-financial players subject to 156 The FATF already individual clients purchasing repeatedly, its recommendations. issued guidance on risks and vulnerabilities i.e. they are rather seeking one-off deals, 15 8 157 and included and Diamonds in Gold and that half their clients were located these sectors in its methodology of mutual in other jurisdictions. Two-third of the 159 So far, art and antiquities evaluation. online galleries’ customers were new to dealers, auction houses, pawnshops and purchasing art online. other dealers and traders in high value 160 goods have been listed as “other entities” Yet, past experience in the financial whose vulnerabilities could be exploited in industry emphasizes the importance of 161 regulated entities. effective Know Your Customer (KYC) and Know Your Transactions (KYT) procedures Depending upon the extent of regulatory and controls, particularly when facing the changes, the strengthening of regulations situation of remote entry into business on players in the art and collectible markets relationship and new clients with envisioned by the EU, the G7 and the G20 insufficient product knowledge. may have a direct or indirect impact on other type of businesses handling high The case for preparedness value goods, whether financial institutions, These enforcement cases, among others, DNFBPs or other entities. could be seen as the foretelling signs of an increased scrutiny by law enforcement Therefore, businesses should identify agencies and regulators in the near future their specific vulnerabilities to Money for players in the art and collectible Laundering and Terrorism Financing from markets. the art and collectibles markets, implement Enforcement actions prove the need for an adequate internal organization, monitor any business dealing with these markets theses business relationships and question to act upon law enforcement warnings, the effectiveness of their cooperation with monitor regulatory changes, identify authorities. Operationally, business should risks and address vulnerabilities in these markets. http://www.cnbc.com/2016/07/21/us-1mdb-lawsuits- 151 “Money Laundering and Terrorist Financing through 158 144 http://www.phillymag.com/articles/ link-malaysian-pm-najib-razak-to-stolen-money.html Trade in Diamonds”, October 2013, FATF. nathan-nicky-isen-art-philadelphia/ http://www.finews.com/news/english-news/23804- 152 - http://www.fatf-gafi.org/media/fatf/documents/re He self identifies as curator of the Louis Icart Museum 145 van-gogh-monet-1mdb-seized-in-switzerland-freeport ports/ML-TF-through-trade-in-diamonds.pdf in Philadelphia (https://www.linkedin.com/in/ 153 https://news.artnet.com/art-world/leonardo-dicaprio- 159 "Methodology for assessing technical compliance with nathanisen). gives-pack-jho-low-picasso-basquiat-996377 the FATF recommendations and the effectiveness of 146 https://www.justice.gov/usao-edpa/pr/ https://www.theguardian.com/film/2016/aug/31/ 154 AML/CFT systems", February 2013, FATF. villanova-man-charged-money-laundering leonardo-dicaprio-wolf-of-wall-street-rainforest-char - http://www.fatf-gafi.org/media/fatf/documents/meth 160 - 147 https://www.ice.gov/news/releases/philadel - ity-malaysia odology/FATF%20Methodology%2022%20Feb%20 - phia-art-dealer-charged-money-laundering-af https://www.hiscox.co.uk/sites/uk/files/docu - 155 2013.pdf ter-ice-investigation ments/2017-05/hiscox-online-art-trade-report-2017. "FATF Guidance - National Money Laundering and 160 148 http://www.mainlinemedianews.com/mainlinetimes/ pdf Terrorist Financing Risk Assessment", February 2013, news/former-villanova-resident-gets--plus-years- Particularly in terms of customer due diligence (rec - 156 FATF. http://www.fatf-gafi.org/media/fatf/content/ in-prison-for/article_825f204e-4233-5703-9d78- ommendation 22.1.c) and suspicious activity reports images/National_ML_TF_Risk_Assessment.pdf 6d3052550eee.html (recommendation 23.1.b). 161 Ibid. 149 http://www.phillymag.com/articles/ “Money laundering and terrorist financing risks and 157 nathan-nicky-isen-art-philadelphia/ vulnerabilities associated with gold”, 20 Jul 2015, https://www.theguardian.com/world/2016/jul/20/ 150 FATF. http://www.fatf-gafi.org/media/fatf/documents/ us-justice-department-1mdb-fund-seizure-fraud-in - reports/ML-TF-risks-vulnerabilities-associated-with- vestigation gold.pdf 259 259

260 Art & Finance Report 2017 | Section 6 - Risk management and regulation EXPERT OPINION Modernizing risk management in the art market: Applying a holistic Laura Patten approach across artwork, Specialist Leader Risk and Financial Advisory counterparties, and Deloitte & Touche LLP Borna Emami Senior Manager business practices Deloitte Consulting LLP An esteemed New York gallery closes after tracking millions of dollars in forged pictures, including a fake US$8.3 million “Mark Rothko” sold to a sophisticated auction house chairman for his 162 A Washington museum forfeits to the U.S. private collection. Department of Justice looted antiquities that are consistent with the types of cultural property that Syrian-and Iraqi-based 163 Each year, the FBI receives terrorists loot and monetize. enough credible complaints about multimillion dollar fraud in the art market that it has to triage for response the most 16 4 egregious. 260

261 | Section 6 - Risk management and regulation Art & Finance Report 2017 st century art market. Welcome to the 21 Historically, the art market protected Art market While the bullish market presents itself primarily through engaging only a opportunities, it also poses significant risks. relatively small group of people, most stakeholders Threats across artwork, counterparties, of whom knew each other if not directly and business practices—coupled with then by referral. This approach might have should apply an expanding marketplace and complex served the market well during art dealer regulatory regimes—converge to create a Bernard Berenson’s reign in the first part forensic due th century, but not so today: Art formidable terrain. of the 20 world “insiders” perpetrated approximately diligence to 87 percent of all art authenticity frauds To thrive in this high-stakes and rapidly investigated by the FBI during the last three changing international art market, Deloitte significant 166 In most of these frauds, such as decades. urges businesses to modernize risk the one that closed the formerly venerable management strategies and capabilities. transactions, and Knoedler Gallery in New York City, victims Art market stakeholders should apply conducted little if any independent or forensic due diligence to significant view all business technical due diligence. transactions, and view all business activities through a lens of strategic risk activities through a Gone are the days when visually inspecting and reputation. This brief article suggests artwork, engaging accredited experts, and an approach to managing risk in the lens of strategic risk transacting with known counterparties art market that will increase enterprise could adequately ensure a positive resilience and client confidence, as and reputation. business outcome. Today art businesses well as differentiate organizations from must adopt a more holistic, data-driven competitors who don’t proactively mitigate approach to risk management that risk. considers artwork, counterparties, and business practices; draws on diverse risk management is especially Modernizing sources of information (e.g., catalogue important at the high end of the market, raisoneé, OFAC Sanction lists, and where financing, acquiring, managing, Lexis-Nexis); and uses modern analytical insuring, or selling artwork represents not methods that leverage the power of just aesthetic or social capital, but financial, technology. Doing so won’t eliminate all risk reputational, and operational capital. (i.e., risk will never be zero), but will help Imagine the consequences of loaning mitigate risk to acceptable and achievable against a masterpiece, only to learn, when levels. the borrower defaults, that the collateral is fake. Or imagine the reputational impact of mistakenly auctioning an antiquity that https://www.nytimes.com/2016/02/11/arts/design/ 162 U.S. forces discovered amid inventory knoedler-gallery-and-collectors-settle-case-over-fake- recovered from the Islamic State’s late rothko.html 165 https://www.nytimes.com/2017/07/06/opinion/hob 163 - These financial chief, Abu Sayyaf. by-lobby-iraq-artifacts.html; hypothetical scenarios reflect real risks in 164 The author served as the FBI’s chief intelligence officer the art market, and should spur a review for art crime from 2013-2016. - https://eca.state.gov/files/bureau/final_presenta 165 of acquisition and other relevant policies tion_to_met_on_isil_antiquities_trafficking_for_das_ across the art world. keller_9.29.2015_.pdf Patten, Laura S. “Painting Red Flags: A Typology of Art 166 Fraud and Risk Indicators.” Sotheby's Institute of Art. New York City, 2016. 261 261

262 | Section 6 - Risk management and regulation Art & Finance Report 2017 . It’s important Consider artwork itself The market has long recognized that to know which types of objects merit extra certain artworks are more problematic vetting, so that businesses can adjust risk than others, e.g. a European painting management resources accordingly. As a whose chain-of-ownership vanishes during commodity, an artwork’s value depends the Nazi era is a riskier object than a upon its authenticity, provenance, unique contemporary sculpture created by condition, rarity, and market variables such a living artist. as taste and context. The late Metropolitan Museum of Art Director Thomas Hoving physicality and history of artwork. Just as estimated that 40 percent of the artwork scientifi c innovations helps advance the he handled (and presumably did not creation of new art forms (think Jeff acquire) was fake or otherwise “wrong,” Koons’ balloon sculptures), technology to use the trade parlance for artwork of can help advance the authentication or 167 As a result of suspect origin or quality. repudiation of existing artwork. Signaling vulnerabilities associated with artwork, that such technical inspection is no longer the trade routinely employ specialists who an afterthought, in late 2016 Sotheby’s are charged with extensively researching acquired Orion Analytical to start an in- 168 and assessing artwork. The market has house scientifi c research department. long recognized that certain artworks . Next, consider counterparties are more problematic than others, e.g. Counterparties are particularly tricky a European painting whose chain-of- to vet in the largely self-regulated, opaque, ownership vanishes during the Nazi era is a and clubby art world. Key stakeholders— riskier object than a unique contemporary especially the ultra-high-net-worth sculpture created by a living artist. Toward individuals and businesses that drive the that end,Therefore trustworthy art market—want and maintain privacy, mostly business typically vet artwork, not just for for legitimate reasons. Unfortunately, physical and historic traits, but also against nefarious players have repeatedly exploited art commercial and government stolen the trade’s “handshake” culture to infuse databases, ICOM Red Lists, import/ export onto the market illegally-generated monies, regulations, and other legal/policy regimes or fake, stolen, or otherwise undesirable governing cultural property. For certain material. Therefore, after verifying a particularly risky or high value pieces, counterparty’s identity and assets, art stakeholders should consider adding businesses should explore a host of forensic investigators to the battery of art cascading questions based on a typology historians, connoisseurs, and other subject of art frauds identified that rose to criminal matter experts who normally assess the prosecution in the United States. For example: Are there any indications that the The market has long recognized that counterparties committed Foreign Corrupt Practices Act violations? Do any of the certain artworks are more problematic counterparties cohabitate with a person previously convicted of art fraud? Does a than others, e.g. a European painting counterparty require request anomalous payment structures? Does a counterparty whose chain-of-ownership vanishes profess access to a large cache of masterpieces artwork previously unknown during the Nazi era is a riskier object to those experts who regularly track such collections? These questions might seem than a unique contemporary sculpture created by a living artist. 262

263 Art & Finance Report 2017 | Section 6 - Risk management and regulation pedestrian, but con-artists succeeded in diligence that combines best commercial threats become more diffi cult to detect, large part because they build rapport and intelligence and investigative techniques. so business tools and techniques must trust with their targets, and often operate This involves extensive analogue and cyber become smarter and capable of adjusting long-term schemes; i.e., a mugging victim due diligencereserch, including scouring a to evolving environments. From Deloitte’s knows he’s being mugged, while a victim in wide range of open source and subscriber point of view, the most important step the art market usually doesn’t discover he’s data for alerting associations, patterns, an art enterprise can take in this regard been victimized until a long time after the and behavior. Assessing these specific risk- is to design and implement a business- moment of exploitation, be it a sale, loan, factors with a wide aperture of information wide risk management methodology. or other deal. and mitigating actions, – such as subjecting Adopting commonsense procedures such an object to forensic testing to withdrawing as those advocated by the Geneva-based 169 , the Moreover, a review of more than three from deal, – provides the holistic approach Responsible Art Market Initiative New York-based International Foundation dozen convicted or self-professed white- we believe is needed in today’s art world. 170 , and other nonprofi for Art Research collar criminals in the art market indicates t organizations, will certainly help that most present themselves as well- enterprises identify and manage obvious educated art aficionados, superficially From Deloitte’s risks. Introducing computer- enabled indistinguishable from the honest brokers algorithms and analytics, process robotics, they emulate. It is easy to overlook a point of view, the artifi cial intelligence, and other cutting- human threat from people who resonate edge enablers could will help identify with one’s own interests, appearances and most important and manage less obvious risks—many of social-behavioral norms. For example, a which only become apparent through the counterparty might appear benign in all step an art correlation of multiple, discrete pieces of respects until arranging payment methods. information. U.S. court documents show that in many enterprise can art-related frauds, con-artists requested Quick responses, real-time data feeds, and multiple tranche payments, just under take in this regard analysis of Potential Risk Indicators (PRIs) legal reporting thresholds; wired funds across object, people and transactions, to off-shore accounts that do not align is to design and are imperative to staying in front of fake with places-of-residence; and made other artwork, exploitative counterparties, unusual transactions that might serve implement a and other business problems. Detecting, as red flags. Collectors, dealers, bankers investigating, and triaging anomalies as – really anyone who has access to, or a business-wide early as possible will help businesses halt stake in – the art market, is a potential the forward motion of threats before target for these charlatans who hide in risk management assets, finnancials, and reputations, are plain sight. Thus, to reinforce defenses, compromised. Failure to take such stakeholders must (a) understand their methodology. a risk-based approach can increase own vulnerabilities to con-artists and (b) vulnerabilities and leave the organizationan acquire an understanding of swindlers’ enterprise exposed to untenable risk. . modus operandi Some forward- leaning art businesses already are taking adopting best practices consider overarching business Finally, and lessons learned from criminologists For reasons noted above, the practices. and the post-9/11 financial industry; . art market is moving away from its As in other international cross-border traditional handshake culture to one that , trades, these more trusted art business while valuing and encouraging freedom in rms will adhere to rigorous anti- money artistic creation on the creative side of the laundering (AML) and know-your- client house, values risk mitigation and assurance (KYC) standards. Staff will conduct, or on the business side of the house. As the outsource to objective third-parties, due art world becomes more complex, and Thomas Hoving. The Hunt for Big Time Art Fakes. New York: Touchstone, 1997. P 20 167 168 http://www.prnewswire.com/news-releases/sothebys-announces-the-acquisition-of-orion-analytical-and-the-appoint - ment-of-james-martin-as-director-of-scientific-research-300372670.html 169 http://responsibleartmarket.org ht t ps: // ifar.org 170 263 263

264 | Section 6 - Risk management and regulation Art & Finance Report 2017 EXPERT OPINION Reducing risk in art transactions Deborah Gunn Senior Adviser Faurschou Most collectors are familiar with the Choosing the right professional Foundation transaction risks associated with pricing, In the case of appraisals and research for authenticity, condition, provenance, artworks, significant should collectors and title. But there are two underlying, consider hiring their own experts rather interrelated issues that can cause or than relying on the information provided increase the probability of these risks: by parties who may have a vested interest conflicts of interest and a lack of unbiased in the outcome. For example, a gallery expert advice. may tend to overestimate market value or overlook the defects of works they have In the art world, free advice may be sold to an art collector, and an auction worse than no advice and failing to seek house may under or overvalue works to independent expert opinions may result in gain favor with an art collector. In a recent costly mistakes. Without transparency in case, the US Tax Court rejected an auction relationship and transaction advice, it can house’s valuations of two paintings, finding, be difficult to safeguard against influences among other things, that the auction house or conflicts that run counter to the art specialist’s appraisals were tainted by a collector’s interests. conflict of interest because the specialist was hoping to secure the consignment to Collectors often seek information and auction the artworks. advice from a variety of sources, including dealers/galleries, auction house personnel, It is also essential to engage appraisers art advisers, scholars/curators, appraisers, specializing in the specific type of artwork and conservators. The overwhelming in question to avoid issues relating to majority of these professionals are misattribution and undervaluation. knowledgeable and trustworthy, and when For one museum, failing to obtain an issues arise they are usually the result of expert third-party appraisal led to a loss misunderstandings, rather than nefarious of over US$1 million when its rare Chinese intentions. But collectors can protect vase was sold by a regional auction house themselves from potential problems in for US$23,000; the vase was quickly resold three ways: by seeking independent, in Hong Kong for over US$1.5 million. When third-party advice from appropriate seeking valuations, it is important to look professionals, clearly defining expectations for certified appraisers who are members and compensation in adviser relationships, of accrediting organizations; in the US, and insisting on transparent transactions the relevant bodies are the International backed by comprehensive written Society of Appraisers (ISA), the American contracts. Society of Appraisers (ASA), and the Appraisers Association of America (AAA). 264

265 Art & Finance Report 2017 | Section 6 - Risk management and regulation The same principle holds for condition Transparency versus conflicts reports. When considering a significant of interest art purchase, it is prudent to commission Conflicts of interest in the art world often an independent report rather than relying arise from undisclosed commissions or on those provided by the seller, gallery, or payments. These are common in the art auction house. Not all condition reports market; for example, in the De Sole case, are equal in quality, reports can become media accounts of the testimony suggest obsolete quickly, are done for a variety that the De Soles may not have been aware of reasons, and are not always prepared that their adviser had added a commission by trained conservators. Indeed, terms for himself on top of the US$8.3 million and conditions for auctions warn that price for the forged Rothko. buyers should not rely on auction house condition reports and should consult In addition to commissions incorporated their own experts. Collectors should in purchase prices, undisclosed payments look for conservators with solid training can take a variety of forms, including and credentials who are accredited by introductory commissions, kickbacks, or professional groups such as the American double commissions—when an adviser Institute for Conservation of Historic and receives payment from both sides of a Artistic Works (AIC). transaction. Kickbacks paid to influence an adviser’s recommendations are obviously Scholars and curators can also be essential problematic; however, double commissions resources when researching potential and introductory commissions paid by acquisitions. Mr. and Mrs. De Sole’s recent dealers and auction houses to advisers dispute with the Knoedler gallery illustrates who bring in clients or business are not how important it is to obtain independent intrinsically detrimental. But, if hidden, expert advice. Because of its reputation, they may affect the quality of advice or the De Soles relied on documentation seriously affect the art collector’s net profit provided by the gallery and did not seek or purchase costs; for this reason, these third-party expertise when purchasing commissions should always be disclosed. what turned out to be a fake Rothko. Collectors often develop long-term relationships with individuals who advise on transactions and collection In the art world, free development. These advisers may be dealers, auction house personnel, independent art advisers, or other art advice may be worse than professionals. In these relationships, divided loyalties can sometimes arise due no advice and failing to to the adviser’s fiduciary responsibilities to other parties, such as artists or consignors. Collectors should evaluate all advice in light seek independent expert of potential conflicts of interest, and may want to consider hiring an independent art opinions may result in adviser who is a member of a professional organization such as the Association of Professional Art Advisors (APAA). Members costly mistakes. of this group agree to adhere to standards that put the art collector’s interests first and forbid practices that can lead to conflicts of interest. 265 265

266 | Section 6 - Risk management and regulation Art & Finance Report 2017 | Section 6 - Risk management and regulation Art & Finance Report 2017 One of the myths of the art world is that confidentiality is always the best policy. 266 266

267 | Section 6 - Risk management and regulation Art & Finance Report 2017 One of the myths of the art world is that To avoid these issues and promote confidentiality is always the best policy. transparency in a long-term art advisory In fact, confidentiality can work to the relationship, it is helpful to create a written art collector’s detriment by hindering agreement that defines the adviser’s adequate due diligence for authenticity, responsibilities and compensation and title, and money laundering. The desire requires disclosure of, or possibly limits, for confidentiality is often cited as the related payments the adviser may collect. justification for intermediary contracts For transactions, especially those for which and net-to-seller agreements, but there is no preexisting advisory agreement, unfortunately these agreements can also collectors can protect themselves with result in conflicts of interest with serious written purchase and sale agreements consequences. between the ultimate buyers and sellers, which include protective warranties and Intermediary contracts in which the language regarding commissions. adviser purchases the work from the seller and then resells to the buyer create opportunities for price mark-ups and fraud; as shown by two recent examples: Conflicts of interest in the Dmitry Rybolovlev’s allegation that he was overcharged by as much as US$1 billion by art world often arise from his adviser, and the case of Lisa Jacobs who defrauded her art collector out of US$1 million on a US$6.5 million sale. undisclosed commissions In net-to-seller or net-return agreements, or payments. the art collector agrees to a net price and allows the dealer or adviser to pocket any difference above that amount. This can create an incentive for dealers and advisers It bears repeating that most collectors to undervalue artworks to increase their never experience serious problems and own profits and may also result in huge most art professionals are ethical and transaction costs when artworks are professional. But by hiring the appropriate offered through successive dealers with independent experts, avoiding conflicts undisclosed commissions added at each of interest, and requiring transparency, step. The Accidia Foundation experienced collectors can avoid or reduce the most this first hand when it received only common art transaction risks. US$5 million on a US$7 million sale after several adviser/dealer commissions were deducted. 267 267

268 Art & Finance Report 2017 | Section 6 - Risk management and regulation EXPERT OPINION Unlocking the art world: Rebecca Jennings Art Researcher Navigating the peaks The Fine Art Group and troughs of a mystifying market Entering an art fair for the first time is a work to satisfy one’s aesthetic impulse, disorientating experience. Everything you just as one might purchase any other see is vying for your attention, imagination, decorative item to adorn one’s household. and inevitably, money. The daunting The knowledge required to know whether task of the new buyer is to negotiate this this canvas, so coveted by the new buyer, maelstrom, often with only the faintest has long-term market and artistic value inkling that perhaps what is on display beyond its decorative qualities may not be is not necessarily all that is on offer, not of any interest to the buyer. As with novices knowing that seeming bargains are not in any new industry, budding collectors necessarily sound investments nor that are endowed with beginners’ luck that may there can often be a discrepancy between enable them to maintain objectivity and the monetary and artistic value of an lead them to become a trailblazer of taste artwork. and fosterer of new talent. Unfortunately, more often than not, this innocence is likely A new buyer at his or her very first art fair to make them vulnerable. Even extremely may stop at a certain booth and behold a experienced buyers have suffered from brightly colored abstract canvas. This work the pitfalls of a bad deal and a changeable has caught his or her eye for the simple market. Many collectors have been taken reason that he or she “likes it,” without in by a work in bad condition, or with a any reference to the artist’s background questionable provenance or—worse still— or artistic context. From an outsider’s trusted implicitly in the hype surrounding perspective, it may seem that there is the latest artist at the vanguard of neither harm nor foul in purchasing said contemporary style. 268

269 | Section 6 - Risk management and regulation Art & Finance Report 2017 It is undeniable that art has set itself apart diligence process. Provenance, exhibition as an asset class from other investment history, price compared to comparable Recommendation opportunities. The market, though subject works and the rarity of the piece within to buyers before to downturns, is a stable, durable and long- the artist’s oeuvre are just a fraction of the completing lasting alternative to investing in property, type of precise questions that must all be gold, or stocks. This, inevitably, brings a thoroughly resolved before a purchase can a purchase certain type of buyer to the market—one be completed. The longer one looks, the whose interest is purely financial—and this more knowledge one accumulates, and the Check : buyer will require different advice from the easier it becomes to answer these obvious 1. Provenance high-end art collector whose investment in but indispensable questions. 2. Exhibition History art is both for pleasure and to turn a profit. There is, therefore, above and beyond the However simple this process may seem, 3. Price Compared to competition between dealers, galleries, and new buyers tend to be impatient, wanting Comparable Works auction houses to sell their works, a drive to act on their own ideas and harbor to find the best advice money can buy to suspicions about hiring an adviser. Rarity of the Piece within 4. secure the most lucrative investment or Investors who have found success the Artist’s Oeuvre the most distinguished collection. in alternate asset classes may fancy 5. Condition of the Work themselves capable of navigating the art However, regardless of the new buyer’s market without the need for such a slow approach to purchasing artwork, the best and calculated approach. While there is an advice will always remain the same and is element of speed that must be observed, perhaps the direct opposite of what one buying from up-and-coming artists while might suppose. The best advice to give a you can still afford them is the cornerstone new buyer is, in fact, not to buy but instead of starting any good art collection and time to look, to cultivate the perfect eyes, nose, spent fostering relationships with people and ears for appreciating artworks and in the artworld is key. This is perhaps the the art market. Investors and collectors greatest and most long-term investment must be patient and begin by looking, you can make, honing one’s senses to taking note of what is on offer, and where appreciate the art market is always best It is undeniable and when certain artists make the biggest done collaboratively with an art adviser impact. They should become familiar whose connections, experience, and that art has set with the names and styles around them expertise are the most valuable assets on and when they feel satisfied with their the market. itself apart as an knowledge of movement, taste, art history, gallery history, and primary and secondary If new buyers follow these steps—time and asset class from markets, they should go back and look patience, advice and due diligence—their again. It is essential to foster an obsessive chances of success are manifold, likely other investment drive for research when sourcing and not only to produce high-end results, but acquiring a desired piece. also to nurture a passion for art that truly opportunities. enrichens their lives. There is no great secret to success in the art world; if anything, the greatest pitfall is that people are often so busy looking for a nonexistent catch they end up ignoring the obvious factors that are constant obstacles to making a worthwhile purchase. These obvious factors are what any good adviser would thoroughly assess as part of the due 269 269

270 Art & Finance Report 2017 | Contacts Contacts Deloitte Luxembourg Micaela K. Saviano Raphaël Glohr US Tax Private Wealth - US Art & Partner - Indirect Tax - VAT Finance +352 45145 2665 Deloitte Tax, LLP [email protected] +1 312 486 3354 [email protected] Pierre-Jean Estagerie Tax Partner - Global Employer Services (Personal tax) Deloitte UK +352 45145 4940 Victoria Kisseleva [email protected] Assistant director - Laurent Fedrigo UK Art & Finance coordinator - Financial Advisory Partner - Audit & Assurance +44 20 7303 8338 +352 45145 2023 [email protected] [email protected] Mark Stokes Director David Heurtevent UK Private Client and Family Manager - Forensic Office Tax & Restructuring +44 20 7007 0956 +352 45145 3799 [email protected] [email protected] Deloitte Austria Adrien Chiarello Gernot Schuster Senior Consultant Partner - Tax Services +352 45145 2927 +43 1 537 006 900 [email protected] [email protected] Cyrielle Gauvin Deloitte Belgium Tax - Art & Finance Frederik Swennen +352 45145 4487 Professor of Law - [email protected] Of counsel Greenille by Laga +32 2 738 06 50 [email protected] Deloitte USA Mathieu Ex Vincent Gauthier Partner - Tax and attorney-at-law Deloitte Consulting LLP at Greenille National Wealth Management +32 477 96 16 09 Leader [email protected] +1 203 905 2830 Famke Schaap [email protected] Director - Global Trade Advisory +32 2 600 69 09 Julia Cloud [email protected] US Private Wealth Leader National Investment Management Tax Leader Deloitte Canada +1 630 841 9579 Nisha Dhaliwal [email protected] Account Manager, +416 986 5313 Phillip Ashley Klein [email protected] US Art & Finance Coordinator +1 212 618 4906 [email protected] Deloitte China Jennifer Qin Laura Patten Partner - Asia Pacific Investment Specialist Leader - Deloitte Risk Management Leader +86 21 6141 1998 & Financial Advisory [email protected] +1 917 603 1257 [email protected] 270

271 Art & Finance Report 2017 | Contacts Deloitte Colombia Deloitte Poland Deloitte Israël Adam Mariuk Danny Bar-On Fracisco O ́Bonaga Partner – Financial Advisory Partner - Head of Financial Partner - Tax Advisory Services Group, Services +48 22 511 0557 +571 426 2166 Financial Advisory [email protected] +972 3 608 5259 [email protected] [email protected] Deloitte Spain Deloitte France Ana Andueza Deloitte Japan Christophe Saubiez Partner - S&O - SP Partner Audit – Responsable Kazuo OSHIMA +34 944 228 801 de Deloitte Family Director [email protected] +33 1 55 61 62 08 +81 909 967 9980 [email protected] [email protected] Deloitte Singapore Benjamin Haziza Mohit Mehrotra Partner - Audit Deloitte Monaco Executive Director - Global +33 1 40 88 72 62 Sébastien Prat Wealth Management Group [email protected] Senior Manager - Leader Head of Deloitte Monaco +65 623 274 76 Benoît Dambre +37 797 772 741 [email protected] Partner - Avocat Associé [email protected] +33 1 55 61 62 62 Deloitte Switzerland [email protected] Deloitte Netherlands Deloitte | Taj Anna Celner Rudolf Janssen Managing Partner - Deloitte Germany Director - Tax Clients & Markets +31 882 883 182 Markus S. Seiz +41 58 279 68 50 [email protected] Director [email protected] +49 711 16554 7699 [email protected] Dr. Ralph Wyss Deloitte New Zealand Partner - Forensic Jeanne du Buisson +41 58 279 7060 Deloitte Hungary Director - Tax & Private [email protected] +64 930 308 05 Dr. Gabor Koka [email protected] Partner - Deloitte Private +36 1 428 6972 Dr. Daniel Kobler [email protected] Partner - Leader Private Banking Deloitte Middle East & Wealth Management Industry Emmanuel Durou +41 58 279 6849 Deloitte Italy Partner - TMT leader [email protected] Riccardo Motta +971 505 913 078 Partner - Financial Services Leader [email protected] Deloitte West Africa +39 028 332 2323 [email protected] Bola Asiru Walid S. Chiniara Leader - Strategy & Operations - Partner - Tax Africa Art & Finance Coordinator +971 4 506 4910 Ernesto Lanzillo +234 805 894 0874 [email protected] Equity Partner - Audit, ICS, [email protected] Deloitte Private Leader +39 02 833 222 53 D.Law Luxembourg Rosine Makhlouf [email protected] Family business Advisor, Ingrid Dubourdieu Deloitte Private Barbara Tagliaferri Partner +971 4 506 4700 Director - Communications, Italy +352 270 47 7405 [email protected] Art & Finance Coordinator [email protected] +39 028 332 6141 [email protected] Fiona McClafferty Senior Manager +971 4 506 4841 [email protected] 271

272 Contacts Ar tTac tic Anders Petterson Managing Director +44 778 866 1049 [email protected] Art & Finance Vincent Gouverneur itte Luxembourg Delo Partner - Art & Finance Leader 560, rue de Neudorf +352 451 452 451 L-2220 Luxembourg [email protected] Grand Duchy of Luxembourg Tel: +352 451 451 Adriano Picinati di Torcello Director - Global Art & Finance Fax: +352 451 452 401 Coordinator www.deloitte.lu +352 451 452 531 [email protected] All Rights Reserved. The services mentioned herein as well as the respective logos of Deloitte Luxembourg and ArtTactic are trademarks or registered trademarks of their respective companies. All other company, product and service names mentioned are the trademarks of their respective owners and are used herein with no intention of trademark infringement. No part of this document may be reproduced or copied in any form or by any means without written permission from Deloitte Luxembourg and ArtTactic. Deloitte is a multidisciplinary service organization that is subject to certain regulatory and professional restrictions on the types of services we can provide to our clients, particularly where an audit relationship exists, as independence issues and other conflicts of interest may arise. Any services we commit to deliver to you will comply fully with applicable restrictions. This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, their related entities (collectively, the “Deloitte Network”) or ArtTactic is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network or ArtTactic shall be responsible for any loss whatsoever sustained by any person who relies on this communication. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide to learn more about www.deloitte.com/about services to clients. Please see our global network of member firms. Deloitte provides audit & assurance, consulting, financial advisory, risk advisory, tax and related services to public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500® companies through a globally connected network of member firms in more than 150 countries and territories bringing world-class capabilities, insights, and high-quality service to address clients’ most complex business challenges. To learn more about how Deloitte’s approximately 245,000 professionals make an impact that matters, please , or LinkedIn Facebook connect with us on . Twitter , Deloitte Luxembourg and ArtTactic disclaim any and all warranties of any kind concerning any information contained in this document. ©2017 Deloitte Luxembourg and ArtTactic.

Related documents

RIE Tenant List By Docket Number

RIE Tenant List By Docket Number

SCRIE TENANTS LIST ~ By Docket Number ~ Borough of Bronx SCRIE in the last year; it includes tenants that have a lease expiration date equal or who have received • This report displays information on ...

More info »
Current APD Policy Manual 2017 1.5 issued 7 20 2017

Current APD Policy Manual 2017 1.5 issued 7 20 2017

APD Issued 2017-1.5 Manual Policy 7/20/2017 Austin Police Department Policy Manual CHIEF'S MESSAGE I am proud to present the newest edition of the Austin Police Department Policy Manual. The Policy Ma...

More info »
E:\PUBLAW\PUBL031.115

E:\PUBLAW\PUBL031.115

131 STAT. 135 PUBLIC LAW 115–31—MAY 5, 2017 * Public Law 115–31 115th Congress An Act Making appropriations for the fiscal year ending September 30, 2017, and for May 5, 2017 other purposes. [H.R. 244...

More info »
MR

MR

MODERN ROBOTICS MECHANICS, PLANNING, AND CONTROL Kevin M. Lynch and Frank C. Park May 3, 2017 This document is the preprint version of Modern Robotics Mechanics, Planning, and Control c © Kevin M. Lyn...

More info »
CityNT2019TentRoll 1

CityNT2019TentRoll 1

STATE OF NEW YORK 2 0 1 9 T E N T A T I V E A S S E S S M E N T R O L L PAGE 1 VALUATION DATE-JUL 01, 2018 COUNTY - Niagara T A X A B L E SECTION OF THE ROLL - 1 CITY - North Tonawanda TAX MAP NUMBER ...

More info »
clp en

clp en

Guidance on the Application of the CLP Criteria – July 2017 1 Version 5.0 G U I D A N C E Guidance on the Application of the CLP Criteria Guidance to Regulation (EC) No 1272/2008 on classification, la...

More info »
ERP 2019

ERP 2019

Economic Report of the President Together with The Annual Report of the Council of Economic Advisers M a rc h 2019

More info »
Justification Book

Justification Book

UNCLASSIFIED Department of Defense Fiscal Year (FY) 2019 Budget Estimates February 2018 Office of the Secretary Of Defense Defense-Wide Justification Book Volume 3B of 5 Research, Development, Test & ...

More info »
me bpd eng

me bpd eng

2017–18 Estimates Parts I and II The Government Expenditure Plan and Main Estimates ESTIMATES ESTIMATES

More info »
StateoftheClimate2017 lowres

StateoftheClimate2017 lowres

STATE OF THE CLIMATE I N 2017 Special Supplement to the Bulletin of the American Meteorological Society Vol. 99, No. 8, August 2018

More info »
tsa4

tsa4

i i “tsa4_trimmed” — 2017/12/8 — 15:01 — page 1 — #1 i i Springer Texts in Statistics Robert H. Shumway David S. Sto er Time Series Analysis and Its Applications With R Examples Fourth Edition i i i ...

More info »
mar19 medpac entirereport sec

mar19 medpac entirereport sec

MARCH 2019 Report to the Congress: Medicare Payment Policy REPOR G RESS T TO THE CON Medicare Payment Policy | March 2019 Washington, DC 20001 425 I Street, NW • Suite 701 • (202) 220-3700 • Fax: (202...

More info »
World Report 2018 Book

World Report 2018 Book

A M U H N S T H G I R C W A T H D R E P O O R T| 2 0 1 8 W R L S 7 0 2 O 1 T N E V E F

More info »
17 8652 GSR2018 FullReport web final

17 8652 GSR2018 FullReport web final

RENE WA BL E S 2018 GLOBAL STATUS REPORT A comprehensive annual overview of the state of renewable energy. 2018

More info »
Fannie Mae 2017 Form 10 K

Fannie Mae 2017 Form 10 K

UNITED ST ATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K O SECTION 13 OR 15(d) ANNUAL REPORT PURSUANT T ACT OF 1934 OF THE SECURITIES EXCHANGE For the fiscal year ended Decem...

More info »
283100

283100

Country Reports on Terrorism 2017 September 2018 ________________________________ United States Department of State Publication Bureau of Counterterrorism Released 2018 September Country Reports on Te...

More info »
WEF GGGR 2017

WEF GGGR 2017

Insight Report The Global Gender Gap Report 2 017

More info »
VAM Book

VAM Book

                                                 

More info »
A/HRC/39/CRP.2 in Word

A/HRC/39/CRP.2 in Word

/HRC/39/CRP.2 A September 2018 17 only English Human Rights Council Thirty ninth session - 10 28 September 2018 – Agenda item 4 Human rights situations that require the Council’s attention Report of t...

More info »