Art Speculators Bid to Lose
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ART & AUCTIONS Art Speculators Bid to Lose David Geffen, Peter Brant and other collectors pledge to bid on art they want but new third-party backers aim to reap fees by getting outbid; ‘they don’t know what they’re doing’ By Kelly Crow May 13, 2019 4:44 pm ET As New York’s spring auctions kick off this week, a new crowd of investors is bidding on works they secretly hope to lose. Several dozen risk-takers have already signed contracts promising to buy at least 84 works for an estimated $611 million combined, or 39% of the entire sales’ expected value. Even if rivals outbid them, these prearranged buyers—called third-party guarantors or irrevocable bidders—stand to profit by taking as much as one-third of the sellers’ proceeds above their pledged prices. Auction houses have long wooed owners by promising their property would sell no matter what, to the house if no one else. Now, auction houses say the number of third-party guarantors has multiplied to over 90 from just a dozen five years ago. And unlike the handful of seasoned dealers and collectors that Sotheby’s, Christie’s and Phillips used to rely on to help shoulder this risk, today’s newer guarantors often don’t even want the art. Increasingly, the goal is to earn a quick payout from the fees surrounding guarantees rather than to bring home any actual paintings. New investors, many from real-estate and international finance, have discovered the guarantee and want to reshape it into a financial instrument entirely distinct from collecting art, with its own margins and strategies. All of this is roiling the houses and old-guard collectors, with some warning that the new generation is propping up the art market. “Doing it right means you don’t get the picture—you get a check in the mail later,” said adviser Tom Mayou with the London firm Beaumont Nathan, summing up the thinking of investment-minded guarantors. His firm only brokers guarantees on behalf of collectors who want to keep the works, he said. Risks abound because guarantors who misjudge demand for an artist—or stake a work one bid above its catnip price—can be compelled to buy an asset that’s difficult to offload quickly, tying up cash for years, said Luke Nikas, art lawyer at Quinn Emanuel, which has helped clients arrange guarantees. Going Once, Going Twice Growing ranks of guarantors are venturing into art auctions, bidding on works they don’t intend to collect Kazimir Malevich’s ‘Suprematist Composition,’ from 1916, was auctioned at Sotheby’s in 2008, above. Monte Carlo dealer David Nahmad said he placed a $60 million irrevocable bid on the geometric abstract—and won it. A decade later, he resold it at Christie’s in May 2018 for $85.8 million. DIMA GAVRYSH/ASSOCIATED PRESS 1 of 5 When the 2008 recession hit, Sotheby’s and Christie’s were left owning $63 million in art they had staked with house money. The market is stronger now, but since then, the three houses have shifted most of their guarantees to third parties. SHARE YOUR THOUGHTS How would you decide whether to guarantee a work of art at auction? Join the conversation below. Here’s how a guarantee is designed to work, though the model is evolving. Guarantors who pledge to bid if no one else does will likely get an undisclosed financing fee from the house for participating. (Sotheby’s doesn’t necessarily dole out a fee to those who place, and win, their irrevocable bids.) By and large, the promised bids hover between the seller’s secret minimum accepted price, called a reserve, and the work’s low estimate. The opportunity for guarantors comes when they negotiate a share of the work’s overage if the art sells for more than the guarantor pledged, according to art lawyer Thomas Danziger. Guarantors said they also often negotiate a share of the house’s commission, a sweetener called a give-back. All three houses said they insist that winning bidders, including backers, pay the buyer’s premium. Before the recession, the handful of people doing third-party guarantees often reaped 50% of the overage and half the buyer’s premium in exchange for staking a work. Today, guarantors say their expanding ranks have already started whittling typical returns to between 15% and 30% of the overage. Auction houses don’t disclose the identities of third-party guarantors—in catalogs their involvement is noted by an asterisk-size symbol—but their presence and purchasing power is credited with propping up confidence in the market because the works they stake sell rather than flop. The dearth of high-profile failures allows auction houses to keep their pipelines stocked with marquee supply, and the artists who attract consistent guarantees tend to fare better than their peers who don’t, dealers said. “If I have an eye for a piece, I like to reassure the seller I can buy it—or benefit if I don’t,” said Halit Cingillioglu, a Turkish banker based in Monte Carlo who said he has guaranteed more than a dozen impressionist and modern works in the past decade. “If I win it, I don’t feel stuck because at least I wanted the art. It isn’t an investment for me.” His 34-year-old son, Kemal Cingillioglu, agreed, saying he has backed more than a dozen works on his own, including ones by Andy Warhol and Roy Lichtenstein. About a third of the time, he said, he winds up taking home the art he has backed. Only once, about six years ago, did he guarantee a work he didn’t admire but considered a profitable bet. That work is now hanging in his London office. “It was my tempting one-off,” he said, “and I tell these new guys they should want to own it, but they just want financial gains. They don’t know what they’re doing.” Bidders competing with third-party guarantors need to know the odds may not be stacked in their favor, collectors say. Guarantors essentially get a discount on works because they can glean financing fees or other discounts they can apply to future purchases or shipping. “When the house pays a financing fee on the guarantor’s winning bid, that fee ends up discounting the final price and that Andy Warhol’s ‘Double Elvis [Ferus Type],’ from 1963, is guaranteed to sell this week at Christie’s for at least $50 million.PHOTO: CHRISTIE’S creates an uneven playing field for other bidders on the lot,” said Megan Noh, an art lawyer with Pryor Cashman. “The guarantor’s money is essentially cheaper than theirs.” Even so, last year saw a wave of guarantees at Sotheby’s, Christie’s and Phillips for major sales of contemporary art—nearly 300 pieces worth an estimated $1.3 billion combined, according to ArtTactic, the London-based auction-tracking firm. These pieces accounted for 58% of the value of the houses’ evening sales of postwar and contemporary art last year, up from 39% in 2016. Percentages this spring look to be settling back to 2016 levels—a sign of seller confidence—but the numbers of interested third-party bidders keep climbing, houses say. Grégoire Billault, head of contemporary art at Sotheby’s in New York, said five years ago he “could An untitled Mark Rothko painting from 1960 is guaranteed to sell at Sotheby’s for at least $35 million. PHOTO: SOTHEBY'S count on two hands” the number of art-market players he could call upon to guarantee pieces in his sales; today, he said, “I have a list of 90 people.” Over the past four years, guarantors have backed $462 million worth of art by Andy Warhol, $409 million in art by Jean-Michel Basquiat and $247 million in art by Roy Lichtenstein—a trio that accounts for 29% of the total value of guarantees placed at major contemporary auctions since 2015, ArtTactic said. In addition to coveted estates, “guarantees are our biggest fuel,” said Mr. Billault, though the artistic tastes and price levels set by this opaque group of guarantors matters in ways auction-house pros are still figuring out. More guarantors allow houses to cherry-pick which ones to call with good leads. Longtime guarantors say houses can nudge backers to stake bundles of art instead of lone works, which spreads out the guarantor’s risk but also protects more of the house’s sellers. Newsprint magnate Peter Brant, who may have invented the third-party guarantee in 1986 when he offered Sotheby’s $6 million to guarantee some of the estate sale of taxi tycoon Robert Scull and Ethel Scull, said the houses can diminish their works’ perceived exclusivity if they shop them to too many potential guarantors—or overlook a particularly motivated one. “If they pass me up on a bid to guarantee something, I won’t always bid in the sale,” Mr. Brant said. Besides Mr. Brant, the pool of heavyweight guarantors includes several well-known families of dealers like the Nahmads, the Mugrabis and the Acquavellas, who tend to trade art at blue-chip levels and are equipped to absorb works they win into their inventories. Other guarantors include collectors like music executive David Geffen, electronic-components tycoon Pierre Chen and currency trader Joe Lewis. When investor Steven A. Cohen enlisted Christie’s to sell his Jean-Michel Basquiat painting of a police officer, “La Hara,” for at least $22 million in May 2017, the house got Mr.