Now that the game of chicken between Art Capital Group and Annie Leibovitz has ended, its worth taking a little time to figure out what happened.
What’s clear from the whole kerfuffle is that this was a highly unconventional loan–even for Art Capital. Most of Art Capital’s lending is against physical art. They take possession of the works and loan only a fraction against the real value as a way to motivate the debtors to pay them back.
Had this been the case with the Leibovitz loan, the story would have never made the papers. ACG would simply have sold the collateral and returned the difference to Leibovitz. But ambition got the better of ACG and they made a loan against two kinds of assets–real estate and intellectual property–that are difficult to dispose of.
We know both the state of the NY real estate market and the problems ACG was having with Leibovitz in gaining access to the real estate. But that was nothing compared to the problems involved with taking intellectual property as collateral.
ACG’s spokesman, Montieth Illingworth acknowledges the unconventional nature of the loan: “This was a highly creative structured finance solution for Ms. Leibovitz to solve an array of personal and professional financial problems,” he said. “We based the loan on an appraisal of the potential value of her photographic archive which is really a form of intellectual property. […] This is the first deal we know of that monetized intellectual property based solely on a valuation model with the prospect of commercialization for the owner that could generate tens, even hundreds of millions of dollars of revenue.”
It doesn’t appear clear that ACG had a well-trod route planned out for monetizing this intellectual property. Leibovitz has not previously exploited her work to a great extent beyond having it appear in magazines and doing some advertising work. Indeed, the amended loan tried to harness Leibovitz’s earning power as a commercial photographer as a way to pay off the debt. The problem with this approach is that it put ACG in the unfamiliar role of photography agent–for a client who is notorious for not completing commercial assignments. A little casual reading could have told ACG that.
A more conventional route to liquidating the assests ACG held as collateral would have been to sell Leibovitz’s archive to a commercial photo agency. Getty offered them $15m for it, far below the number they had been expecting which caused another lawsuit. ACG is so pissed about Getty’s having cut a side deal with Leibovitz after negotiating with them that they’re continuing on with the lawsuit against Getty even though they’ve dropped the one against Leibovitz. So there’s reason to believe ACG simply miscalculated the value of this intellectual property.
Commercial photography is highly dependent on advertising and editorial work. Both fields face a massive cyclical and potentially secular decline. Not the best time to expect someone to lay money out against future expected earnings.
Today’s truce resolves this asset headache for ACG. Whether the loan has been guaranteed by another party or some other collateral has been pledge or if the loan has simply been turned into an unsecured loan at a higher interest rate, is unknown. [Update: The New York Times says the real estate and copyrights remain the secured asset but ACG is no longer the agent to sell.] Goldman Sachs might have intervened. Si Newhouse might have helped out.
It doesn’t really matter from our point of view. What we’ve come to learn here is that the Leibovitz loan had almost nothing to do with the fine art and photography market. And perhaps that’s where it all went wrong.