It is understandable that more than a few art market players have been upset by Sotheby’s acquisition of Art Agency, Partners for $50m upfront and the potential to make another $35m over the next five years. That’s an impressive payday for a two-year-old firm built upon Allan Schwartzman’s very successful art advisory business. (Though it is nothing compared to the $800m Citigroup paid to acquire Old Lane Partners, Vikram Pandit’s year-old hedge fund, in mid-2007 to bring Pandit into the bank’s leadership, but let’s not digress.)

Disbelief at the purchase price has led at least one person to root through Sotheby’s 8k disclosure on the acquisition to point to what coincidentally appears to be a smoking gun of hidden value, AAP’s art fund. As you can see from the screenshot, above, the two art funds that AAP manages contain $52m in art. (This is down from the $100m AAP claimed it had committed from an anchor investor when it was soliciting additional investors.)

That’s led to the mistaken assumption that Sotheby’s paid $50m for the art in AAP’s funds. That’s not the case. The art is owned by the funds and the funds are owned by the investor(s). 

Sotheby’s says no decisions have been made about the art funds going forward. But, then again, none need to be made unless Sotheby’s wants to expand the fund by raising more money. (And, it is worth pointing out, that others have done work in the past suggesting that an auction house is uniquely situated to manage an art fund.)

So, for the record, the $50m being paid to AAP represents Sotheby’s estimation of the firm’s profits over the next five years. Sotheby’s believes that the additional revenue to the auction house from those profits will be accretive. That means revenues will increase more than the purchase price paid. Acting CFO Dennis Weibling made that point more than once on the company’s investor call yesterday.  Weibling is a board member, so his statement should hold extra weight.

If AAP can increase Sotheby’s revenues even more by meeting the targets written into the acquisition, Schwartzman, Cappellazzo and Chinn will make an additional $35m. And, at the end of the five years, Sotheby’s will have to decide whether to enter into new deals with any or all of the three principals.