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New Year’s predictions are a hoary journalistic tradition best honored in the breech. Nonetheless, at least two art market columnists have taken the opportunity to predict the increased use of guarantees by auction houses in 2018.
The logic presented betrays a fundamental misunderstanding about the use of guarantees in the auction market. There’s no way to predict whether there will be more or fewer guarantees in 2018, or whether the value of the guarantees will go up or down. But it is worth noting that 2017 saw more evidence of a decline in the use of guarantees across the major sales.
Actually, with the presence of the massive Rockefeller estate—which carries a massive global guarantee that dwarves the aggregate guarantees offered in most previous years—on the market, the rise in the use of guarantees for 2018 is already baked in.
But that’s not what the prognosticators mean when they say the use of guarantees will go up. Here’s an example from Artnet:
Every time the world economy crashes, auction houses dust off their talking points about fiscal responsibility and the wrong-headedness of their older, freer-spending policies. Then, every time we experience a sustained recovery—at least, at the apex of the economic pyramid—they go right back to approving big guarantees, especially now that it’s become de rigeur to offload some of the risk to third parties.
Or take from The Art Newspaper that assumes the success of the Leonardo inevitably leads to more guarantees:
why would vendors not accept a guarantee, particularly in the light of the very public failure at Christie’s London in October, just a month before the Leonardo sale, of Francis Bacon’s Study of Red Pope 1962. 2nd Version 1971, (1971), which “went naked” sans guarantee and was estimated at an over-optimistic £60m-£80m?
So let’s try to answer that question and then talk about what guarantees are, how they are used by the auction houses and how the use of guarantees has changed over the last decade.
The Art Newspaper questions why vendors would not accept a guarantee. Yet that’s exactly what the Bass family did to their great advantage only a few weeks after the failure of the un-guaranteed Bacon in London. The sellers of the Fernand Léger Contraste de Formes at Christie’s happily made the $62m hammer price without the help of a guarantee. There’s a good chance they also got a portion of the buyer’s premium too. That’s because a guarantee isn’t the only financial inducement to sell available to an auction house. Why do vendors turn down guarantees, the reasons can be counted in the millions.
Even as some of the biggest sales were taking place with guarantees during the prior years there were confident sellers who chose to capitalize on the mood by bringing their biggest lots to market without the inducement of a guarantee. One of the most obvious examples was Sheldon Solow’s sale of his Giacometti in 2015. In the midst of a heavily guaranteed sale, Solow’s sculpture made $126m hammer or $143m with fees.
Why did all of these sellers go to market the old-fashioned way? They wanted to make more money and were comfortable with the risk.
Here’s the thing about guarantees. They are driven by the immutable emotions of any market: greed and fear. When greed dominates, guarantees lose their appeal to consignors. When fear dominates, guarantees become essential to persuading the owners to part with their works.
That simple dichotomy is why both of these predictions are most likely wrong. As the markets generate more expectations of high sales (another way of saying greed) consignors will want to maximize their share of the sale. They do that by negotiating not for a guarantee but for a portion of the buyer’s premium. If market expectations remain high (and that’s not a foregone conclusion for 2018, by the way) sellers will eschew guarantees.
To go further, let’s look at the artnet quote which blithely talks about “every time” when there really hasn’t been a typical guarantee cycle. More to the point, the quote has the process backwards. Guarantees don’t disappear when markets fall; and they don’t ‘accelerate,’ as The Art Newspaper puts it, when markets rise.
Auction house guarantees are not new to the current art market. The primary use of a guarantee was as a means to secure a large estate or collection. The auction house guaranteed the estate a global number which the auction house had the freedom to work through across the various lots. The Rockefeller guarantee is the grand-daddy of these types of deals exceeding, by all accounts, the massive guarantee $515m that Sotheby’s gave the Taubman family just a few years ago.
At the beginning of the current market, the innovation was to offer guarantees on individual works instead of estates. These guarantees were provided directly by the auction house and they were driven by the houses’ own market-making intelligence. That means, for a brief period from around 2005 to 2008, the auction houses had an information advantage over consignors and, possibly, dealers. Through their broadening networks, they were the first to know about demand for particular artists and works. That enabled the specialists to approach collectors with an offer that would seem too good to pass up.
The consignor would begin the process feeling that they had already won. They were getting a guaranteed fee in excess of what they thought their object was worth. On the other side, the specialists were confident buyers existed above the price the consignor had accepted. The guarantee allowed the auction house to become a principle in the deal and share in the spread between what the buyers were willing to pay and what the sellers were happy to accept.
This magical moment increased the auction houses’ profit margins for a few short years but the salad days were never going to last. The global financial crisis brought an end to the wide-spread use of direct guarantees. Even if it had not come to a close so dramatically with the auction houses taking possession of a substantial amount of art in November of 2018, the information advantage and expectations of sellers would eventually have made those margins the guarantees could capture evaporate.
That’s what happens in markets.
As 2009 dawned, the auction houses had very different priorities. Overnight they went from eyeing fatter profits through guarantees to contemplating what it would take to survive as enterprises. Art auctions Sotheby’s, Christie’s and Phillips’ main business but they’re also the most powerful form of marketing for those businesses. In 2009, all three houses pushed toward private sales but they still needed to have art works to auction. Auctions create market information and confidence.
The solution was to shift toward third-party guarantees or irrevocable bids. The auction houses neither had the appetite nor the balance sheets to provide direct guarantees in the post-credit crisis world. Over time, the art market came back bigger and better than anyone could have imagined in early 2009. But guarantees remained primarily off-balance-sheet arrangements. In other words, the primary goal of using third-party guarantees was to populate sales.
Direct guarantees sought to super-charge the buyer’s premium with additional revenue; third-party guarantees seek to preserve revenue by giving up a portion of that premium. Each has a different business function and cost for the auction house. They just happen to share the term guarantee.
The shift from direct guarantees to third-party guarantees was a fundamental one in the auction business. It has lasted for eight years. Even late in this period, the use of a direct guarantee on an individual work is uncommon and usually precedes the introduction of a third-party guarantee to replace it.
Going back to Artnet’s claim that guarantees disappear during the fallow periods and return when reckless spirits abound, it’s not too hard to see from the auction house’s behavior that the opposite is true. Direct guarantees were dominant during the market euphoria phase before 2008; third-party guarantees have prevailed since. And, as pointed out above, third-party guarantees have declined in 2017.
Or, it should be pointed out, there has been an increased use of third-party guarantees not as inducements to consign but as backstops to manage sale results. Sotheby’s made a point to say their November Contemporary Evening sale was the third in a row to reach a 90% sell-through rate. One of the ways the auction house does that is by taking last-minute third-party guarantees.
In the current market, excepting the Rockefeller sale, there are no indicators that would predict an “acceleration” of the use of guarantees. Competitive pressures might keep them at levels we’ve seen over the last 3-5 years. Though there is every reason to believe that non-discretionary sellers may see it to their greater advantage to enter the market without those kinds of protections preferring to be paid for taking the risk.
What will 2018 hold for the art market? (The Art Newspaper)