The Art Newspaper calls guarantees the next big art market scandal; Philbrick’s guarantee math; Is guarantee use a market tell that we’ve peaked?; Amy Cappellazzo defends the art market; Cosby sells Thomas Hart Benton

This commentary by Marion Maneker is available to AMMpro subscribers. (The first month of AMMpro is free and subscribers are welcome to sign up for the first month and cancel before they are billed.)

It’s All But Guaranteed

If you’re looking for something interesting to read about the use of guarantees in the auction market, skip the first half of The Art Newspaper’s story and read the points made by Nick Maclean and Adam Chinn.

The quotes up top about guarantees being conflicts of interest or inflating prices are presented wholly without evidence. Third-party guarantees are private transactions that give the seller the opportunity to look for a better offer publicly. The mergers and acquisitions market has adopted a similar mechanism called a “Go Shop” clause that allows the seller to make a deal and then see if there’s more value achievable elsewhere. No one claims that go-shop clauses are inflating the M & A market or a scandal waiting to happen.

Deeper in the story we get the opposite view that guarantees take all of the drama out of an auction. Yet just last night the most dramatic lot sold had a third-party guarantee announced at the beginning of the sale. Nonetheless, the Monet snow scene attracted a flurry bids and made a final price three times the low estimate. Everyone was surprised. There’s no way of knowing what the guarantor offered. Christie’s wasn’t shy about signaling pre-sale interest in the painting from Post-War collectors. So there’s always a chance that the seller locked in a high price but the bidding went even higher.

The problem with the third-party guarantee system is that it is effectively an auction before the auction. Except, the third-party guarantee auction is not publicly announced nor conducted with any sort of rules. This is what Kenny Schachter is alluding to when he is quoted saying,

• “What’s pretty unregulated is what these idiots are doing in the room among themselves.”

That’s part of what Sotheby’s guarantee book runner Adam Chinn means when he says this:

• “You may make the argument that there’s an inequality of information [between bidders], but I don’t think there’s a conflict of interest,” he says.

A real area of concern is how the bidding is conducted with third party guarantees. After a sale, there’s often discussion of whether the work sold to the guarantor or not. That ought not be a secret (there’s more information asymmetry for you.) And the article has dealer Nick Maclean making an excellent case for more disclosure. Surely an article headlined, Irrevocable Bids Ought to be More Visible, would not have gotten the attention The Art Newspaper is looking for.

• bidders have no idea who is bidding on behalf of the third party—a bone of contention for Maclean, who suggests that “the auctioneer should be the one carrying out the bid for the guarantor, or it should be announced which member of staff is bidding on their behalf. It would be more transparent, particularly to new buyers unaware of the intricacies.”

Inigo’s Open Kimono

One of the fascinating aspects of The Art Newspaper’s guarantee story is Inigo Philbrick’s quote. The story’s subhead claims “third-party deals have made some people very rich.” By definition, anyone who has made a big score from backing works at auction started out “very rich.” They were given the opportunity to provide financing because they have capital.

Philbrick illustrates how guarantors deploy their capital and what kind of return they can hope to make:

• The London-based dealer Inigo Philbrick offers around 20 to 25 third-party guarantees a year on works by artists such as Rudolf Stingel, Christopher Wool, Mike Kelley, Richard Prince and Wade Guyton. “For me, the best outcome of a guarantee is that you make a lot of money [without buying the work]. Say it’s a million dollars that you’ve risked, then you’d want to make $100,000 to $150,000 as your fee,” he says. “The second-best outcome is that you get a work you were happy to buy at a price you were happy to own it at. The second-worst outcome is that it sells on one bid and you make $5,000, having put in all this effort to negotiate a deal. [And] the worst outcome is the sort of guarantee you do purely for financial speculation and end up with a painting you don’t want to own.”

Philbrick tells us he backs 20-25 works a year which would be 4-5 works each major auction season (New York in May & November; London in March, June and October.) If Philbrick has a phenomenal success rate of 80%, that’s 5 lots each season at $1m each. He ends up owning 1 out of five each season. So he’s got to have $5m to buy the works even if he doesn’t need to reach into his pocket for the other $4m (presuming the auction house doesn’t require he put up the cash for the guarantee before the auction.)

On the works he buys, Philbrick hopes to make his money later. In the meantime, he’s ‘earning’ $100k to $150k on the other four works he’s backed each season. With little room for error, Philbrick is making $2-3m a year from guarantees using $5m in capital.

That 40-50% return on capital is huge. If he takes a longer view, Philbrick might be able to get more leverage out of the guarantee game. Philbrick could plow his guarantee profits back into the art he’s obligated to buy. That would reduce his cost on $5m in art to $2-3m. If he can sell it in 3 years for twice the price he paid, that would give him $7m profit on three year’s investment.

Tripling your money in three years would be very impressive. But it still isn’t the kind of massive return the guarantor of the Salvator Mundi got. That took a $100m to make, possibly, $50m which is hardly a get-rich-quick scheme even in this peak performance scenario.

Pi-eX’s Auction Guarantee Data

This data presented in The Art Newspaper’s story on guarantees comes from our friends at Pi-eX. The Art Newspaper tries to suggest that guarantees are a scandal waiting to happen. The data shows something different. Guarantees seem to be an indicator of market surges. (Note the increased proportion of guaranteed value in 2014 and 2015.) The Evening sale figures for 2017 show the guarantee volume exceeding 2007’s high when 40% of the Evening sale value was guaranteed. A separate graph in the story projects 2018 to exceed 2017.

Amy Cappellazzo Defends the Art Market

Kurt Anderson talks to Amy Cappellazzo and Nathan Kahn about Kahn’s art market documentary, The Price of Everything, now on HBO. The value of these first 20 minutes of Anderson’s weekly radio show is hearing some of the good and bad points made by Kahn and Cappellazzo’s quite valid objections to Kahn’s efforts to depict the art market as a pall on culture.

Camille Cosby Sold Her Thomas Hart Bentons

Bloomberg reported late last week that Camille Cosby has sold or taken loans on significant works from her art collection amassed over many years with her husband Bill Cosby. The collection is said to contain 300 works ranging from Old Master works to important African Artists. Bloomberg says two Thomas Hart Benton works were sold or used as collateral for loans.

Asher Edelman has the lien on Benton’s The Instruction. The other picture, Going West, is on display at a Palm Beach art gallery having been purchased by Chris Morse and Clay Surovek of Granary Gallery on Martha’s Vineyard and is now on view at Surovek’s Palm Beach shop.

• [Buck] Kiechel estimated that “Going West” and “The Instruction” have a combined market value of $12 million to $14 million. Morse and Surovek declined to disclose the asking price for “Going West.” Cosby paid $105,000 for “The Instruction,” according to a December 1978 article in the magazine Jet.