Adam Chinn’s new role with the Mugrabi family may be a harbinger of bigger changes on the art market’s supply side.

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.)

A few weeks before the May cycle of art auctions began in New York, Josh Baer rolled a grenade into the gathering art market. He published a laconic announcement that Adam Chinn, Sotheby’s former Chief Operating Officer, had “taken a position” with the Mugrabi family.

The blow was softened a few days later when Chinn made the rounds with David Mugrabi. At the auction house previews, Chinn volubly greeted old colleagues, former rivals and a plethora of new and old business contacts. The auctions themselves drowned out speculation about Chinn’s future role. Today there was news of Chinn’s first move, an alliance with Olyvia Kwok, the art advisor with Asian clients. That renews the question: What effect will it have on the art market when Sotheby’s former chief deal-maker teams up with one of the biggest clients for both auction houses?

White Shoes

Because David Mugrabi remains entangled in a prolonged divorce from his fractious wife, Libbie, many assumed that Chinn was joining the family to act as an internal legal advisor. After all, Chinn cut his teeth as an aggressive deal attorney. But no one seriously believes José Mugrabi would have been foolish enough to place any of the family’s art, its most important asset, into a legal entity that might be at risk in David’s divorce. After all, the family still does business as Fashion Concepts, Inc. a corporate entity that harks back to José’s original trading in textiles.

Some former peers wonder if Chinn’s resurfacing so quickly with the Mugrabi family is only a signal of greater ambitions. Chinn’s resumé doesn’t suggest he would be shy or take a setback too hard. He left a partnership at the world’s most profitable law firm, Wachtel, Lipton, Rosen and Katz to join a boutique investment bank, Centerview Partners, shortly after it was founded. From Centerview, Chinn joined Allan Schwartzman and Amy Cappellazzo in Art Agency, Partners to launch art funds and expand the firm’s advisory services. In less than a year, Chinn made some $17m when the company was sold to Sotheby’s and his stake soared in value.

Chinn has an appetite for risk which has mostly been rewarded. To many, AAP’s express elevator to the top would have been a career capper. For Chinn and Cappellazzo, it seemed to be a curtain-raiser. Former colleagues and peers all remark on the pair’s brimful self-confidence. Their peers believe their goal was (and is) to lead a global auction house together. To these observers, Chinn may be parking himself in a neutral role that will allow him to bide his time, marshal his financial forces and potentially mount a campaign to acquire one of the three leading firms.

Whatever his peers think his ultimate goals are, working with the Mugrabi family shows Chinn is willing to be flexible to stay in the game. A corporate lawyer, investment banker, Oxford undergraduate and law review editor, Adam Chinn has joined an octogenarian Israeli textile trader who worked his way up from errand boy to billionaire (everybody thinks) at a firm with a handful of employees who are mostly the trader’s children. That’s a far cry from Chinn’s mostly white shoe resume.

The Engrossers

One of the tensions at the very top of the art market over the last decade or two has been the symbiotic relationship between the auction houses who need a constant supply of art to sell and a few collector/dealers with very large holdings. The best way to think of these market participants is as engrossers. They take big positions and use their market clout to make favorable deals for themselves. A wily trader with a feel for markets, the needs of buyers and sellers, can nimbly operate within the context of a market duopoly that needs product on demand. Indeed, a confident trader with the temperament of a gambler has a natural advantage of the diffused decision-making and responsibility of an auction house.

In his former role at Sotheby’s, Chinn was playing poker with engrossers like David Nahmad, Peter Brant, José Mugrabi and a host of others whose names are less familiar but whose holdings may be no less valuable in any given situation. No matter how much decision-making freedom Chinn had, he always had to play his hand with a large audience looking over his shoulder. (Sotheby’s took an extraordinary step a year ago by publicly assigning blame for a poor earnings report to a few large guarantees.)

When David Nahmad makes a bad bet on a guarantee, he answers only to David Nahmad. His family also has an advantage in that they can roll over some of their guarantee losses by settling accounts with future consignments from their deep stock of art works. High stakes art dealing is a lot like gambling but at the very top of the market the roles have been reversed with engrossers, not the auctioneers, assuming the natural, long-term odds advantage of the house.

Long-Dated Capital

The Mugrabis don’t need Adam Chinn to make guarantees. José can do it in his sleep. Where the Mugrabis do need help is in deploying the capital they’ve accrued from all of that art trading. As the art market diversifies and value seeps into a broader range of artists and categories, mastering the market requires more than one mind. For a decade, the Mugrabi family has tried to move beyond its original trading in Warhol to artists like Prince, Hirst and Koons. Years ago, they took a big position in Tom Wesselmann’s work and José was bidding on Wesselmann earlier this month too.

Lately, however, the big gains in the art market have been in other artists not necessarily within the Mugrabi world view. That doesn’t mean the family has missed out. Engrossers in the KAWS market say the family bought a block of work directly from the artist a couple of years ago when Brian Donnelly needed money to make a real estate transaction. How much of the KAWS market rise has been on liquidity created by the Mugrabis is anybody’s guess. The challenge for the family is how to find the next set of artists whose work can see a sharp and sudden rise in value.

This gets us back to Chinn. The growth of the art market over the last decade and a half has created a set of financial challenges that are new. Art dealers with salaries and rents to pay are not in a position to sit on art and let it rise in value. They have to sell. Increasingly secondary market dealers, the kind who will make their biggest deals of the year next week at Art Basel, are selling works on consignment for their customers because they cannot buy works from collectors with enough of a margin to be able to pay their rent and salaries let alone get a decent profit. Many of the booths at Art Basel will be decorated with work owned by engrossers.

In finance terms, what these engrossing families have is long-dated capital. In other words, the Mugrabis need to make a return on their capital but they don’t need to make it this quarter or this year even. They are patient. They know that profits come when the time is right, not when investors need a return. Private capital is patient capital. That’s one reason art funds have not worked, a lack of patience—and trust.

The Mugrabis need someone with the professional contacts, market knowledge and trading experience to put their capital to work in art. One place Chinn might look is toward mid-sized galleries. There’s been a lot of talk that mid-sized galleries are pinched in the global art market by increasing costs and competition. Here’s where the Mugrabis might be able to make money in a way they’re comfortable with but without having to have the expertise on the artists who are coming next. This is what finance does best. It seeks out expertise and backs it with capital for a price. Not a ton of people are qualified to do this kind of work.

It was revealed a few years ago in a lawsuit between Ron Perelman and Larry Gagosian that the Mugrabis and Gagosian had a habit of creating price pressure on works in the secondary market by transacting between each other so Gagosian could legitimately say he had sold a work. Gagosian is hardly the only dealer to play this game. Many primary galleries will arrange to pre-place works in a show so the artist gets paid and the buyers are assured of competition. The collectors who take those positions sometimes scale up to take a piece of the whole show confident the galleries will ultimately find buyers for all of the work. This is a kind of demand-side factoring benefits the artist, the dealer and even the prospective buyers because there is a market-maker now fully behind the artist.

“Mostly through the home”

On the other side of the art equation, the Mugrabi family owns a lot of art. They sell a lot of it through auction houses but the family also pitches in. Libbie Mugrabi told the New York Times her soon-to-be former mother-in-law explained how it works, “The way we run our business is mostly through the home, because we don’t have a gallery.” Libbie’s departure and Alberto’s marriage to Colby Jordan, a much younger woman with her own family wealth and a strong ambitions to become an social-media influencer more than facilitating her husband’s private dealing, may have cut into the second generation’s ability to move the merchandise.

Today, Olyvia Kwok, who has built an advisory business with Asian clients, announced that she will be working with Chinn to begin selling work privately in New York and London. The first of these private events will “take place in Mayfair in early July and will feature five major art works from a private collection: one Jean-Michel Basquiat, one Richard Prince, one Tom Wesselmann, and two Andy Warhols.” In New York, Kwok will partner with the English real-estate entrepreneur Louis Buckworth and be held at the private membership club at 520 Park Avenue.

Through Chinn, Kwok represents the first new capillaries in a broader distribution network for the family. Add to that Kwok’s interest in offering works with 50% financing and one can begin to see that there is the potential for doing things differently.

The Michael Ovitz of the Art World

Chinn and the Mugrabis are hardly the first movers here. As a generation of boomer collectors dies or decides to sell before the kids squabble over the art, former auction house personnel have already moved into place to seize advisory roles on the sell side. Some, like Tobias Meyer, have swum further upstream economically to all but pre-package a collection like the latest tranche of Newhouse art sold at Christie’s earlier this month.

Whether Christie’s provided the financial guarantee or Meyer brought it to the auction house so he could lower their fees to a mere marketing charge (as some have surmised), the Newhouse auction had echoes of Philippe Ségalot’s Carte Blanche sale at Phillips in 2010 where the private dealer used Phillips as a platform while retaining most of the traditional responsibilities of lining up buyers and reaping benefit. If Meyer’s Newhouse deal does end up spawning similar arrangements in the future, we will have seen a process not unlike the way talent agencies in Hollywood began to pre-package entertainment projects. That might make Ségalot or Meyer the Michael Ovitz of the art world.

Whether that comes to pass or not, Chinn’s move to the Mugrabi family is a sign that broad economic pressures that reshaped the art fair, gallery and auction house sectors of the art market may finally be extending into the supply side.