Art Market Monitor

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Sotheby’s Opens Up Its Guarantee Book

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One of the subjects that causes a great deal of consternation within the art market is the use of guarantees by the auction houses. A few days ago, the New York Times suggested that Sotheby’s was operating differently by proffering a guarantee to the seller of the Gustav Klimt this week in London. The seller was offered a guarantee directly from Sotheby’s which then arranged an irrevocable bid for the work.

In today’s earnings remarks released before the call, CEO Tad Smith discusses the use of guarantees. He refers to the process described above as a hedge. That’s not really the best way to think about it. A hedge involves using one trade to counteract the possible negative outcomes of another trade. Here Sotheby’s is replacing their direct offer with a minimum offer that reduces their risk with a definite sale (as a opposed to benefiting from the opposite eventuality.)

Either way, Sotheby’s has a $48.3m in exposure to the next fortnight’s sales:

With respect to our hedging of such guarantees, as of February 22, 2017, we had outstanding auction guarantees totaling $147.7 million and as of that date we have reduced our financial exposure with irrevocable bids totaling $89.4 million, and may yet secure more irrevocable bids in the lead up to the March sales.

Sotheby’s Shows The Dealmaking

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The one art market innovation nearly universally remarked upon in last night’s sale was the new sales price reporting that acknowledges the effect of deals with third party guarantors (or, in Sotheby’s structure, irrevocable bidders.)

Sotheby’s deserves credit for initiating the practice of reporting fixed-fee bids accurately and seeking clarification from the NY Department of Consumer Affairs to make the practice standard operating procedure in New York auctions.Continue Reading

Sotheby’s Has $258.8m in Guarantees This Fall Offset by $144.2m in Irrevocable Bids

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Sotheby's Sale of Magnificent Jewels and Noble Jewels 17.05.16

One of the signal tropes of this auction season is that the auction totals are down because auction house guarantees have supposedly evaporated. But as this morning’s 10-Q shows, Sotheby’s is still making substantial and aggressive guarantees that are then covered with so-called “irrevocable bids.”

As of November 4, 2016, Sotheby’s had outstanding auction guarantees totaling $258.8 million and, as of that date, Sotheby’s financial exposure was reduced by irrevocable bids totaling $144.2 million

Art Auction Guarantee: Bringing Guarantees to the Primary Market.

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Since it’s inception in 2011, Art Auction Guarantee (based in Los Angeles and London) has been providing traditional third-party guarantees. At the upcoming Art Basel Miami Beach 2012, the company will launch it’s new service, offering guarantees to buyers as opposed to sellers for works in the $10,000 to $500,000 range.

According to AAG’s website, their objectives are to:

 Offer our clients (being private individuals, dealers/ galleries, art funds and/or auction houses) the peace of mind of obtaining a minimum amount agreed upon in advance from the buy/ sell of a piece of art:
  •  Either as a guarantee for a price paid when buying an art piece (either in  auction or privately)
  • Or as an auction guarantee for a piece that a seller will present in auction.

Blouin Artinfo reports on how this service works:

AAG charges clients a fee of 5 to 7.5 percent of a work’s acquisition price in exchange for a guarantee. If a collector decides to sell the guaranteed artwork at auction two or more years after purchasing it and the work fails to sell above its reserve, AAG will buy it back for the same price he or she originally paid. (Inflation, exchange rates, and auction house fees aren’t factored into the total.) If the work sells above the original acquisition price, AAG receives 15 percent of the profit and the collector keeps the rest.

“It’s a competitive rate,” noted Aquizerate. By comparison, most third-party guarantors take at least 50 percent and as much as 80 percent of the upside. To entice dealers to recommend the service to their clients, AAG will be offering them approximately 1.5 percent of its initial fee and a small portion — approximately 5 percent — of the resale profit.

However, skepticism remains regarding the comfort level the company can offer in it’s services.

According to Jeff Rabin, co-founder of art investment firm Artvest Partners.

“I don’t know what they own or the scope of their guarantees. But if all their clients try to cash in at once, they might be forced to go into bankruptcy and liquidate. And if that happens, what happens to all the people they guaranteed?”

Founder of AAG, Arnault Aquizerate, says that he:

is planning to approach investors at the beginning of next year to provide an additional backstop, but “for the time being we have not had the need to invite in our shareholding structure any private investors or investment bank.”

The Art Market Without Tears? A Company Will Guarantee You Can’t Lose, For A Fee. (Blouin Artinfo)

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