The Art Law Foundation in Geneva (Fondation pour le droit de l’art), together with the Banking Law Centre at the University of Geneva, hosted a sterling event on Monday in Geneva. This was the second part in a series spearheaded by the Foundation, the first day was held in London in November. While I was not able to attend the London event, it was very well received, and together with this week’s event it must be said that the organization is up to great things. Their events page (here) is something anyone interested should book mark. In particular, these events have showcased sophisticated insights into market-based aspects of art and law, which whether we like it or not is what is driving the discussion (and will continue to). A real hats off to the organizers, in particular Attorneys Sandrine Giroud of Lalive, and Pierre Gabus of Gabus Avocats, a director and president, respectively, of the Foundation.
Giroud and Gabus opened the session covering the topics of the day. What really is the magnitude of the art market? Where does art fit in as an asset class? What is really happening with art funds? What can art do as collateral? Is more regulation needed, or less? And lastly, as always, taxes.
Luc Thévenoz chaired the first session, “Art as a common asset class?” This is an interesting question I’ve discussed myself with many private wealth advisors. Art is obvious an asset, with significant value. Perspectives vary widely on how to treat it as part of someone’s overall portfolio, yet this is a question that needs to be addressed; after all, if nothing else art in your estate will most certainly be considered an asset for taxes. Does art produce income? Should it? No different than real estate, leveraging can create income even in a low-interest environment. Or in another sense, perhaps its illiquidity makes art more like commodities like gold. On the other hand, investors don’t hang marketable securities in their living room or create museums to house them. No one would say art market is financial market, but can investors approach art as investment?
Philip Hoffman of the Fine Art Fund Group was up next. Hoffman had many years of experience at Christie’s, and now runs his fund in London, Geneva, and Dubai, without about $500 million in investments. As he put it, he worries not about the characterization of art as an asset class, and more about whether he is making money for his clients.
Philipp Fischer of Abel Avocats gave a detailed presentation about the possibilities of art fund structuring in Switzerland, that is, do art funds fall within existing investment regulatory regimes? His presentation was thorough and informative. Fischer said that the Swiss Collective Investment Schemes Act supervises collective investments that provide proof of assets that are managed collectively, by a third party (Fremdverwaltung).
Structurally, there are two options: 1) a Swiss investment company with fixed capital, and 2) Swiss limited partnership for collective investments. Open ended funds mean more or less an immediate redemption right, and presumes that assets are liquid. Where less liquid than marketable security, closed-end structure makes more sense. In fact, most funds are creative outside of Switzerland. The critical point them becomes how interests are distributed to Swiss-based investors. That will depend on the characteristics of the interests in the investment vehicle and the targeted investors in Switzerland. If they are qualified investors (pension funds, etc.), there is relatively light regulation. No formal registration is required, but it must have Swiss paying agent. Supervised Qualified Investors (Swiss banks, securities dealers, insurance companies) are treated as a placement and not a distribution, so regulation is less applicable.
Jan Prasens of Sotheby’s Financial Services discussed their work in finance and art. His job, as he put it, was to control the downside. Art has been collateral for centuries, but only in the last 20-30 years has it become a more developed and professional marketplace. Sotheby’s started only 1988, but was still one of the first. Prasens point out that market data are hard to come by, but transparency is increasing. Estimates of approximately $60 billion underscore that art pales in proportion to other assets being financed. Contemporary art has been a game changer, prices are going up, but so is liquidity. Challenges are marking to market, title and World War II restitution claims, and possession. Whereas the U.C.C. allows the borrower to retain possession, that is not true everywhere.
Frédéric Dawance, of Lombard Odier in Geneva gave a private banking perspective. Equities, fixed income, and cash are only agreed-upon categories of asset classes. During the panel discussion that followed the presentations, Hoffman noted the pressure to trade early in the life of the fund. At one point they analyzed how performance would have compared with longer retention, and they determined the performance would have been slightly worse.
I asked the question how the rising issue of authenticity factors into their analyses. Hoffman’s answer was that he’s offered $5 million in fakes every week. Prasens noted that being at Sotheby’s provides the highest level of expertise to draw on. One can’t simply trust one person. Fischer made a point about feeder funds that I thought was quite observant. A feeder fund is necessarily going to rely on a person or small team’s expertise, and meeting that trust is the key to success. An audience member asked the panel about where in the marketplace they would fit in, and one panelist noted that there are funds in China guaranteeing 10-20% returns, but that’s obviously worth nothing.
Session Two dealt with the tax aspects of art finance. Xavier Oberson talked about Swiss implications, but I’m afraid my French wasn’t up to summarizing his presentation. James Carleton of Farrer & Co. LLP presented the English view, noting the upheaval caused in 2012 by France’s proposed (but no enacted) wealth tax. Art is a key aspect of estate and succession planning. In turn, key structuring for tax questions focus on how to hold the art: oneself, in a trust, a foundation, or a partnership. It can be “dynastic or ruinous.” In the UK, capital gains are 28% and estate tax is 40%. That makes domicile questions critical. There are certain tax breaks for art owners in England. On death, an estate can offer it in lieu of tax. During lifetime, offer to nation gives 20% and a carry forward of 5 years.
Alas, the third session was entirely in French too and I can’t do it proper credit. If the presentations by Yan Walther, Fine Arts Expert Institute; Fabian Bocart, Tutela Capital; Yves Bouvier, Natural Le Coultre; Manuela de Kerchove, Schroders; and Alexandre Quiquerez become available online I’ll certainly update. It was an informative day in a beautiful place (with a bonus trip to artgenève thereafter).
