Randall Willette
Director - Fine Art Wealth Management
April 28, 2008

Will Distressed Art be the Next Opportunity for Investment Funds?

Over the past weeks we have seen opportunity capital that is well
organised and looking for a home moving into distressed assets. Just
as vulture funds are circling the property market amid the fallout
from the credit crisis, we at Fine Art Wealth Management, the
London-based art wealth management firm, believe that distressed art
may soon be the next big investment opportunity.

Mixed Signals

Art market indicators over the past six months have been mixed. Both
Christie’s and Sotheby’s say that the six-month period since the last
August, when the credit crunch began, was one of their most
successful six-month periods in their respective histories.
In contrast, it is worth noting that about 60 per cent of lots of
contemporary art failed to achieve expected prices at auction in
February. A recent survey by ArtTactic, the London-based art
research firm indicates that confidence in the contemporary art sector
has dropped 40 per cent over the past six months.
“It is clear that the respondents no longer think that the art market can
be detached from economic realities,” ArtTactic said in the survey.
Some experts believe that the resilience of the art market will be
maintained by the depth and breadth of buying interest. While
historically, there is no clear evidence linking the volatility in the
financial markets with what is happening in the art market this may be
starting to change as a new generation of collectors are buying art for
investment.

Merrill Lynch/Capgemini, in their 2007 World Wealth Report has
stated that “art collecting is increasingly seen as an investment by high
net worth individuals. This in turn, is helping to fuel a large
international art market that has been setting record prices.”

Art Investment Funds

FAWM’s March 2008 survey of global art investment funds indicates
that at least five new art investment funds plan to launch in the first
half of 2008. At least one of these funds has a stated investment
strategy of taking advantage of the expected slow down in the art
market to invest in distressed art assets with an opportunity for
out-performance.

A small number of other funds under development have put their
plans on hold, choosing instead to wait and see what will happen with
the turmoil in the financial markets.

The emerging markets, such as China, India, and the Middle East
remain key geographic interest areas for new art funds globally, with
speculation in contemporary art being the predominant focus.

Market Watch

If speculative forces continue to bid up art prices to unsustainable
levels, FAWM believes that the likelihood of a price correction will
increase. Equally, the current credit crisis may force art works into the
market at distressed levels that might otherwise never have changed
hands.

Much like the financial markets, the art market is not immune to
bubbles. In fact, the rate from which prices in the art market are
driven by tastes and fashion, particularly in the contemporary sector,
is much greater than other financial markets where value is more a
function of market fundamentals.

The most significant bubble in the art market occurred in the late
1980s and early 1990s in the Impressionist sector and was caused by
soaring Japanese demand. Today it is widely believed that
contemporary sector may be experiencing a similar bubble.

As in the period of the Impressionist bubble, it is interesting to note
that there is also a new and distinctive group of buyers that has
emerged, pushing prices steadily upward. A large number of these
buyers include new collectors from emerging markets who have
achieved enormous levels of personal wealth from strong advances in
GDP and market capitalisation taking place in their respective
countries.

If these sources of new wealth dry up, it is possible that the
contemporary art sector in particular, could experience a correction.
But some experts believe it is too soon to be talking about distressed
art and that the market has a truly global client base which will allow
it to weather the storm. Whatever the case may be, one thing for
certain is that the art market is entering a period of accelerating
change and complexity.