Auction house guarantees have been an essential part of the top end of the art market for decades. But with more people than ever before clamoring to be third-party guarantors, auction houses increasingly simply structure the guarantee transaction and then sell off the risk to dealers, art advisors, or collectors who typically hail from the hedge fund, private equity, and real estate industries.
This past May, for example, about 50% of sale proceeds in the major Post-War and contemporary evening auctions were from guaranteed lots. But, most striking, 95% of these proceeds were associated with third-party guarantees, up from around 40% four years earlier.
As more people seek to be guarantors, those new to the market can easily make rookie mistakes in the face of savvy, more experienced competition. Here are some of the most common pitfalls:
Believing the guarantee price negotiated by the auction house is ‘in the money’. The guarantee price walks a knifes edge between the lowest amount the auction house needs to provide to secure the consignment and the price at which their specialists are confident the work will sell. The larger the spread between these numbers, the more valuable the guarantee. Deals with large spreads are typically retained by auction houses. But to win consignments, specialists sometimes talk themselves into ever higher sale prices to justify higher guarantee amounts. When these deals are sold off, the third-party may be absorbing more risk than they fully understand.
Overlooking the need to be ‘cheap capital’ to secure a position in a deal. Auction houses like doing business with seasoned guarantors who can move quickly to get a deal done with reasonable commercial terms. To be a viable alternative, a new guarantor may need to accept a lower financing fee and/or upside split to get access to deal flow – terms that seasoned guarantors would be unwilling to take.
Guaranteeing works they don’t want to own. With so much capital chasing guarantee deals, new third-party guarantors now face higher odds of owning the object than would likely be the case for more seasoned market participants. Because of this, it’s best for new guarantors to consider only objects they want to own, along with negotiating as large a financing fee as possible. By doing so, their cost of acquisition is lower, and they have something on their walls that they truly love.
A final word of advice to collectors. Auction houses put the onus on third-party guarantors to disclose to their clients that they have a financial interest in a lot. Because the disclosure is left up to the guarantor, it’s unclear whether it always happens. To make matters more complicated, auction houses will sometimes make sale-room announcements just as an auction is about to begin that a lot has a last-minute third-party guarantee. But this makes it impossible for bidders to query their advisors. For all they know, the person they asked to bid on their behalf may now have a financial interest in that very lot. To prevent these conflicts, it’s essential for collectors to have formal agreements with their advisors stipulating that the advisor has a fiduciary responsibility to them. But unfortunately, there is no way for collectors to independently confirm their advisor’s actions because the identities of third-party guarantors are not disclosed by auction houses.
* A version of this article appeared in The Art Newspaper on November 12, 2018.
Doug Woodham is Managing Partner of Art Fiduciary Advisors, former President of Christie’s for the Americas, and author of Art Collecting Today: Market Insights for Everyone Passionate About Art.