Look Before You Leap | Alchemy Magazine

http://alchemy.secondmarket.com/online/look-before-you-leap/

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http://alchemy.secondmarket.com/online/look-before-you-leap/

Look Before You Leap

EXCLUSIVE ONLINE CONTENT
Art Fund Due Diligence The outstanding performance of the art market over the past 10 years, coupled with the trepidation many have about financial markets post-2008, has led to growing interest in art as an investment and increased dialogue about art fund vehicles. The sheer mention of the term art fund often stirs controversy. A contributing factor to the lack of understanding and agreement is that the term is broadly, and sometimes inappropriately, applied. Artvest defines an art fund as a structured investment vehicle with offering documents that is open to third-party investors for the purpose of financial gain. Everything from valuation methodology, to inherent conflicts of interest, to risk control and diversification must be sound, well considered and documented. Properly created, an art fund will share similarities in structure with financial asset funds, yet take into account the crucial difference that art is the underlying asset. Specialized expertise is essential to successfully managing such an entity. Private Investment Partnerships (PIPs) are often conflated with art funds, creating additional misunderstanding. Unlike art funds, PIPs are not made available to outside investors and are simply groups of individuals who have pooled resources to invest in art or other assets.

Investors remain wary

Artvest estimates the global art fund industry to be approximately US $1-$2 billion, with Asian funds accounting for approximately one-third of that total. Traction has been slow for a number of reasons, the most important being apprehension about investing in a little-understood market. Another concern is the impact that unpredictable trends in fashion and taste can have on the art market over time. A scarcity of art fund structuring expertise has also been a detriment. These factors, along with the absence of established

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Look Before You Leap | Alchemy Magazine

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long-term track records, have made the possibility of meaningful institutional investment in art funds a challenge thus far. Further exacerbating the broader acceptance of art funds are a few notable instances of fraud and/or incompetence in the last five years the result of unscrupulous practices by a handful of individuals that led to the loss of investor capital, numerous lawsuits and a considerable hit to the industry. More confusion comes from individuals who have been successful in financial products now venturing into the art fund space, believing that their experience is portable. The art market is remarkably different from all other asset classes it is opaque, illiquid, unregulated, noncommoditized and emotional. A deep understanding of the players, artists, sectors and intricacies is essential. Getting involved without this knowledge is akin to letting a child drive the family car.

Questions to ask
When considering an art fund investment, many critical questions must be answered, such as: How is the fund structured? Are there adequate risk controls? How often is the fund valued and what is the methodology? What is the liquidation strategy? Who are the principals and advisors, how are they compensated and what are their potential conflicts of interest? This is not by any means a comprehensive list. The questions are many, and engaging an expert before committing capital to any art fund is crucial. The art fund industry is still in its infancy, so experts with authentic experience are few. Lack of regulation has allowed for the unfortunate rise of self-appointed experts, which has made it more difficult for potential fund investors to separate fact from fiction. Continued global economic uncertainty, combined with low interest rates, has led many to seek investments outside of traditional financial vehicles. As new art funds proliferate and investors commit more capital, due diligence will become more imperative, and a full understanding of such issues as tax consequences, legal implications, risk management, market access and collecting trends will be all the more critical. For those interested in art fund investments, we stress the importance of dealing with professionals who have substantial

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Look Before You Leap | Alchemy Magazine

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experience with both financial and art assets and who adhere to strict risk controls, calculated portfolio diversification, active management, open architecture and strict governance guidelines. It is the best way to avoid funds with conflicts of interest that are neither disclosed nor apparent. Jeff Rabin and Michael Plummer, are Principals and Co-Founders of Artvest Partners LLC, an independent advisory firm that provides investment advice for the art market and helps clients use art as a vehicle for long-term wealth preservation and capital growth.

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