Art Investment for Everyone?

Wim Delvoye poses next to Suppo, part of his exhibition ‘Wim Delvoye at the Louvre’, running until September 17, 2012. The Art Exchange is currently selling one of his sculptures. (Image credit: AFP/Getty Images via @daylife)

What if you could buy or sell a share in a Picasso or a Monet painting much like a stock in a company? Sounds like a great idea, right? After all, why should ownership of fine art be reserved to an elite cadre of hedge fund managers and Fortune 500 CEOs? Why shouldn’t the average retail investor get a taste of the action – and potentially benefit from a beautiful art work rising in value?

That’s the belief of the folks at the Liquid Rarity Exchange. Within 12 to 18 months, the company based in St. Louis, Missouri hopes to get fund management companies to license its product, called Liquid Rarity Funds, which will allow them to securitize individual art works or groups of art works and sell them publicly, through shares, ETFs, mutual funds or indices.

The idea is to allow more investors to participate, without the hefty management fees or large minimum investment associated with private art funds, improve liquidity in the market, and make pricing more accurate and transparent. And it not stopping there, but thinks it can take everything from rare books to fine wine to musical instruments public too.

As you might have gathered from my first post on art investment, I’m pretty skeptical about this. Hedge fund manager and art collector Adam Sender mentioned a few of the problems with this specific approach in this Businessweek article:

“It would be more akin to betting on a specific stock, where there’s macro factors and then micro factors that you have to weigh, in terms of who represents the artist, and what kind of work are we dealing with. Is it his top work? Work that’s not in favor? Is it the top of the market for that artist? Is the artist still working and putting out less desirable work and diluting that market?”

These are also problems for private art funds that buy a portfolio of art works. However, if a large number of buyers end up holding a stake in just one painting or collectible in any of these Liquid Rarity Funds, that presents a much more obvious difficulty that is quite the opposite of betting on a stock.

While you can sell your Apple or Microsoft share at any hour of any day, how will a fund manager ensure that it has enough buyers and sellers to create any sort of liquidity for fractional shares in very rarified assets? And if it can’t ensure that, how will an investor offload his or her 4,000^th share of a Francis Bacon painting, for example, without convincing up to 3,999 other people to do the same? If the whole painting, fine wine or whatever it is will be sold at some point, how is it determined whether a buyer can be found at the right price at that particular time?

This is not the first effort to take art works public. In January 2010, French company A&F Markets set up the Art Exchange, billed as the first stock exchange dedicated to art, where buyers can buy shares for €10 apiece in a number of different contemporary art works. According to the Art Exchange website, it offers buyers and sellers daily liquidity. Orders are executed daily if they match with opposing orders, within a price limit fixed by the client. If there isn’t an opposing order or if orders would cause the share price to fall more than 12%, execution is delayed until the following day.

Yet there’s no mention of whether a sale has ever been made by a previous buyer, much less every day, or if shares in an art work have ever appreciated since they were first offered. In fact, the biggest risers and fallers touted on the Art Exchange website are for shares in two new works the exchange offered for sale in May–Cement Truck, a sculpture by Belgian artist Wim Delvoye, and an oil on canvas Under the Volcano, A Brush with Fire by British artist Mark Quinn. The price of shares in those works have moved a massive 0.00%, which doesn’t sound too promising.

There’s a big debate about the pros and cons of private art funds, which I’ll tackle again soon, but I’ll definitely need some more convincing about how public art investment can work.