Thoughts from The Inc. Tank | Changing the Art Market Paradigm



May 4, 2021

The Inc. Tank logo

by Christina Elson

If, like me, you would love to invest in art, but the whole process strikes you as too expensive, imprecise, and nebulous, you might want to keep on reading. Or even better, tune into the episode I recently recorded with Wall Street veteran and art financing aficionado Cynthia Sachs.

Most of us are not buying Dali (one of my favorites). We buy art because we are attracted to it and hope the artist will make a living in a tough line of work!

Art investing is a bit different. It revolves around the concept of considering art more like a commodity and designing markets to value and trade it.  Art can be assessed through the prism of data analytics and blockchain technology, but in the final analysis, does art generate enough financial interest to spur a new kind of asset class or classes?

Cynthia, now the CEO and CIO of Athena Art Finance, as well as the Managing Director of parent company Yieldstreet, believes the answer to that core question is an emphatic “yes!”

Few understand the world of financial valuation and credit markets as well as Cynthia. Early in her career, she spearheaded Bloomberg’s fixed income evaluated pricing business, BVAL.  As a devotee of painting, sculpture, and other visual arts, Cynthia has long been intrigued with the notion of applying data analytics to the rapidly changing art world.

Job one, Cynthia and I believe, is the need to create art-driven asset classes. “Backing art with credit essentially, or debt, is very, very new,” she noted. In fact, until she established Athena in 2015, it had never been done in a concerted or institutional way. Given her financial background, Cynthia recognized years ago that art attracted assets – “very valuable assets,” she was quick to point out – but back then had virtually no credit market behind it.

So, the challenge became to create a credit market that could ultimately fuel the art market. Almost every other asset class the world over has a credit market behind it.

“In real estate, of course, you would buy a house with a mortgage,” Cynthia says. “Or if you’re trading stocks, you would likely use margin to give yourself more purchasing power.” Why not a similar approach to art purchases?

I asked Cynthia to size up today’s art marketplace. “The art market is very much kind of stopped in time,” she said, noting that, traditionally, it was open only to a few select buyers and essentially limited to physical auctions in places like New York, London, and Hong Kong.

“Also, historically, art is a very illiquid asset,” she added. “There’s a lot of endemic issues associated with art that make it hard to lend into meaning, [or get] comfortable with the artwork’s authenticity or get comfortable with the artwork’s title. Anyone who is focused [on] the real estate market knows that title is one of the key elements of providing credit.”

But the art market has traditionally lacked comfort factors and reliable metrics. Her top priority was to navigate all that as she and Athena grew the business. She had to acknowledge that art isn’t so much “priced” as it is “valued.”

“As lenders, we look at conservative valuations, in that we look at what would be called a ‘net realizable value’ because that would be the value as a lender you would be able to achieve in a sale to pay back your loan if there’s a default,” she says.

That may be a relatively simple concept in the world of finance and liability – but a tough one to grasp in the world of art.

Another nettlesome issue is that the art market is so idiosyncratic – you know, the old expression that “art lies in the eyes of the beholder.”

“Every artwork is different,” Cynthia says. “So, that’s what makes valuing art difficult from an analytical algorithmic perspective. Not that there aren’t ways and technologies with AI, etc., that are trying to do that better and better, but it definitely is something that takes time. There aren’t a lot of ‘comps’ because it’s not a relatively deep market when you look at other asset classes. You factor all of that in to hone in on a proper valuation and, of course, we [Athena] then validate that with third-party appraisal firms and corroborate data and valuations.”

The application of data analytics is changing the art world; so is the link between digital art and cryptocurrency. One reason digital art is doing so well is that digital artworks that have a blockchain behind it (NFT or non-fungible token) have a credible and validated understanding and certification of title and authenticity.

Christie’s, for example, just sold an NFT for a cool $70 million with the buyer’s premium. Why, Cynthia and I discussed, is someone willing to pay that? “That’s an enormous amount of money,” she said. “Is there something else that these buyers see in terms of future monetization of the asset?”

The answer is “yes.” Having worked with museums, I know that 19th century models of museums as collectors and repositories of art are changing and the business models need to change, too. Digital, scalable, art makes it possible for owners to license works to multiple venues at once and create new business models where artists, investors, and venues share the risk and profit. And blockchain-enabled art makes it possible for the artist to receive royalties for a piece no matter how many times it changes hands in the market.

The art market is undergoing a paradigm shift, Cynthia and I agreed. Wealthy tech sector pioneers are finally making their presence felt in the art world. “They’re visionaries,” she observed. “So, what do they see in this that’s going to justify these values? And obviously, the expectation would be [to] grow these values over time.”

I asked if Athena’s work facilitating art-backed debt investing opens art sales to “regular buyers” as opposed to big institutional investors? Yes, it does, Cynthia volunteered.

“The Athena business that I run essentially originates art loans. So, these are loans that are backed by blue-chip artworks, that we have our own data analytics behind to help us make the decisions around which artists are the most liquid, which artists have the most stable track record, things that you would look for in other asset classes. Again, we’re just borrowing from what other asset classes have done to justify making an investment decision and applying it to art.”

Since its inception six years ago, Athena has originated some $500 million of art loans. “The idea then when Yieldstreet purchased us from The Carlyle Group back in 2019 was now offering this art back risk to its Yieldstreet investors. So, that’s when the model then changed from just being an institutional model of Carlyle investors at the time, holding the risk, to now offering it out on the Yieldstreet platform so that retail investors can hold that risk and selling it in sizes that make sense for the retail investor.”

What’s the future hold in store for the art market? Cynthia believes that with more transparency in the market, with more online auctions, and more data coming in to make decisions off of, there should be more confidence in the art market over time. “And with more confidence should bring more investors and more growth,” she argues.

Personally, I see these changes as a great thing. After a career focused in art, graphic design, art direction, and information visualization, my husband Christopher P. Sloan is now building his portfolio of fine art in digital and in oil.  His style, called conceptual realism, is all about creating art that serves to improve our understanding of the human condition. So, it’s exciting to see how technology will open up access to the world of art and enable new opportunities for him and other artists.

I love seeing new markets emerge and flourish – especially in a field as historically stodgy as art.

# # #

Listen to the podcast here or on your favorite platform.

Read more “Thoughts from The Inc. Tank” by Dr. Christina Elson on Linked In.

Christina Elson is cohost of The Inc. Tank and the Executive Director of the Wake Forest University Center for the Study of Capitalism.