Understanding Liquidity in Artwork Monitoring Decisions

Part 1 Recap: 

The Covid-19 pandemic has led to a substantial drop in asset values across markets, resulting in a brutal de-leveraging process, generating high levels of margin calls. Art is one of the least leveraged private asset classes, standing at 2% of wealth in private hands.

While we have solid clues about the future economic behaviour of art through experience and research, we need to look at the correct variables when making lending and collateral monitoring decisions, as is the case with any other asset class.

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Defining Liquidity

How auction results fall in line with broad market trends depends on many factors affecting the individual artworks on offer. For any artwork on offer, we can expect subject matter, price level, and medium will play a role, as well as depth of the artist’s market, the artist’s popularity, and the work’s importance. These variables among others determine the confidence we can have that an artwork will sell for close to its estimated value or above – which we shall call liquidity. 

In other words, liquidity is a good reflection of the realisable value of an artwork. 

The graph below illustrates what the liquidity analysis captures from major auction house sales over 2016-2019. Where the x-axis represents deviation from the sale estimate, and y-axis represents percentages of artworks sold (or unsold, when bought-in), we see that: 

·       Works with high risk scores (in red) are bought-in at almost twice the rate than lower risk (in blue), with 35 every 100 works with a high risk score vs 16 in every 100 for low risk.

·       Works with high risk scores are skewed to the left of the hammer estimate at x=0, while conversely the works with low risk scores skew to the right. In short, the lower the risk score, the higher the uncertainty of the sale price. 

When applied to individual artworks, this scoring methodology offers a comprehensive understanding of a collection’s financial behaviour, where market movements are already factored in. It represents a practical, usable metric against which to understand risk in the treatment of art as an asset class. This has applications whether an artwork is destined for sale or leverage. In the current liquidity crises, scores offer a reference point that can drive better loan-to-values and pierces through the opacity of artwork valuation. 

The COVID-19 crisis, combined with the ripe conditions of a more regulated marketplace, will accelerate the already steep increase in the use of art as collateral.

Click here to learn more about Overstone’s Art Risk Monitor scores, and how our services can speed up your execution.