A Glimpse On The Art Funds Market Globally

By Author: mark harris
Total Articles: 57
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Art funds are generally privately offered investment funds dedicated to the generation of returns through the investment in art. Art fund neither acquire nor dispose artworks. An investment in an art fund is a long-term undertaking with investors committing to make capital contributions to a fund for a period of between three to five years and which are typically not subject to return for between five and seven years with additional annual extensions ranging from two to four years at the discretion of the art fund manager.

An investment in an art fund has a number of unique characteristics that should be considered by prospective investors. Such characteristics vary according to the specific attributes of the art fund; however, the following discussion focuses on the typical structure of most fine arts fund namely that of closed-end private equity fund structures.

• Art fund investments are based upon a belief in the art fund manager. Except in the case of pre-specified art acquisitions identified by art fund managers in the fund’s offering documentation, an investor in an art fund has no knowledge ...
... of what specific works of art will be acquired by the fund and has little, if any, ability to opt out of committing capital to a particular art acquisition.

• Art Fund investments are illiquid. Owing to the illiquid nature of an art fund’s underlying assets (i.e., the art comprising its investment portfolio), art funds as a general practice preclude withdrawals by investors of their contributed funds. In addition, art fund investors are typically prohibited from selling their equity interests in the art fund, except in limited circumstances such as with the consent of the art fund’s general partner.

• Art Funds acquire art to sell and not own. Most fine funds have a pre-specified investment period and end-date by which the fund’s art investments are to be sold. While fine arts fund own their art for between five to seven years as an average, all art must be sold within the life of the art fund. In case you are looking to buy indian art, then this knowledge is really beneficial.

• An art fund’s investment manager and general partner are often one and the same. It is not unusual for the investment manager of an art fund and the general partner of the fund to be owned and operated by the same individuals.

• Art fund investors typically receive significant investor protections. Investors in an art fund are provided substantial information and disclosures as to the performance of the fund. Such disclosures come in the form of the fund’s provision of quarterly and annual financial statements. Depending upon the manner in which the fund receives its compensation, the financial statements will vary in the level of detail.

• Art fund’s rarely drawdown an Investor’s capital commitment all at once. In order to achieve better rates of return, an art fund will seek to minimize the time in which it has received monies from its investors. As a result, funds for art will usually drawdown on its investors’ capital commitments as it identifies potential art acquisitions

• Most art funds are closed-ended funds with limited capital raising periods. As the investments are limited in their ability to liquidate the fund’s art investments to permit investor withdrawals, these especially designed funds are typically structured as close-ended investment opportunities, that will seek to raise a certain minimum amount of capital commitments prior to launching the fund and will limit their total capital raising efforts to a fixed period.

• Art funds often utilize multiple investment vehicles. In order for an art fund to accept monies from investors located in different countries without prejudicing such investors’ tax positions or adversely impacting their limited liability protections, these funds often find it necessary to create multiple investment vehicles – each with their own organizational structures and domiciles.

Art funds are managed by professional investment management firms that are usually comprised of a mix of experienced art market professionals and professional investment advisors from more traditional hedge or private equity funds.

This industry has grown significantly over the last ten years with an increasing number of fine art funds, managers and service providers participating in the industry. That being said, the reality is that art funds and the transactions that they conduct represent only a small part of the global art market and investment industry. It is estimated that there are currently less than 200 art investment funds in the world with less than $3 billion in aggregate art investments made over the course of staggered investment periods of between three and five years. By way of comparison, the entire value of the sales of art conducted solely by means of public auction in 2009 was $5.14 billion, which represents only a small fraction of the aggregate global sales of art made in such year. In addition, there are over 9,000 hedge funds in existence worldwide with assets under management of over $1.7 trillion.