Skate's Art Investment Handbook – The Blog

Yesterday, when we published our latest issue of Skate’s Market Notes, we stated that a variety of exchange rates led to mixed reporting on the final sales price of Giacometti’s Walking Man I. These variations have resulted in confusion on whether Giacometti has topped Picasso as the artist with the most expensive work of art ever sold at auction.

In its press release, Sotheby’s states that it “uses HSBC Bank Mid-Market Exchange Rate against Sterling which for today was 1 GBP = 1.6050 USD.” Under this rate, the total sales price for Walking Man I was USD 104,327,006 – clearly ahead of the 2004 sale of Pablo Picasso’s Garçon à la pipe.

Yesterday, we speculated that the mixed reporting could have been a case of journalists inadvertently transposing the digits from Bloomberg’s early report (USD 103.4 million). The Sotheby’s statement makes clear that this was not the case. Given the lack of precedent for using the HSBC Bank Mid-Market Exchange Rate for auction prices at Sotheby’s or elsewhere, we will continue to use the average Interbank exchange rates for this sale and non-USD sales in the future. Just as Bloomberg remained consistent with its figure of USD 103.4 million in a follow-up article, so too will we remain consistent with our figure of USD 103,689,994.

We will refrain from any additional speculation, although one can only wonder whether the unnamed buyer aimed for a pound sterling price just high enough to make headlines proclaiming broken records. If so, he or she certainly achieved the desired effect.

The past week’s news has contained several items of interest related to theft of artworks. On December 31, 2009, Karen Gullo’s article in Bloomberg reported that a U.S. federal appeals court in San Fransisco had ruled that it will reconsider a September ruling in which it asserted that Spain can be sued in the United States by a California man seeking to recover a Pissarro painting stolen by the Nazis from his grandmother upon her fleeing Germany in 1939. At issue is whether a U.S. law that shields foreign countries from lawsuits filed in the states applies in this case. According to the court, the law contains an exception for illegally expropriated property even if the country being sued hasn’t broken the law. According to Gullo, “after the war, the painting was sold at least three times before ending up with the collection of Baron Hans-Heinrich Thyssen-Bornemisza, which is housed in Madrid.”

On January 6, 2010, it was reported that the Musee Cantini in Marseilles had recently been the scene of a crime involving the theft of Edgar Degas’ Les Choristes (1877), which was owned by the Musee d’Orsay in Paris and valued at approximately USD 1.15 million. This high-profile theft followed on the news of a major robbery of some thirty works from a villa in southern France, which were valued at nearly EUR 1 million. Farah Nayeri’s article in Bloomberg discusses the tendency for stolen artworks to eventually resurface. “No matter how skillfully executed these thefts sometimes are, they are generally poorly conceived,” said Robert Korzinek, fine-art underwriter at insurer Hiscox Ltd., referring to the Degas theft. “The chances of an eventual recovery should be good.”

While these two cases are obviously quite different, the fact that they exist at all highlights one of the biggest risks in fine art investment and collecting, as well as one of the most important ownership costs incurred by collectors. While Mr. Korzinek’s comments are valid and do provide some cause for relief, these cases are nevertheless an important reminder of the need to have professional due diligence when it comes to ensuring that any art investment decision involves works with clean title and provenance.

On December 14, 2009, Artfact, the world’s largest online art auction company (profiled in the latest edition of Skate’s Art Investment Handbook), announced that it had closed on a USD 13mln financing round from two well established venture capital firms – Commonwealth Capital Partners and Ascent Venture Partners. Skate’s understands that the deal was in works for quite some time and the fact that it closed hopefully indicates a positive change in investor sentiment toward the art market. Congratulations are in order for Artfact’s Chairman and CEO, Adam Kirsch.

Artfact’s press release on the deal is available here

While the parties have not disclosed the valuation and structure of the deal, the following represents what Skate’s believes are the interesting aspects of this transaction. Skate’s offered Artfact the opportunity to comment on the points discussed below, and where applicable, comments from Mr. Kirsch and his colleagues appear in italics.

1. Although no terms of the deal have been disclosed, it is apparently structured as an investment in a new company called Auction Holdings, which in turn serves as the consolidation entity for Artfact’s properties: Invaluable Live and Auctionzip. The Auctionzip merger was announced simultaneously with the deal, and technically Auctionzip is being acquired by Auction Holdings.

2. While the ownership structure and valuation of Auction Holdings has not been disclosed, Skate’s believes that Mr. Kirsch has retained majority ownership of the resulting vehicle. Steve Johnson will remain President of Auctionzip, while co-founder, Joe Koval, will take on a more consultative role moving forward. Skate’s believes Auctionzip shareholders will have a partial or complete (with deferred component) cash-out from this transaction, although we were unable to confirm this with Artfact.

3. Following the completion of this deal, Artfact apparently, although not necessarily, crosses even further into artnet’s market territory. Already more successful than artnet in the online auction space, Artfact is now building the equivalent of artnet’s Gallery Network with its acquisition of Auctionzip. Artfact is positioning itself as the online marketplace for auctions and their online auctions software provider. In the very near future, however, this strategy could have the effect of transforming its real world member auctioneers into little more than physical stores and service providers, thus moving a considerable amount of the actual trading engine to a larger and more efficient liquidity pool that is being built by Artfact.

In response, Mr. Kirsch downplayed the threat to the physical auction space, stating that “Artfact provides technology and marketing services to traditional auction houses worldwide. While traditional auction houses need to embrace online live auctions as a vehicle to sustain and grow their businesses, many of their most loyal customers continue to attend live auctions in person. Artfact’s live auction platform, scheduled to be available on Auctionzip in March 2010, provides a convenient, complementary channel through which bidders can find and bid on merchandise at auction regardless of location. The role of the physical auction is safe and secure. Physical auctions assure the integrity of the bidding process offline and online.”

4. Commonwealth Capital Partners is a well-established Waltham, MA based venture capital firm. In 2009, it concluded only two deals, including this one. Commonwealth typically invests between USD 2mln and USD 6mln in a company and seeks to own no less than 25%. The firm is an active investor and will have influence on various aspects of Auction Holdings’ strategy and value management going forward.

5. Ascent Venture Partners is one of the oldest venture capital firms in the United States and is known to invest USD 2mln to USD 8mln in early-stage ventures. Like Commonwealth, it is an active investor.

6. Mr. Kirsch is one of the most active dealmakers in the art industry and has managed to bring very professional capital providers to the art market with this Artfact / Auctionzip transaction. Even still, we cannot help but speculate that this deal might have came with a certain element of disappointment. Even more important than the valuation (which we assume was not exciting, as the closest publicly-traded peer company – artnet – was valued at USD 39mln at the time of the Artfact closing) is the fact that twenty years after Artfact’s establishment, Mr. Kirsch had to turn to activist venture capital sources and perhaps give away a significant part of the company and definitely lose control over important strategy and exit decisions going forward.

When asked to comment on Skate’s speculation, Artfact officials countered by stating that “Mr. Kirsch is extremely excited about the merger as he believes Artfact and Auctionzip are a perfect complement to each other.” They went on to say that “Mr. Kirsch retains his role as Chairman and CEO and will continue to oversee the strategic direction and financial direction of the company.”

7. Both Commonwealth and Ascent are value-adding investors in the software and technology space but are not specialists when it comes to the art market (at least their art market credentials are not obvious from their track record and lists of portfolio companies). It therefore remains to be seen what value they will bring to Artfact/Auctionzip apart from financing.

According to Mr. Kirsch, “Commonwealth and Ascent add significant value due to their experience investing in growth online technology companies, such as Constant Contact (Commonwealth) and Guardium (Ascent).”

8. Loaded with some cash and on the way to consolidating the online art auction space, Mr. Kirsch could find himself in a very lonely position against art market insiders when they wake up to the strategic threat Artfact poses with the growing transparency and robust nature of the company. Artfact does seem to be learning the lesson of eBay, which has been haunted by multiple incidents of misrepresentation and outright fraud (This fascinating story is duly profiled in Skate’s Art Investment Handbook.) Given Skate’s focus on informing art investors and collectors of the risks involved with art acquisition, we will continue to closely monitor the news for scandals related to the growing online art trade.

Mr. Kirsch was much more guarded in his assessment, stating that “Artfact does not pose a threat to the art market, which continues to thrive both offline and online. Artfact and Auctionzip service a wide variety of auction houses representing all categories of the auction market.“

In response to concerns about the possibility of counterfeits being traded through Artfact’s platform, Mr. Kirsch responded by saying that “Artfact partners with premium, traditional auction houses to protect against high profile fakes being sold online. As the facilitator for traditional auction houses to sell merchandise online, Artfact relies on its partners to appraise and validate the consignors and merchandise they offer at auction.”

November saw a number of new entrants to Skate’s Top 1000 (nineteen in total). Particularly surprising were the sales of works at Christie’s five-day sale of Asian Contemporary Art & Chinese 20th Century Art. Given the lack of pre-auction estimates for many of the these works, as well as fact that Christie’s only recently published auction catalogues, Skate’s had not forecasted any new Top 1000 entrants from this sale.

The top-selling work was Fu Baoshi’s Landscape Inspired by Dufu’s Poetic Sentiments, which sold for nearly USD 7.8 million and now occupies the 652nd place in Skate’s Top 1000.

The only entrant to Skate’s Top 1000 from the sale that had been assigned a pre-auction estimate by Christie’s was Ren Renfa’s Five Drunken Kings Return on Horses, which sold for an astounding USD 6 million – almost eight times the auction house’s high estimate of USD 777,751!

Finally, Chu Teh-Chun (Zhu Dequn) just barely made it into the ranking with the sale of Vertige Neigeux for almost USD 5.9 million.

The November 29 sale at Christie’s marked the debut of each of these artists into Skate’s Top 1000 and shows the great resilience, albeit slight correction amid growing maturity, of the Chinese art market.

Click here to view the full December issue of Skate’s Art Industry Investment Letter.