The Financialization of Art with Philip Hoffman

Katie and Steve speak with Philip Hoffman, founder and CEO of The Fine Art Group, about art funds, art financing, and financial guarantees of auctions sales.  They also explore how art is performing as an asset class.  Philip started the first “art fund” in 2002, and he is one of the world’s leading experts on the financialization of art.


The Fine Art Group –

Episode Transcription

Steve Schindler: Hi, I’m Steve Schindler.

Katie Wilson-Milne: I’m Katie Wilson-Milne.

Steve Schindler: Welcome to the Art Law Podcast, a monthly podcast exploring the places where art intersects with and interferes with the law.

Katie Wilson-Milne: And vice versa. The Art Law Podcast is sponsored by the law firm of Schindler Cohen & Hochman LLP, a premier litigation and art law boutique in New York City.

Steve Schindler: Hi, Katie.

Katie Wilson-Milne: Hi, Steve. So today we are finally, as promised, talking about art and finance.

Steve Schindler: Money.

Katie Wilson-Milne: And money and a few different examples. As most of our listeners probably know the art world is largely about money but instead of paintings just being expensive we are going to talk today about the financialization of art or how art itself is leading to financial products that might look more familiar to people in other settings.

Steve Schindler: Right. And are we going to talk about that question that has popped up it seems like in many, many settings whether art is an alternative asset class?

Katie Wilson-Milne: Yeah. That’s something we should ask our guest because I’m not sure about the answer to that.

Steve Schindler: All right. Well we will see what he has to say.

Katie Wilson-Milne: Philip Hoffman is the founder and CEO of The Fine Art Group. The Fine Art Fund, which is part of the Fine Art Group, was the first fund of its type to invest in art, founded in 2001. Since then, Philip has developed the business into a market leader in both art investment and art advisory. Before launching the Fine Art Group, Philip Hoffman spent 12 years working for Christie’s Auction House. He joined from KPMG and at 33 became the youngest member of the management board and later served as the deputy CEO of Europe. Welcome, Philip. Thank you for joining us. Could you start by telling our listeners a little bit about your career in the art-meets-finance world and also what the Fine Art Group does?

Philip Hoffman: So my career is that I started at KPMG as a chartered accountant or CPA and I qualified and my first position was KPMG suggested that I should be finance director of Christie’s. So when I was 27 I became finance director or CFO of Christie’s. And I resigned after a year having done what I wanted to do, which was to clean up the books and the accounts. And then they asked me if I would become deputy chief executive of the European business and get involved in all aspects of the business. And so I had about 300 to 400 people reporting to me when I was about 29, joined the main board at 30 and was then involved in running most of the European business and also setting the global strategy for Christie’s. I was at Christie’s for 12 years and then I left. I had the idea of setting up an art investment fund with Christie’s and at that time Lord Carrington who was the then Chairman, Former Secretary General of NATO said there were too many conflicts of interests. So, we didn’t do it at Christie’s. And I then left to set up the Fine Art Group.

And I started with an Art Investment Fund back in 2001 and Dresdner Kleinwort Wasserstein came in 2002 and said we would like to be your 50-50 partner. And then, it took us another year, a lot of legal costs and we launched the first Fine Art Fund 1 and then just to fast forward now to 2018 we founded Fine Art Fund 1, Fine Art Fund 2, Fine 3, 4, 5. Then we setup an auction guarantee fund number 1, auction guarantee fund number 2 and then we set up an art lending business. During that period we also set up an art advisory business. And then, some of our biggest clients came to us and asked us to look after the whole collections around the world and ship them around the world. So we look after a couple of the world’s biggest art collectors who spent between $100 million to $300 million a year on art. That’s where we are. We now have 35 full time staff, 15 paid consultants. So there is about 50 of us. We have an office — head offices in off Berkeley Square in London. Then we have an office in Dubai, in China, in Shanghai, in Geneva, in Munich and one or two other places. So we are rapidly trying to expand.

Katie Wilson-Milne: That’s a lot.

Steve Schindler: That’s a lot to pack in. Just tell us a little bit about what is an art fund? That’s what you left Christie’s to do and why did you see the need or the opportunity to do that and what is it?

Philip Hoffman: So it stemmed from the — when I was at Christie’s I started getting involved with clients very early on and the experts used to look at the art and say gosh that’s an incredible Canaletto and its amazingly interesting and rather unique. And money never was discussed and then the client would finally say, “and what do you think it could fetch?” And the answer was, “well I think it could do very well and we will look at the condition and we’ll get back to you,” but money wasn’t really discussed and was regarded as rather vulgar back in 1989-2000 and Christie’s thought the idea of art and money was quite outrageous and that you don’t look at the price of art. But I looked at the price of the two paintings that this client bought and wanted to sell, and I quietly said, “Can you tell me what you paid for these two pictures that you want to sell?” And he said, “for the Monet, I paid $50,000 and the Canaletto I paid also another $50,000 back in 1976.” And I said to my experts — I whispered to them and said, “So what do you think they’re worth?” And then he said, “Well, the Canaletto is probably worth between £1 million and £3 million” – pounds this is – “and the Monet is worth 3 million.” And I suddenly tried to compute 16 years on the returns, and it sort of sounded a large number, but I couldn’t work it out in my head.

Steve Schindler: That’s the financial person in you.

Philip Hoffman: Yes. So I then started looking at this and I said to Christie’s about five years later that I thought we ought to look at investing in art and also running a fund in art and Christie’s said no. And I then explored the whole idea of an art fund. And the purpose of it was to offer clients, families, institutions the opportunity to invest in art through a limited partnership. And we set up a Delaware Limited Partnership for clients to put their money in like a private equity fund, charge a fee of between 1.5% and 2% with a performance fee and a hurdle. And when we bought the art we hold it and then we sell it and the aim is to make a profit. It’s no different from buying and selling real estate like a real estate fund. So what we manage is now eight art funds that are like buying and selling houses. And the aim is to give your client back more money that he put in and hopefully more than 6% per year, more than he put in.

Katie Wilson-Milne: Were you the first art fund?

Philip Hoffman: We were indeed the first art fund and everybody wrote up what a disaster this is going to be and that made me work twice as hard.

Katie Wilson-Milne: And so how did you convince people to invest and if you can, you know, there is some press about this, tell us about how these funds perform at least in the beginning.

Philip Hoffman: So, when I set up — I mean Dresdner was my partner at the time – Kleinwort Wasserstein – and they said “look we have got to do huge amounts of due diligence and go through this very carefully.” So we ended up spending about £1.5 million on setting up the structure, which was incredibly expensive. And I thought it would cost me 15,000 but they asked for everything to be done absolutely by the book and to set standards that I have never seen certainly in the art world. And they said we have to have due diligence and structure and we had to go out and professionally fundraise. We had to go through all the SEC regulations and I thought I could just pick up the phone and wander off and go see everybody. They said, “hang on a minute you can’t and certainly not with Dresdner Kleinwort Wasserstein’s brand on a piece of paper. You have to abide by these rules and these rules.” So I had to get — it was very tough. I went to 4,000 probably over two years — I went to 4,000 clients from CalPERS and CalSTRS, Ontario Teacher’s Pension Fund, Harvard Endowment. You name it, I pretty well met them. So I would probably be the best placing agent in the world because I met every single institution or family office over the last 20 years. And they all said this is a very interesting idea. Remember Ontario Teacher’s Pension Fund, I flew to Toronto because Dresdner said, “this is a very big investor. They could do 100 million.” And I was trying to raise a very large sum of money that time back in 2001.

And I hadn’t checked how far the office was from my hotel so that’s one of the key lessons in fund raising and I —

Katie Wilson-Milne: Maps.

Philip Hoffman: Yes. And so I heard the Ontario Teacher’s Pension Fund was on Young Street. I hadn’t really counted on how long Young Street was and I said to the doorman as I came out of the hotel, “is it on the left or the right, number 4640 Young Street?” And he said, “well how are you getting there?” And he’s said, “I don’t know which side of the road it’s on.” And I said, “I’m going to walk,” and he said, “that will take you about 3 days.” And I didn’t realize that it was 60 miles and I rang them and said, “look I’m really sorry I’m going to be late now and I will be there at 9:40 as opposed to 9.” They said, “don’t worry you have until 10 o’clock and at 10 o’clock we have another meeting. So when you arrive we will start and at 10 o’clock we will finish.” And at the end they had 15 members of the Ontario Teacher’s Pension Fund sitting around the table. And they asked me 10 questions. One, how long have you been doing this? Two, how long the team has been together? Three, what’s the track record? Four, which of Merrily Lynch, Morgan Stanley, Goldman Sachs have analysts your sector and could you show us the charts of the art market and show us some example deals? And I said, “I can’t give you a yes to any of these.” And they just said, “have you got any questions you would like to ask us?” And I said, “well what’s your typical ticket size?” And they said, “100 million.” I said, “that’s fine we can probably take that.” And they said, “well there is one catch – we have to tick all the boxes in order to invest with you and you only tick one out of the ten.” I said, “what’s that?” They said, “well we think art is quite an interesting asset class.”

Steve Schindler: So you use the word asset class and I was thinking as you were ticking off these potential clients – not the usual art market people, CalPERS and pension funds. So did you visit typical art collectors when you were trying to raise money or these were all just investment funds?

Philip Hoffman: No. I went from A to Z. I have seen family offices, art collectors, pension funds, endowments, trusts. You name it, I have been there and as long as they could invest a quarter million and up, I met them around the world. And every single art collector that I went to originally said, “look. Thanks but no thanks. I collect art. I don’t need a fund to do it. I want the enjoyment of having the picture on my wall, and I have made money out of this picture and that picture and at night –“ and most of them said I don’t look at art and money anyway. And in fact it was a Texan private equity fund manager who I was sitting with in London. I went to see him just as a friend and he said, “what are you trying to do?” I explained to him and he said, “how is it going?” I said, “very tough.” I said, “I haven’t raised a single dollar so far and it’s year 1.” And he said, “you know what, I will give you the first million.” And I said, “well, why do you want to do this?” He said, “because I was in the same position when I started my fund.” And he was one of the biggest private equity funds in the world at that time. And he said, “how long is the fund?” I said, “10 years.” He said, “please do me a favor. Try and report back to me regularly. It would be nice if you didn’t wait till the end of year 10 to sell the assets. I would quite like to see if you can actually do it in year one or two. It would be helpful but don’t worry there is no pressure.” So he was my first investor and he is still investing with me 18 years on.

I had a dinner at the very over the top club in London called Annabel’s where all my first investors were invited. And I was very proud that they are still backing me now 20 years later. And I probably had another 500 meetings before I got the investor number two. I went to Spain. I walked into a meeting and they said, “okay get going and outline your plan.” And after 10 minutes they said, “thanks very much.” They said, “we have already made our decision.” And I rather half-heartedly thought well another one in the pot of negatives. I looked at my colleague and I said, “well there is no harm in asking what the decision is.” He then looked to me and he said, “well we are a bit worried because we know we are a bit late in this and we wondered if you could take 10 million.” And I looked and thought I don’t believe what I’m hearing. And I tried not to appear too excited and said, “well I think in these circumstances we might be able to squeeze 10 million in.”

And I went that same day to another meeting. I didn’t really care about the next meeting because I thought well we have got 10 million on this trip to Spain. And I walked to the meeting and they said after 10 minutes, “thank you very much we have made our decision.” And I said well I might as well ask the same question and they said, “would you take 10 million?” So in one day I took 20 million. I had aspirations of much bigger funds and my backer said start small, improve the product and then you can do a fund after that and after that. So I did. And I had to take a cut in my salary and make it happen and we did and then we raised fund 2 and fund 3 and so on and now this is where we are.

Katie Wilson-Milne: So I have some operational questions because I remember reading about you and I think you may still be best known for being the pioneer of art funds and maybe one of the few successful ones. I don’t know. We can ask your opinion about that. But I remember reading that you — you know what your returns were at a certain point in time and being really surprised, and part of that surprise is just I think how the operations of a fund like this, the kind of expertise, the kind of luck that goes into buying art at the right time – how long you keep it? You know, what the return expectations are from your investor. So can you talk a little bit about how these funds were put together and you are not opening new funds at this point, sort of how that ended up closing?

Philip Hoffman: Well I can talk about this because I’m not – I havent’ got an open fund. So I’m not breaching any rules at the moment, but we are certainly looking to expand the business quite significantly over the next year or two.

Katie Wilson-Milne: You are still in the art fund business? Growing?

Philip Hoffman: We definitely are.

Katie Wilson-Milne: Okay.

Philip Hoffman: Although our website says that we have — all funds are closed, that doesn’t mean that we won’t be in the market. And so in answer to the question we had to try and test out this concept. And all our clients said look if you can turn 1 million into 1.5 million or show us this works we will double up or triple up or multiply. And I had to go away and we made our first — the first investment we pondered over for 2 weeks and we bought a Degas and a Picasso for about a million each. And I agonized over it long and hard and we had the art experts. And we bought a team of art experts in who were outside the company but they were incentivized. And we then bought those two pictures. And of the $820 million of transactions I did up till the last year and now nearly a billion those two were the worst performing assets of our investment program. And I look back in horror to see all the questions we thought we could ask but we weren’t savvy enough in getting it absolutely right and working out the hidden ingredients.

Katie Wilson-Milne: What are the hidden ingredients?

Philip Hoffman: That’s what the Chinese ask me. They ask me two things. First conference I did in Shanghai 15 years ago where they said they would fly me over and ask me to speak about art funds and at the end of it, there were 60 people in the room. At the end of it they said, “how does this work? And we would like your documents please.” And I said, “well you know you can have them but you know we send those out to investors who would like to invest a million dollars or more.” They said, “no, no we don’t want to invest a million dollars.” I said, “well how much do you want to invest?” They said, “we don’t want to invest anything.” And I said, “so why do you want the document.” She said, “well we want to do an art fund.” And I said, “well –” and she started grabbing the documents out of my hand and saying, “can I have them? I will take them. Come on, give them to me.” And I just thought it was the most strange – I said, “look you invest a million and you can have all documents.” And they said, “no, no we are not doing that.” So I said, “well then you can’t have the documents.” But I think they got hold of the documents and within a year and half the Chinese came out with their version of an art fund and every single investor that invested in that lost everything.

Steve Schindler: They obviously didn’t know the secret ingredient, which is what you are about to tell us.

Katie Wilson-Milne: This is your way of telling us that you are not going to answer the question.

Philip Hoffman: I will answer the question like every good politician. Now the facts are that the key is aligning your experts with yourself. So my experts put money into the deals so as you call it – was it “sweat in the game” or something like that.

Katie Wilson-Milne: Yeah.

Steve Schindler: Skin in the game.

Philip Hoffman: Skin in the game.

Steve Schindler: I like sweat in the game.

Katie Wilson-Milne: I do too, and it sounds right actually.

Philip Hoffman: And that’s one. Two is having brilliant art experts and we now have in-house art expertise and they are not our team are not conflicted. So we have in-house jewelry experts, in-house contemporary experts, in-house impressionists experts, Old Masters and we do all of this research. And now it’s like a factory, but we do have a 20-point due diligence document that can be anywhere from 3 pages to 30 pages. We had some lawyers look over our documents in London and they said that they had never seen such complete file on every investment we made. And having come from an audit and business background rather than an art background, I just set out 20 common sense questions that you need to ask. And those common sense questions are, you know, is it a fake or forgery? Has it been exhibited in a museum? Is it bought in the public market? Has it been shown by the trade? Are we buying privately? What are the markups? What’s the history of the pictures? Is there damage? Have you sent in a conservator? What’s the price comparisons? And then the key – and that the Chinese probably picked up most of those. But the final key is: look at the picture and spend as much time looking at the front as the back and look at whether it is commercial and that is where most people fall down because they just don’t get it.

They think the one Van Gough, one Picasso, one Damien Hurst, or one Warhol of 1 meter by 3 meters or 2 meters – If it’s got brighter colors or bigger, they assume it’s worth more. And most people don’t have a clue about the history of art, how rare it is? What the condition is? And I’m horrified at how many people mess it up. And the reason why other art funds and everybody who’s institutional and trying to invest in art – they just don’t have a clue what they are doing in terms of getting expertise to look at the condition of the picture and understand how to read a condition report on a picture. And if you don’t know what you are doing, a Picasso could be worth 10 million, 1 million or 10,000. And the same picture in different conditions could be any of those three.

And I had a client that came to me and said he bought a Monet. And it was at auction for 10 million. A dealer offered it to him for an incredible discount of 40% at 6 million and there was an auction price fixed so 4 million discount and he said you know it’s an absolute steal. They needed to move the picture quickly and give him 40% discount. He then said, “could you have a look at it?” We had a look at it and we realized that it was a massive insurance claim. It had been ripped left, right, and center. It had been repaired invisibly, and the insurers had paid out the full 10 and sold it to the dealer for 2 which was what it was worth. And the dealer sold it for 6. And I won’t name the dealer nor the picture, but the buyer has no idea what he has bought but he thinks he got a good discount.

Katie Wilson-Milne: So what is the goal? You have a capped amount of money you are going to spend for a particular fund. And what is — you have a set time horizon that you are buying stuff you want to appreciate over 10 years? Or is that flexible?

Philip Hoffman: I have given up on the idea of buying any major piece for a 10-year view. I do that for private clients. So, I don’t think I mentioned that we run private accounts for families that are bigger than the funds.

Katie Wilson-Milne: Which are investment oriented?

Philip Hoffman: Totally 100% investment oriented. They are run like a fund but they are for a single family office. And we have one client who will allocate anywhere up to 300 million at any one time. So they say look if you can sell it in 6 months or 2 years or 3 years or 5 years or you insist that I hold it for 10, now they listen to me because I think the key and the reason why we are so far reasonably successful. I never say we are very successful until probably I kick the bucket, or die as they say in English. And it’s that we have made money on 90% of all the art we have ever traded. We have been involved in as I said just under a billion dollars of trades where we have handled it. On our investment funds I think we have made money by value on 99% of the trades. That doesn’t mean we made tons of money. It doesn’t mean we have done it in a week but we haven’t screwed it up.

The only time we have screwed it up is buying young, contemporary Chinese art. Young contemporary, I mean something that maybe 10 years ago at 200,000 where we have off loaded it at 100,000 or even at 20,000. But against the millions I have made, it’s peanuts. And to have a track record like this, I’m fairly proud. It’s nothing by the same league as John Paulson or Steve Cohen, but in our own little way, I’m very proud that we have done alright.

Katie Wilson-Milne: What’s a typical return? Can you give us a sense like?

Philip Hoffman: I’ll give you a range. I mean we used to invest 18 years ago in Old Masters, we don’t any more.

Steve Schindler: Why is that?

Philip Hoffman: I mean I used to run the Old Masters team at Christie’s and it was the number one or number two department at Christie’s. It’s now number 20 in Christie’s and the reason is that the new buyers are not that interested in Old Masters. They don’t understand them. They don’t understand the words “circle of,” “follower of,” “partly by” – you know and that’s the issue on a picture like the Leonardo Da Vinci. You know everybody goes wow 450 million. People say well is it by Leonardo Da Vinci or isn’t it? And then you get 20 versions. So somebody says it’s 10% by Leonardo and the 90% circle of, or studio. And then people say well what does that mean? So is it or isn’t it? Is it a Rolls Royce or is it a Fiat with a Rolls Royce engine? And they are still debating whether that Leonardo is a Rolls Royce or a Fiat with a brand new Rolls Royce grill. And that debate will go on for another 100 years. It’s super complicated.

You know, our Hong Kong clients or our Middle Eastern clients, they want to build collections in a matter of 5 years. So some of them will invest $300 million a year into art to building a billion or a billion and half collection and they are not really interested in piddling about with a unheard of Pieter Bruegel II or of Frans Hals because they won’t know what you are talking about and it’s not a brand. Whereas a brand as Leonardo Da Vinci as in Old Masters or Canaletto or Rembrandt but beyond that they are lost. Whereas you say Monet, Van Gough, George Condo, Christopher Wool, Andy Warhol, Picasso the world know what you are talking about and the world are interested.

But once you go into the difficulties of understanding why – just to give you an insight I bought — my parents gave me about $6000 and I was at Christie’s in my first year. And there was an Old Master from 1740s of the Venice Mark’s Square at $5000-$6000. And I said to my wife, “let’s buy that. I will spend the money on that.” It was very beautiful. And there was a lovely picture to compare it with of also 1740s which was $380,000 and I said well I can’t afford that. And there is no point because I can get it cheaper on the left for $6000. And I then went to the head of Old Masters at Christie’s and I said, “I’m thinking of buying that. Could you organize a bid?” And he said, “you can’t buy it.” And I said, “why is there a rule against staff buying pictures of the auction?” He said, “no I won’t allow you to buy it.” I said, “well why won’t you allow it?” He said it’s a piece of – and then he used a four-letter word which I won’t repeat.

I said, “what do you mean why is it so — what’s wrong with it?” He said, “this is the picture you should buy.” And I said, “who is it by?” And he said, “well it is by an artist called Canaletto.” And obviously I was only 27 or 28 and new to business and I had no idea what he was talking about but it had a £380,000 price tag and I said, “well I would rather – I don’t have 380,000,” and he said, “well then don’t buy anything.” So I didn’t buy anything and that’s the start of my lesson in paintings that what you see is not what you get. I said, “what’s wrong with the 5000 one?” He said, “1740 painted in 1980,” because the canvas was of 1740. All the paint dropped off and they re-plastered it with new paint in 1980. Whereas that work of art would sell for about $2000 now the Canaletto would make about 3 or 4 million. I made my first mistake, I didn’t buy it.

Katie Wilson-Milne: So where — I feel like there was a lot of buzz, not right when you started but you know, certainly in the last 15 years about art funds and that was the new thing. This was before art lending and guarantees sort of took up a lot of space but where is that world now? Are there new funds being started? I mean how are funds doing generally? Do you see competition?

Philip Hoffman: I was interested to see that Peter Brant tried to launch a new art fund and then there was unfortunate circumstances where his partner, I think, is no longer around. And so they haven’t completed that objective. I have seen other funds come and go but nobody — I think now there are huge barriers to entry, because nobody has an audited track record and we are audited by KPMG and Deloitte. Our track record has been poured over by the industry titans. We have had the biggest investment groups in New York with hundreds of billions crawl all over our data room. I didn’t know what a data room was 3 years ago or 2 years ago but I soon learned. And now we have a data room and everything is tracked and you can see deal by deal when we bought it, what we bought it for, what the incidental costs were, when we sold it, what we sold it for, The IRR, i.e. compound rate of return and our losses, our profits. We are totally transparent. And the reason that why I think we have got so far is because we are transparent, because I say with hesitation but it’s very important that we are 100% honest and I’m not doing it to make billions out of this. I’m not doing it out of the money objective. I’m doing it out of the fascination of building an interesting business and proving that it is achievable and if you are smart and you got a very good team you can build an incredible business in this field. But if you are greedy and if you cheat you are thrown out.

Katie Wilson-Milne: Are you seeing a growth of funds now or are you seeing kind of either a decline or a sort of static state?

Philip Hoffman: I think there are lots of what I would call private funds where two people put 20 million or 10 million. I met somebody today three people who put $6 million together and they are buying. So they call it an art fund.

Katie Wilson-Milne: Based on their own “expertise”.

Philip Hoffman: Yes. They are mostly based on their own expertise because I think a lot of people and I’m probably one of them. You start thinking well I have bought a house, you know, own a house in London. I bought it for 100,000 30 years ago and it’s now worth 2 or 3 or 5 whatever millions.

Steve Schindler: That’s my real estate career by the way.

Philip Hoffman: Yeah.

Steve Schindler: But I don’t fancy myself as a real estate investor which is I think where you probably…

Philip Hoffman: That’s exactly — and what we are saying is that – I was asked a question: Are you running an art fund because you like parties? I looked at them with some slight surprise and the person next to me said, “yes that’s one of the great perks of the job.” And I looked in horror and thought well actually it’s not a perk of the job, it’s a must do of the job. Because I go to every art event I possibly can, because I meet incredibly interesting people and that’s the way to network and as much as I like the champagne I get served all of them I probably have that at the end of the party once I have done my job. And I don’t really like — I could go to a party 364 days a year, but I now temper my attendance at these events. But a lot of bankers have come into the art world and think that they can do it because they have done it with — they brought a George Condo for 30,000 and suddenly it’s worth 500,000. And you know that’s why I have learned I don’t treat myself as a real estate expert just because I did it once or maybe twice because I have seen things go up and down very fast. And when it goes down you just don’t know what to do. And I have had my art investments go down and I did know what to do because I have been through this cycle three times over. I have been in the art market 30 years and I know how to keep my cool, what to do and how to get out and I have so far got out of 90% of it the right way.

Katie Wilson-Milne: Is that a way of saying that you are not seeing as much interest today as there may have been either pre-2008-9 or people are diverting their interests to things like art lending and guarantees?

Philip Hoffman: I think one or two people will try and bring in large amounts of money and give it a go. I think the challenge will be that when you have large amounts of money and you lack discipline you screw it all up. You get carried away. One of the big problems is when you have large amounts of money you want to spend it in order to prove to your investors that you are doing something and earning your fee. And, in fact, Bruno Schroder, who owns Schroder’s bank was one of my first board members, said the art of running a fund is knowing when to do nothing.

Katie Wilson-Milne: Sounds like good investment advice generally.

Philip Hoffman: Yeah. And that was possibly the reason why I made the first two mistakes was I was under pressure to do something because clients were saying, “what have you bought?” So I don’t discount others coming in but I would hope to see that will do a 500 million or billion dollar fund.

Katie Wilson-Milne: One of the — before we move on to other art finance platforms, one of the interesting thing about arts fund is that you are not only dependent on getting a certain level of investment to make it worth it to do your business. You are relying on the fact that the art market is going to continue to soar and go up and you know, some people speculate that the art market has increased so much in the last 20 years especially certainly in the contemporary space and certainly still in post war generally, how much further is it going to go up? Or is there going to be a point where it sort of reached the peak of what people are willing to pay? And then the fund doesn’t work anymore, right?

Philip Hoffman: I don’t agree with that.

Katie Wilson-Milne: Okay. Tell me.

Philip Hoffman: I’ve been in this business 30 years. It’s about picking the artists that are on the rise and not necessarily just picking the brand names or the ones that have risen the most. So I’m constantly moving our target every year and which artists are we are into and which ones we are out of. I’m not relying on a rising market or general activity in the art market. Or what Christie’s and Sotheby’s necessarily are selling for the world record price. In fact, I’m out well before that record price is achieved because I’m in something else. So you know I bought Peter Doig when nobody knew who Peter Doig was and paid 880,000 for one in 2005 and that is public knowledge I sold Iron Hill 1 year later to the date and made a million to profit in 12 months, 110% profit or whatever it is. And I bought another Peter Doig a bit later but this time it was 13 million and I sold it for 18 million in 6 months, and I bought another one for 20 million and sold it for 23 million. Am I still into Peter Doig? Well it’s now going to be a bit hairy and I’m holding back but I then bought tens of millions of Christopher Wool and sold them all profitably. Bought millions of George Condo 10 years ago. So I think we hold — out of the 50 artists we have traded, we hold 5 world record prices in all those artists.

Katie Wilson-Milne: And just for our listeners – these are living artists, this is contemporary art, so you are shifting to people who are alive and making more art.

Philip Hoffman: Yes. We do less in Impressionists. We do zero in Old Masters with more modern and contemporary in 1940s and 1950s to the present day.

Steve Schindler: So your last answer brings me back to the question I started to ask at the beginning which is whether art is an asset class? And I ask that because Katie suggested that you know the market was not going up. I think your answer was well whether it’s going up or not is not so relevant to what I do because I’m picking artists that I know are going up. So does art behave like other asset classes or is it more idiosyncratic?

Philip Hoffman: It’s an alternative asset class. It is an asset class but you have got to have a smart operator who knows what he is doing and it’s not perfection. And I just happen to be in the art business for 30 years. But I have specialists who really know 100% about their very small subject. And I have a vague idea of all the different artists but I’ve got to cover 400 years of art history in 24 hours so I go in but what I do is I have art experts who look at the art and they do the due diligence and then they go through and prove why they think it and I ask the common sense questions at the end. But I realize the art that I like the most is usually the worst performing investment and the art that I hate is the biggest investment. I remember buying Cindy Sherman, which is a photography artist from the 80s, for $70,000 and I thought 70,000 back in 2004-5 was a huge amount of money when we could buy an Old Master at the same price. And my experts said, “we will put money in with you because we believe in it.” And I said, “well given the scale of our funds, 70,000 is not the end of the world but I would be quite annoyed if we lose money. In fact, I would be furious.” We sold it for 260,000 about 4 or 5 years later.

Katie Wilson-Milne: But what makes it an — you know, I think what people when they think of an asset class they think of certain predictable rules of performance or certain replicability or numerosity that defines asset classes. And it’s hard to think about art in that way because every work is bespoke. It’s entirely dependent on whether it’s authentic or not, what’s the artist’s reputation is, you know.

Philip Hoffman: I think the answer is if you have got good experts and you know what you are doing I think it could be an asset class but people coming in and buying 50 works of art by the greatest artists at Christie’s or Sotheby’s or Phillips or Bonhams or whatever. The trouble is one of the big issues there is that the margins they pay knock the value of the art, the real value by 20%, 30%, 40% on day 1 because the cost of doing business in the art business. I don’t incur those costs that others do because we are at huge economies of scales. So I buy most of my art privately. I sell 50% in auction, 50% privately. The problem is that other funds who come into the market, if they didn’t have access to the art and knowing where it is privately you will have to buy at auction is going to be killer in costs. And what’s happened now is when I started nobody looked at Artnet and pricing of all the different paintings and what it made. You know if you buy a Warhol, you could go through Artnet and look at a thousand Warhol’s that sold and price yours exactly based on the one that sold previously. But you know, a long time ago nobody published these prices. So I could buy a Warhol for 100,000 and try and sell it for 2 million and settle at 1 million. Now if I buy a Warhol at auction for 100,000 and I try and offer it for a million everybody says well I just saw it on Artnet for 100,000 so I will offer you 105,000 and forget your million. And so the market has changed that way. People have learned getting smarter and faster.

Steve Schindler: Transparency supposedly.

Philip Hoffman: Yeah. And an art fund manager hates transparency.

Katie Wilson-Milne: Well you can’t triage it. So what Steve and I are seeing now both in conversations we have with colleagues on the legal side and on the business side and in our own practice is much more attention now to art finance and increasingly to guarantees. We see lot of activity and appetite by finance-type people not necessarily art-type people to get some value out of what they see as a red hot art market through these more traditional, financial mechanisms and I know you have done work in both of these areas, too. I don’t know in the balance of the investments of the Fine Art Group, you know, where those two fall compared to the funds but I know you are in both spaces so maybe you can tell us a little bit about what the role as of those in the market now and what the direction is?

Philip Hoffman: Yes. We manage investment in art finance, lending money against art and yes we do guarantees and we have done about a third of a billion of guarantees, auction guarantees. We have offered another quarter of a billion so we are probably just under 600 million of guarantees in my last 4 or 5 years. I have about 350 million of equity for my lending business but both of those are very interesting businesses and some of them are slightly based on what’s going on the market so I’ll talk a bit about guarantees in a moment but on the lending front what I’m seeing is that —

Katie Wilson-Milne: And can you just, for people who are not familiar with this world, explain what an art loan is and the mechanism?

Philip Hoffman: So an art loan is identical to a mortgage on the house. You own a house. You buy it for a million and you ask the bank to lend you 500,000 to help you buy it with a property where you get 80% of the cost of house and you put in 20%. What we do in the Fine Art Group is we lend if the client has got $10 million Picasso we will lend him $5 million. We will take 3 to 5 days to do it. It’s a non recourse loan so we don’t have to review their balance sheet. We don’t review what their cash flow is. We don’t have to review all their other assets we just look at the picture. We look at the picture. Then we do our homework as if we were buying it or selling it or doing a guarantee in it.

Katie Wilson-Milne: To make sure it’s authentic and no title issues.

Philip Hoffman: All the same 20 checklist that I have been through for every work of art. So we have the same process for every single work of art. And the reason why the biggest investment funds in the world offered us large amounts of money for the lending is because they looked at our data room and they have seen our profit to loss ratio, the number of errors, have we ever had to call on our insurance for any errors, which is never. Have we had a loss, damage, theft to date? Never. I have run this business for 20 years and they can see the due diligence we go into.

Katie Wilson-Milne: So why are people — I mean just some background for our listeners, so the idea of art lending is not new. Big banks have done this as an accommodation to their important customers for a long time. So UBS or Citi Bank or JP Morgan will give out a very low interest rate loan to a client against their art collection but they will then have the entire balance sheet of the client as collateral as well. It’s not just the art. So it’s very little risk to the bank. It’s a nice thing to do for the client. The idea of lending —

Philip Hoffman: And an inexpensive loan for the client.

Katie Wilson-Milne: Very inexpensive loan. So the idea of using art as collateral is not new but the idea and business concept of that being a standalone business is fairly new and the risk profile obviously changes a tremendous amount when you don’t have the entire balance sheet of the person. You haven’t been doing business with them for 20 years. You don’t know where they live and their family. So who are the kind of people, Steve and I ask each other this all the time – even though we know some of them or work with them – who are the kind of people who don’t have a relationship with Citi Bank or UBS or JP Morgan or any big bank like that who can’t get a loan at 2% or 3%? Who are the people who don’t have that relationship and yet are so wealthy that they own an art collection that is worthy of financing through you and they are willing to pay I’m guessing you know 8 plus percent on the loan based on what we see with other lenders. That’s a big difference than they could get if they had a relationship with JP Morgan let’s say, so who are these people?

Philip Hoffman: Every type of person is coming to us. The richest guy in the — some of the richest people in the world, some of the most dodgy people in the world, the first loan that somebody approached me for I knew of the guy and I knew he was completely crook. I just said, “I’m sorry we are fully lent out right now we haven’t anymore capacity.” That’s the neatest way of getting rid of them. We placed loans with one of the auction houses because it was too diverse for our particular group. We borrowed 50 million against 100 million collateral for that client.

Katie Wilson-Milne: But why aren’t these people going to their bank to take a loan?

Philip Hoffman: Because either it takes too long, if you go to most of the major banks.

Katie Wilson-Milne: Well that’s true.

Philip Hoffman: They take 3 months and they want you to do all the account opening. They then want you to deposit — if you do take a loan they want you to deposit 10 million or if you take out a 50 million loan, 10 million goes back into the bank and they use that to invest in securities. Their 3 moths is our 3 days. Their interest rate margin versus our interest rate margin is possibly a difference of 3% or 4% so we are probably less expensive. And I’m aiming to bring that cost down as we get more and more accurate. I think we would be very competitive against the banks in 5 years time.

Steve Schindler: And do you take possession of the art? How does that work?

Katie Wilson-Milne: We do mostly. I have learned — I will tell you a story. One of the big banks in Switzerland they lent 2.5 million against a $5 million Picasso and they left it on the wall. And every year the agreement was that the bank manager would turn up and look at the Picasso and check it was above the fireplace, have a nice sherry, a glass of wine every Christmas and have a look at the picture and sits there, went back, tick the box and after 5 years the owner said, “I’m really sorry but I’m a bit short of money I can’t pay the loan back. Why don’t you sell the picture?” And they came to collect the picture and the auction house said, “unfortunately it’s a copy so it’s worth nothing.” I’m a little — however rich you are 1 in 100 cheat, and I can’t afford 1 in a 100 mistakes. And so, you can put UCC filings on it.

Katie Wilson-Milne: In the US.

Philip Hoffman: Yeah. And you can do all sorts of other charge needs but if the guy takes the picture of the wall and goes to the Amazon jungle and decides to enjoy it you know you need all sorts of other insurances to cover you for that nightmare. So I’m a believer in taking the picture off the wall and having it at our warehouse. And in some cases, very rare cases, I will think about leaving some of the pictures on the wall. In one loan we lent — we took 70% of the art and we left 30% in his restaurant where he wanted to have the art. In other cases, we’ll lend the art to museums so he can have his art on display in museum and we have a legal agreement. So he can leave it being displayed. He can shift it around the world. We had one client who wanted to borrow 140 million this week and he had $300 million art collection and we agreed to move around the world for him and have it in museum shows so that’s a possibility. But we listen to what the client wants.

Steve Schindler: And you see this market as increasing over time or is it a plateau?

Philip Hoffman: No. I think it is increasing as we become — we are getting known to be super professional, careful, efficient.

Katie Wilson-Milne: I think what Steve also means is it just the volume of out loans in the marketplace increasing? I guess is this something more and more collectors for whatever reason, which I don’t entirely understand, are trying to get liquidity out of their art collections rather than making more money or selling the art.

Philip Hoffman: I think the main thing is that 90% of collectors haven’t a clue they can borrow any money against their art at all. And obviously in New York they know about it and I mean mainly the loans are coming out of the US.

Katie Wilson-Milne: I was going to ask you about the UK.

Philip Hoffman: Yeah. We do loans out of the UK. The Chinese are super interested but it’s complicated with Chinese art. What’s the value of that art? The price of Chinese art is very volatile, whereas the price of a Picasso might drop by 20%. And I have never in touch wood, in my 30 years running the investment side, I have never seen any of our quality works of art ever hit 50% which is what all the investment groups were looking at in our data room and we have never done that. We have never lost. I think most we have lost about 10%.

Katie Wilson-Milne: And when you say non-recourse, first of all, why if you could have some recourse against other property or other collateral why not do it? And are you taking guarantees ever? I mean if there is a profile of a borrower who —

Philip Hoffman: So somebody who will give a personal guarantee?

Katie Wilson-Milne: Yeah.

Philip Hoffman: And especially if it’s a company we take personal guarantee.

Katie Wilson-Milne: So that gives you some protection.

Philip Hoffman: Yeah. But obviously if the guy has got zero cash, zero assets and one Picasso and we find out it’s a fake or a forgery we have insurance cover for most things.

Steve Schindler: And you have mentioned Picasso a couple of times. Is there a list of artists that you feel comfortable lending against or is it less structured than that?

Philip Hoffman: It is structured but unstructured. I have always been entrepreneurial and I will not blink and say this is the list and there is no other, you know, we look at everything but in the what I call flat art, i.e. pictures and also I put sculpture, we look at mainly Old Masters, Impressionists, Modern, Contemporary and Jewelry but we will introduce other categories later on.

Katie Wilson-Milne: All right. So what on earth is an art guarantee because that our listeners will need an explanation for some of them, not all.

Philip Hoffman: All right. It’s a put option, like a put option in stock market.

Steve Schindler: That answers it.

Katie Wilson-Milne: Yeah.

Philip Hoffman: So you go to the auction houses or come to us direct and say I want to sell my Monet. I’ve changed it from Picasso this time. I want to sell my Monet and I think it’s worth 10 million. And we will then say well we think it’s worth 8 million and they say okay but only if I get guarantee and people say what the hell is that? And they say, well if I go to the big dealers they have offered me 8 million cash.

Katie Wilson-Milne: To sell it privately.

Philip Hoffman: They will sell it privately for 8 million. We say we will guarantee that it will sell at 8 million. And what does that mean? It means that we will buy it at 8 million. If no other bidder is in the room 8 million is ours and trust me I have owned a picture of 10 million I didn’t want, but it was under my guarantee and I paid up. But if it makes 20 million we get a share of the upside which can range quite widely.

Katie Wilson-Milne: So we are seeing a lot of this work obviously through the auction houses and are you getting this work because someone will go to Christie’s or Sotheby’s and say here’s my collection but I want a guarantee.

Philip Hoffman: Yes.

Katie Wilson-Milne: I want a guarantee from you and Sotheby says or Christie’s says well I can’t but I will arrange a third-party guarantee and I’ll go find it and the seller says I don’t care who it is you find it and so then the auction house would approach you and say look we have this sale would you be interested in guaranteeing it?

Philip Hoffman: Yeah. We offered $450 million on a single guarantee from one family and we would syndicate that between two families of art.

Katie Wilson-Milne: I see. So you on your own end could pick particular investors who want to be part of the —

Philip Hoffman: So we have a fund and then we have co-investment from our major clients. So if somebody comes to us and says they want $300 million guarantee we can do it between a couple of investors.

Katie Wilson-Milne: So you are a broker and you are the investor yourself in a way.

Philip Hoffman: We are always investors. We are always in. I would never describe myself as a broker. I would – it’s slightly more sophisticated than that.

Katie Wilson-Milne: Okay. And are you seeing a growth in this? We were saying before we started recording that Steve and I are hearing from people we know that a majority or close to majority of lots at auction this season are guaranteed, third party guarantees in fact, which seems surprising since it’s a fairly new phenomenon.

Philip Hoffman: I think that at this price I think you need to have some very serious professional advice before you enter into guarantee right now. I think the downside risk is enormous.

Katie Wilson-Milne: And you are seeing people lose?

Philip Hoffman: Masses.

Katie Wilson-Milne: Okay. So people are going home with art.

Philip Hoffman: People are going home in tears. They are going home with art they didn’t expect to buy and they realize it’s not quite worth what they thought it was. And if you end up with guarantee and you don’t want it you are down 30% on day one.

Steve Schindler: Do you think that these guarantees are having an effect on the price of the art or the moving of the art market in general? It seems like it could.

Philip Hoffman: I think the issue about guarantees is that the auction house is going in knowing the outcome of the sale before they start.

Katie Wilson-Milne: Yeah.

Philip Hoffman: And one I find it exceedingly boring to sit in the sale where it’s like going around a gallery showroom and you say, “well what can I buy?” And they say, “well it is all sold.” You say, “well can I buy something off the wall that’s already sold?” And they say, “well you make us an offer we will have a think about it,” and the whole game of auctioneering is changing. So the auctioneer is going to pretend that someone in the room is bidding and that person is just the guarantor or the house. It’s either Christie’s or Sotheby’s or Phillips or it’s their client that they pass on to. There might be absolutely no other interest and so you sit there. I mean the auctioneers are incredibly skilful at making it look like there is fantastic interest. I mean last night looked like there was interest in every corner of the room.

Steve Schindler: The so-called chandelier bidding, where you know they are pulling bids off the chandelier.

Philip Hoffman: Something like that.

Katie Wilson-Milne: But that’s a really great point because it’s a complete change in what an auction is, right. The whole idea of an auction is everyone arrives, everyone has a chance to bid and everything that happens, happens in the room and that’s not the case. Guarantees undo that.

Philip Hoffman: No. I mean if I was giving professional advice right now I would say don’t guarantee.

Katie Wilson-Milne: But you will.

Philip Hoffman: I will do occasional guarantees now a fraction of what I did because I think the markets do in general and they have pictures where they are asking for guarantee there is a reason. The reason is they don’t think it will make any more than that price.

Katie Wilson-Milne: So the Fine Art Group is pivoting towards these other two core businesses the lending and the funds.

Philip Hoffman: Yeah. I mean I will guarantee if the price is right and when everybody realizes that they don’t know what they are doing and they are disappointed because they end up owning the art and it’s not such a big profit maker. And you know if you are starting to own 40% of all the guarantees so let’s say you have a billion dollar fund and you end up owning 400 million and you wipe off 30% of that 400 million tomorrow that’s a 120 million off you can lose 10% of your money yet.

Katie Wilson-Milne: So one thing I want to ask you about with respect to auction houses and this is a question both in the art financing, art lending space and the guarantee space, are there conflicts of interests that you see or perceive in auction houses getting into either of those businesses? Now in the lending context there is really only one big auction house that’s doing this directly but when an auction house is lending against art that it obviously hopes to sell or that it is selling the auction house now has two roles one of which is clearly _____ [00:51:05] sharing and one of which is not. And in the guarantee context you know I think it is not necessarily a conflict although there have been some interesting articles about this recently. But you have an auction house who is trying to sell the work for its consigner at the very highest price but at the same time it’s trying to find these third party guarantors and make them happy. I mean there is a lot more parties involved than in a traditional consignment context.

Philip Hoffman: The guarantee business has just got metamorphosed through various different stages and now it’s got to the most extreme where you give your picture over and the auction house then rushing around to find somebody who will guarantee it. In the meantime it’s shown to 20 clients. They all turn it down and then do they bid? No. So, you’ve just screwed up.

Steve Schindler: That’s right.

Katie Wilson-Milne: Exactly.

Steve Schindler: You’ve had an auction before the auction and then no one shows up.

Katie Wilson-Milne: So if in extreme cases I let a guarantee be offered and it’s offered to the house not to third party clients, can’t be shown around. But the house hasn’t got – I mean the indication of guarantees is that Christie’s are doing zero in house and Sotheby’s is limiting having got hammered in the last round. You know it wasn’t really funny I think when we Modigliani, 170 million, Picasso, at 150 million, got owned by the guarantor. I don’t think the guarantor enjoyed it and I have a feeling the guarantor was the same on both. So that’s $300-250 million.

Katie Wilson-Milne: It just strikes me that you are in a – I don’t mean safer just legally, but in the legal-ish world or the ethical world, just understanding what your obligations are you are in a safer position being in this third party entity dealing through and with collectors, family offices, and auction houses but because you are not attached to the auction house every transaction you do is not tied also to a sale. You have a different perspective.

Philip Hoffman: We turn down 90% of the deals we do. Guarantees we turned down 97% of the deals we were offered right now. And you know I’m moving capital. My clients give me discretionary capital to move across from one area to the other. So I moved out of guarantees. Probably everybody will realize that in about 2 years’ time.

Katie Wilson-Milne: They will just listen to this podcast.

Philip Hoffman: But there would be a time I want to come back in. Maybe next year, maybe in 6 months’ time, but I am waiting for a reality check and I think it’s got out of control.

Steve Schindler: Well I also think as a consigner of the work to an auction house where your depending on their advice and their fiduciary obligation to tell you whether this is a picture that should be auctioned and how it should be auctioned and what the reserve should be, they are the only ones also who know how many potential third party guarantors have expressed interest in that. So when they come back to you and tell you whether or not they think it’s a good idea for you to get a guarantee and thereby give up the upside, they know something that you don’t unless they have been very transparent and saying we have spoken to five possible guarantors and three have said yes and two have said no.

Philip Hoffman: No. I think you are right in a way because they know — if they are giving guarantee they know that they have got five people who might buy it and they might do the house guarantee.

Katie Wilson-Milne: Yeah. And as a seller if you know that why on earth would you ever not just take the upside yourself?

Philip Hoffman: I mean I took guarantees about $20 million dollars last month because I wanted out. I took a profit. I knew that they may sell for that but I knew that I wouldn’t have an unsold picture. And, you know, I pushed them to the hilt and we got the guarantees and they sold at a guarantee that was marked slightly up. I was very disappointed with that because 2 years ago I would have made a lot of money but the market shifted. And also, the market shifted away from bidding on lots that are guaranteed because we got people smarter and say well it’s guaranteed so somebody is making a killing out of me so maybe I won’t buy. So there are all sorts of psychological issues. There are all sorts of issues about when you think about what you have just raised and I haven’t thought about that but it adds to the complexities. But I’ve been in the market for 30 years and as I sit and listen to your thoughts I’m learning something new today and I will digest that and apply that to my thinking when I deal with – and that’s why I’m pulling out but I’m really interested in coming back in maybe 6 months, 12 months or 18 months once the reality checks come in. But we are an independent group we would make up our own mind. We think of all the pros and cons as you have outlined and many more and we decide when we allocate capital and when we stop.

Katie Wilson-Milne: All right.

Steve Schindler: Maybe that’s a good place to stop.

Katie Wilson-Milne: Thank you for joining us. Thank you, Philip.

Steve Schindler: Thank you Philip. And that’s it for today’s podcast. Please subscribe to us on iTunes or wherever you get your podcasts and send us feedback at and if you like what you hear give us a five star rating. We are also featuring the original music of Chris Thompson and finally we want to thank our fabulous producer Jackie Santos for making us sound so good.

Katie Wilson-Milne: Until next time I’m Katie Wilson-Milne.

Steve Schindler: And I’m Steve Schindler bringing you the art law podcast, the podcast exploring the places where art intersects with and interferes with the law.

Katie Wilson-Milne: And vice versa. The information provided in this podcast is not intended to be a source of legal advice. You should not consider the information provided to be an invitation for an attorney-client relationship. You should not rely on the information as legal advice for any purpose and should always seek the legal advice of a competent counsel in the relevant jurisdiction.

Music by Chris Thompson.  Produced by Jackie Santos.