Over the past weeks we have seen opportunity capital that is well organised and looking for a home moving into distressed assets. Just as vulture funds are circling the property market amid the fallout from the credit crisis, we believe that distressed art may soon be the next big investment opportunity.

Over the past weeks we have seen opportunity capital that is well organised and looking for a home moving into distressed assets. Just as vulture funds are circling the property market amid the fallout from the credit crisis, we at Fine Art Wealth Management, the London-based art wealth management firm, believe that distressed art may soon be the next big investment opportunity.

Mixed Signals
Art market indicators over the past six months have been mixed. Both Christie’s and Sotheby’s say that the six-month period since the last August, when the credit crunch began, was one of their most successful six-month periods in their respective histories.

In contrast, it is worth noting that about 60 per cent of lots of contemporary art failed to achieve expected prices at auction in February. A recent survey by ArtTactic, the London-based art research firm indicates that confidence in the contemporary art sector has dropped 40 per cent over the past six months.

“It is clear that the respondents no longer think that the art market can be detached from economic realities,” ArtTactic said in the survey.

Some experts believe that the resilience of the art market will be maintained by the depth and breadth of buying interest. While historically, there is no clear evidence linking the volatility in the financial markets with what is happening in the art market this may be starting to change as a new generation of collectors are buying art for investment.

Merrill Lynch/Capgemini, in their 2007 World Wealth Report has stated that “art collecting is increasingly seen as an investment by high net worth individuals. This in turn, is helping to fuel a large international art market that has been setting record prices.”

Art Investment Funds
FAWM’s March 2008 survey of global art investment funds indicates that at least five new art investment funds plan to launch in the first half of 2008. At least one of these funds has a stated investment strategy of taking advantage of the expected slow down in the art market to invest in distressed art assets with an opportunity for out-performance.

A small number of other funds under development have put their plans on hold, choosing instead to wait and see what will happen with the turmoil in the financial markets.

The emerging markets, such as China, India, and the Middle East remain key geographic interest areas for new art funds globally, with speculation in contemporary art being the predominant focus.

Market Watch
If speculative forces continue to bid up art prices to unsustainable levels, FAWM believes that the likelihood of a price correction will increase. Equally, the current credit crisis may force art works into the market at distressed levels that might otherwise never have changed hands.
Much like the financial markets, the art market is not immune to bubbles. In fact, the rate from which prices in the art market are driven by tastes and fashion, particularly in the contemporary sector, is much greater than other financial markets where value is more a function of market fundamentals.

The most significant bubble in the art market occurred in the late 1980s and early 1990s in the Impressionist sector and was caused by soaring Japanese demand. Today it is widely believed that contemporary sector may be experiencing a similar bubble.

As in the period of the Impressionist bubble, it is interesting to note that there is also a new and distinctive group of buyers that has emerged, pushing prices steadily upward. A large number of these buyers include new collectors from emerging markets who have achieved enormous levels of personal wealth from strong advances in GDP and market capitalisation taking place in their respective countries.

If these sources of new wealth dry up, it is possible that the contemporary art sector in particular, could experience a correction.

But some experts believe it is too soon to be talking about distressed art and that the market has a truly global client base which will allow it to weather the storm. Whatever the case may be, one thing for certain is that the art market is entering a period of accelerating change and complexity.