The fever of art finance is heating up again.

by anonymous on 2012-03-01 09:31:58

The Heat of Art Financialization Rises Again (Reported by Xu Lan)

The increasingly heated art market [bulk paintings] is attracting more and more bold investments from the financially savvy. In the first half of this year, the scale of art trusts reached 2.47 billion yuan, a fourfold increase compared to last year's total of 558 million yuan for such products. Meanwhile, a large number of private equity funds specializing in art investment are also emerging, with astonishing growth rates. According to industry insiders, publicly issued art funds may grow by about 2 billion yuan within this year, and could reach a scale of 5 to 7 billion yuan by next year.

Art Trusts Grow Fourfold

Since the beginning of this year, due to poor performance in both the stock and real estate markets, many investors have turned their attention to the recently popularized art investment sector, which was previously rare in China. Like mushrooms after rain, art trusts have emerged one after another.

According to Hengtian Wealth statistics, since June 2009 when Guotou Trust launched the "Prosperous Treasure No.1 Poly Art Investment Collective Fund Trust Plan," Guotou Trust, CITIC Trust, and Beijing International Trust have collectively issued nearly 20 art trust products under series like Feilong. Other trusts, such as Zhongrong Trust, have also established specialized art finance departments to invest in the art market. Since the beginning of this year, an increasing number of trust companies have started venturing into the field of art investment. Products like CITIC Trust’s Tianwu Museum No.1 Chinese Porcelain Investment Collective Fund Trust Plan, Zhongrong Trust’s Rongmei No.1 Art Collection Fund Trust Plan, Beijing Trust’s Maoyuan Fuya No.1 Art Investment Collective Fund Trust Plan and Boteng No.1 Art Investment Collective Fund Trust Plan, and Shanghai Trust’s Xianghuashi Series New Chinese Painting Art Investment Trust Plan have all come to market. Among these, Guotou Trust is currently preparing to issue two larger-scale art trusts, with a total fundraising amount possibly reaching 1 billion yuan.

Statistics show that in the first half of this year alone, the scale of art trusts has already reached 2.5 billion yuan, whereas the total scale of art trusts issued throughout last year was only 558 million yuan. In just six months, the issuance scale has quadrupled, indicating an extremely rapid growth rate.

At the same time, the high returns of art trusts are attracting more and more investors. The newly established "Zhongrong Trust Bangwen Legacy Treasure Collection Fund Trust Plan" in April promotes an expected return rate of 10%, a capital threshold of 1 million yuan, and an investment term of 12 months. Meanwhile, the "CITIC Yudaodo Jade Investment Fund Collective Fund Trust Plan" with a scale of 50 million yuan, established on January 18th last year, was terminated ahead of schedule on January 21st this year, achieving an annual return rate of 10%. Compared to last year's average expected return rate of 7.76% for trust products, the high returns of art trusts are clearly very tempting.

Rise of Private Equity Art Funds

In addition to trust companies, numerous private equity funds have also entered this field. In June 2007, the first true art fund, Minsheng Bank's "Extraordinary Asset Management Art Investment Plan No.1," was launched. This product achieved an annualized return of 12.75% upon expiration. Such high returns have gained initial recognition for funds' ventures into the art sector.

Since 2010, domestic financial institutions, private banks, and fund management companies have successively launched art funds, including Modif, Taierui, Demei Yijia, Zhongyi Dachen, and Shenzhen Xingshi among others, which were continuously expanded in 2011. Tongxin Hui Fund Management Company in Beijing will soon launch the "Fuwén Art Fund No.1," with a fundraising scale of 100 million yuan, a subscription threshold of 2 million yuan, and an expected return rate of 20%. Earlier, Beijing Demei Yijia Investment Management Co., Ltd. issued the Demei Expo Art Fund, with a fundraising scale of 50 million yuan.

According to incomplete statistics, there are already over ten art investment funds listed or about to be launched in 2011, including Zhongyi Dachen, Demei Yijia, and Bangwen Investment. Most of these were established last year, mainly as private placements. It is reported that the current scale of privately placed art funds operating in the market is approximately 700 million yuan, while the total scale of newly established art funds is nearly 1 billion yuan, excluding smaller-scale privately operated funds. These types of funds generally appreciate at a rate of 13-14% annually, with some achieving an annualized return rate as high as 31%.

The investment targets of these art funds are primarily modern and contemporary Chinese calligraphy and painting, along with contemporary Chinese art including oil paintings and sculptures. Over 80% of the investment portfolio comes from auctions, while the remaining works are purchased from galleries and collectors.

Although the overall quantity of art funds is still relatively small, the growth rate is quite remarkable. Industry insiders estimate that the scale of publicly issued art funds may grow by about 2 billion yuan within this year, and could reach a scale of 5 to 7 billion yuan by next year.

Short-Term Operations Increase Investment Risks

However, in the eyes of industry insiders, art funds are still in the exploratory stage. First, some insiders have questioned the transparency of the investment process for these funds. To ensure investment returns, some art funds engage in practices such as buying out an artist's works and then aggressively promoting them through various marketing methods to enhance their reputation, thereby inflating the market price of their works.

Secondly, the biggest challenge for art funds still lies in the monetization method. Currently, the exit channels for art funds revolve around auctions and private or institutional collections. This means that the investment decision committee of art funds needs to possess a high level of professional expertise. However, there is no authoritative institution in China that can provide a definitive answer on the value of a piece of art, which remains the largest obstacle to the development of art funds in China.

Finally, the typical lock-up period for overseas art funds is 8-10 years, but most Chinese art funds have a lock-up period of only 3-5 years. The "buy in spring, sell in autumn" approach has become the most common operational style, which increases the risks associated with short-term operations.

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