Sunday, February 10, 2008
From The Economist print edition
Offering guarantees gives auctioneers a vested interest in their auctions
AFPROBERT BROOKS has firm views about his trade. “The minute an auction house moves away from simply being an intermediary between buyers and sellers and takes on the role of financier,” he says, “it starts to change its core character as well as the relationship between the seller, his agent and the buyer.” Mr Brooks is the chairman of Bonhams, a British auctioneer of art, jewellery, cars, musical instruments and furniture. He says his firm is an agent only. In particular, it does not offer sellers guaranteed sums, regardless of the price their items fetch in the auction room.
Bonhams' way of operating has become the exception rather than the rule. Thanks to the unprecedented boom in the art market, Christie's and Sotheby's, the duo at the top of the art-auction world, have resorted to offering sellers ever more lavish guarantees for particularly desirable works of art. In effect, a guarantee is an agreement to buy a work for a specified minimum price.
For auctioneers, the practice can be highly profitable. If the hammer price exceeds the guarantee, which is usually at the lower end of the valuation range in the sale catalogue, the seller and the auctioneer share the difference. And the auctioneer pockets the commission too: 25% of the hammer price for items fetching up to $20,000, 20% for those at $20,000-500,000, and 12% for works that sell for more than $500,000.
Last year Sotheby's made about $15m by offering a guarantee for a Mark Rothko painting owned by David Rockefeller, an American banker. It sold for $73m—almost double the estimated $40m guarantee. Sales of items with guaranteed prices accounted for perhaps $1 billion of the more than $6 billion that the two big auction houses turned over last year.
Even so, guarantees are risky. If a painting fails to reach the reserve, or minimum bid price, a guarantee can cost the auction house dearly. Last year Sotheby's hoped that “Wheat Fields”, painted late in life by Vincent van Gogh, would fetch up to $35m, but it failed to attract any bids over $25m and did not reach its undisclosed reserve price. As a result, Sotheby's became the picture's unwilling owner. The day after the auction the company's share price fell from $50 to $36. Two days later Sotheby's announced its third-quarter results, which included a $14.6m loss stemming from guarantees relating to the ill-fated sale.
At the big sales of Impressionist, modern and contemporary art at Christie's and Sotheby's between February 4th and 6th, most of the top paintings at auction had guaranteed prices—although, contrary to widespread assumptions, the most expensive painting on offer, Francis Bacon's “Triptych 1974-77”, valued at £25 million ($49m), was not guaranteed. The dark beach scene of a writhing man shadowed by black umbrellas, painted soon after the death of one of the artist's lovers, sold at Christie's on February 6th for £26.3m, just shy of the record for a Bacon at auction.
“Sellers who are very confident about their art don't need guarantees, which can reduce their upside considerably,” says Mary Hoeveler of Citigroup's Art Advisory Service. Owners of Bacon's work have reason to be optimistic. His gloomy art is the flavour of the season; last year it was Mr Rothko's colourful works, and the year before it was Willem de Kooning's abstract expressionism.
Though auctioneers deny it strenuously, guarantees are likely to make them partial. The prospect of earning a huge sum if a sale succeeds, or losing one if it fails, surely tempts them to push items with guarantees harder. This might mean a favourable presentation in the sales catalogue, or steering favourite clients in the direction of the works in question.
Christie's and Sotheby's mitigate the risk of a guarantee by farming out a portion of it to a third party, usually an art dealer or private collector interested in seeing the prices of a particular artist's work increase. Even the bosses of Bonhams, whose principled stand on guarantees probably reflects the fact that they lack the financial muscle to compete with the two big houses' guarantees, are “actively thinking” about third-party guarantees. Bonhams' sales last year were one-tenth of those of the two top dogs. Phillips de Pury, a niche auctioneer that specialises in modern art, photography and jewellery, says it offers guarantees in certain cases.
“It is a manipulated market, as Christie's and Sotheby's are not neutral,” says Ian Peck, the chief executive of Art Capital Group, a New York bank that specialises in art finance. The big two also constitute one of the most resilient duopolies in business. Bonhams and Phillips de Pury are much smaller and pose no real threat. Bonhams specialises in the “volume” middle-market, with sales of items worth £5,000-15,000. Phillips de Pury says auctions are the bulk of its business, but will in future focus more on building collections and on organising private sales for customers. It has given up competing with the top two, which capture about 95% of the market for premium-art auction sales. However imperfect their business model, this is unlikely to change soon.