Destiny Family Office works with ultra-high-net-worth collectors, offering services tailored to their investments, families, and passion assets. By understanding what’s most important to you, we can help you navigate complexity, simplify your life, and achieve peace of mind.
If you have a valuable collection you’d like to include in your financial, tax and estate planning, contact our Destiny Family Office team today. And don’t forget to self-assess your planning to date by completing our Collectibles Scorecard.
After 30 years of waiting, hunting, and searching, your long-coveted holy grail of art or memorabilia is coming to auction. This may be your only opportunity to secure that elusive pièce de resistance for your collection.
But you don’t have the liquidity available to purchase it.
That nightmare scenario, however, is mitigated through collection-secured borrowing. Using their collections as collateral, collectors can borrow funds, unlocking liquidity when it’s most needed (or desired).
The 2023 Deloitte Private and ArtTactic Art & Finance Report estimated that the art-secured lending market would total between $29 and $34 billion that year (as measured by the total dollar amount of loans outstanding), with high-single-digit growth expected in the years to follow. For various reasons, art-secured lending has become a popular offering among private banks, specialty lenders, and auction houses, as collections evolve into sources of financial utility.
Borrowing against collections is prevalent among high-net-worth collectors. The 2023 Survey of Global Collecting from Art Basel & UBS found that 43% of surveyed HNW collectors had used loaned funds to finance an art purchase that year. As the popularity of borrowing and lending against art has grown, so has the prevalence of those offerings for other collectible assets, classic cars, trading cards, and memorabilia among them.
With the growing availability of lending options and varieties, collectors should understand and evaluate the various benefits and risks of borrowing using their collections as collateral.
Pro: Collection-secured borrowing can create flexibility and liquidity for collectors, preventing forced selling.
The nightmare scenario outlined above is just one of many that can require immediate, short-term liquidity for collectors. By borrowing against their collections, collectors can very quickly (often as soon as the same day if they have an existing facility in place) unlock the necessary funds to make their prized purchase.
Consider the alternative.
Absent that borrowing capability, a collector would instead have to sell other parts of their collection or perhaps part of their liquid investment portfolio to raise funds. The former can sometimes take months, as finding the right auction event for consignment or negotiating a private sale can be a lengthy process. Liquidating traditional investments creates unnecessary strain on a portfolio, potentially throwing allocations out of alignment, realizing capital gains, and otherwise disrupting the portfolio’s growth.
New collection additions aren’t the only impetus for borrowing. Collectors can meet non-collection-related liquidity needs, tax bills, margin calls, and capital calls by borrowing against their collections, providing them with extra time to determine how to meet the obligation optimally. This flexibility might allow them to avoid the forced selling of assets – art, investments, or otherwise – into soft or volatile markets.
Pro: Collection-secured borrowing can enhance portfolio returns in times of prosperity.
As with traditional investments, leverage can amplify returns when the underlying assets appreciate. Contemporary art, a significant source of collateral in the art-secured lending industry, has often delivered strong appreciation in recent decades. Results vary by oeuvre, artist, and work, but for those well-positioned, leverage would’ve enhanced the returns realized on their out-of-pocket costs.
In recent periods of very low interest rates, enterprising collectors saw and embraced the opportunity to borrow against their collections and invest the proceeds in assets (sometimes art and other collectibles) that they believed offered higher return potential than the interest cost associated with borrowing. Interest rates have since risen, making it more difficult to achieve that carry, but it remains a popular strategy among those with conviction and expertise in their chosen asset class.
Of course, collectors can’t always count on their collections to deliver consistent, positive returns, and we’ll discuss the downside risks shortly.
Pro: Borrowing against collections can create flexibility for heirs, trustees, and executors in estate planning.
Collection-secured borrowing can be a useful tool for those individuals involved with an estate, whether the heirs, trustees, or executors. Collections, particularly those of significant value, can create a material estate tax burden upon a collector’s passing absent prior plans to the contrary. Heirs and executors might be inclined to sell works to meet those burdens. However, as noted previously, selling expensive pieces is rarely swift, and forced selling seldom generates optimal outcomes. Borrowing can provide much-needed time to assess alternatives, identify other sources of liquidity, and set plans in motion.
Collections often come with carrying costs of their own, insurance and storage among them, and borrowing can meet those ongoing liquidity needs, allowing the new owners to understand what they own at a less frenzied pace, particularly if they’re new to collecting. A heightened urgency to sell now to eliminate carrying costs may result in regret later.
We can echo similar benefits for trustees of trusts that own collections, where bridging liquidity needs can reduce friction and enable more seamless management.
Finally, borrowing can enable a more thoughtful approach toward estate considerations while living. Collectors with highly appreciated works can avoid selling them to meet liquidity needs and thus incurring significant taxes on their gains, instead keeping the works in their estate where they’ll receive a step-up in cost basis upon their death.
Con: Borrowing against collections increases risk in tumultuous and volatile market conditions.
While borrowing can be highly beneficial in periods of prosperity, it can become a source of significant stress when markets grow more volatile and begin falling. As in traditional margin investing, falling markets can lead to margin calls and forced selling as the collateral value drops and becomes insufficient to support the outstanding borrowing. Forced selling, then, would occur in a period of market weakness, creating subpar outcomes. Complicating matters, it may be difficult to raise liquidity elsewhere in these moments.
Lending against trading card collections became more popular amid the COVID-19 card collecting boom in 2021 and 2022. However, as the Fed began raising rates, economic uncertainty increased, and speculative appetites decreased, these markets started to decline precipitously. The premier, modern sports cards that became the subject of speculative activity, with auction prices north of $1 million attracting headlines, receded in value just as quickly as they rose. These cards caused margin calls and even defaults, returning to the auction block hastily to generate much lower prices than they last fetched.
Though some asset classes (and sub-asset classes thereof) boast more stable track records, there are few certainties for these collectible assets that do not generate underlying cash flows and whose value is subject to other collectors’ tastes. Just as leverage can amplify the spoils of prosperous periods, it can intensify stresses during market turmoil.
It’s also possible that a borrower’s traditional investments may be enduring concurrent market weakness, further increasing the difficulty of meeting margin calls (and the borrower’s stress).
Con: Borrowing against collections can increase logistical burdens and constraints on collectors.
Many – but not all – lenders against collections allow borrowers to retain the assets pledged as collateral for display at their home or a place of their choosing. Some lenders, though, require certain storage protocols and insurance coverage for the collateralized assets, which may not have otherwise been the choice of the collector/borrower. When financial considerations like borrowing are introduced, a collection – a pure hobby and passion for many collectors – becomes a less leisurely pursuit. In general, the complexity of owning it often rises with its value and the utility that comes with it; as collections grow in value, though, their financial might and capability become difficult to ignore, both a blessing and curse for the pure collector.
There’s also the matter of the interest costs themselves. Rates have risen considerably since the turn of the decade, meaning that borrowing is a less attractive proposition than it was a few years ago. Additionally, some lenders lend against collections with recourse to the borrower, meaning they can pursue the borrower’s other assets if the artwork fails to cover the full amount of the unpaid loan. Recourse loans can mean lower interest rates than non-recourse loans, but it’s an additional element of risk for the borrower to consider. On our Significance of Wealth podcast, Colleen Boyle of the Fine Art Group shares some insight on the differing mechanics in those two types of loans.
Collection-secured borrowing can capably and efficiently smooth financial disruptions caused by short-term liquidity needs, and minimizing those disruptions can have significant long-term benefits for collectors, even reaching into matters of estate planning. Though leverage can be a friend in those situations and in moments of market prosperity, it can also create severe stress for borrowers and collectors as markets unravel.
It’s a tool to be used carefully and thoughtfully, with clear intent and full comprehension of risks. But for collectors who have worked so diligently to cultivate the perfect collection, it’s a compelling option to make that collection work for them.
Destiny Family Office works with ultra-high-net-worth collectors, offering services tailored to their investments, families, and passion assets. By understanding what’s most important to you, we can help you navigate complexity, simplify your life, and achieve peace of mind.
If you have a valuable collection you’d like to include in your financial, tax and estate planning, contact our Destiny Family Office team today. And don’t forget to self-assess your planning to date by completing our Collectibles Scorecard.
