Auctions Market Comment USA

New York sales show how to guarantee success

This month’s auctions were carefully choreographed to secure big prices and even bigger headlines

Jeff Koons’s record-setting puppy at Christie’s. Photo: Don Emmert/AFP/Getty Images

Was ever a set of auctions as carefully orchestrated as the post-war and contemporary evening sales at Christie’s and Sotheby’s in New York last month? Despite modest results in London in October, the auction houses pulled out all the stops to stage an unprecedented spectacle of spending. Both houses fuelled expectations with major marketing campaigns, led by Christie’s, which even changed its brand colour from red to orange to match Jeff Koons’s Balloon Dog (Orange), 1994-2000. Both houses sent a series of billets doux from their heads of department, Tobias Meyer at Sotheby’s and Brett Gorvy at Christie’s. The latter, without irony, exhorted clients to bid, “otherwise the memory of the work and the hurt of the loss will be all that remain”. (After we went to press, Sotheby's announced that Meyer and the auction house had "agreed to end his association with Sotheby’s".)

On 12 November, Christie’s succeeded in creating what it termed “a landmark auction”, producing the largest ever total—$691m—for a single sale. This included what Christie’s subsequently described as “the most valuable work of art ever sold at auction”: Francis Bacon’s Three Studies of Lucian Freud, 1969, which sold for $142.4m. (Widely repeated by the world’s media, this was an effective piece of marketing spin, but it is factually inaccurate once the price is adjusted for inflation: that honour still belongs to Vincent van Gogh’s Portrait of Dr Gachet, 1890, which sold for $82.5m in 1990—equivalent to $148m today.) Sotheby’s, meanwhile, made its highest total for a single auction—$380.6m on 13 November.

Lessons from the past

All this seemingly spontaneous spending was more controlled than might immediately appear. Rather than the high prices, these sales should be remembered for the return of that boom-time instrument, the auction “guarantee”. We estimate that art on offer worth around $500m was guaranteed across the evening sales at Christie’s, Sotheby’s and Phillips, meaning that these works were preordained to sell at an agreed price, underwritten by either the house directly or a third party. In the latter case, if another bidder goes above the agreed guarantee level, the third-party guarantor gets an unspecified percentage of “the upside”—reducing, of course, the auction house’s profit margin on the work.

At Christie’s, the saleroom crowd burst out laughing when the lengthy list of works with prior financial arrangements—23 out of 69 lots—was read out at the start. These included the $142.4m triptych by Bacon, which found a third-party backer at the eleventh hour, Koons’s record-setting $58m dog and Christopher Wool’s Apocalypse Now, 1988, which sold for $26.5m. Meanwhile, Sotheby’s took most of the risk in-house. Filings show that it had $206.4m in guarantees as of 7 November, $152m of which was financed directly by the auction house. This is almost double the $87.3m the house guaranteed for its equivalent sales in 2006. In addition, Sotheby’s recently tripled its borrowing capacity for guarantees to $300m.

Guarantees are controversial as they potentially distort the market. This gung-ho return to guarantees is also a sharp reversal of the conservative policy both houses have had to minimise risk since the market downturn in September 2008. Sotheby’s and Christie’s each laid out hundreds of millions in guarantees during the boom years, between 2005 and 2008, but had their fingers burned when the market crashed. In autumn 2008, they had to pay at least $200m on guaranteed works that had failed to sell, according to the Economist. In 2010, Mitchell Zuckerman, the executive vice-president of global auction transactions for Sotheby’s, told us: “We took losses… we announced that we were going to stop giving guarantees.”

One New York collector, who guarantees works, says: “It’s not a bad business model if you want to buy the work, but it can just inflate prices, and that can’t go on forever. At some point, the music stops and someone’s left holding the baby.”

One adviser says that third-party guarantors are “skewing prices. You have a group of ten or so wealthy people who are very used to getting what they want, and they’re muscling in on the deal. We want transparency on pricing because people base things around the auction record.” Guarantors are known to include powerful players, such as the Qataris, who can demand their own terms. Other backers include wealthy collectors such as the Taiwanese businessman Pierre Chen, the US collectors Stefan Edlis and Peter Brant and art dealers including Bill Acquavella and the Nahmad family. It can be in guarantors’ interest to take a hit on a work, if they own ten more by the same artist, for example.

Acting as a guarantor may also offer insider information that is not available to other bidders: they are likely to have more knowledge about, say, the reserve level, which can then create an uneven playing field. There are also potential conflicts of interest. The Turkish financier Halit Cingillioglu and his son Kemal Has Cingillioglu are believed to act as guarantors, yet Halit sits on Sotheby’s advisory board and Kemal on Christie’s. Both houses say they do not comment on particular arrangements with clients.

“It’s a very bad thing for the auction market, which is supposed to be a place where true values are experienced. Private sales taking place at auction are not auctions,” one dealer says. Others see it as just another way of doing business. “It’s one of many things I do for objects I like and would be pleased to buy,” says the dealer Robert Mnuchin.

A spokeswoman for Christie’s says that the firm “is strongly committed to transparency and goes well beyond what the City of New York Department of Consumer Affairs requires”. Sotheby’s chief operating officer, Bruno Vinciguerra, says: “In 2007 and 2008, we were using guarantees as a typical business-getting tool. The approach now is very specific and opportunistic.”

Nonetheless, it is unclear how much money the auction houses are making. “Both are under enormous margin pressure at this level of the business. It’s not hard to imagine that these record-setting sales actually make less money than much smaller versions of the same sales did five or six years ago,” says Michael Plummer, co-founder of the art advisory firm Artvest Partners.

Battle of the brands

Sotheby’s faces particular challenges: its largest shareholder, Daniel Loeb, the founder of the hedge fund Third Point, accused the firm of a crisis of leadership in October. The company has recently taken on more risk in order to raise its profit margins again, according to the financial analyst David Schick of Stifel, in a recent filing.

The stress is clearly telling. In an interview with Newsweek last month, Sotheby’s Tobias Meyer was reported to have wept when speaking of his “near-death experience” in winning the consignment of Warhol’s Silver Car Crash (Double Disaster), 1963, which made $105.4m, a record for the artist.

So why do they do it? Both houses are in a race to find good works of art to sell to the fast-swelling ranks of the world’s super-rich. The number of billionaires has tripled over the past five years to 2,170, and their combined net worth is a staggering $6.5 trillion. Brand appeal counts, and Sotheby’s and Christie’s are battling to be Coca-Cola to the other’s Pepsi.

It is easy to forget in such heady times that some of the biggest critics of guarantees used to be the houses themselves. “We want to remain at arm’s length on a transaction. If a guarantee goes wrong in a down market, it could destroy the business. In the long run, it could be fantastically dangerous to the business itself,’’ Christopher Burge, the former president of Christie’s New York, told the New York Times in 1990. Christopher Davidge, formerly the managing director of Christie’s International, said: “Guarantees are not the proper business of the auction process… we do not believe they should be offered.”

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