Auctions USA

Rise of the outside guarantor

The big auction houses are increasingly turning to third parties to guarantee lots

NEW YORK. More than a year after Sotheby’s began noting “irrevocable bids” in auction catalogues with a tiny horseshoe-shaped symbol, some are still uncertain about what it means. “It adds a layer of murk,” said one dealer. “To print a symbol which no one can understand—it’s confusing.”

The “IB” is a twist on the “straight” guarantee. While both function as insurance for vendors that they will be paid regardless of the outcome of the sale, a straight guarantee means the auction house bankrolls the risk. In the worst-case scenario, the house will own a work if it fails to sell. In the best-case scenario—where the work sells above the guaranteed amount—the auction house and seller usually share the upside.

Irrevocable bids were developed about 15 years ago by Sotheby’s as a way of passing on its exposure to an outside party. Christie’s began to do similar deals in the last five years. What was new in November 2008 was Sotheby’s decision to identify which lots were guaranteed by the house (a small circle is used), versus lots guaranteed by anonymous third parties (a circle plus a horse shoe). Christie’s only indicates which lots are guaranteed, with no special marker for third-party guarantees.

Sotheby’s said the decision to add the new symbol was in the interest of transparency. “We decided to make as full disclosure as possible, while still respecting the interest of both sellers and buyers,” said Mitchell Zuckerman, chairman of Sotheby’s financial services. Yet dealers and collectors say they aren’t clear how the process works.

Third-party guarantees are on the rise as auction houses pull back on straight guarantees. During the 2005-2008 boom years, Sotheby’s and Christie’s each laid out hundreds of millions in straight guarantees, mostly for modern and contemporary or impressionist art, with an estimated $700m in spring 2008 alone. This all changed with the credit crisis in autumn 2008, and resulting art market tumble. “We took losses,” said Zuckerman. “We announced we were going to stop giving guarantees.”

“Until the capital markets are fundamentally different, we will look to third parties to do guarantees,” said Marc Porter, Christie’s Americas president.

While the houses declined to identify their partners, sources involved with the transactions say there is a pool of around ten collectors and dealers who regularly get involved in IB bids, including hedge fund manager Steve Cohen, and dealers Robert Mnuchin, William Acquavella and the Nahmads. “We are very careful [about the process of selecting a third-party],” said Zuckerman. “Our optimal candidate is a client who would be happy to buy the item for the hammer price plus premium at auction.”

Sotheby’s and Christie’s lock in the IB bidder, who contractually agrees to place an order bid. They may take all of the risk, or share the risk with the house. While the two houses structure deals similarly, there is at least one difference: Christie’s offer the third-party a financial fee, paid out whether or not the third party is the successful bidder. This fee can either be applied against the final purchase price or against the parties’ account. Sotheby’s only reward unsuccessful IB bidders. The third party pays the full price plus the buyer’s premium, with no fee.

For the third-party underwriters, financial rewards may not be very enticing. “I don’t encourage it,” said art lawyer Ralph Lerner who tells his clients: “Only do it if you really want to buy it at the guarantee price. You have to really love it—this is not a great money-making proposition.”

Nevertheless, some say the arrangement has appeal. “I like to do guarantees,’’ said William Acquavella, who has backed guarantees at both houses. “I’ve done a lot on things I’d like to own. I’m more than happy to own the works at the price I’ve guaranteed,” he said. “It’s always something we like to look at. It’s just another way of doing business.”

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