How The Art Investment Industry Works

And why you shouldn't get involved

Preamble

This isn't the usual sort of thing I like to write about and certainly isn't what I created this Substack for, but there are a lot of art portfolio investment funds advertised recently and I wanted to share some information about how the art industry works to help inform my readers. I'll keep this brief rather than waffle on and try to make it interesting because I'd rather be writing about my predictions for the economy and shares (which are pessimistic at the moment) and it'll make this a quicker read.

How The Art Investment Industry Works

In short, the art investment industry is all about tax breaks for the in-crowd. Because of this, it's almost impossible to buy a painting that will later be worth millions. Let me explain how it works. Important art galleries decide which artists' art they will sell, millionaires buy that art from those specific art galleries, hold onto the art for a few years then sell it to each other via those same galleries (art brokers) for an agreed mark up. The ownership of that art might transfer between millionaires a few times, appreciating in value each time. Finally the cycle ends with the millionaire getting a valuation on that art (which reflects it's past rate of growth and is well above what they last paid for it), gifting it to a museum and getting a tax break that's greater than the amount of money that they paid for the art.

Because the whole thing is about money (specifically being part of orchestrating that tax break at the end), it's important that the art doesn't get into the wrong hands in case the art's next transaction is not managed correctly. If not managed correctly, this could damage the value of the artist or legitimacy of other transactions in the scheme and affect the wealth of everyone who's invested in that artist. Therefore art galleries / brokers carefully control which artists and buyers are selected to be part of the cycle. In other words, if you're not part of the in-crowd, you probably won't even be allowed to buy the art from those galleries.

This means that it's unlikely that you will be able to be part of this cycle and therefore unlikely that an investment in art will appreciate. Because the end goal is to get a tax break, while having enough transactions that appear to be legitimate arms-length transactions (and sort of are, but at the same time really aren't), I feel that it's unlikely (though not impossible) that an art fund would be trusted to be part of the in-crowd.

As with any investment into any kind of fund, it's important to look at the trading history, confirm underlying value, check if it's independently audited and what kind of audit, check if it's registered with the FMA (I understand foreign companies don't have to, but why wouldn't you if you were specifically advertising in NZ?), check the fees, read the fine print, find out how hard it is to exit and what commitments and rules there are about distributions and read anything you can about the company and it's board, etc. Personally, my feeling is that the art industry is too shady to invest in and there are other options around that are well regulated alternatives.