Next Week’s Bellwether Auctions: Guarantees, Investor Pleas, Uncertainties

Ahead of next week’s major Impressionist, modern and contemporary art auctions, both Sotheby’s and Christie’s are assuring possibly skittish buyers that there are “signs of strengthening”  in the market (in the words of Tad Smith, Sotheby’s CEO) and cause to be “confident in the art market” (in the words of Sara Friedlander, Christie’s department head for post-war and contemporary art, in a Bloomberg video).

Smith’s remarks came as part of his earnings conference call yesterday morning with securities analysts, whom he was trying to convince that “Sotheby’s future prospects [are] attractive for investors today,” notwithstanding its revenue decline (p. 20) from $962 million for 2015 (full year) to $805 million in 2016. The 2017 first quarter (a period that is normally not a big revenue-generator) showed a net loss of $11.3 million—an improvement over the $25.9-million net loss for the same period in 2016.

“Persuading prospective investors to join our mission when they see our stock is at a multiple of 26 times trailing Adjusted EPS [earnings per share] can make for an interesting conversation,” Smith conceded.

In trying to spin that “interesting conversation” in the right direction for Sotheby’s, Smith unpacked what he regards as a bullish auction-market indicator:

In 2006, the 201st wealthiest person on the Forbes 400 would have had to spend 10% of his wealth to purchase the most expensive piece of art sold in auction that year; in 2016 that same number was only a little over 5%. In 2006, the 201st wealthiest person on the Forbes 400 would have had to spend over 70% of his wealth to purchase all of the top ten pieces of art sold at auction that year; in 2016 that same number was under 40%. In other words, the median member of the Forbes 400 would have seen his personal spending power to purchase art at auction grow 75% in the past decade alone.

This contrived hypothetical doesn’t take into account how many Forbes 400 moguls actually have a strong appetite for top quality art, are interested in acquiring it at the highest price points, and want to make such purchases solely or even primarily at public auction. All it says is that the richer are getting richer and can buy more stuff. (We already knew that.)

This is Big Data with little significance. Nevertheless, Robert Frank, CNBC‘s “Inside Wealth” commentator, who occasionally dabbles in art-market analysis, seems to have bought into it. By contrast, Marion Maneker of Art Market Monitor, a veteran on the art-auction beat, was, like me, nonplussed by Smith’s strained analysis.

Smith’s theories will be put to practical test at Sotheby’s, which is increasingly relying on guarantees—the undisclosed sums that auction houses promise to pay to some sellers, whether or not the bidding reaches the level of the guarantee. Auction houses sometimes reduce their guarantee risk by securing third-party backers, some of whom may commit to making “irrevocable bids” to buy a work if the bidding on it falls short. If that happens, the irrevocable bidder is paid a fee by the auction house. The result is that the irrevocable bidder’s net cost is less than it would have been for anyone else in the room bidding the same amount—an uneven playing field.

After having been “very conservative” in offering consignors guarantees in last spring’s jittery market, Sotheby’s has considerably upped the stakes this season in its race with Christie’s to snare consignments. According to the auction firm’s Form 10-Q quarterly report, filed yesterday with the SEC, Sotheby’s has “outstanding auction guarantees totaling $266 million,” with “financial exposure…reduced by irrevocable bids totaling $177.7 million.” That’s a huge leap over last May’s figures of $86.2 million and $14.2 million, respectively. (A privately traded company, Christie’s doesn’t disclose the value of its guarantee portfolio.)

Although the amounts of guarantees and irrevocable bids are typically confidential, Bloomberg‘s Katya Kazakina yesterday reported that “Sotheby’s guaranteed Lise Spiegel Wilks [the consignor of its star lot, Basquiat‘s untitled skull-like head] would collect more than $60 million for the painting, which her parents [the late Jerry and Emily Spiegel] bought in 1984 for $19,000.”

A Sotheby’s spokesperson declined to confirm to me the amount of the guarantee or the name of the consignor. But he did confirm that an irrevocable bid had been secured for the Basquiat, for whom Sotheby’s hopes to set a new auction record, breaking this one set at Christie’s last May.

Both Katya and Kelly Crow of the Wall Street Journal reported that Christie’s had guaranteed that Pamela Sanders, the sister of the Basquiat consignor, would “collect more than $100 million” for the 107 works from their parents’ collection that she consigned to Sotheby’s rival. A Christie’s spokesperson told me that 26 of those will be in next Wednesday’s evening sale, with the rest to be offered in three sales (including one online) between now and October.

“As you know, we do not disclose or comment on the terms of financial arrangements with our clients,” Christie’s spokesperson told me, but “we can confirm the collection is expected to sell in excess of $100 million, all in.”

Chatting with me after last week’s Sotheby’s press preview, Lisa Dennison, the firm’s chairman for North and South America (and formerly director of the Guggenheim Museum), defended guarantees (which famously backfired in Sotheby’s Taubman sales) as necessary “to get consignments today. You have to have that in your arsenal. Discretionary selling is tricky, so you have to make sure that there’s something enticing there.”

During yesterday’s conference call, Adam Chinn, Sotheby’s chief operating officer (who joined the firm last year when it acquired Art Agency, Partners) tried to allay concerns about guarantee-related risks. Sotheby’s specialists, he boasted, are “damn good at pricing pictures,” meaning that fewer guaranteed works “are falling in one bid to the people who backed them.” Such awkward silences when no other bids materialize take the air out of the salesroom.

Whether Chinn will take it on the chin for extolling his colleagues’ price predictions remains to be seen. But Smith revealed that 20 of the 36 guaranteed lots in next week’s auctions already had irrevocable bids lined up. “We currently have $217 million in gross guarantees outstanding to consignors” to next week’s sales, he said, “but only $40 million net guarantee exposure after offsetting the risk with irrevocable bids.”

That, Smith declared, was “an extraordinary accomplishment.”