Definition: In a recourse loan, the lender can seize any and all of the borrower’s assets (e.g. your home and business) in order to repay the loan; in a non-recourse loan, only the collateral (e.g. a painting) may be seized.
The distinction between recourse and non-recourse loans is blurred in the art world. Some companies and banks claim to offer non-recourse art-backed loans, however, it is a distinctly Orwellian doublethink, meaning the simultaneous belief in two contradictory ideas, that these ‘non-recourse loans’ sometimes require a personal guarantee. A non-recourse loan with a personal guarantee contradicts the very definition of what a non-recourse loan is.
These caveats pervade the extant ‘non-recourse’ art-backed loan market and the very small number of companies that do offer the loans require extremely high interest rates of approximately 13% with short-term maturities of one to two years. These non-recourse loans are exclusively offered on works with a fair market value of greater than $2m.
The art world is characterised by a lack of commercial transparency, an issue that is perpetuated by art finance companies that have, in instances, painted a misleading picture of their products. Genuine non-recourse loans with demonstrably competitive interest rates have not existed because of the risks involved for the lender. According to Deloitte, 84% of wealth managers see authenticity, provenance, and attribution issues as the greatest risks to the art market, not least because a lack of insured authenticity prevents liquidity in the market (1).
Therefore, through providing unparalleled conclusivity in authentication, Hephaestus’ scientific and digital tests offer lenders the value guarantee of an artwork. With the risk of forgery and misattribution immaterial to the lender, lenders can offer far more competitive interest rates on a longer-term basis. Forgery and misattribution has his historically been understood as an ‘invisible’ risk, for which collectors’ exposure was impossible to measure. Authenticity insurance, however, entirely transforms this traditional dynamic by enabling collectors to have the authenticity of their artworks protected. Forgery and misattribution is the only risk that can shift an artwork’s value from 100% to most often, nil, that has been uninsurable.
Authentication, guaranteed by insurance, not only increases the fair market value of an artwork but also enables a suite of financial services to operate, foregrounding authenticity and, for the first time, incentivising the elimination of forgery from the market. Authenticity holds paramount importance in art finance due to its direct correlation with asset valuation, risk mitigation, and market liquidity. For lenders, the assurance of an artwork's authenticity serves as a fundamental basis for determining its value and inaccurate or disputed provenance and attribution can undermine the perceived value of an artwork, leading to discrepancies in collateral assessments and loan terms. Furthermore, authenticity concerns directly impact the risk profile of art-backed loans. Lenders rely on the credibility of the underlying assets to mitigate the risk of default and ensure the recoverability of funds in the event of borrower insolvency. A lack of insured authenticity introduces uncertainty into the equation, potentially exposing lenders to heightened risks and diminishing the attractiveness of art-backed financing options. Insured authenticity, in this way, helps collectors to unlock liquidity in the context of art finance and foster a more robust and resilient marketplace for art investment and financing.
Today, high-net-worth individuals and their families view their fine art collections not only as legacies but also as investments. As these collections expand in both quantity and value, the utilization of fine art finance has surged as a means of accessing capital. Art-backed loans offer a versatile solution for various needs, with some of the most common scenarios being:
Hephaestus' unique authenticity insurance product enables private and institutional collectors to participate in non-recourse loans at world leading rates and terms. Enhancing liquidity and transparency to what is widely understood as a time-honoured asset class, insured authenticity will attract long-awaited institutional participation.
(1) Deloitte, ‘Art and Finance Report’, 2019, p.206.
