Credit Alberto Giacometti Estate/Licensed by VAGA and ARS, New York
Perhaps itâs a mark of confidence in the art market. Or a sign that profit margins are thin. Or simply another big gamble, like the ones taken in 2008.
But naysayers and optimists agree: The worldâs largest auction houses are back in the business of guaranteeing prices on works that they sell, one of their most speculative practices.
Sothebyâs and Christieâs all but gave up guarantees in late 2008, after the effects of the financial crisis spilled into the art market. Sothebyâs lost about $ 52 million in just one season when works did not sell at the price it had guaranteed to the seller, and it had to make up the difference.
âWe are out of the guarantee business at least for a while,â the chief executive of Sothebyâs, William F. Ruprecht, declared at the time.
But last fall, Sothebyâs pledged to cover minimum prices on works that made up 43 percent of the $ 422 million in revenue at its November Impressionist and Modern art sale, typically one of its highest-grossing auctions of the year. Christieâs has moved in the same direction. At its postwar and contemporary art sale in November, it directly guaranteed 23 lots that accounted for 44 percent of the saleâs $ 853 million in revenue.
To entice owners to sell a work of art, auction houses sometimes offer them a guaranteed minimum price. If the work sells for more, the house and the seller split the extra amount. If it sells for less, the house makes up the difference. Because it is risky to guarantee prices, the houses may have outside financiers underwrite the guarantees. The outsiders then stand to enjoy any gain.
Value of art sold with a guarantee*
MILLIONS OF DOLLARS
After the financial crisis of 2008, the houses relied on outside financiers to extend the guarantees. Now the largest houses are taking on more of the risk themselves.
In November 2014, Andy Warhol’s “Triple Elvis” was guaranteed by Christie’s. The piece sold for $ 81.9 million.
In November 2014, Sotheby’s guaranteed Warhol’s “Liz #3.” It sold for $ 31.5 million.
*Prices of works sold with guarantees at the evening sale of postwar and contemporary art held each November in New York.
That auction house guarantees have come roaring back, despite the risks, is a reflection of the largely hidden turmoil in the art market, according to some analysts. Despite the headlines about soaring prices, the analysts say profit margins for the auction houses on big-ticket lots are razor-thin, creating financial pressure that they suggest may have helped prompt Mr. Ruprecht of Sothebyâs, and Steven P. Murphy, his counterpart at Christieâs, to announce recently that they were stepping down.
âIt is a brutal business,â said David Kusin of Kusin & Company, a research firm that specializes in the economics of the art market.
Guarantees, in which the house pledges to the seller that it will cover a minimum price, are surging because they are potentially quite profitable and can replace some of the revenue lost because of thinner margins on sales. If bidding surpasses the guarantee, the house typically splits the extra money, often millions of dollars, with the seller.
Margins are thin because competition is squeezing the traditional way auction houses make money: charging sellers and buyers big commissions. To secure the most valuable works for sale in the highest-priced markets â contemporary art, and Modern and Impressionist art â the houses have been surrendering much of their commission revenue to sellers as an inducement to do business with them, not their rivals.
âThey are trying to fix eroding margins by getting more of the upside from the guarantee,â said Michael Plummer, a partner at Artvest, an art advisory firm in New York. âIt is the one way to eke out profitability when your margins are getting squeezed.â
There is little data to determine the success of the housesâ big-risk, big-reward strategy. Neither Christieâs nor Sothebyâs specifies the prices it guarantees, only the final prices for the works on which a minimum was pledged.
When an auction house guarantees a sale price, it is basically wagering on the ability of its experts to predict the market. In September 2007, for example, Sothebyâs committed to guarantees worth hundreds of millions of dollars, likely turning a good profit during a period of exuberant buying. But two years later, Sothebyâs was guaranteeing almost nothing because of the losses it had suffered.
Christieâs also acknowledged losing millions of dollars at that time on guarantees and said it was returning to a more âtraditional business.â Christieâs, which is a private company and not obliged to release its finances, declined to comment for this article.
In the ensuing years, both houses tried to secure consignments by guaranteeing prices. But they arranged for independent financiers to take the risk in return for a share of the price achieved above the guarantee, a practice they still employ. If the bidding never reaches the guaranteed price, the financier walks away with the work.
But now, with a need for a new source of profit, the houses are increasingly putting their own money on the line, analysts say.
In November, Mr. Ruprecht said in an investorsâ call that Sothebyâs was using guarantees on coveted works not only to secure the consignments but also to make money.
âAuction guarantees,â he said, âhave been meaningfully profitable to the company.â
In November, at its Impressionist and Modern art auction, Sothebyâs guaranteed minimum prices to the sellers of two of its highest-profile offerings, among them Alberto Giacomettiâs sculpture âChariot,â which sold for nearly $ 101 million. It did not disclose the guaranteed price, but such guarantees are typically â but not always â close to the presale low estimate. (Sothebyâs did not provide a presale estimate range but said the sculpture could sell for âin excess of $ 100 million.â)
Another auction house, Phillips, is taking a more cautious approach. At its November evening sale in New York of contemporary art, most guarantees were extended by third parties, not the house. Edward Dolman, its chief executive, said that taking big bets with the auction houseâs own money was not sensible.
âWeâre not involved in the battle between Christieâs and Sothebyâs for market share,â he said.
Guarantees may be a reasonable response to thin margins, but their use comes with some longstanding complaints that they can tilt what auctions have long claimed to be â level playing fields.
Critics say, for example, that an auction house may promote a guaranteed artwork more than one in which it has no stake. At Sothebyâs and Christieâs, outside guarantors can also bid on a work they are backing. This gives them an unfair advantage, some critics say, because they will know the guaranteed price whereas other bidders in the room will not.
The auction houses defend their practices. They say that they fully disclose in catalogs or at the sales which artworks carry a guarantee and whether they are being guaranteed by an outside party or by the house.
âGuarantees are just one of the business-getting tools we use,â said Andrew Gully, a Sothebyâs spokesman. âSothebyâs has been strategic and prudent with guarantees and uses them when we feel strongly about the artwork and confident in our ability to sell it for our consignors.â
Beyond matters of market ethics, though, there is the question of whether the auction houses have done enough to protect themselves from the potential downswings that caused problems six years ago.
Kristine Koerber, a research analyst at Barrington Research, an investment firm, said Sothebyâs had prudently made extra credit arrangements to be able to issue more guarantees.
If the market falls unexpectedly, however, the auction houses could still be left holding unsold artworks and committed to paying sellers millions of dollars, analysts say.
Mr. Plummer said the increase in guarantees shows that auction houses are optimistic about their ability to assess values so as to offer guarantees that are attractive, but safe.
âBut,â he warned, âif you go into an auction and you have guarantees and there is economic upheaval around the time of the sale, then you can have problems.â