Insight: How to borrow $10 million

Wed Sep 28, 2011 9:24am EDT
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By Chris Vellacott

LONDON (Reuters) - At Christie's auction house in London one evening last July, as art investors bid millions for an 18th-century painting of a horse, the sons and daughters of the capital's super-rich were going through their paces in a simulated auction.

In an upstairs room in London's plush St James's district, around 30 people mostly in their 20s chatted politely in fluent English, their accents Russian, Arabic, South Asian and Chinese. After a three-course dinner of salmon and roast lamb, the program began: a role-play in which teams bid in an imaginary auction for various works of art.

A crew of experts was on hand to advise on the value of the pieces. The bidding gathered pace. Staff took fake phone calls and bid on behalf of "mystery buyers." A young woman shouted encouragement in Arabic. One team bid hard, driving prices far higher than the recommended valuations. At the last minute they pulled out, landing rivals with an exorbitant bill. A large plasma screen showed the real-life bidding going on downstairs. George Stubbs' "Gimcrack on Newmarket Heath" sold for 22.4 million pounds ($35 million), making it the third most valuable Old Master ever sold at auction.

For the young would-be buyers, the event was one of a series of workshops aimed at grooming them for the responsibilities of inheriting vast wealth. A taster of how to invest in alternatives to stocks and bonds, the session showed how some of their 'high net worth' parents are protecting their wealth from the market ructions of the financial crisis.

But it went further. It also showed the young investors how they could boost their budgets by offering art in their collections as collateral for loans.

"It's a way for them to get liquidity out of the art collection to invest back into their business or buy other new business," said Suzanne Gyorgy, a New York-based art finance manager at Citi's private banking arm, which organized the event.

Art used to be known as an "investment of passion"; today for those who can pay, it is a form of haven. Demand for art, watches, rare wines, vintage cars, boats and wine expanded in 2010 as the world's super-rich rebounded from the 2008 financial crisis, according to a report by Capgemini and Merrill Lynch in June. A 300-bottle collection of Chateau Lafite-Rothschild sold at auction earlier this month in Hong Kong for $540,000, the highest value lot achieved at any wine auction in the world during 2011.

The Christie's lesson went beyond using alternative assets to hedge a portfolio. When the players' budgets ran out, they could borrow against the value of what they already owned.   Continued...

<p>Acker Merrall &amp; Condit's President and Auction Director John Kapon poses with a lot of 70 "Four Centuries of Chateau Lafite Rothschild" bottles, which includes bottles between 1799 and 2003, during a news conference in Hong Kong March 24, 2010. REUTERS/Bobby Yip</p>