1. ART AS AN INVESTMENT: THE FUNDAMENTALS – 15 MAY 2012
© Artvest Partners LLC 2012

2. III. UNDERSTANDING ART INVESTMENT VEHICLES
© Artvest Partners LLC 2012

3. © Artvest Partners LLC 2012
WHAT IS THE VALUE OF GLOBAL ASSETS UNDER
MANAGEMENT IN ART FUNDS?
A. US $550 Million
B. US $1.00 Billion
C. US $2.25 Billion
D. US $3.50 Billion

4. © Artvest Partners LLC 2012
WHAT IS AN ART FUND?
ART FUND
Structured investment vehicle
Offering documents
Third party investors
PRIVATE INVESTMENT PARTNERSHIP (PIP)
Group of individuals who pool resources
Closed to outside investors

5. © Artvest Partners LLC 2012
WHY INVEST IN AN ART FUND?
PROS
Allows for overall portfolio diversification with a
relatively small individual capital commitment
Does not require investor to have art collecting
expertise
Mitigate cost of
security, transactions, insurance, storage, research, t
ax, etc.
CONS
Lack of transparency & track record
Undisclosed conflicts
Currently, limited art fund options

6. UNIQUE ESTATE PLANNING BENEFITS AS PART OF INVESTMENT STRATEGY
STANDARD CASE
DEFERRAL / AVOIDANCE OF TAXES
Collector
Collector
Art Sale
Shares in Fund
Fund
Capital Gains
Deferred until
Earlier of Fund
Selling Art or
Cash Paid to
Collector
Death (If before
Capital Gains
Tax Due)
No Capital Gains
Incurred
Sale of Art
66% Net
Proceeds above
Cost Basis
34% Capital
Gains Tax*
Death
55% to Heirs
45% Tax of Value
of Estate at Time
of Death
*Combined Federal
&- New York State
Capital Gains Tax
Rate
55% to Hiers
45% Tax of Value
of Estate at Time
of Death
For significant collectors based in the US, section 721 of the US tax code allows for a collector
to invest a work of art, rather than cash, in a fund for shares deferring the 28% - 34% capital
gains tax and thereby earn returns on that deferment until there is a qualifying “liquidity event”
In certain circumstances, there is an opportunity to mitigate all capital gains tax – if the collector
dies before the capital gains tax is due
© Artvest Partners LLC 2012

7. © Artvest Partners LLC 2012
EARLY ART FUNDS
PEAU DE L’OURS
Founded in Paris in 1904
Acquired 100+ works before liquidating in 1914
Net of fees, annual IRR was 14.6%
1970s
Several art investment ventures were launched
By 1985, ventures aside from the British Rail Pension
Trust had all collapsed
BRITISH RAIL PENSION TRUST
Between 1974 and 1980, invested £40 M in 2,400 artworks and
collectibles
The fund liquidated these assets between 1987 and 2000
Net of fees, annual IRR was 11.3%

8. © Artvest Partners LLC 2012
SAMPLE ART FUND
FUND STRUCTURE
Management Fees: 2%
Hurdle: 5% net
Carry: 20%
Duration: 5 years
Cash returns: From end of year 3 onwards
SALES
Between years 2 and 5
To private collectors
At auction
To dealers
OPPORTUNISTIC APPROACH
Funds are typically opportunistic with sales prior to year 3 as part of
their active asset management strategy
RETURNS
Re-invested to the end of year 3
Distributed to investors after year 3

9. ART INVESTMENT CYCLE
Supplementary
Harvesting Period
Harvesting
Period
Potential
Profit
Growth (%)
Value
Creation
Ramp-up
Time
Initial
Distribution Phase
(target date)
0
© Artvest Partners LLC 2012
1
2
3
End
Distribution Phase
(target date)
4
5
6…8YR
End
(eventual liquidation)

10. © Artvest Partners LLC 2012
OPPORTUNISTIC GAINS IN A DOWN MARKET
PIERRE MATISSE GALLERY: OVERVIEW
Sotheby’s partnered with Acquavella Galleries, Inc. to
form Acquavella Contemporary Art, Inc
Sotheby’s put forward the entire $153.1 million in May
1990 to acquire all the common stock of the Pierre
Matisse Gallery
Gallery assets comprised 3,500 works of fine art of the
20th century (Matisse, Picasso, etc.)
The purpose of the partnership was to liquidate the
inventory with each partner having an equal ownership
stake

11. © Artvest Partners LLC 2012
OPPORTUNISTIC GAINS IN A DOWN MARKET
PIERRE MATISSE GALLERY: RESULTS
By December 31, 1993, $278.5 million had been distributed
to Sotheby’s in accordance with the partnership agreement
Additionally, at the end of 1993, $45.7 million of inventory
remained, the proceeds of which would fall to the bottom
line
The compound annual growth rate for the investment over
the period May 1990 to the end of 1993 was ≈ 25%
From 1993 to 2006, an average of $2 million of the
remaining inventory was sold annually
At the end of 2006, $20.3 million of inventory remained to
be sold

12. © Artvest Partners LLC 2012
ART FUND DUE DILIGIENCE
Asset Allocation
Liquidation Strategy
Fund Structure & Governance
Transparency
Investment Strategy
Risk Controls
Valuation & Reporting Methodology
Manager & Advisor Compensation
Potential Conflicts of Interest
Market Access & Expertise
Track Record

13. © Artvest Partners LLC 2012
ART FUND STRUCTURING – KEY ISSUES
Governance & Conflicts
Areas / Sectors of Focus
Acquisition Strategy
Holding Period & Exit Strategy
Risk Mitigation
Value Enhancement & Revenue Generation
Use of Other Investments
(i.e. Fixed Income, Leverage, etc.)
Innovative Opportunities
(3rd Party Guarantees, Funding Artists, Lending)

14. © Artvest Partners LLC 2012
ART FUND STRUCTURING – KEY ISSUES (CONTINUED)
Operations, Administration & Logistics
Financial Expectations & Expense Forecasting
Valuation & Reporting
Staffing, Advisors & Resources

15. © Artvest Partners LLC 2012
POPULAR ART INVESTMENT STRATEGIES
Buy & Hold
Global Arbitrage
Distressed Acquisitions
Collection Buyouts
Sector Specialization
Promotion/Showcasing/Scholarship
Leverage Acquisitions
Leasing
Financing & 3rd Party Guarantees
Deal Participation

16. THE ART FUND LANDSCAPE
Funds Announced vs. Funds Active *
2
6
Private Investment
Partnership
*
*
Active Art Fund
6
31
31
*
*
Start-Up Phase
*
Never Launched
1
Fraud
Full Cycle
*All funds between 2003 – 2012
** Only Private Investment Partnerships that have received press coverage were included
*** Multiple Funds run by the same manager are counted as a single fund
Data: Artvest Partners
© Artvest Partners LLC 2012

17. HONG KONG HAS BECOME INCREASINGLY IMPORTANT TO WESTERN AUCTION HOUSES
Status of Active Art Funds
1
7
9
Start-Up Phase
Acquisition Phase
Asset Management Phase
15
Liquidation Phase
Data: Artvest Partners
© Artvest Partners LLC 2012

18. GOOD PRACTICE & RISKS
RISK
 Loss of capital
MITIGATION / RESPONSE
 Art rarely goes to zero value
 Too much value concentrated in a single object or category
 Implement concentration limits
 High auction house fee structures will reduce investment
returns
 Fund should negotiate preferential fee structure with auction
houses
 Dealers will try to saddle the Funds with lesser quality
product
 Strict investment guidelines and rules of engagement;
 Fund will not be able to liquidate all of its investments during
life of the Fund
 Active Fund management; buying at right stages in art business
cycle
 Opportunity costs should returns be less than projected
 Term of Funds should allow for extensions
 Funds will invest or have to sell at wrong moment in art
value cycle
 Importance of combining market expertise and term extensions
 Small group of market insiders can distort activity and
results, and enrich themselves at the expense of less
knowledgeable investors
 Clear rules and investment practices, staying clear of known
artificial markets
© Artvest Partners LLC 2012

19. HONG KONG HAS BECOME INCREASINGLY IMPORTANT TO WESTERN AUCTION HOUSES
Art Fund Companies by Country by Year
45
40
Other
35
UK
30
Asia
25
Europe
20
North America
15
10
5
0
2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012
H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1
Data: Artvest Partners
© Artvest Partners LLC 2012

20. REPORTED ART FUND RETURNS
Fund Name
Fund’s Estimated
Annualized Returns
Annualized Returns
on Assets Sold
≈ 39%
Aicon Art Fund I
Artemundi Global Fund
24.33%
Art Photography Fund
7.98%
British Rail Pension Fund
19.86%
11.30%
Castlestone
3.85%
China Fine Art Partners
≈ 26.00%
Dionysos Art Fund
12.41%
PFF Fine Art Invest Fund
5.60%
Sharpe Art Fund
10.26%
Terry Art Funds
≈ 20.00%
The Collector’s Fund
28.50%
© Artvest Partners LLC 2012
The Fine Art Fund
I: 25.40%
II: 26.70%

21. © Artvest Partners LLC 2012
KNOWN FUND FAILURES
Marble Art Investment (UK – Fraud)
Ronald Coles Investment Gallery (Australia – Fraud)
Osian Art Fund (India – Losses)
Cannonball Art Fund (Singapore – Losses)
Art Trading Fund (UK – Losses)
Fernwood (US – Fraud)
Meridian Art Partners (US – Never Launched)
Societe Generale Asset Management (France – Never Launched)
The Savigny Art Fund (US – Never Launched)
Emotional Asset Management (UK – Never Launched)
ABN AMRO (UK – An Illusion)

22. © Artvest Partners LLC 2012
THE FUTURE OF ART FUNDS
Despite some notable setbacks, interest continues to
grow in art funds:
Several funds in the US and UK have raised 2nd and
3rd generation funds
Continued global uncertainty and low returns on
other investments will drive interest
More funds will mean more investment options
As existing players build track records, institutional
investors will begin to participate more actively

23. VIII. LIQUIDITY ISSUES & LENDING LANDSCAPE
© Artvest Partners LLC 2012

24. The Art Market is Highly Illiquid
During market pullbacks, already limited liquidity becomes even more scarce
In difficult economic times, the lack of liquidity becomes one of the most daunting
issues facing an owner wishing to sell
Percentage of Art Unsold
Impressionist & Modern New York Evening Sales
45%
41%
40%
35%
29%
30%
25%
22%
23%
21%
20%
15% 14%
13%
22%
19%
22%
18%
17%
14%
11%
12%
Nov
'06
May
'07
10%
5%
0%
May
'05
Nov
'05
© Artvest Partners LLC 2012
© Artvest Partners LLC 2012
May
'06
Nov
'07
May
'08
Nov
'08
May
'09
Nov
'09
May
'10
Nov
'10
May
'11
Nov
'11
May
'12

25. ART LIQUIDITY
Artist
Tier 1
© Artvest Partners LLC 2012
© Artvest Partners LLC 2012
Tier 3
First Rate
Artwork
Tier 2
High
Moderate
Low
Second Rate
Moderate
Low
Very Low
Third Rate
Low
Very Low
Illiquid

26. 2011 – 2012 TYPICAL LENDING RATES
Rates vary significantly based on the type of lender
Auction
House
0%
© Artvest Partners LLC 2012
© Artvest Partners LLC 2012
2%
Private
Banks
4%
6%
Asset-Based Lenders
8%
10%
12%
14%
16%
18%
20%
22%
24%

27. BORROWING OPTIONS
Private Bank
Rates
Conditions
300-400 bps above LIBOR
Specialized Lender
Auction House Advance
12% - 24% per year
varies by client
ranges from interest free
to Prime + 3%
full-recourse
non-recourse
borrower sometimes retains
lender takes possession
possession
auction house takes
possession
Caveat
banking relationship
other assets
limited to certain sectors
title insurance
works must be sold through
the auction house
LTV
50%
30% - 50%
30% - 50%
Term
1+ year (renewable)
6 months to 1 year
(renewable)
3 months to 1 year
© Artvest Partners LLC 2012
© Artvest Partners LLC 2012

28. © Artvest Partners LLC 2012
THINGS TO WATCH OUT FOR IN AN ART FINANCING CONTRACT
Yield
Terms
Estimates
Loan To Value (LTV)
Collateral
UCC Filings vs. Possession
Access to collateral incl. default

29. © Artvest Partners LLC 2012
WHEN TO GET ART-SECURED FINANCING
When the art market is weak and estate tax is due
To Avoid Capital Gains Tax
When interest rates are low
When returns from another investment
opportunity are likely to outweigh the interest on
the art loan

30. © Artvest Partners LLC 2012
© Artvest Partners LLC 2012
Auction Advocacy
Private Selling and Sourcing
Art Investments
Art Financing
Market and Value Analysis
Art Wealth Preservation: Tax & Estate
WWW.ARTVEST.COM
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