Canvas and Capital: Exploring Art as an Investment

Canvas and Capital: Exploring Art as an Investment

Tony Roth, Chief Investment Officer
Charlie Banta, Private Equity Investor

Tony Roth: This is Tony Roth, Chief Investment Officer of Wilmington Trust, and you are listening to Capital Considerations.

Today we have a wonderful guest to talk about an interest that is very close to his heart and very close to my heart which is art and art investing. Charlie Banta is a private equity investor specializing in media who has a deep background in both art and finance.

He has a undergraduate degree from Yale in art history as well as an MBA from Harvard. He has a very deep storied background in the finance side of the world, but I think that his real passion is combining finance and art.

Charlie has been a key member of the board of what is officially called the Buffalo Fine Arts Academy, but is more commonly known as the Albright Knox, a wonderful museum up in Buffalo, where he's been a board president and on the board for many, many years. And that institution was actually co-founded by his great, great grandfather in 1862.

He also has been on the board of the Portland Center for the Visual Arts, Palm Springs Art Museum, the National Council of the Fine Arts Museums of San Francisco and the Whitney in New York.

In full transparency, we want to let you all know that Charlie Banta is a client of Wilmington Trust. However, he is not here today to comment on us, but rather in his capacity as an art expert.

And, as always, I’d like to remind our listeners that nothing that we say should be construed as an investment recommendation or endorsement.

Charlie, welcome. It’s so exciting to have you today for this conversation.

Charlie Banta: Thanks, Tony. It's always nice to talk to a fellow art collector.

Tony Roth: Everybody wants to understand, why does art have an inherent value? Art of course has some ability to provoke an aesthetic experience that creates value in and of itself. But when people ask me the question, I always go back to sort of the old laws of supply and demand.

Something that's very, very rare, maybe the only one example of a particular object, that is something that creates that kind of experience that many people appreciate. By definition, there’s only one and therefore it's valuable. What would you add to that answer?

Charlie Banta: Today we're not talking about aesthetic value of art. We're not talking about the intellectual value of art, which is all there. But we're talking about the financial value of art. Somebody obviously thinks it has value since it's an international multi-trillion-dollar asset class.

There's a lot of value out there. When you talk about the classic dynamics of supply and demand, when you look at the supply of important art, it's really a unique asset. When you think about Leonardo, Picasso, Jackson Pollock, Andy Warhol. There's only one of those artists.

And their artworks are unique. So there's only one Mona Lisa. There's only one Demoiselles d’Avignon by Picasso, the first Cubist painting. There's only one Convergence, one of the famous drip paintings by Jackson Pollock.

There's only one Campbell's Soup Cans painting by Andy Warhol, actually, I think he made two, but they’re still very unique and probably each worth over $100 million. And then, of course, when an important artist dies, all of a sudden, the universe of their artwork is finite. It never grows after death.

Then you look at the demand side. The valuations for art are driven by high-net-worth individuals, which is a great, great client base because they tend to be somewhat recession resistant. They tend to continue to buy art during downturns. Global wealth has been increasing dramatically over the last 30 years.

So there's your dynamic that you referred to. You have a very limited supply of important artworks, and you have an expanding demand metric buying the art with the high-net-worth individual buyer class. So, the result of all that has been, if you look at the actual performance of art, especially contemporary art between 1995 and, I think, it's 2021, it's actually outperformed the S&P500, compounded 14% versus 9% annually.

Tony Roth: In order to assess whether any particular piece of art would constitute a judicious investment as a financial asset, you have to delve deeper. You have to assess whether or not it is today or likely to be in the future broadly regarded, with persistance, as something that is important, something that is, in fact, beautiful or something that is interesting. Can you talk to us more about that?

Charlie Banta: I'm going to go back to my days as an art history major at Yale. One of the courses I took by a professor called George Kubler, who was really brilliant, his specialty was pre-Columbian, but he was really more than an art history professor. He was also a philosopher. And he wrote a book called the Shape of Time. He pointed out that time is normally measured with arbitrary metrics, like decades, centuries, reigns of Kings, et cetera.

And the way he measures time is by the emergence of new art forms. What he meant was, art alters the sensibilities of mankind.

Fra Angelico is one of the first important Renaissance painters. And in 1437, he painted a work called The Annunciation. This is the first example in the history of art of using Alberti's invention of one point perspective to create more realistic three-dimensional space on a two-dimensional surface.

It was a real transformation out of the Gothic and primitive abstraction into realistic three-dimensional spaces. So, it was a very, very important moment of innovation in the art world, and therefore, probably nobody could afford to buy Fra Angelico’s The Anunciation these days. Picasso's Demoiselles d’Avignon is another great example.

It's the first time modern space was abstracted and made you look at the world in a very, very different way. You look at Jackson Pollock's, one of the big drip paintings, Convergence, 1952.

I mean, those drip paintings were revolutionary, an unbelievably different way of looking at space, motion, and emotion. And then, Andy Warhol's Hundred Soup Cans, 1962. Who would think of painting a soup can as a piece of art?

But it completely transformed the world's view of what art was all about. And obviously it was the creation of pop art. All those are really great examples of art which alters the sensibility of mankind. When I personally buy art, I think about three things. Number one, I think about whether I like it aesthetically.

I'm not gonna hang a work of art in my home that I don't like. Number two, I do think about whether it is art which alters the sensibilities of mankind. And number three, as a result of that, I think about, does this artist and does this work of art I'm buying have a chance for an important place in the art history books 50 to 100 years from now?

Those are some of the things I think that really differentiates great art from ordinary art. And also leads to investment opportunity.

Tony Roth: I have all these stories and experiences that I was able to build with each object I acquired. So I might have a couple hundred objects of art in my collection, maybe even more. But many of them are multiples, they're prints.

I don't have as many unique pieces as I would like to have. And if I could do it over again, I would have had a different focus.

What is someone to do who's interested in art, maybe wants to hang something because they have an open space on their wall. and they need to have something to look at, but doesn't have a sensibility to really help angle in on whether or not something is broadly considered to be of aesthetic worth, much less, likely to be in the canon of art history in 50 or 100 years?

Charlie Banta: One of the most important things in buying art is to look at a lot of art. I go to a lot of art fairs. In order to identify what you think are good pieces of art, you have to look at a lot of bad art. New York City has probably the greatest concentration of commercial art dealers. You go down to Chelsea and you can visit 30 or 40 different galleries.

If you get to know a dealer or two, the dealers can be very helpful in terms of educating you. There are also many art advisors out there, if you want to go that route.

Another thing I should mention is, in addition to looking at art, it really helps to read a lot about it.

Tony Roth: How confident do you feel when you collect in a contemporary arena? I'm going to use the word primary issuance as opposed to secondary market. If you're going to go out and buy an Ellsworth Kelly.

Or you're going to buy an artist like a Warhol or a Picasso, whether it be a print or a drawing, or if you're really well off, you can buy a painting. You pretty much know that it's going to be in the canon of art history because they've already been established, they may even be dead, etc.

But contemporary art is much harder.

How does one who's not really relying on advisors and gallerists, et cetera, to help, focus? Because that’s where the best opportunities must be right from a wealth creation standpoint or value creation standpoint? you're much more likely to find a young artist who is going to be in the canon in 50 years to turn into a lot of money than you are saying, Oh, I'm going to buy a Picasso or a Monet that have already been well established.

And maybe the upside is a little bit more limited.

Charlie Banta: Well, there's no question about the fact that you can create higher percentage returns by buying emerging contemporary art than buying established artists at auction or on the secondary market. It's just simple math. If you were to buy a really important Picasso painting today, you're probably going to have to spend $20 million or $30 million, maybe more.

I was fortunate enough to buy an artist early into his career called Mark Bradford, which frankly, I don't know if he'll be as important as Picasso, but he's going to be very, very important. And I was able to buy it for, you know, relatively modest amount of money. Let's see, it was 2009, I bought that piece. So, 14 years later, it's literally millions of dollars. Obviously, the percentage return on something like that is significantly better than buying a Monet or a Picasso or a Basquiat or Warhol.

The process of how you identify those emerging artists is kind of a little bit of what we talked about before.

You don't even have to be born with a good eye. You can be, it can be an acquired taste, but you have to work at it a little bit.

Tony Roth: How cyclical do you think the art market is for works by artists that have been recognized as established or important artists.

Is it just one direction all the time or is it cyclical with the economy and with geopolitics and there has been so much wealth created in the last 20 to 30 years. I remember a big crash in the art market. but since that time, it seems like it's been a one-way ratchet up.

Charlie Banta: The valuations for important art is driven by high net worth in individuals. During an economic downturn the market isn't nearly as affected as most other asset classes. High-net-worth individuals can still afford to buy art during a recession.

Art is really considered to be a non-correlated asset class. Look at another major downturn. Between 2007, 2010, the great recession, there were only two asset classes that actually increased in value during that period.

One was gold and the other was art. Art is very much a store of value in the way gold is. Just think about World War II and all the great art that was in Europe during that unbelievable confilguration. And when it emerged, it did nothing but increase in value.

It's a very, very. Solid asset class.

Tony Roth: Do you buy art exclusively from galleries, or do you also buy art at auction?

Charlie Banta: I've sold things at auction. I've never bought anything at auction. I've really focused primarily on emerging contemporary artists.

Early on, some of the artists, I. acquired like Alexander Calder, Sam Francis, Richard Diebenkorn, Yayo Kusama, Richard Prince, Gerhard Richter, Robert Mangold, Mark Bradford. Those people are all pretty well established artists right now. I wouldn't be buying their work today.

To give you an example of some of the works I bought more recently and more in the emerging class is Mary Course, Amy Sillman, MacArthur Binion, Julia Rommel. I mean, I could go down a much longer list. I've really tried to focus on emerging artists, because frankly, I find the intellectual process pretty interesting. And from a strict investment perspective, it's absolutely the best way to generate a return on your money, if that's what you're looking for.

Tony Roth: Right. At that stage in those artists careers, they're really not showing up at auction.

Charlie Banta: When you do primary market or secondary market kind of depends on number one, what your aesthetic makeup is. Some people like art has kind of been more proven aesthetically over time.

They're just more comfortable with it. Some people like to take more risks with more experimental works of art. And then number two, again, the level of risk is what your financial level of risk is. Are you willing to put a lot more money into an artist in the secondary market because that makes you feel more comfortable with the value of the asset. Are you willing to buy an emerging artist who may not be that expensive and may or may not emerge as somebody important, but if they do could be pretty significant.

Tony Roth: The thing that's interesting about collecting the real emerging artists is that the gallerists, art consultants, people like yourself figure out fairly quickly who meets the criteria that you rattled off earlier, of being aesthetically compelling, doing it the right way, having a chance to grow and become a significant established artist. And consequently, it's very hard to get access through dealers to that kind of material. When a show happens, it’s sold out in advance.

The dealers buy the best pieces for themselves for the principal’s collections and it's probably not a phenomenon that you've encountered a lot because you're such a well-known collector. But for folks that aren’t even if you're lucky enough to be able to identify what you want to maybe be buying, unless you're very, very early and very, very talented, it's very hard to get access to the material, is it not?

Charlie Banta: Unfortunately, the short answer to that is yes, you're correct.

Getting access to the right artists at the right time early into the game is not something that somebody is just starting out is going to be able to do. You got to look at a lot of art. You got to get to know the dealers.

You have to start buying the work. Once you establish yourself as a collector, who’s actually willing to commit resources to the space, you get a little bit more attention.

Tony Roth: If you think about this year, what percentage of your productive energies will be involved in art in some way?

Charlie Banta: Art was basically an important part of mankind's existence at the birth of civilization. And it will never end being so until the end of civilization. So it's never going to be superannuated. It's a great asset class from that perspective. So, to answer your question is I'm basically spending virtually 100 percent of my time in the art space these days.

Tony Roth: Basically just continuing to build your collection. Do you accession things that you think have run their course, either in terms of your own interest or appreciation? Is that what you're doing?

Charlie Banta: I'm collecting and I'm also investing.

Tony Roth: Let's say that we have people that are listening today that want to get involved.

They don't want to build their own collection. They just want to get some portfolio exposure, what should they do?

Charlie Banta: Probably the easiest way to do that is through an art fund. There are many art funds out there.

Created like private equity funds. Most of them are buying art on the secondary market, because most of these funds are started by finance guys. Finance guys like to validate value in what they're buying and the best way to validate value in the art world is through the auction markets, which means by necessity you're investing in works in the secondary market.

The Picassos, Monets, Basquiats, those are private equity vehicles, which you have to be an accredited investor. So you have to be something close to a high-net-worth individual.

Tony Roth: My team has looked at a lot of art funds and the vast majority of them focus on established artists.

Our conclusion has been that it's hard to see the wealth creation that the world has seen in the last 30 years—Asian buyers, Middle Eastern buyers, Russian buyers, necessarily continuing whereby these underlying objects, these art investments, the Picassos, the Matisses, that are going into these funds will continue to appreciate, net of fees at the same kind of rate.

So we've been very reluctant. Having said that we have had interest in the contemporary space, but it's higher reward, higher risk. That's where we like to see our clients focus and we'd like to direct our clients over time. And so we'd love to hear anything that you might have to share with us or offer.

If we wanted to if we wanted to get people involved in the right areas of the emerging artist space, how might some of the investors, our clients go about that on their own?

Charlie Banta: I actually was approached by two very consequential figures in the art world to help them start an art fund.

And this fund is very, very different from the funds that we just talked about who were dealing with secondary market pieces. And I agree with you that Picasso's aren’t going to grow at 50% a year. They've already established a pretty good valuation track.

They'll grow over time. But, you're right that the returns will probably be in this maybe single digits over long period of time, but this fund is focused exclusively on emerging contemporary artists. These two individuals, their entire careers have been spent in the art museum world and the commercial world doing exactly that, identifying emerging contemporary artists and ultimately help picking those who they think are really going to be the old masters of the future and developing their careers.

I'm sure that finance people in the audience know what a hockey stick growth curve is.

So those, those more traditional art funds working on the secondary market are buying works of art pretty far up on the shaft of the hockey stick. What we're doing with our fund, to your original point is we're buying at the inflection point of the hockey stick. Why do we think we'll be successful with that?

Because, frankly, we have been for the last 40 years. And even though it may be deemed as higher risk, if one of the artworks you buy doesn't work out, it's a hell of a lot different than buying a $30 million Picasso and not having it work out.

In some ways, I view the downside risk as actually less than the conventional art funds.

Tony Roth: So you guys get together, you'd say, okay, we're gonna get this. And you do that for 50 pieces going to the fund. And then it turns out that you spent $50,000,000 dollars or $20,000,000 dollars, whatever the number is and maybe you get 1 home run and the rest of them, eh.

Charlie Banta: No, no, no. I don't think that's the way it will work out. This is not like a venture technology fund. I think the success ratio will be closer to 80%.

Tony Roth: We're not trying to create an advertisement for your fund here just for the audience, we're trying to just use this illustrative case. There's lots and lots of funds out there that fit this kind of profile, but Charlie, not necessarily with the aesthetic power that you guys bring.

Tell me about the structure of the fund. Is it, again, only open to accredited investors? And does it have a lifetime or does it go on forever? And how do people get out of it?

Charlie Banta: You do have to be an accredited investor. It's a classic private equity structure.

It's seven years to invest, 10 years to exit, but, you know, we frankly feel we'll be in and out of it much more quickly than that. We've already had a 1st closing. We've already acquired 14 artworks. On a mark-to-market basis right now, just based on dealer information and auction information, we could probably sell that immediate inventory for at least a 2x.

Two or three of the pieces are at a 3x and 4x already with less than a year into it. We're pretty high level of confidence about what we're doing. And it's not an evergreen fund. So anything that's sold will be 100% return to the investors,

Tony Roth: but the ultimate fund life is…

Charlie Banta: Ten-year life, 10 years from 0.0.

Tony Roth: Okay. At the end of the fund, there’s some great stuff in there that, you know, you guys don't want to part with.

Charlie Banta: We're not buying this art to hang on our walls.

We're using a lot of other people's money to make an investment. The whole idea is to generate return on the investment.

Tony Roth: Where does the art live?

Charlie Banta: Mostly in in professional storage. We’ll lend to museums to help the artist career.

Tony Roth: Fascinating.

Charlie Banta: In an earlier conversation we had, you brought up the issues of whether art's a liquid asset class or not. It's a multi-trillion-dollar international asset class, but it’s traded internationally in every major currency. It's a physical asset that can be easily transported and stored globally. It's a very lightly regulated business, which is good. Another interesting aspect of this is, the individual collector can realize value on the art collection by establishing a credit line collateralized by the art.

That's actually a pretty important point for the average collector. It's not a frozen asset necessarily.

Tony Roth: And we do a lot of that at M&T, of course. We'll do a full assessment on what we think and we'll bring in a third party if we need to and we'll figure out what the right loan to value is that we're comfortable with.

Charlie Banta: I'm actually one of your clients. It's a terrific facility and it just gives you tremendous financial flexibility. And it's just a great mechanism by which to realize current value in your art collection without having to sell it.

Tony Roth: What do you do when you have an object that you say, wow, that is terrific. You could say, well, I could buy it and put it in the fund, but I'm not going to do that.

I'm just going to buy it myself because I think this is a great opportunity. I'm not going to give it to the fund. It seems like the three of you guys have a real conflict in deciding how to allocate those opportunities.

Charlie Banta: I understand the potential concern, but it's just not going to happen. You want the art fund to be successful as possible because you want to then do fund 2, 3, 4, 5 you know, et cetera.

Tony Roth: Well, it's just an interesting question. Allocation of opportunity is one that we confront when we look at any private market fund, particularly in context of a series of funds, new opportunities are going to go to the existing fund that's not fully deployed, et cetera, et cetera.

We are out of time, but I think that the takeaway in my mind, and there are a couple of them, I think. One is that the art space is really unique. And if we think about where we started with where does the value derive from, it’s really about supply and demand of something that is broadly considered to be a unique object. You can look at things like multiples, you can look at things like wine, you can look at things like watches. But from a collectible standpoint, art is really truly unique in that there are very few other kinds of collectibles that are as broadly followed and indeed offer unique objects like art does.

If you can get involved early, in the value creation process for an artist, you can really do quite well in a non-correlated asset class. And it's something that at Wilmington Trust, we'll continue to study and if we have an opportunity to bring the right type of opportunities to our clients in the future, you'll be hearing more from us.

Charlie, I'll just ask you if you have a last word that you want to share with our audience.

Charlie Banta: Warren Buffett, people ask him all the time what kind of business should I go into? What should I do with my life? And Buffett's response is do something that you love. I obviously am personally very passionate about the art world. Even for those who aren't right now, if you are willing to spend the time, looking at the art and reading about the art and talking to dealers, et cetera, it could very well be something that they'll end up loving as well.

Tony Roth: I think that's a great final piece of advice. I want to really thank you, Charlie, on behalf of all of us for sharing what is just a fascinating journey that you that you've had in your life and continues around finance and art, how you brought it together and again, the advice that you've shared with us.

So, thank you so much.

Charlie Banta: Well, thank you. It was a great pleasure.

Tony Roth: I'd like to remind everybody that you can go to Wilmington Trust dot com for a full roundup of our latest economic, market and broader thought leadership. Thank you for joining today.

Look for new episodes in the coming weeks as well as our 2024 Capital Markets Forecast coming in December. This will detail where we are seeing opportunities and how we are positioning for the year ahead.

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Charlie Banta
Private Equity Investor