LOS ANGELES--(BUSINESS WIRE)--Art lending as an investment took off over the past year as investors search for yield with short duration. Inflation fears and pandemic recession defaults are additional drivers to what is a $20 billion market. Shinnecock Partners, an investment boutique, researched the market for two years before making its first loan. The firm’s managing partner, Alan Snyder, brings insight into the challenges and opportunities awaiting investors and funds.
After almost four years and $45 million in loans against $120 million of art, Shinnecock has already seen numerous disasters, sadly for investors. For example, lenders who don’t actually possess the art they lend against can be left empty handed when the loan defaults. Shinnecock offers its own extensive due diligence checklist to avoid the minefields in alternatives.
Not every player sweats the details, but the suggestions below are essential to protecting your investment. Snyder warns:
- Avoid bad actor borrowers. Financially distressed or overly litigious borrowers can generally be avoided with record searches. “We stepped away from a loan opportunity where the borrower, a noted figure, sued most everyone in his past. When we asked about this, we were assured it would not happen to us,” Snyder recalled.
- Control the collateral with proper legal filings. The U.S. Uniform Commercial Code allows loans to be recorded to establish seniority. A pre-screen before loan execution is critical. The final filing at loan execution, a UCC 1, must be properly undertaken, otherwise it is invalid.
- Insurance must be in place. Specifically, lenders should demand separate coverage limits for art in transit and in storage locations, that would cover a total loss. Always insure with highly rated claims-paying insurance carriers such as Chubb and AXA.
- Notwithstanding the challenges of COVID-19, a physical examination must be undertaken versus total reliance on high-resolution photographs.
“In the current flurry of activity, a duty of care by the lender is even more important. Investors must know the questions to ask and when the answers aren’t thorough,” Snyder concluded.
About Shinnecock Partners
Shinnecock Partners is a 30-year-old family office investment boutique with a unique approach: empower investors to make informed investment decisions. Shinnecock was founded by Alan Snyder (Harvard Business School, Baker Scholar), former CEO, Chairman and President of Answer Financial, President of First Executive, CEO of Executive Life and Executive Vice President of Dean Witter (now Morgan Stanley).