Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / Why Ultra Wealthy Families Are Buying Art as an Asset Class
Transcript
- Lucas: So last week I was looking through the Deloitte Art & Finance Report for 2025, and one number jumped out: 82 percent of family offices now say they view art as an investable asset class. Ten years ago that number was 55 percent. Luna: That's a massive shift. And it's not just the mega-wealthy hanging a Monet in the foyer — this is about portfolio allocation. Lucas: Exactly. The report shows that the average family office now allocates about 3 to 5 percent of total assets to art and collectibles. That's real money — we're talking tens of millions for a billion-dollar family office. And they're not treating it like a hobby. They're using art-secured lending, fractional shares, even 1031 exchanges. Luna: Let's start with the lending piece, because that's the least intuitive. You own a painting worth ten million dollars. Why borrow against it rather than sell it? Lucas: Two reasons. First, selling triggers capital gains — potentially 20 percent federal plus state. If you bought the painting for two million and it's now worth ten, you're looking at a big tax bill. Second, the painting might be hard to replace. The market for top-tier Basquiat or Richter is thin. If you sell, you might never get back in at the same quality level. Luna: So instead you take a loan at, what, SOFR plus three hundred basis points? Lucas: Roughly. The rates on art-secured loans have come down as more lenders enter the space. Banks like Citigroup and UBS now have dedicated art lending desks. You can borrow up to 50 percent of the appraised value, and the interest is often non-recourse — meaning if you default, they take the art, not your other assets. Luna: And you don't have to mark the loan to market unless there's a default event. So there's a bit of optionality there. Lucas: Right. Now, the other big trend is fractional ownership platforms — Masterworks being the most famous. They buy a painting, securitize it, and let investors buy shares. The minimum used to be ten thousand dollars; now they've lowered it to around five hundred for some offerings. Luna: That democratizes access, but it also changes the return profile. A $500 investor isn't getting the same liquidity or voting rights as a $50,000 one. Lucas: Correct. The fine print matters. Masterworks typically holds a painting for three to seven years, then sells and distributes proceeds. They charge a management fee — around 1.5 percent annually — plus a 20 percent performance fee on gains. So the net return to investors can be significantly lower than the gross appreciation of the artwork. Luna: But the pitch is low correlation to equities. In 2022, when the S&P 500 was down 19 percent, the art market overall was flat to slightly down. Some categories — like post-war contemporary — actually gained. Lucas: That's the diversification argument. And it's real, but with caveats. Art is illiquid. The bid-ask spread can be enormous. A painting that last sold at auction for $20 million might fetch only $12 million in a private sale during a downturn. You can't just click a button and sell. Luna: So for the ultra-wealthy, art is more of a long-term store of value than a trading vehicle. But what about the tax angle? You mentioned 1031 exchanges. Lucas: The IRS allows like-kind exchanges for art held for investment — same as real estate. So if you sell a Warhol and buy a Rothko within 180 days, you can defer the capital gains tax. It's a powerful tool for upgrading a collection without triggering a tax event. Luna: But you have to be careful about the 'held for investment' test. If you hang the painting in your living room, the IRS might argue it's personal use and disallow the exchange. Lucas: Exactly. That's why many collectors keep their investment-grade pieces in bonded storage or loan them to museums. It establishes the investment intent. And there's another strategy: donating appreciated art to a charitable remainder trust. You get a charitable deduction for the fair market value, the trust sells the art tax-free, and you receive an income stream for life. Luna: That's a classic move for the high-net-worth set. But let's talk about the elephant in the room: price discovery. The art market is famously opaque. Auction results are public, but private sales are not. How do you know what something is really worth? Lucas: You don't, fully. That's why the market relies so heavily on a small cohort of advisers — former auction-house specialists, independent appraisers. The Deloitte report also found that 72 percent of collectors say they would invest more in art if pricing were more transparent. Luna: And then there's the 'Salvator Mundi' effect. That painting sold for $450 million in 2017, supposedly to a Saudi prince. Then it disappeared. No one knows where it is or what it's really worth. That single transaction probably distorted the entire Old Masters market for years. Lucas: It's a perfect example of art's liquidity premium problem. When a market has one data point that huge, it becomes a benchmark even if it's not replicable. Most Old Masters sell for under a million. The 'Salvator Mundi' is an outlier, not a comp. Luna: So what should a family office looking at art for the first time do? Buy one blue-chip painting outright, or go fractional? Lucas: That depends on the size of the portfolio. If you have $200 million, buying a $2 million Basquiat outright makes sense. You get full ownership, you can lend against it, you have control over timing. If you have $10 million, fractional platforms let you diversify across artists and periods without putting all your eggs in one canvas. Luna: But you pay fees for that diversification. And you don't get the same tax benefits because you don't own the physical asset directly. Lucas: Right. Fractional shares are treated as securities, not collectibles. So you lose the 1031 exchange option and the charitable deduction on donated shares. There are trade-offs. Luna: If today's episode was useful to you and you want to keep it ad-free, buy me a coffee dot com slash fexingo helps. That's buy me a coffee dot com slash fexingo. Lucas: And it genuinely does. A handful of listeners chip in monthly, and that's what keeps these conversations going without sponsors. So thank you. Luna: Alright, back to art. So Lucas, you mentioned the Deloitte report also talked about the rise of 'collectibles as an asset class' — beyond just paintings. Watches, classic cars, wine, even sneakers. Lucas: Yes. The report has a whole section on alternative collectibles. The total market for investible collectibles is estimated at about $2 trillion globally. Watches — especially Patek Philippe and Rolex — have seen strong appreciation. Classic cars have plateaued a bit after the crazy run from 2010 to 2019. Wine has become very institutionalized, with funds like Cult Wines managing portfolios. Luna: And sneakers? That feels more like a speculative bubble. The hype around the Nike Air Yeezy 2 was insane, but prices have cooled. Lucas: They have. The sneaker index tracked by StockX was down about 15 percent in 2025. The problem is that sneakers are a consumable good — they degrade. A painting can last centuries. Sneakers will crumble in 30 years. So the long-term store of value thesis is weaker. Luna: Which brings us back to art as the most established alternative. But one question I have: with interest rates still elevated compared to the 2010s, does the opportunity cost of holding a non-yielding asset change the calculus? Lucas: It does. When risk-free rates were near zero, art's zero yield didn't matter. Now a ten-year Treasury yields around 4.5 percent. That's a real hurdle. But art's return comes from appreciation, not income. And historically, blue-chip art has appreciated at a compound annual growth rate of roughly 8 to 10 percent over the long run — similar to equities. Luna: So the argument is that art's return compensates for the lack of yield. But you have to be right about which artists appreciate. A lot of contemporary art bought in the past decade has underperformed. Lucas: Absolutely. The market is winner take most. According to the Deloitte data, the top 100 artists by auction revenue account for over 50 percent of total market value. The rest is a long tail. So unless you have expert guidance, you can easily overpay for a name that won't hold value. Luna: That's why the family offices that do this well often hire a dedicated art adviser — someone with decades of auction house experience. It's not a role you can fill with a standard financial advisor. Lucas: Right. And the best advisers are the ones who understand both the aesthetic and the financial side. They know that provenance and condition are as important as the artist's market. A painting that's been restored poorly can lose 30 percent of its value. Luna: So if I'm a family office with $500 million and I want to allocate 5 percent to art — that's $25 million — what's the smartest way to deploy that? Lucas: I'd say buy three to five blue-chip works from the post-war and contemporary category — artists like Rothko, Warhol, Basquiat, Richter. Hold them for at least 10 years. Use art-secured lending to free up cash if needed. And consider donating a piece to a museum via a charitable remainder trust for the tax benefits. Luna: What about emerging artists? Could that be a higher-risk, higher-reward play? Lucas: It can, but it's closer to venture capital than to traditional art investing. You need a very long time horizon — 20 years or more — and you have to accept that 80 percent of emerging artists will not maintain value. For a family office, that's usually better done through a dedicated fund that spreads risk across dozens of artists. Luna: So the bottom line is: art can be a legitimate portfolio diversifier, but it requires expertise, patience, and a tolerance for illiquidity. Lucas: Exactly. And the tax and lending structures are evolving to make it more practical. I think we'll see more institutional involvement over the next decade. Pension funds and endowments are starting to dip their toes in. Luna: They are? I hadn't heard that. Lucas: It's early — maybe 2 to 3 percent of large endowments — but the Yale endowment has a small allocation to art through a partnership with a fund. If the Yale model spreads, that could bring more transparency and liquidity to the market. Luna: Which would actually help family offices too, because it would mean better pricing data and lower transaction costs. Lucas: Right. So art investing is still a niche, but it's becoming more mainstream. The key is to treat it as a serious asset class with its own rules — not just a passion purchase you hang on the wall. Luna: And if you're going to hang it on the wall, at least take the tax deduction. Lucas: That's the High Net Worth way.