Should you Invest in Art Auction House Companies?

Hedge funds, family offices and other investors have been asking a lot of questions about whether to invest in auction house companies. The headlines of huge art prices push people to think that auction houses must be making a LOT of profit. Not really.

Auction houses ravenously compete with each other to win business from sellers of art. Oftentimes, they will even go into a deal making no revenue (so after the cost of sales, there is an actual loss on the auction house books). Why do they do it? Because marketshare - beating the other house - is the most important consideration in this highly emotional market, along with wanting the biggest headlines in the NYT and FT. The rationale is that if you have marketshare and great press, you will be able to attract more profitable business during the next auction cycle to balance out the loss-leading deals in the current cycle.

Instead, the process starts all over again the following season with repeat consignors expecting even more aggressive concessions from the auction houses. And the consignors all talk with each other and either brag about or embellish what they were able to negotiate with the auction house. Attorneys and advisors of sellers also know what they were able to negotiate and want similar deals for their other clients.

So when we talk with investors about whether to put their cash into an auction house, we note whether there has been any recent amazing auction house news in the press and if the answer is "Yes," passing on this investment opportunity is likely the best decision. Good press on winning a consignment, or on a world record art sale, equals little to no profit for the auction house.