What was the state of the art market when OMNIA entered?
Following the financial crisis, it was obvious that the banks was forced to only finance against liquid assets, primarily stocks and bonds, and the only illiquid asset they took in was real estate. Previously, banks were able to offer their clients liquidity based on luxury assets such as art, classic cars, diamonds and other investment objects, but that service disappeared overnight. After a while, different funds with different legislation and more freedom to decide their own investment strategy and credit risk appeared, and they took over the market for banks within lending against different luxury assets with art being the no. 1 asset to lend against.
What was the market in need of?
Many of the asset owners who borrowed against their assets did it to follow an investment object or project, or simply to get liquidity. But the people I paid most attention to was those who had this valuable piece of art, which they would like to keep, but they would like to borrow against it to invest in a project for a return – in order to turn the intrinsic value of the artwork into a cashflow. Looking at the amount of loans issued, which was around USD 20bn, it was just a tiny percentage of the total value of art, which some believe to be worth 2,500bn, that was being lent against. What we found interesting was to combine the loan and liquidity, and with an investment with cashflow or upside – all in one offering. All in all, the dream was to make it easy for art owners, as we knew the interest for a simple setup for illiquid assets was very high.
Can you explain the setup?
There were three elements to the setup. The first one being the structure around the due diligence of the asset – getting it assessed, insured, authenticated and stored safely. The second element was approaching the market – the securitisation of the investment product meaning placing the asset in an instrument, which the capital market understood. That meant taking an illiquid asset, now with valuation, authentication and insurance, placing it in a bond or note, so that a family office, bank or insurance company could buy the securities, which were secured by the asset. The third element was the deployment of the investment – that is placing the liquidity in private equity investments, which provides a high return of approx. 15%, attractively more than the 6-7% that the capital market was pricing the notes. Thereby, the return matched the risk, which the art owner was taking, with enough cashflow from the investments to make it attractive.
Why did you call the OMNIA Bond 1.0 the perfect product for the capital markets?
Looking at mortgage bonds in Europe and particularly in Scandinavia, house owners are able to mortgage up to 80% of the property value despite real estate being an illiquid product with no cashflow, and the general increase in value is nowhere near that of the art market. Nevertheless, banks consider real estate as one of the safest investment products out there. With a higher annual appreciation in value for art than real estate, and a loan amount limited to 50% of the appraised value, I consider art a safer investment product than real estate. On top of that, we offered the capital market a product where the capital was invested in private equity with an average 15% annual return. To me that makes the perfect product offering for the capital market.
Why was it not what the capital market demanded?
What we learned was that there is a big difference between what the art market should buy and what they were looking to buy. And apparently, the motivation to buy a product is not always in the client’s best interest, but holds a great job risk for those taking the decisions. For example, as no one else offered art bonds, it was impossible to get credit rating on the art bonds, and without official credit rating, each individual asset manager had to decide on the risk and their internal credit rating of the bonds. If things do not turn out as planned, you as the asset manager who set the credit rating have to defend your rating, and then it might be easier to avoid the offering to begin with.
It was possible to get credit rating on the insurance of the bond, but only if the offering was more than USD 500m, which meant that the first offering had to consist of quite a lot of art! Finally, it turned out that it was very difficult for the capital market to understand the combination of art and private equity in our structure, as those involved in private equity and art are very different groups of people. We took two very different asset classes and combined them. The art owners thought it was a great offering, and we thought it was a great offering for the capital market with a high interest, but it did not work, because they simply did not understand it – was it an art product or a private equity product?
What were the main obstacles with the bond?
When you create a private equity fund, you spend two years raising the capital, five years investing the capital and building the companies, and then several years selling the companies – meaning it is a rather time-consuming process. We looked at companies with a high return and growth, which are typically SMEs. But that also meant we had to buy 15-20 companies to match the value of the bonds. Looking back, the entire setup was extremely time-consuming and required a much bigger team than we had for it to be an ongoing business.
What did you learn from the process?
We learned from the bond that issuing bonds or notes and using them as a loan in an investment company that acquires companies and sell them later was way too complicated. What we could do instead was take what we had learned and create a structure with fewer art owners. Now, we match few investments, for example our SPACs, with each client’s or investor’s need and leverage. We see version 2.0 as a cooperation with very few art owners with a common investment strategy in a fund structure, with OMNIA Global Management as general partner, based on the value of the art instead of a bond structure.
Thereby, each art owner gets his or her own mini fund either issuing notes or a credit facility combined with another form of acquisition finance with a planned exit strategy. This means bigger deals with fewer art owners and fewer investments that match the leverage from the art piece, and therefore, we are no longer only looking at SMEs. This is a structure that works way better for us, as the issues we had with the bond has been removed. SPACs and reverse take-overs are well-know, so is using art as collateral for a loan as well as creating a fund in Luxembourg – that makes it way easier to get everyone on board when you are not creating an entirely new product, but just twisting familiar products a bit.
Why are we ahead with version 2.0 today?
We are ahead because we have taken all the beating and the risk over the last five years and learned from that. We did not just talk about it – we went into the market and learned everything about the art market in relation to the capital market. Since we have also been in the investment market for almost 15 years, and are entrepreneurs to the bone, we have a great understanding of how to create partnerships and joint ventures. We have tremendous experience in what to do and what not to do! And that is what happens when you are not afraid of being innovative. The consequence of that, though, was that we had to take the bonds off the market, and invited bond holders to be part of version 2.0.