ART MARKETS: A NEW ERA

April 2014

ART MARKETS: A NEW ERA

CONFIDENTIAL

2

CONTENTS

Confidential | Art Markets: A New Era I ECJ Capital | April 2014

Executive Summary

Art as an Alternate Asset Class

Global Art Sales and Key Trends

Asian Art Market – A Perspective

Art Fund Industry

Key Challenges for Art Investments

Confidential | Art Markets: A New Era I ECJ Capital | April 2014 3

Executive Summary

Investment in art, which was commonly classified as ‘passion investment’, has been redefined as an attractive alternative asset

Art has a low or negative correlation with other traditional asset classes, thereby providing an appealing diversification opportunity

In 2012, artwork worth €43bn was traded globally, up nearly 2x from the amount traded 10 years earlier

Although sales are still below the peak in 2007, owing to the global recession, average transaction size has grown robustly and remains almost

1.5x that in 2002

Sales of fine & decorative art declined in auction as well as dealers markets in 2012, primarily due to lower volumes

However, both sales channels expanded more than 2x in the last decade

Buyers are more inclined toward post-war/contemporary and modern art investments which, together, accounted for 73% of global art sales in 2012

Post-war and contemporary art yielded returns of 130% and 121%, respectively, over 1998–2013, exceeding that of the global art index (105%)

The global investable wealth of high net worth individuals (HNIs) is expected to increase at a CAGR of 6.8% to US$55.8 trillion (tn) by 2015, primarily

driven by growth in the Asia-Pacific region (CAGR of 9.8%)

Hence, the Asia-Pacific region would remain the key market for growth

Asia has emerged as the growth engine of the global contemporary art market, as the continent is home to 12 of the top 20 cities by art turnover

China is the region’s strongest market, with art sales increasing 10x during 2004–12

Southeast Asia is also witnessing increasing traction

Southeast Asian art worth US$27mn was auctioned in Sotheby’s fall 2013 auctions, more than double the presales estimate of US$13mn

Increasing demand for art investments is driving growth in the art fund industry; more than a third of these funds are based in China

Key challenges in the art market are the global economic environment, valuation of art, illiquid market, high cost, volatile performance, risks to title and

authenticity, and high barriers to entry


Source: JP Morgan, ECJ Capital Research

ART HAS A LOW CORRELATION WITH OTHER FINANCIAL ASSET CLASSES

During the 25 years to 2011, art (as measured by the Mei Moses World Art Index) had almost zero correlation with US equities and was negatively correlated with fixed income and real estate investment trusts (REITs)

Emergence of art as potentially strong alternative asset class improves its popularity

S&P 500 Equity Index

MSCI EAFE Equity ETF

FTSE NAREIT All Equity REIT

Barclays Aggregate Bond

S&P GSCI Commodity Index

Mel Moses World All Art

S&P 500 Equity Index 1.0000

MSCI EAFE Equity ETF 0.7128 1.0000

FTSE NAREIT All Equity REIT

0.4919 0.4440 1.0000

Barclays Aggregate Bond

0.2311 -0.1944 0.1287 1.0000

S&P GSCI Commodity Index

0.1226 0.3558 0.1723 -0.2256 1.0000

Mel Moses World All Art

0.0003 0.1524 -0.1719 -0.1788 0.1983 1.0000


2007

2013 Q1

33.0%

28.2%

27.0%

26.1%

17.0%

20.0%

14.0%

15.7%

9.0%

10.1%

Equities Fixed Income Cash/Deposits Real Estate Alternative Inv.

13.8%

27.9%

15.9%

5.0%

37.4%

Jewelry, Gems, & Watches Luxury Collectibles* Art Sports Investments**

Other Collectibles***

31.6%

19.0%

16.9%

8.0%24.4%

Art currently forms an increasing component of HNIs’ investment portfolios

ALTERNATIVE INVESTMENTS CONSTITUTE ~10% OF HNIs’ WEALTH

Source: Capgemini, Merrill Lynch, RBC, ECJ Capital Research

2007 2013 Q1

* Luxury Collectibles include automobiles, boats, and jets, among others; ** Sports Investments comprise sports teams, sailing, and race horses, among others; * Other Collectibles include coins, wine, and antiques, among others

ART ACCOUNTS FOR ~17% OF HNIs’ ALTERNATIVE INVESTMENTS

Growing economic uncertainty is leading to a rise in the share of alternate investments in HNIs’ investment portfolios Within the alternative investment asset class, investments in art are rising significantly


Source: Deloitte’s Art & Finance Report 2013, ECJ Capital Research

According to the Deloitte ‘Art & Wealth Management Survey 2013’, although non-financial elements dominate, a majority of wealth managers, collectors, and art professionals favor investments in art due to diversification benefits as against investment returns

Diversification benefits, an important driver of investment in art

43% of Wealth Managers

44% of Art Collectors

59% of Art Professionals

PORTFOLIO DIVERSIFICATION MORE IMPORTANT THAN INVESTMENT RETURNS

Stated portfolio diversification was one of the strongest arguments for including art and collectibles in traditional wealth management

Revealed portfolio diversification was the primary motivation for investing in art

Said they are motivated by opportunities for portfolio diversification

In the long term, the

diversification benefit

reduces portfolio risk

even though the impact

of global uncertainties

and economic

situations trickles

down to every asset

class, including art


2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

22.3 18.624.4 28.8

43.3 48.142.2

28.3

43.0 46.1 43.0

25.8 25.4 26.6 28.232.1

49.8

43.7

31.035.1 36.8 35.5

Global Art Market Sales (€ bn) Global Art Market Transaction Volumes (mn)

CAGR of Sales Value: 6.8%

CAGR of Transaction Volume: 3.2%

€863 €734 €917 €1,022 €1,350 €965 €965 €914 €1,224 €1,254 €1,211

Global art sales on a strong uptrend, approaching pre-crisis level

GLOBAL ART MARKET EXHIBITING STRONG GROWTH

Over the past decade, the value of art sales increased almost 2x, whereas average transaction size expanded around 1.5x

Source: The European Fine Art Fair (TEFAF), 2013, ECJ Capital Research

Art market

rebounded

significantly in 2010

and 2011,

approaching the pre-

crisis level

In 2012, deceleration

in China impacted art

sales

Average transaction

size has grown

substantially and

remains almost 1.5x

than that in 2002

Average Transaction Size (€)


Sales of fine and decorative art worldwide rising significantly at auctions

ART AUCTION MARKET GROWS OVER 2X IN THE LAST DECADE

Despite growth decelerating year-on-year in 2012, auction sales remained strong


2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

8.911.7

13.8

20.824.0

19.0

13.1

20.823.3

20.9

Global Auction Art Market Sales (€ bn)


168.7% -45.4% 77.2% -8%

Change in Value TurnoverSales declined in 2012, largely due to lower

volumes in developed markets

Country Volume Change (%)2012 over 2011

Germany -13.7%

France -12.9%

Italy -18.1%

UK -11.1%

EU -11.3%

US -6.4%

China 0.03%

Rest of the World -9.4%

Total -8.0%


Fine/decorative art sales in dealer sector account for 52% of global sales

DEALER SALES DECLINED, BUT SHARE IN GLOBAL MARKET GREW


GALLERY DOMINATES DEALER SALES, 2012

Gallery44%

Domestic fairs23%

International Fairs13%

Auctions4%

Privately8% Online

8%

Sales of ~€22.2 bn

2011 2012

23.122.2

Global Dealer Art Market Sales (€ bn)

-4.0%

Share in global art sales

~50% ~52%

Dealer sales were estimated at €22.2bn in 2012, down 4% from 2011, but, their share in the global art market grew to ~52% Galleries remain the most important channel; however, art fairs and the event-driven market rose steadily in the last decade


Buyers more inclined toward post-war/contemporary and modern art investments

POST-WAR/CONTEMPORARY AND MODERN ART OUTPERFORM


MARKET SHARE INCREASING (% OF GLOBAL SALES, 2012)

5.0% 10.0% 15.0% 20.0% 25.0%€0

€1,000

€2,000

€3,000

€4,000

€5,000

Post War and Contempo-rary

Modern

Impressionist and Post Impressionist Old Masters

* Bubble size reflects average sale price/lot in the specific category

2003 - 2012 Sales CAGR (%)

2012

Art

Sal

es V

alue

(€ m

n)

Average: 15.5%

Average: €2,506 mn

43%

30%

12%

11%4%

Post War and Con-temporary

Modern

Impressionist and Post Impressionist

Old Masters

Others

41%

28%

13%

8%

10%

By Transaction

Volumes

By Value of Art Sales

Buyers are increasingly purchasing post-war/contemporary and modern art, making them the most important sales generator Together, they accounted for 73% of total global art sales in 2012


Post-war and contemporary art performing robustly

Over 1998–2013, the indices of post-war and contemporary art yielded returns of 130% and 121%, respectively, exceeding returns of 105% generated by the global index

Source: Artprice Global Indices

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

50

100

150

200

250

300

350

Global Index (USD) Old Masters 19th Century Modern Art Post-War Contemporary

POST-WAR AND CONTEMPORARY SECTORAL INDICES OUTPERFORM GLOBAL INDEX

Strong demand for post-war and contemporary art driving up

higher returns


Emerging economies, with rising HNIs, are key markets for growth…

ECONOMIC OUTLOOK FOR MAJOR ART MARKETS

Source: IMF World Economic Outlook, October 2013, ECJ Capital Research

SHIFTING WEALTH DISTRIBUTION TOWARD THE EMERGING WORLD

-1% 4% 9% 14% 19%-1%

0%

1%

2%

3%

4%

5%

Australia

Brazil

China

FranceGermany

India

Italy

Japan

Qatar

Russia

Singapore

Switzerland

UAE

UKUS

2000 - 2012 GDP/Capita CAGR (%)

2012

-201

6F G

DP/

Cap

ita C

AG

R (%

)

* Bubble size represents GDP/Capita in current US$

Average: 7.3%

Average: 2.1%

High historical growth; high forecasted growth on a per-capita ba-sis

2007 2008 2009 2010 2011 2012 2015E

11.79.1

10.7 11.6 11.4 12.715

North America

8%18%

2007 2008 2009 2010 2011 2012 2015E

10.78.3 9.5 10.2 10.1 10.9

13.1

Europe2%

20%

2007 2008 2009 2010 2011 2012 2015E

9.57.4

9.7 10.8 10.7 12

15.9

Asia-Pacific26%

33%

The Asia-Pacific region is expected to lead growth in global HNI wealth in

the next three years

Higher growth in emerging economies caused a relatively sharper increase in the number of HNIs and their investable wealth Surging HNIs are likely to drive stronger growth in the sale of luxury goods, including artwork

Source: Capgemini, Merrill Lynch, RBC, ECJ Capital Research


…and exhibit significant demand for art

COMPOSITION OF PASSION INVESTMENTS

High demand for art in the Asia-Pacific region (excluding Japan); ~17.3% of passion investment dollars allocated to art


Sotheby’s growth in recent years largely driven by new markets outside US and UK

SOTHEBY’S MAIN MARKETS

Global Asia/Pacific ex. Japan Japan

31.6% 33.5% 30.8%

19.0% 16.8%29.7%

16.9% 17.3%

12.2%8.0% 9.4%

11.8%

24.4% 23.0%15.4%

Jewelry, Gems, & Watches Luxury Automobiles, Boats, Jets, etc ArtSports Teams, Sailing, Race Horses, etc Coins, Wine, Antiques, etc

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

US UK Rest of the World

~30% in last four years


Asia emerges as a key global growth center for contemporary art…

ASIA: A MAJOR CENTER OF WORLD ART

Source: Art Stage Singapore, artprice.com, ECJ Capital Research

12 of the top 20 art cities globally in Asia

Top 20 cities by % of contemporary art

sales turnover (2012)

Asia accounted for ~45% of global revenue (US$2 bn) in contemporary art auctions during 2011–12 Around a decade ago, 80% of the art market was shared between two centers: London and New York


…driving increasing cross-border art trading

ART TRADE IN MAJOR ART MARKETS

Greater wealth in buoyant economies in the emerging art market has not only improved domestic consumption but also increased imports


-90% -60% -30% 0% 30% 60% 90% 120%-60%

-30%

0%

30%

60%

90%

120%

150%

180%

Austria

Belgium

Denmark

France

Germany

Greece

Ireland

Italy

NetherlandsSpain

SwedenUKUS

Switzerland

Norway

China

Singapore

Brazil

UAE

India

Russia

2010–12 Change in Art Imports (%)

2010

–12

Cha

nge

in E

xpor

ts (%

)

Rising imports of art in Asia

Decreasing art imports Increasing art imports

Net Importer Net Exporter


Auction sales expand 10x in China during 2004–12…

CHINA’S ART MARKET: A TIMELINE

Auction sales in China increased robustly in the past decade; value expanded to €9.8bn in 2011 from €691mn in 2004, with average transaction size up 5x; growth decelerated in 2012, following the global slowdown


2004 2005 2006 2007 2008 2009 2010 2011 2012

6911,516 1,560 2,012 2,152 2,151

5,962

9,808

6,90599,797

112,616 108,923127,851

117,992138,304

219,252

284,941

239,682

Chinese Auction Sales (€ mn) Volume of Auction Transactions


CAGR of Transaction Volume: 11.6%

€6,924

Average Transaction Size (€)

€13,462 €14,322 €15,737 €18,239 €15,553 €34,421 €28,809€27,192

The economic dynamics

and rich cultural heritage

of art and antiques have

helped create a large

market in China


…altering the structure of the global art market as a whole

THE CHINESE ART MARKET

Source: The European Fine Art Fair (TEFAF), Annual Updates, ECJ Capital Research

China’s share in global art market declined to 25% in 2012 largely due to slowing demand and fewer high-

quality, high-priced works

China; 9%

US; 35%

UK; 34%

France; 6%

Switzerland; 1%

Germany; 2%

Rest of World; 13%

2008

China, 30%

US, 29%

UK, 22%

France, 6%

Switzerland, 3%

Germany, 2% Rest of World, 8%

2011

China, 25%

US, 33%

UK, 23%

France, 6%

Switzerland, 2%

Germany, 2%Rest of World,

10%

2012

China was one of the strongest art markets in the past decade, with its share rising from 9% in 2008 to 30% in 2011 Ending the virtual duopoly held by London and New York for the past 50 years


Art markets in Southeast Asian countries too growing significantly

TRENDS IN SOUTHEAST ASIAN ART

Source: ECJ Capital Research, Industry News

Sotheby’s Hong Kong Autumn 2012 auctions marked a record sale of Southeast Asian art

Sales of modern and contemporary paintings amounted to US$15.5 mn, surpassing the pre-sale estimate of US$5.8 mn and achieving the highest auction total in this category

Singapore is one of Asia’s key art markets and one of the most versatile cities in Asia, offering art from across the continent

As compared with its peers, the Indian art market is at a nascent stage, in terms of buying art

Southeast Asian art worth ~US$27mn was auctioned in Sotheby’s fall 2013 auctions, more than double the presale estimate of ~US$13mn

Art auctions in Southeast Asia have constantly grown in the last few years Reflecting wider recognition of the art of Southeast Asian artists and global acceptance of the region’s art


Growing demand for art investments drives growth in art fund industry…

GLOBAL ART FUND AND ART TRUST MARKET (AUM) TREND

Growth is largely due to the investment community’s increasing recognition of art as an asset class that offers strong potential for price appreciation and diversification benefits

2011 2012

1.0

1.6

Global Art Fund Industry AUM (US$ bn)

~69%

40.2%

59.8%

AUM of ~1.6 bn

The US, Europe, Korea,

and Brazil

China

2012

Source: Deloitte’s Art & Finance Report 2013, ECJ Capital Research

Note: Above AUM is a conservative estimate based on publicly available information; this does not include a few large funds recently announced due to lack of information

Almost 83 art funds globally have artwork worth ~US$1.62 billion in assets under management


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

5

10

15

20

25

30

35

Total number of art funds coming to market in ChinaTotal number of art funds coming to market (excl. China)

The art fund industry has emerged robustly in Asia, driven by growth in funds and trusts in China Reflecting growing investment interest in emerging markets

…dominated by strong growth in Asia

GLOBAL ART FUND MARKET – FUNDS RAISED ANNUALLY AND NUMBER OF ART INVESTMENT FUNDS BEING LAUNCHED

Source: Deloitte Luxembourg & ArtTactic Art & Finance Report 2013, ECJ Capital Research

Estimated 83 art funds and art investment trusts in operation in 2012; of these, 58 set

up in China since 2009

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

100

200

300

400

500

600

Actual funds raised (US$) in China Actual funds raised (US$) (excl. China)

Mill

ions


Art offers potential for high returns along with unique associated risks

KEY RISKS/CHALLENGES FOR ART INVESTMENT

Source: ECJ Capital Research

Performance Influenced by Global Economic Environment Although individual sectors in the art market experienced different trajectories of growth, overall performance is tied to the wider economic environment

Challenges in Valuation Trading volumes are extremely small, making it difficult to arrive at an objective valuation Indices such as Mei Moses have a selection bias, as they only account for auction sales

Illiquid Market Sellers cannot always offload as required Large bid–offer spreads make arm’s-length transactions difficult Art investment funds typically have a lock-in period of 3–5 years

High Costs Buyers can expect upfront payment of up to 25% Sales tax, import taxes, transport costs, and brokerage fee add around 10% to the purchase price Ongoing costs incurred for insurance, storage, and maintenance need to be considered (1–5% of the value of the artwork)

Risk of Title and Authenticity Ownership risks in the art industry have evolved over time due to lack of transparency in transactions Although financial institutions have made significant advancements in assessing the value and risks associated with art assets, proper due diligence for

authenticity is often a challenge

High Barriers to Entry Investment in quality art requires significant funds, which is a deterrent for small investors

This material is exclusive property of ECJ Capital. No part of this presentation may be used, shared, modified and/or disseminated without permission. © 2014, ECJ Capital. All rights reserved.

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ART MARKETS: A NEW ERA