solving the liquidity trap through luxury assets

Solving the Liquidity Trap

Many affluent individuals have worked hard to develop a fi-nancial plan that helps ensure their quality of life for years to come and maximizes their ability to reach personal and professional goals. But life doesn’t always go as planned:

At times, these individuals may need to generate a considerable amount of cash, whether to fund an attractive business or investment opportu-nity, or simply to manage unexpected expenses such as a looming tax bill. When that happens, it’s critical to have options to provide liquidity without interrupting or compromising carefully laid financial plans.

Luxury assets present a valuable option for freeing up capital—one that advisers and their clients often overlook. Selling assets outright or borrowing against their value can provide an important source of li-quidity, and for some individuals can provide attractive benefits over traditional methods of raising funds.

THE CHANGING ROLE OF LUXURY ASSETSFor generations, luxury assets from fine art to automobile collections played a singular role as objects of enjoyment for the owner. In recent decades affluent individuals have begun considering these luxury assets to be more than just possessions. In many cases, that has meant includ-ing these items as part of their overall financial portfolio.

“Increasingly, we’re seeing people look at a purchase of, say, a piece of artwork as an investment,” says Tom McDermott, Chief Commercial Officer for Borro, a lending marketplace for clients with investments in luxury assets. “It’s not just something to hang on their walls. They see this investment as a way to bring more diversification to their broader investment portfolio.”

Indeed, 76% of art collectors consider their purchases to be investments as well as additions to their collections.1 One reason for that shift is that many luxury items have increased significantly in value in recent years. In the 10 years through 2014, luxury assets including jewellery, stamps, coins, fine wine, classic cars, and art and antiques have increased in value by more than 200%2—more than double the cumulative return of stocks during that same time period, and nearly five times the return of government bonds.

Luxury assets aren’t just for personal enjoyment. They also can help provide financial flexibility.

www.borro.comSponsored by 1

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A SHORT LIST OF EXTRAORDINARY ASSETS Samantha Lilley, MRICS, FGA, DGA, Director of Valuations UK at Borro, says we have a very diverse portfolio across a variety of different asset classes including; works by important Old Masters, Impressionist and Modern Artists, including Monet and Degas, Urban Art such as Banksy. And it is not just the more traditional art we can offer the best deals on, categories such as Luxury Cars, Important Jewellery and Memorabilia are also represented within our portfolio and we are proud to be able to offer the best rates, for the most diverse works, including some historically unique and important Star Wars Memorabilia.

Paul Aitken, CEO of Borro, believes many investors have turned to luxury assets in recent years partly because of the financial crisis that began in late 2007, which highlighted the financial system’s po-tential for tremendous volatility. Items such as jewellery or automo-biles are considered more tangible than assets such as stock shares or bond certificates. “People have begun to think about the hard as-sets they own when they think about their financial planning,” says Aitken. “These items are unlikely to decline in value to zero. In the stock market, a stock can lose its entire value in a day.”

A TOOL FOR WEALTHDespite changing attitudes toward luxury assets, individuals and their trusted advisers—including wealth advisers and trust and es-tate planners—often are reluctant to leverage those assets to meet capital needs.

In a recent Borro/WealthManagment.com survey of more than 300 financial advisers and lawyers, just 7.5% of respondents said clients should consider selling personal assets to meet the need for short-term capital.3 That may be due to a lack of awareness among advisers and their clients that these assets can be leveraged through lending or outright selling to generate money—perhaps because there haven’t been many providers of these types of services to af-fluent individuals and families. “Until recently, it really was just the major global banks who let their very high net worth clients lend against their luxury assets,” says McDermott. “They served a very small and very wealthy audience.” These days, companies such as Borro are making such services available to a greater number of affluent individuals.

That said, most advisers focus on more traditional avenues to raise money: More than half of the survey’s respondents said clients should seek capital through home equity lines of credit (63%), tradi-tional bank loans (62%) and securities-based lending (56%).4

Yet clients aren’t all alike: While one client may benefit from tap-ping an equity release, another might have too little equity to cover the required cash flow. What’s more, the need for capital might be urgent—for example, to take advantage of an immediate business opportunity, or to raise funds to take part in a pressing property investment. In these situations, bank loans and other methods of raising capital may need too much lead time to work through paper-work and a potentially onerous approval process.


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THE VALUATION ADVANTAGE Once a client decides to sell or borrow against a valuable belonging, what’s the timeline from decision to deal completion? We asked Borro’s Samantha Lilley to walk us through the process.

Current market value. Samantha remarks, “Our in-house team of highly qualified specialists, rely on the latest globally recognized market data to provide informed opinions on current market value, within the different asset classes. Drawing up-to-date data from different source points, enables us to get a global view re market value and therefore provide more accurate valuations than our competitors. This is especially important within the fine art sector, were markets are often very volatile. By analyzing and monitoring the current market trends and consulting with our vast network of industry renowned specialists across the diverse range of disciplines our expert team are able to offer the best deals for lending or consigning purposes.”


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THE VALUATION ADVANTAGE CONTINUEDThe process. The Borro team of valuers will request information for all assets. They require images, and information such as medium, dimensions, condition, provenance etc. Samantha explains, “From this information we can give informed opinions of current market values, based on comparable auction data.” Borro offers a bespoke and confidential valuation service which can be carried out either in the comfort of the clients’ own home/office, or by appointment at their London, premises. Appraisers will physically examine the property, discuss provenance and any condition issues, (which can often effect overall value). Samantha expounds, “Once appraised, we are able to provide comprehensive written and online valuations, listing each asset under its own unique reference number, along with an image for every asset. All valuations are confidential and can only be accessed by the client with a unique password and login, which are accessible 24 hours a day through Borro’s online platform.”

Due diligence. As part of our due diligence process we will also consult with more than one specialist, to arrive at the final figure, and consult with a number of online platforms to ensure the highest standard of service is provided to all our customers. All data is passed by to our experienced sales team who will offer competitive rates based on the information provided.

And while traditional approaches may suit some clients, oth-ers may not be good candidates for bank loans or lines of credit. For example, they may have considerable assets tied up in entre-preneurial ventures, leaving them less attractive in the eyes of lenders than borrowers with lower debt levels. Clients and their advisers also may be reluctant to tinker with a carefully built in-vestment portfolio in order to meet a short-term capital need by selling stocks or borrowing against those investments.

A FUNDING ALTERNATIVEWhile many advisers and their clients seek out traditional channels to raise capital, they also may benefit from exploring opportuni-ties to tap their luxury assets. In the UK and US markets, affluent individuals hold some £380 billion worth of luxury assets that are effectively lying idle.5

Meanwhile, luxury asset lenders make just £10 billion in loans annually. That market is expected to double to £20 billion in the next five years as advisers and their clients gain a better understanding of the benefits of leveraging valuable assets such as jewellery, art and antiques.

Consider a restaurant owner who wants to expand into a new market. He applies for a small-business loan from his financial in-stitution, but learns that it may take eight weeks or longer to process the loan paperwork, receive approval and release the funds. Mean-while, he’s negotiating with the property owner for what he believes will be the perfect location for his new restaurant, and wants to move quickly to secure the lease. One solution to cover the security deposit, rent and upgrades to the space is to borrow against his fam-ily’s collection of heirloom jewellery.

In this scenario, the jewellery is collateral for a short-term loan that lets the restaurateur cover the startup costs for the new location while still pursuing the small-business loan. Once the funds are re-leased by his bank, the man can repay the balance on the short-term loan and take back his family’s jewellery. “Most people simply aren’t aware that this is an option,” says Borro’s Aitken. “They don’t have a clue they can do this with their luxury assets. But this can really help people when it comes to managing their finances.”


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of art collectors consider their purchases to be investments

Percent luxury assets have increased in value from 2004-2014

current U.K. and U.S. luxury assets

76%

£380

200%

BILLION

More Than

It’s not just entrepreneurs or investors who can take advantage of the benefits of tapping the capital in luxury assets. Leveraging valuable assets can serve to bridge short-term financial gaps caused by tax bills, unexpected medical expenses or other costs.

Consider an example of a woman whose remaining parent dies, leaving an estate that needs to be divided among the fam-ily members—as well as a large tax bill that needs to be covered before the assets are spread among the heirs. “In this case, bor-rowing against assets may make sense. There’s no capital gains tax, because nothing is sold,” says Aitken. “Why solve one tax problem and cause another?”

DISPELLING MISCONCEPTIONS Affluent individuals have many options for managing their luxury assets. They can go directly through an appraisal network or auction house to sell items, and engage advisers and attorneys to assist them through the appraisal process.

However, more than four in 10 advisers and lawyers say they don’t regularly use appraisal firms for their clients,6 suggesting that these clients’ luxury items may not be considered part of their over-all financial picture. That’s a mistake, says Aitken. “The bottom line is that these advisers’ clients have put more and more of their net worth into these asset classes in recent years, and they need their advisers to help them manage these assets,” he says.

Advisers need to better understand the process of leveraging luxury assets so they can offer a broader and more comprehensive range of solutions to their clients. These may include discussing questions such as:

• What options are available? Borro offers several options, from assistance selling an item or collection (and receiving immediate payment in advance of the sale) to short-term bridge loans or term loans of several months or even years.

• How long does the process take? With firms such as Borro, as-sets can be appraised and terms agreed on in as little as one hour to a week or so for more complex loans and sales.

• Is it complicated? Thanks to a proprietary technology platform, clients can quickly upload information about their items and often can receive feedback from valuation experts without having


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to ship items back and forth.• Is it reputable? Borro employs a 10-person team of in-house

valuation experts as well as a network of more than 300 inde-pendent advisers with specific expertise in a range of fine art, automobiles and other assets. Borro has valued more than 45,000 items and loaned more than £140 million to clients.

• Is it cost effective? Fees for advanced sales, short-term and longer-term loans are competitive with more traditional methods of funding.

• How large are the loans? Borro provides loans of as little as £3,000 to as much as £5 million.

Whether a client wants to sell or lend against a valuable personal item or collection, leveraging luxury assets may offer significant benefits against traditional lending strategies such as equity release or bank loans. For instance, individuals engaged in relatively high-risk businesses may want to avoid borrowing against their primary residence or key business equipment. In these types of loans—called “recourse” loans—failure to repay may mean not only forfeiting the asset as collateral, but also receiving a black mark on a credit report for the default. However, the type of luxury lending Borro is involved in is non-recourse, which means that there’s no additional credit im-pact if the borrower can’t repay the loan.

Ultimately, the ability to leverage luxury assets is another tool financial advisers and trust and estate planners can use to properly guide clients in need of capital. It is critical for advisers and plan-ners to fully understand not only the process of selling and lending these valuable items, but also the role these assets play in their clients’ overall financial picture. “As people are investing more and more into these asset classes, it poses a real challenge—and a real opportunity—for those involved in wealth and trust-and-estate planning,” says Aitken. n

1 Deloitte Art & Finance Report, 2014.2 2015 Knight Frank Wealth Report; Invesco & Lipper Inc., 2014.3 “2014 Trusts & Estates Asset Liquidity Survey,” Borro/WealthManagement.com, 2014.4 “2014 Trusts & Estates Asset Liquidity Survey,” Borro/WealthManagement.com, 2014.5 Christie’s and Sotheby’s filings; IBIS World reports, other industry sources.6 “2014 Trusts & Estates Asset Liquidity Survey,” Borro/WealthManagement.com, 2014.

Why Would I Use Luxury Asset Lending? Three Examples. Small Business Owner — wants to expand into a new market. The small business loan may take eight weeks or longer to process paperwork, receive approval and release the funds. He’s negotiating the perfect location for his new restaurant now, and wants to move quickly to secure the lease.

Estate Heir — needs to determine how to divide an estate among the family members—as well as pay a large tax bill that needs to be covered before the assets are spread among the heirs. By borrowing against the assets, there’s no capital gains tax, because nothing is sold.* Why solve one tax problem and cause another?

Other Investors — may have considerable assets already tied up in entrepreneurial ventures but don’t want to miss an opportunity. Also may be reluctant to tinker with a carefully built investment portfolio in order to meet a short-term capital need by selling stocks or borrowing against those investments. *This material is provided solely for educational purposes. Individuals should seek advice from a qualified tax expert to ensure tax rules are being observed.


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Borro is the leading marketplace for luxury asset lending. The company launched in 2009 in the uk and proceeded to open offices in new york and los angeles. Borro offers loans to high net worth individuals, entrepreneurs and business owners, with clients using luxury assets such as fine art, antiques, prestige and classic cars, jewellery and luxury watches as collateral. Borro has extended over £140 million in luxury asset-backed loans since its inception.

Borro’s platform is built with flexibility and scalability in mind. It integrates seamlessly with partners, servicing loans from £3,000 to £5,000,000 across multiple asset classes. This facilitates growth, allowing Borro’s business to expand with its partners and their clients.

Borro’s investors include: canaan partners (lending club), eden ventures, augmentum capital, rocket internet, ourcrowd and victory park capital. The company’s board of directors includes: nigel morris (co-founder capital one) as chairman, and paul gratton (ex-ceo egg, first direct).

solving the liquidity trap through luxury assets

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