Sotheby's Surprising Sizzle

Hedge fund collectors have taken a hit, but international buyers are pouring into the art market

When the credit bubble popped this summer, many believed that the art bubble inevitably would burst as well. Premier auction house Sotheby's (BID ), which more than doubled its revenues from $317.3 million in 2003 to $664.8 million in 2006, seemed poised to fall.

But a funny thing happened on the way to catastrophe: prosperity. Since mid-August, Sotheby's stock has climbed 45%, to 54.17. Whatever revenues the auction house may have lost from Wall Street collectors have been more than offset by sales to international buyers. Privately held archrival Christie's International, the other globally dominant player, does not report earnings.

Heading into the mid-November New York contemporary art auctions--the bellwether events that attract the most glamorous crowds, the highest bids, and the most media attention--the art market appears to be holding up. Sales at the recently completed fall auctions for photography, to take just one example, exceeded the high end of the presale estimate range. Although some hedge fund managers have lost lots of money over the past few months, it turns out that this group may not have played as big a role in supporting the art market as was widely believed. "It's an entirely New York-centric view that the hedge funds and New York money are driving this market," says George Sutton, who tracks Sotheby's for Craig-Hallum Capital.

Instead, the lift is being provided by art lovers in Europe, Asia, and elsewhere. "The art market is increasingly global," says William Ruprecht, CEO of Sotheby's. Recent financial tremors "have not had a meaningful influence on Russian wealth, Chinese wealth, or most of our principal customers."

In August, as fears escalated about how the credit crunch would affect the art market, Ruprecht commissioned an informal study of Sotheby's top 500 buyers over the past five years. He found that less than 10% were collectors with financial-services wealth.

The increasingly global profile of the collecting community was visible during Sotheby's Oct. 12 auction in London--this fall's first big contemporary art sale--which had been nervously anticipated by auction house executives, collectors, gallery owners, and artists. It was a success: 84% of the works sold, and overall sales were three times higher than last year. Only 17% of the buyers were Americans, compared with 33% or more in previous years, according to Francis Outred, head of evening contemporary sales at Sotheby's. He adds that 38% of purchasers came from Continental Europe, 22% from Britain, 6% from the Middle East, 6% from Asia, and 11% from elsewhere. "While there's a weakness in the mortgage market, there's an infinite amount of demand from other wealth," says Hallum's Sutton.

That's the optimistic case, coming from an analyst who thinks Sotheby's stock will increase by an additional 10% before the end of the year. But history gives cause for concern. Financial crises have not immediately triggered art market crashes. In fact, the art market rose for two years following the 1987 stock market meltdown, then dropped precipitously. During that collapse, plenty of once trendy art could not be sold at any price.

If such a panic recurred this year, Sotheby's would be in trouble. It has provided sellers with a record number of guarantees, which assure consignors of a minimum price while giving the auction house a share of the profits after that minimum is reached. Of the contemporary art scheduled to be sold in New York in November, 78% has a minimum price guarantee. But Ruprecht professes not to worry: "I would not say that the laws of gravity have been repealed for Sotheby's, but it's fair to say that the credit crunch in New York has not affected the market."

By Jessica Silver-Greenberg

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