Over the last 30 years, financial regulators have slowly but steadily clamped down on the ability of insiders – those with material information about a company – to profit at the expense of the rest of us.
But there is another market where practices such as insider trading and front-running continue to run free: the art world. ‘It makes it a lot easier to be a winner when you can do all this legally without violating any law,’ says Ruediger Weng, chairman and CEO of Weng Fine Art.
As the boss of a publicly listed art dealer, Weng sits at the intersection of the financial and art markets. He has loved both worlds all his life, working initially in stockbroking and asset management before founding Weng Fine Art in 1994.
At first, his company focused on the wholesale art market, so it only supplied galleries, auction houses and other dealers. The need for additional capital saw it go public in 2012 with a listing on the Frankfurt Stock Exchange, an unusual move for an art dealer then (or now).
A key change took place in 2015 when the company launched Weng Fine Art Online (WFA Online). This subsidiary operates in the editions business – where artists make a series of works based on an original piece – and sells direct to the public. Over the last five years, it has become the most profitable part of the overall firm and Weng hopes to list its shares publicly in the next two years.
Amid this growth, Weng acts as a one-man investor relations team, responding to emails day or night from interested investors and posting directly to Germany’s financial notice boards. ‘People like that when they ask a question, they get the answer from the CEO instead of somebody who is just a spokesperson,’ he says.
Welcome to the Wild West
Dealing in art can be ‘a lot more profitable’ than other businesses, says Weng, given the ability of insiders to use their privileged position to their advantage.
‘We can legally practice insider trading, front-running, whatever you want,’ he explains. ‘Part of the profit is that we know more than anybody else about what the artist is producing… We know how many [works] are left – nobody else knows – so we know when a certain price is going up; we know this before it’s happening. That means we can still buy for the old price while knowing that in a week or so the price will rise.’
The situation is comparable to the stock market 30 years ago, says Weng, when the use of inside information was far more prevalent, and tolerated, than it is today. ‘Of course, brokers then made a lot more money than brokers today, because of no regulation. And this is the situation in the art market: there is no regulation,’ he says
This state of affairs is not necessarily to the disadvantage of the buyer, argues Weng. ‘I can take care of an artist and in addition, [do a lot] better also for the buyer,’ he says ‘I can tell buyers, Okay, that’s the time to buy – there are only 10 left in the market and we have them all. That’s insider knowledge, but when I give this information, the buyer feels a lot more comfortable.’
Why go public?
While it’s hard to find other listed art dealers – Sotheby’s quit the NYSE last year, and Christie’s delisted more than two decades ago – Weng says there are clear benefits to being a quoted company.
‘Why are we on a stock exchange? The most important reason is because our business model is very capital-intensive,’ he says. ‘We are not brokering art; we are buying art, taking all the risk and then selling it. That’s different from what auction houses do: they just work on commission – they’re brokers.’
A listing has also boosted the company’s financial profile. ‘As soon as our banks saw us on the stock exchange, it gave us a real push and we could get a lot more capital from them,’ Weng explains. ‘And on the stock exchange, people are happy that we have access to capital from the banks.’
While the art world is an exciting place to invest, it may not be the first place investors look for reliable returns. Auction houses regularly feature items that hugely over or underperform expectations, giving the impression that art prices are volatile and unpredictable. That may be true with unique items, but the editions business – where there may be hundreds of copies of the same item – offers a far more stable environment for companies to turn a profit, says Weng.
‘If you deal with editions, it’s a much more homogeneous product,’ he adds. ‘You can compare, you can follow a market that is a real market, you can see them in auction... The differentiation is down to condition, service, shipping costs and things like this. But it’s a lot more stable, and it’s a lot easier to calculate.’
The ecommerce business received a major boost through a deal with Jeff Koons to sell versions of his balloon animal artworks, a focus of the renowned artist since the late 1970s. Koons’ balloon sculptures have broken the record for the world’s most expensive artwork by a living artist on more than one occasion. For example, last year hedge fund manager Steven Cohen paid a record $91.1 mn for one in the shape of a rabbit.
WFA Online offers smaller, edition versions of some of these balloon sculptures, including rabbit designs, with prices at the time of writing of $13,000.
‘Getting that contract was our home run,’ says Weng. ‘Because Jeff Koons is the most valuable artist in the editions market, it was a bit unlikely that we, as a small company in Germany, would get a contract with him. But he wanted to have a guarantee... and there are not so many in this fragmented market, which has a lot of small players, that are able to supply this kind of guarantee.’
Going direct
When it comes to IR, Weng says he has to be careful not to generate excessive interest. ‘We don’t have many shares to sell,’ he says. ‘Most investors we have keep them long term... I have to find a way to keep the current shareholders happy [and] find a few new investors, but not too many.’
He favors direct contact, either through emails or by replying to questions on Germany’s popular online investor forums. ‘What people like most is that it is me who is answering the question,’ he says. ‘They write to me, day or night, and they’re happy that they get, day or night, an answer.
‘In Germany, we have these boards taking care, especially, of small caps [and] micro-caps. I’m active and I communicate on there as the CEO of the company, which is rare. I’m more or less the only one who is doing that.’
Weng also holds long annual shareholder meetings, where he says he is happy to field questions on whatever investors want to ask, be it accounting methods, the balance sheet or strategy. In addition, twice a year he goes to capital markets forums, the most recent of which resulted in two institutional investors coming on board.
What kind of information do investors want to know? First, says Weng, people want to understand the art world and how it compares with the financial markets. After that, they want to hear about growth potential.
‘There is no market leader. It’s a heavily fragmented market,’ he explains. ‘If we find the right way of consolidating things, if we can leverage, then the sky’s the limit.’
Not an investment
Given the advantage insiders have in the art world, there is some debate over whether the industry needs more regulation. This is more true in the US, says Weng, because in that market they see ‘buying art also as a kind of investment, and then they start comparing practices with the financial market.’
In Germany, by contrast, people are less concerned, he says: ‘People don’t really care about art as an investment... As long as the price seems to be fair for them, they’re buying.’
At the same time, Weng acknowledges that the opacity of the art market draws in people who feel the financial markets, now heavily regulated, have lost much of their edge and excitement. ‘They hate all this over-regulation, that they are not allowed to say, to talk, to do whatever – you cannot move anymore. I’m so happy that I’m not in the financial market anymore,’ he says.
With his IR hat firmly on, Weng argues that those looking for an investment should put money in the art dealer, not the art itself. ‘Better put your money in the companies than in art, because you don’t have insider knowledge – but we do,’ he says.
