The wealthy are borrowing billions against their art collections and lenders are reselling the debt

Banks typically charge 2% to 5% on art loans, depending on the client’s other assets and businesses, while art lending firms and auction houses often charge 6% to 9%. The term of an art-backed loan is typically a year, and owners can usually borrow as much as half of the appraised value of an artwork. This means an owner of a $10 million work by Pablo Picasso, for instance, could typically get a loan for as much as $5 million.

Sotheby’s is making the biggest push among non-banks. The auction house recently formed a partnership with former hedge fund manager Alex Klabin to grow its lending business and develop alternative financing structures.

Klabin is now executive chairman of the auction house’s financial arm, Sotheby’s Financial Services. Previously, he co-founded Blackstone Group-backed Senator Investment Group, parting ways with the multibillion dollar hedge fund about a year ago.

The value of privately held art is more than $2 trillion, Klabin said, yet the art lending business is valued at only about $20 billion. He estimates the potential market for art loans could easily top $400 billion.

“We think there is a tremendous growth opportunity ahead of us,” Klabin said.

Sotheby’s CEO Charles Stewart said the rise of younger collectors, who tend to see art as more of a shorter-term asset, is also driving the growth in art loans.

“It’s not the same mindset as, ‘you’re going to own something forever,’ ” Stewart said. “There’s a view that you buy something, and then when you want something else or are done with it, you sell it and reoffer it. Things take on more of an investment mindset. So that creates opportunity for some of these financial services.”

Lenders say the big opportunity — and the new risk — is in the business of reselling art loans to investors.

Yieldstreet, an online investing platform, just added an $11 million junior loan participation to its Diversified Art Fund 1, which pools together art loans backed by Andy Warhol, Roy Lichtenstein and other top artists. The fund, driven by analytics from the company’s Athena Art Finance unit, has sold nearly $40 million in loans to investors, with a targeted net return of 9.5%.

Cynthia Sachs, managing director at Yieldstreet and the CEO of Athena Art Finance, said the company is considering launching a second art fund as demand grows from borrowers and investors.

“We are really creating a credit market around art,” Sachs said. “People talk about art as an asset class. But you can’t have an asset class without a credit market.”

Sotheby’s said it’s still in the early stages of its expansion. But industry experts expect the auction house could also launch its own fund or securitization structure, packaging art loans as an investment opportunity for other clients or outside investors.

“We’re going to look at all kinds of ways of lowering our costs of capital and building out a sophisticated funding framework,” Klabin said.

The question is whether investors are fully aware of the risks of using art — a notoriously illiquid, opaque and fickle market — as loan collateral and an investment product. Artists who can be hot one year can flop the next. Borrowers, no matter how wealthy they are perceived to be, can have their own blow-ups.