Laura Stewart: There have been many banks and consortiums who have attempted to put together successful art investment funds and many have failed. Why is The Fine Art Fund Group different?

Philip Hoffman: That is a good question. I think there are several factors. First, many of us working at The Fine Art Fund Group were in the art business first, and the investment business second, so the fund is run by a group of people who are both passionate about art, and whose expertise are unparalleled. If you don’t have that combination and are looking at art as just another investment vehicle like a stock or a bond, you will inevitably fail because the pricing of art and the indices that are available to look at markets are far more difficult to compile and analyze than those for something like a commodity.

LS: That’s interesting. Explain what you mean?

PH: Well, the “mark to market” price for, for example gold or pork bellies is easily graphed on a daily or even minute by minute basis. In art, no painting, or sculpture or object is exactly alike, and the price is really ultimately determined by what an individual is willing to pay at any given moment. In essence, the market is still far more obtuse than others, and margins are wider, as the move of art from the auction — or sort of wholesale market, to the retail, or dealer market can be shrouded in secrecy, and so the “mark-up” is only really known by insiders with many years of specific art historical expertise

LS: What got you into the art investment business in the first place?

PH: Actually that is a funny story. As a businessman, my father decided that all his sons needed an accountancy training, so when I finished University with an aptitude for numbers, I joined KPMG. Soon after joining, I was given a few plum assignments where I was essentially outsourced to different companies in Saudi and in other parts of the world. I had the bug for rare books and 1920s Heath Robinson cartoons but never the big art masters. Eventually, at the age of 27 I ended up at Christie’s as Finance Director, then the youngest member of the Senior Management team. From there, my education in both art and the business of art really began.

LS: That was during Christopher Davidge’s tenure as CEO right?

PH: Yes, that’s right, in the 1990s, and the market was booming and it was a very exciting time to be working at one of the premier auction houses and learning how the mechanisms of both the auction business in particular and the art market in general worked.

LS: And so through the contacts and friendships that you made at Christie’s with experts and dealers in London, you decided to embark on a business of your own in art investment.

PH: I started The Fine Art Fund 12 years ago, and I had a few simple rules. First, although we were dealing with serious amounts of money, beautiful works of art and very sophisticated clients, I vowed that while foremost we would do well by our clients, our focus would be professionalism, profit and fun.

LS: It’s no fun if you lose money, so how were you able to keep your business growing and get the returns that you have? As I understand it you currently have something like $200m under contract and clients from more than 23 countries?

PH: Yes, you’re right. We are not perfect, we have made a few bets that didn’t work out, but overall you are correct, overall we have had a lot of success in sourcing and buying very special works of art for a good price, holding on to them, and either selling them for a nice profit, or seeing their value increase. That is really down to one thing: our experts. I was extremely choosy in putting together the team. They are to a man (and woman) the leading experts in their given field. They have the longest amount of time in the business of anyone at the top of their field, which has given them an invaluable list of clients, contacts and information. Most importantly, they are honest brokers who are passionate about art. Art lovers first and businessmen second, their characteristics lead them to pursue beautiful or rare work with a sterling provenance in a way that one who is focused on the margin might not.

LS: Yes, having worked in the art world for a very long time, I was really blown away by your team. Tell me about some of them?

PH: Well, from Johnny van Haeften, who is our expert in Old Masters to Ivor Braka, our expert in Modern and Contemporary art, our advisors are true connoisseurs who, to use a hackneyed phrase “ know where the bones are buried”. As I mentioned we buy 95% of our art privately, which is quite unusual in this market. This is a result of the access our experts have to clients and discreet information about when and where a particular work of art might become available. Previous art investment funds have failed because they bought certain “schools” or “names” that they thought would bear fruit, but in the art world, it is really down to the particular and singular work that is the key to finding value. For example, there might be two De Koonings of the same period on the market for a similar price. What some buyers would not know is that one of them had been “shopped around” or had a questionable provenance, or was not in the best condition, whilst the other had the opposite attributes. This is where true expertise comes in. The condition of a stock certificate is not of any importance. The condition of a picture, and who owned it previously can mean the difference between utter failure or spectacular success in the market.

LS: You are here in Bahrain on your way to Dubai, where you will be launching your office and I believe, the only other HQ of The Fine Art Fund other than London. Other than the obvious reason that there great wealth in the Gulf, what other reasons made you, your Board and Executive team choose Dubai rather than say, New York, Los Angeles or Hong Kong as the second bricks and mortar location for the firm?

PH: Well, it happened organically. Yes, you are right. Part of the reason was that there are a great deal of people with great disposable wealth who understand the value of diversifying their portfolios in tangible assets in the UAE and the wider Gulf region. However, in addition to the fact that we see the MENASA region as one of the next areas of great growth in the art market, and one that is easily accessible to the other growing markets in Asia, we were also able to put together a very good and mutually beneficial deal with Emirates NBD. Once that was worked out, it made good sense to expand our services there.

LS: You mention that one of the foundations of your business philosophy at present is that with the shaky financial markets, the domino effect of the European and U.S. debt crises, art can be an attractive “hedge” and a fun and profitable alternative for investment diversification. Isn’t there a built in danger, however, that art is also — especially at the high end of the market in which The Fine Art Fund Group deals– notoriously and historically difficult to value on a basis of critical mass.

PH: Yes, that is true. When something like a 1903 blue period Picasso comes on the market in good condition and with a great provenance, the price is really whatever two parties, whether they be a private collector or institution, are willing to pay. However, I truly believe that in 99% of the cases in which The Fine Art Fund Group have purchased a work, where always four of our leading experts have evaluated every aspect of the art work, I believe we have the “eye”, the historical market context and the information necessary in order to avoid being burned.

LS: You are currently offering clients either a “buy in” in the large fund, in which they invest money and reap a return based on a “basket” of art that you hold, buy and sell, or they can create a “personal account” where they can be the arbiter of what is bought and sold. What percentage of your current capitalization is in the former, and which in the latter?

PH: Globally it is about half and half. In the Middle East though a lot of our clients like the control, liquidity and involvement to have their own personal account.

LS: Finally, what sectors, either geographic or stylistic do you see as “growth” sectors in the market, both from a creation and market perspective? And which do you see either flat-lining, or headed for a downturn. Or is that a “state secret”?

PH: It is difficult to tell. Many people thought that the Indian market was on the up a few years ago, and that seems to have slowed in terms of market presence. I wouldn’t say state secret, but a lot of careful due diligence from our team goes into working out the next ‘big’ area – I would advise that you watch this space.