12 THE ART ECONOMIST

Mr. Hedges shot on location at the Gershwin Hotel, New York City. Portrait by Neke Carson.

James R. Hedges IV has spent the last 20 years or so turning himself into a master of twin pursuits: finance and art. He made a bundle in the former and discovered his passion col-lecting the latter. Now he thinks he has found the perfect way

to merge the two, starting Montage Finance as a means of bankroll-ing galleries and other collectors.

One could argue that if there’s one thing the art world has plenty of, it’s money. But, to paraphrase Woody Allen, sometimes it’s not flowing. Even with all the hedge-fund managers, Russian oligarchs and newly minted millionaires from far-flung locales honing in on art collecting, cash is not always on hand. Hence the rise of asset-based lending firms, which specialize in loans with fine art as collateral.

“We’ve got relationships with clients that have 9- and 10-figure net worths — hundreds of millions of dollars — that still want to borrow,” Hedges says over breakfast at Cookshop, steps from some of Chelsea’s top galleries. “It doesn’t matter how rich people are. People still need to manage their liquidity needs.”

Hedges, 43, built his personal fortune advising the wealthy on theirs. As he discusses the peculiarities of the art market, his ap-proach appears to be measured and analytical. Targeting art, which he calls the world’s “largest unregulated asset class,” worth roughly $4 trillion, for his next business venture is no lark. He compares art to hedge funds in the early 1990s, when they were poised for explosive growth.

“When I started in the hedge-fund landscape, there were about 600 to 800 hedge funds in the world, in ‘92 or ’93, and there were supposedly $40 billion under management. It was totally relation-ship-driven, it was an opaque industry, and it was driven by cults of personality,” he says. “I think if you fast forward, you would describe the art world in exactly the same way. There are 600 to 800 meaning-ful players. There’s supposedly $40 billion in annual sales. It is totally opaque — there is no transparency on price or on transactions. It’s unregulated, which makes it even more opaque than the investment business. And it is certainly driven by cults of personality.”

Hedges, who’s tall and lanky, with a full head of dark hair and bright blue eyes, grew up in an art-oriented family in Chattanooga, Tennessee. His mother, Diane Evans Gratz, was an interior designer, and his father, Jimmy, is an artist, as was Hedges’ great-grandmother, who also started the Hunter Museum of American Art in Chatta-nooga. His grandmother served as a docent there. As a child, he’d tag along on her tours. “The first thing I remember seeing was a Sol LeWitt balsa wood sculpture,” Hedges says. “It had mystery to it in a way that was very exciting to me — what was it that made this thing precious? It was elevated by being in the same room with these sumptuous, enormous, Oscar Bluemner paintings.”

He began collecting in 1989, the year he graduated Rhodes College in Memphis. “I had a little bit of money that I could get my hands on,” he recalls, “and I was very interested in photography at the time.”

H E D G I N G H I S B E T SBY J U L I E L . BELCOV E

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14 THE ART ECONOMIST

Refco, Lehman Brothers and Neuberger Berman. In one instance, he even helped quietly acquire and liquidate a gallery’s inventory. “I started seeing my investment activities overlap with my collecting activities,” Hedges says.

In early 2010, Hedges had what he calls a “midlife crisis,” though he quickly qualifies himself and explains it wasn’t really a crisis but more “like the end of Act II.” Around that time, an investor group approached him about the art-lending business. That’s when he had his “aha” moment and created Montage as the intersection of his two areas of strength. “Art is an emerging asset class,” he says. “There is an enormous need to provide collectors with liquidity, and I believe that galleries need access to lines of credit. I believe the time is very ripe.”

The field, however, has had a shady reputation. Most notoriously, celebrity photographer, Annie Leibovitz, was at risk of losing the rights to her entire archive to Art Capital Group after putting up her photographs as collateral in return for a $15.5 million loan, accord-ing to The New York Times. Housed in Sotheby’s former headquarters on New York’s Madison Avenue, the firm is commonly compared to a high-rent pawn shop. One competitor expressed surprise that it’s still operating, considering the amount of high-profile litigation — Julian Schnabel is just one plaintiff — against it and the wave of bad press. Art Capital did not respond to a request for comment.

Others in the field say demand remains robust. “The banks are still not lending,” says Andrew C. Rose, president of Art Finance Partners LLC, based in Manhattan. “There is still a real liquidity crisis. You still can’t borrow money today.” And while the Leibovitz affair in particular has given art lending a bad name, Rose insists his business is not reliant on foreclosure. “That’s certainly not how we do business,” he says. “We try to be helpful to our clients, and we try to be of service to our clients.”

Hedges is of the opinion that most asset-based lenders are “pred-atory” and a “last resort” for people in desperate straits, charging “near-usury” interest rates of 20 to 22 percent. (Montage will reap about 12 to 14 percent interest, at least a few points below competi-tors’.) “Their business model,” he says, “is predicated on the bor-rower tripping up.” At the other end of the market are private banks, which, he argues, lack dedicated teams that understand the machi-nations of the art world. Banks also tend to demand more liquid assets as collateral, reserving art loans for major clients in what one art lender calls “relationship banking.”

Between these two poles, Hedges sees an enormous gap, and he expects Montage to slide right in. Hedges offers a recent case study: A gallery needed financing for its secondary-market inven-tory. It owned a couple of Julie Mehretu paintings and tried to use them as collateral for a loan from a private bank. The gallery had paid between $300,000 and $350,000 each; the bank offered the gallery a loan for one-third of the purchase price. The hitch, Hedges says, is that the canvases are probably now worth more in the vicin-ity of $1.2 million to $1.6 million each. “The traditional banking world misses the boat,” he says. Montage, by contrast, is offering 40 percent of the current value. (Hedges consults a network of ap-praisers, dealers, auction houses, collectors, art advisers and other experts to determine market value.)

In another case, “a major real estate family” was putting together a deal, and one family member needed a source of cash to get in on it. “They tapped a line of credit secured by their artwork,” Hedges says. “Given time, they could have found that money elsewhere in their portfolio, but this was the cleanest shot, and it was the least encumbered shot.”

He employed what he self-deprecatingly refers to as a “travel-ogue” method of collecting: He lived in Paris for a couple of years; he bought Henri Cartier-Bresson (which he says still hangs in his older son’s bedroom). He visited Mexico; he picked up Tina Modotti. He quickly and easily amassed 15 to 20 good pieces. “Because the photo market was so inexpensive at the time, you could do that as a very young person,” he says. “It was a super-small universe.”

After returning to the U.S., he settled in Naples, Florida, where he found himself with a house full of walls to fill. At first he gravi-tated to what he now describes as the “decorative and pretty” and “part of my experience base.” “I thought I wanted to live with things like a Matisse print, having just lived in Paris,” he says.

He soon, however, felt limited. Around 1994, he read an article in Forbes about art consultants, Thea Westreich among them. Hedges made an appointment with her and told her he wanted to amp up his collecting but needed guidance. Westreich, he recalls, told him, “I’d be a fool not to take you on as a client because you’re enthu-siastic, you’re young and you’re rich, and you’re only going to get richer, I presume.” Hedges remembers thinking, “I like this woman.” Westreich also bluntly ordained an annual minimum he would have to spend on art. “It was more than I had spent. It was more than I wanted to spend,” Hedges admits. “But it was like crack.” In less than a year, he’d surpassed her budget.

Soon she had him buying post-war artists such as Willem de Kooning, Sigmar Polke, Georg Baselitz and Gerhard Richter. Then he moved into Minimalists and Conceptual artists — whom he terms his “greatest love” — including Jim Turrell, Ellsworth Kelly, Sol LeWitt, Dan Flavin, Donald Judd, Robert Smithson and Richard Serra. Next came Warhol, Jeff Koons and Damien Hirst. “Along the way, we always bought contemporary artists like Peter Doig, Chris Ofili, Matthew Barney and Keith Tyson,” Hedges says.

Westreich not only guided him to the right galleries and artists, but, Hedges says, “She was also very shrewd at parachuting me into the center of the patronage discussion.” She made introductions to other collectors and curators, and Hedges joined the drawings ac-quisitions committee at the Museum of Modern Art and the Whitney Museum of American Art’s national council. It didn’t take long for him to realize, “these people are much more fun than investment bankers!” He then became involved with other institutions, includ-ing the Aspen Art Museum, The Drawing Center, the Tate and Dia.

Chris Vroom, who first met Hedges while both were sitting on a film and video committee at the Whitney, describes him as truly passionate about art and artists. “He’s very smart, and he’s affable,” says Vroom, who is now chairman of Art+Culture, an online venture selling artists’ editions. “He knows a lot about art, which is not always the case with collectors.”

While immersing himself in the art world, Hedges was simulta-neously building his business. In 1993, he had founded LJH Global Investments, a hedge-fund advisory dealing primarily with high net-worth individuals and banks with a similar clientele. Along the way, he became a regular commentator for CNBC and wrote a book, aptly titled Hedges on Hedge Funds. He sold LJH in 2004 and turned to private-equity investing. He also made New York his full-time base; now divorced, he shares a town house in the West Village with his partner, interior designer Tom Delavan.

Not surprisingly, many of his clients also collected art. Some began asking him to negotiate deals to buy and sell work. Hedges put together bidding groups in ultimately unsuccessful efforts to buy corporate and private collections, including those owned by

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In the estimation of another friend, Joel Wachs, president of the Andy Warhol Foundation for the Visual Arts, the concept of bor-rowing and lending based on the value of art makes sense in theory, even if he professes not to know the details of how Montage will operate. And he is confident Warhol himself would approve: “Andy was very commercially minded.”

To art-world denizens who are traditionally loathe to talk about the price tags on art — or to admit to it, anyway — Hedges says it’s time to reevaluate. “Any gallerist who suggests art is not a com-modity is deluding themselves,” he says. “I’d think galleries would welcome an increase in capital flowing through the art world.”

The two dominant roles of art — object of desire and asset tool — can coexist harmoniously, he argues. “People who don’t get that,” Hedges says, “are naïve.” �

JULIE L. BELCOVE HAS WRITTEN ABOUT THE CONTEMPORARY ART WORLD FOR NEARLY FIFTEEN

YEARS. SHE SERVED AS DEPUTY EDITOR OF W FOR MORE THAN NINE YEARS, AND SHE CONCEIVED

AND EDITED THE MAGAZINE'S ANNUAL ART ISSUE. SHE IS NOW A FREELANCE WRITER BASED IN

NEW YORK.

With a clientele consisting initially of collectors and galleries —which, in addition to financing secondary-market purchases, often need help with their artists’ production costs — Hedges says Montage is aiming for long-term business liaisons. “It is a relation-ship-driven industry like nothing I have ever seen before,” he says. Down the road, he’d love to work directly with artists as well.

“Art is a very specialized business,” says Vroom. “In order to really serve this market, you have to come from within, but you also have to have knowledge of finance and a set of relationships that will lead people to trust you. Jim is uniquely positioned to succeed.”

Vroom, who also has a background in finance, speculates that Montage could build a $2 billion book of business relatively quickly. “There are many instances of players being capital-constrained,” Vroom says. “He’s going to introduce new liquidity to the market, which is going to make it more vibrant.”

Though Hedges is “clearly in business to generate returns,” Vroom emphasizes he also has standing in the art world and is decidedly not of questionable character. “He has a reputation for caring about artists, being sensitive to institutions, and being very philanthropic.”

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