This week, scratching underneath the surface…

Private Eye

You’ve probably heard by now that Emmanuel Perrotin is in exclusive negotiations to sell a 60 percent equity stake in his namesake international gallery to Colony IM, a Paris-headquartered private-equity and real-estate-management firm. And yet, I don’t think the story has gotten nearly as much attention as it deserves—partly because of external factors, and partly because its inner workings resemble nothing that the average art-market professional has ever encountered.

The most vexing part of this unusual pact concerns how Perrotin himself will fit into his own company as a minority stakeholder. The various permutations turn out to be more complex than the equity arithmetic might lead one to believe, and understanding them crystallizes just how much the art business of the 2020s has changed from the art business of prior decades.

The story was first reported by Bloomberg on June 12, aka the Monday of Art Basel week. A press release about the deal went out the same day, thrusting the gallery’s name into plenty of conversations around the Messeplatz during the kickoff of one of the industry’s biggest weeks of the year. Emmanuel Perrotin kept the narrative front and center in his booth later that week by flashing a sticker reading “Sorry No Comment” to anyone hoping to follow up on the announcement. Never let it be said that this gallery doesn’t understand how to commandeer a news cycle.

The terms of the deal, which is expected to close in the second half of the year, have not been disclosed beyond a few broad strokes. What we know is that Colony will take a 60 percent equity stake in Perrotin (the gallery), leaving Perrotin (the founder) with the remaining 40 percent; and that the two parties have been presenting the pact as a “pioneering alliance… to facilitate Perrotin’s long-term growth plan and vision.” Emmanuel Perrotin has also made it known that said growth may include “conquer[ing] new geographies” and even acquiring competing galleries.

But if you’re confused as to who will really steer the gallery once the deal’s been finalized, you’re probably not alone. Stories across the art-mediaverse have relayed the curious idea that Perrotin won’t give up any control of his gallery as a part of the deal despite selling off a majority equity position. Bloomberg reported that Perrotin “plans to stay in charge.” A gallery spokesperson told The Art Newspaper that he “will continue to play a key role in the organization, both strategic and operational, and will retain his role as chairman.”

On the surface, it might seem like Perrotin has an insoluble math problem on his hands, and his proclamations about retaining power are just face-saving bluster. Even if a minority shareholder negotiated a chairmanship for themselves, wouldn’t they still only serve at the pleasure of the majority shareholder—meaning that if they fell out of favor over the long run, they would be just as vulnerable to the axe as any other employee?

Not necessarily, it turns out. But you probably wouldn’t know it unless you happen to be a mergers and acquisitions specialist.

A photo of Emmanuel Perrotin in 2013 under a Paola Pivi bear, Who Told You White Man Can Jump?. Photo: Guillaume Ziccarelli, courtesy of Perrotin Gallery.

Merger Mechanics

After talking to some folks in M&A, I’m now convinced that Perrotin has been telling the truth about his grip on power when and if the pact with Colony goes through. His minority stake really will coexist with his status as the most powerful voice in setting the gallery’s course for the medium and long term.

While this duality sounds counterintuitive, one important reality for private companies is that their economic structure and their governance structure don’t have to match after a merger. To say it another way, the party that owns the majority of a company’s equity doesn’t necessarily get to control the majority of the company’s decisions about how to operate. The balance of power and the financial upside can be independently negotiable.

The language in the Perrotin­­–Colony announcement, as well as the public comments made by the principals (and their spokespeople) so far, imply that this deal’s economic and governance components are not one-to-one—and that both parties are content with where the needle is landing on each dial.

(For clarity, everything that follows is speculation based on conversations with M&A professionals. An email to Perrotin requesting comment went unanswered, and no one I spoke to had inside information about the deal with Colony.)

One clue that this 60/40 alliance hinges on a genuine power-sharing arrangement is the joint press release. Generally speaking, a straight-up acquisition would be announced on the acquiring company’s letterhead, with the acquiring company’s press contact listed as the waypoint for all inquiries. In this case, however, Colony and Perrotin are each represented equally on both fronts, suggesting the notion of a partnership is more than just public spin.

A governance structure like this is more logical than it seems at first. Despite all their evolutions and advancements, galleries in 2023 are still what one source called “a human capital business.” In other words, they succeed or fail based on people, reputations, and relationships. Remove a visionary founder with a proven track record from a thriving gallery, and the odds are that the company craters in value. Which means, in turn, that any institutional investor intrigued by adding an international gallery to its portfolio would also have a vested interest in keeping the founder on board and engaged.

Based on what I’ve heard, the most likely scenario is that the deal between Perrotin and Colony will involve an employment agreement that not only secures Emmanuel’s services for a significant time period but also incentivizes him to perform at the top of his game. There are also probably a series of special rights and vetoes in place to guide operational and strategic decisions, with the likely upshot being that Perrotin himself largely maintains the ability to run the business as he sees fit except for moves of extraordinary cost or consequence—say, the decision to spend several million dollars to open a lavish new permanent location. In those rare cases, he might need Colony’s approval to proceed.

(It’s also possible that the structure of this part of the deal could be inverted, meaning Colony would have broad authority over the day-to-day and Perrotin would hold veto power over extraordinary decisions. But the nature of the gallery business and the structure of this deal make that prospect improbable.)

So, Emmanuel Perrotin can become a minority shareholder in his own company while retaining the most important voice on operations and strategy. The more vexing question is whether a private-equity deal makes financial sense for both sides.

Emmanuel Perrotin outside his Orchard Street gallery in New York in 2018. Courtesy or Perrotin Gallery.

The Sell Membrane

Given that the gallery posted €141 million ($151 million) in sales in 2022, “has always been profitable,” and is debt-free, per Bloomberg, the natural first move would have been for Perrotin to take out a corporate loan to finance his expansion plans. But it’s certainly possible that he didn’t like the terms he was being offered. Interest rates have shot into orbit (or what feels like it, anyway) around the world since early 2021, as we’re all sick of hearing by now, and art dealing’s status as a cash-flow business poor in collateralizable assets hasn’t exactly made most banks excited to lend big bucks to galleries on super friendly terms. In this sense, going to the private equity sector for financing certainly has some appeal.

It’s Colony’s endgame that has left some M&A folks squinty-eyed. The consensus among my sources is that the fund has likely negotiated its way to an outsize chunk of Perrotin’s upside, significant protection against the downside risk, or both. Still, even this prospect leaves the most important part of the equation blank. As one M&A specialist said of Colony after reviewing the public aspects of the deal, “I just have no idea how they get liquidity out of this.”

Here’s the thing: Private equity funds tend not to invest in companies for the sake of stewarding them for decades and decades. Usually, the ideal gameplan is to get involved, grow the business and/or optimize its financial picture by any means necessary, and then exit their stake for a profit.

But the scale of growth matters, too. I highly doubt that Colony would be interested in buying into Perrotin for the sake of taking the gallery from $151 million in annual sales to, say, $171 million. Those gains are barely worth drawing up the deal paperwork. My guess is that the fund invested because its brain trust believes Perrotin can at least double in annual sales revenue, if not go 10X. That’s an ambitious goal for a gallery that already operates in 10 cities and works with close to 100 living artists.

It would explain why a gallery spokesperson told TAN that Colony’s investment would help Perrotin by “accelerating its international deployment and developing in new activities,” including strengthening its offerings of “derivative products” (presumably meaning more editions and artist-licensed merch), its nascent resale operation, and its acquisition of “‘white label’ galleries”—a retail-sector term for when one company buys another’s products outright and rebrands those products as their own. (My guess is that this is what Perrotin himself had in mind when he told Bloomberg about the potential to gobble up rival dealers.) Those are big-time moves aimed at a big-time payoff.

The partnership also positions Perrotin to benefit from Colony’s relationships with lenders. Because of their size and frequency of dealmaking, institutional investors tend to get better (sometimes drastically better) financing terms than businesses that might take out a corporate loan once or twice a decade. This means that, as long as Colony is a shareholder in the gallery, Perrotin could receive the same white-glove treatment, meaning sweeter, faster deals for any additional financing that might be useful.

Assuming the plan works, however, Colony only really benefits by finding another buyer for its stake in the supersized, super-profitable Perrotin. It’s likely that the terms of this process are also being hammered out in negotiations—and that they are their own little labyrinth. Can Colony flip its equity stake to an institutional investor willing to pay a good price, or does Perrotin himself retain some influence over the selection of the next buyer, at least under certain conditions? If he doesn’t like the outcome, what mechanisms are in place to keep him in the fold under new management? A noncompete with fangs will almost assuredly be part and parcel to his employment agreement with Colony, but how could he be prevented from, say, retiring in protest?

All of these questions and many more will likely need to be resolved before Colony’s investment in Perrotin can close. Their existence solidifies this deal as an unusually bold reflection of the art market’s financialization and global growth ambitions in the present day. But it also clarifies that the more (and the more creatively) the industry expands, the less equipped traditionalists will be to even understand what they’re up against.

That’s all for this week. ‘Til next time, remember: the only constant is change.