One symphony’s dance with capital markets

Much has been written already about the New Jersey Symphony’s decision to sell their collection of rare string instruments (here’s the story in the New Jersey Star-Ledger, and here’s fellow blogger Drew McManus’ reporting on the topic). Beyond the artistic, marketing, or public relations issues surrounding the decision, a few business issues are getting buried in the coverage. Among them:

Capital Issues
The instruments were a capital investment, and their purchase shifted the capital structure of the symphony. As Clara Miller at the Nonprofit Finance Fund tells us often, changes in capital invariably alter the structure and behavior of all areas of the organization, and such changes should only be made with great care and consideration.

In the for-profit world, decisions to invest in capital are based on expected future returns on that investment (more equipment leads to greater productivity, or lower costs, or access to a wider market, for example). In the nonprofit arts, those calculations are necessarily more complex.

In theory, arts organizations invest in things for two reasons. One reason is similar to the for-profit world: the expectation that an investment in infrastructure will improve the organization’s bottom line (through increased sales, or more and bigger contributions by enthusiastic donors). The other reason nonprofit arts invest in capital is to enhance their ability to deliver their stated mission — a museum adds exceptional art works to its collection, a theater builds a new space. Of course these two reasons are closely related, but they also suggest different financing strategies (reason one is intended pay for itself through increased net revenues over time, reason two will not).

In New Jersey’s case, they seemed to be playing both strategies simultaneously. They expected the exceptional string instruments to garner attention and adoration from more and more ticket buyers, and spark excitement among their donors. Plus, they perceived the purchase as an aesthetic choice requiring more altruistic philanthropy. At the same time, they decided to absorb all of the risk of both strategies buy purchasing the instruments outright, rather than financing access to them in a more distributed way (investment partnership, separate nonprofit trust, bond financing, etc.).

Influencing the Market
Another interesting element of the announcement is its probable impact on the rare instrument marketplace that they intend as their financial savior. The international market for rare string instruments is extraordinarily limited. But like any other market, it’s driven by the forces of supply and demand. Essentially, by announcing their intent to sell all of their instruments, the symphony is radically increasing supply and therefore influencing the demand (that is, the price) of the instruments. They may not have intended to announce their decision with such a flourish. But that flourish may well have cost them millions.

Finally, the sale raises interesting analogies to the museum world, where organizations are extraordinarily strict about how and why they sell their works of art. Because they are presumed to buy, preserve, and present artworks for the public trust (hence their nonprofit tax status), museums are sharply criticized when they ponder selling that art to save their bottom line (see this story, for example). Granted, a symphony is not a museum. But one could argue that their purchase of these instruments was an investment for the public trust, and their return to the private market — where they will likely not be played in public — is a violation of that trust.

Is a rare violin a work of art or a means of production? If it is both, how do you untangle the two in your policies on selling it?

A sad situation for the symphony. A complex set of questions about symphony finance.


  1. says

    Talk of deaccessioning abounds these days but talk of fiscal responsibility and business realities while administering a non-profit is rare. Thanks for your blog.
    I thought you might be interested to see a solution (that is fiscal solution) to the Barnes Foundation’s problems I submited as amicus during their trial to move. The judge referred to my plan but then ignored it in finding for the plaintiff. Irrespective of this travesty, my plan would have solved their fiscal problem, by selling not paintings entire but by offering for sale temperary partial, undivided interests in the fee simple (title) to selected paintings that would convey possessin of the whole paintting for life but which must be returned to the foundatin as a gift not later than the partial share owner’s last will and testament.
    In this way, the Barnes could have raised $200M for endowment without violating AAMD guidlines and stayed in Merion while strengthening – not jettisoning – the founders original bequest. The plan is posted on my web site above: I would be pleased to hear your reaction to it.