While target returns are set as an objective by the investment manager, they are often erroneously interpreted by investors as being yields or coupons – that is not the case. For more information about internal rate of return and target returns, here’s a thorough piece we wrote last month.
In the alternative investment space, it is customary for professionals to declare the target return for a specific fund, or investment opportunity. That number is not a projection, nor an expectation, rather an attempt to set a realistic goal and give investors a ballpark estimate of where returns can fall.
It is not uncommon to see target returns missed entirely, or for funds to have double-digit target returns and deliver negative IRR.
Yieldstreet’s investment team is committed to propose realistic return targets for our investments, rather than showcase eye-popping numbers and then undershoot them. As evidence of that, in our seven year-history as an investment platform, our matured investments generated a 9.71% IRR, just shy of the 10% target return.
While of course this does not accurately reflect the investment experience of all of our customers – some investments ended up returning below target, some others beat it – it is a testament to the hard work of our originations teams in selecting investment opportunities that performed in line with expectations.
While some asset classes performed better than others, more than 90% of our investments performed within 50 basis points of the target returns, which is a remarkable outcome by most reasonable standards.
As of May 31, the total amount of matured real estate offerings was $350 million across 68 offerings. These opportunities had a comprehensive IRR of 9.1%, 50 basis points higher than the original target IRR. Yieldstreet’s matured real estate deals spanned different areas of the US – from the East coast, to the Sun Belt, to the Midwest, to the Rockies – further evidence of the wide geographic diversity of the potential opportunities offered to its investors.
On private credit, Yieldstreet deployed $386 million in capital across 37 offerings, of which 19 were in the field of supply-chain finance (SCF), a widely successful program where the company deployed close to $270 million. Private credit opportunities achieved an average return of 8.4%, 1.7% lower than the target. However, SCF beat target returns by 30 basis points.
Legal finance performed well above expectations, with a 12.2% IRR against a target return of 11.2%. We are quite proud of the result as it was obtained from a number of different investment opportunities, across different legal cases.
Art, transportation financing and short term notes (STN)2. And while matured STN returns may appear relatively low by today’s standards, given the inflation levels and rising risk-free rates, they were not immaterial when they were launched – at a time of record low rates – given the limited lock-up period and potential large downside protection.
Finance isn’t a precise science, and investment returns are not guaranteed. Depending on an investor’s risk tolerance, there can be potential for higher or lower returns, but there is no certainty of outcomes. In these markets, especially, there can be plenty of potential downside risk.
This is why it is notable that in its history as an investment platform, Yieldstreet’s effective returns net of fees almost matched target returns. It is a testament to our thorough investment process, which can potentially reduce idiosyncratic risk, as well as to our reluctance to overpromise and underdeliver. While we could advertise outsized returns, and deliver successfully on a fraction of them, we continue to prefer being honest about what our deals can achieve, and avoid fooling investors.
Private market investing should be built on trust, credibility – and returns. Against these numbers, it is hard to argue that Yieldstreet is not pushing for all three.
1 As of May 31, 2022
2 STNs are excluded from our calculation for the platform’s IRR as they are issued by Yieldstreet to fund its investments. With short-term notes included in the calculation, total IRR for matured products is 8.9%, 20 basis points lower or 98% of the target (9.1%),
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.