Q4 2023 Letter from the Chief Investment Officer

December 18, 20234 min read
Q4 2023 Letter from the Chief Investment Officer
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What a year…

The opening of 2023 witnessed the continuing epic standoff between persistent inflation and an equally persistent Fed, determined to curb the trajectory of the economy. As the battle wore on, market participants feared a severe recession and continually tried to predict “peak rates”. As we exit 2023, the much-hoped-for “soft landing” seems more realistic to many, and recent public market performance has reflected that optimism. While the market feels more stable, there remain economic and geopolitical headwinds that may introduce negative volatility into the public markets over the course of 2024.  

Against that backdrop, our conviction in the strength of private markets is as strong as ever. As our Founder and CEO Michael Weisz discussed in a recent letter, capital flows into private markets continue to gain momentum as investors look to improve the risk-return profile of their portfolios. 

We expect 2024 to offer a breadth of private market opportunities as the economy continues to work through the current inflation and rate cycle — and the resulting repricing of assets and risk. 

Our areas of specific focus are detailed below.

A robust private credit landscape

In 2023, traditional banking institutions significantly scaled back their lending activities — creating a vacuum for private lenders to fill. We see this “Golden Age” of private credit, characterized by significant dry powder ready to deploy, higher quality borrowers, and investor-friendly structures, continuing into 2024. 

In addition, with a significant volume of debt coming due in the next two years, we anticipate a unique environment for opportunistic refinancing solutions in 2024. Our flexibility as a credit investor will position us well to compete for these potentially attractive opportunities. 

We see elevated interest rates as a fleeting opportunity. After hitting the peak Federal Funds Rate, the Fed typically cuts rates sharply over a 12-18 month period. Investors may consider “locking in” private credit yields now at a fixed rate, or floating rate with a floor, as it appears we may have reached the end of this rate hiking cycle. 

At Yieldstreet, we continue to emphasize offering a breadth of asset-based credit opportunities in the 2 to 5-year duration range. As some indicators point to increased defaults in the new year, we focus on diversified offerings underwritten with conservative loss assumptions and other credit enhancements to help protect investors. 

Real estate: Seeing beyond the headlines

As the real estate environment regains its footing, resetting property valuations and elevated interest rates have created both headwinds and tailwinds for investors. The intricacies of location, sector, and investment strategy are more important than ever. 

Our advice to investors: Don’t dismiss the asset class entirely because of the narrative around office buildings in major metropolitan areas. 

We see significant opportunities in real estate investments with a contractual return component. This could span everything from a traditional short-term bridge loan to newer, promising structures like land banking. As projects seek additional sources of capital, we expect a robust pipeline of debt opportunities into the new year. 

We remain hyper-selective, approving less than 5% of real estate investments we evaluated this year. 

Finding diversification in specialty asset classes

With lower-correlation returns top of mind, we expect to continue to deliver new opportunities in the following specialty asset classes, among others, in 2024: 

Legal: The asset class offers a compelling value proposition as investment performance is generally driven by legal outcomes, not the stock market. We continue to focus on providing a range of legal finance structures — from pre- and post-settlement portfolios to highly diversified funds.  

Art: The art market has shown resilience throughout market cycles, often holding its value and even appreciating during market downturns. Art can also serve as an effective hedge against inflation — both in debt and equity form — as its value tends to move alongside increases in the cost of living.

Building a balanced portfolio

During my last six months at Yieldstreet, I’ve had the privilege of meeting with many of our investors like yourself. In our conversations, one key theme stands out: Every investor has goals in mind when they come to Yieldstreet. 

For some, it’s the pursuit of strong risk-adjusted returns. Others are looking to offset their lifestyle with regular income. And many are looking for a balance of both. 

But building a portfolio that achieves a particular outcome isn’t always straightforward, especially with private market assets that each have unique qualities. With this in mind, you can expect the following in the front half of 2024:

Model portfolio strategies: We’ve designed a range of sample private market portfolios aligned with various investor goals. These strategies are intended to serve as a framework to guide your portfolio’s construction. 

Managed portfolios: Our forthcoming automated investing solution will build and manage a private market portfolio in alignment with one of the model portfolio strategies referenced above. This first-of-its-kind product is expected to make achieving holistic private market diversification easier than ever. 

Closing thoughts

We are entering the new year with a renewed sense of optimism. Thank you once again for your continued trust in Yieldstreet. Here’s to a prosperous 2024.

Warm regards, 

Ted Yarbrough
Chief Investment Officer

View PDF of letter

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