Due Diligence At Yieldstreet

January 17, 20226 min read
Due Diligence At Yieldstreet
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At Yieldstreet, we offer a diverse range of unique private market investment opportunities that offer potentially attractive benefits to investor portfolios. However, before an offering makes it onto the Yieldstreet platform, it must undergo a stringent multi-step vetting process, designed to holistically review an investment opportunity from various risk lenses, with the goal of minimizing the likelihood that an offering on the platform will fall short of its initial expectations. 

Our multi-step curated process is the reason that most investment opportunities we evaluate may never make it onto the platform. In fact, since 2018, less than 10% of all investment opportunities presented to Yieldstreet made it onto the platform1

Why this is important: As Yieldstreet canvases and curates alternative investment market opportunities, the investments that ultimately pass through the multi-step process must be able to withstand our vetting process to ensure a resilient investment structure that seeks to minimize surprise downside outcomes.

The vetting process includes five stages:

  1. Originations & Screening
  2. Diligence
  3. Assessment
  4. Committee Review
  5. Investor Decision

Stage 1: Originations & Screening

The process begins with the Yieldstreet originations team, which screens each opportunity and prospective partner. Yieldstreet leverages its network to access opportunities from multiple sources, including partner originators with successful track records.  Yieldstreet develops these partnerships with originators through a stringent screening process. 

Only a handful of potential opportunities are allowed to progress through the investment vetting process. At the initial stages we eliminate the potential risks of doing business with those subject to prior scrutiny by others – including past material litigation or even certain government investigations into companies and the decision makers behind them.

Stage 2: Diligence

After the first screening, both the originations and investment teams evaluate a multi-step review of the track record, experience and reputation in their respective asset classes.

The Yieldstreet investment process takes a long-term view, looking for partners whom Yieldstreet and our investors can grow with beyond any given opportunity. We pride ourselves in partnering with originators who understand our investment ethos (performance, transparency, openness, discipline, structure and rigor), our mission to provide more access to private market investments and whom we and our members can develop deeper relationships with or a “familiarity factor.”

We take a structured, rigorous and holistic approach when scrutinizing originators and opportunities. For example, in evaluating an originator partner, we make the decision after our structured assessment based on multiple factors, including the following:

  • Management team experience, stability and exit strategy: We assess partners’ domain, operational, industry sector, and geographical experience and how the team design aligns to the origination, investment and exit strategy. We also assess cohesion of the origination partner team in not just good times, but review historical stability in down markets.
  • Demonstrated track record and external validation: Typically verified by analyzing past track records, the current investment portfolio, performance to comparable funds, historical performance metrics, reoccurring investors, and external reference checks. We want to verify our partners have a documented history of putting money to work and also meeting performance targets. We typically target firms with track records ranging from $50M – $2B+ in total deployed capital.
  • Alignment of interest: We assess the management team’s incentive structure, reputation, independence and self-investment and alignment of interest in compensation. 
  • Infrastructure and overall strategy: Understanding of the originator’s scope of operations (team size, backgrounds, process manuals, reporting systems, underwriting guidelines, etc.), deal flow strategy, hands-on approach, investment focus, fund size, and exit strategy alignment to the overall strategy. 
  • Integrity: Formal diligent background checks on key principals of the firm coupled with our own independent research and referrals. The process follows a deeper investigation of key issues based on our holistic diligence process.
  • Regular reviews of originator / sponsor relationships: Yieldstreet continually refreshes its assessment of key performance indicators to ensure views remain current and are updated to reflect actual experience (positive or negative).

This assessment is a mix of the objective (e.g., a track record is subject to verification) and the  subjective (e.g., are we comfortable with the principal members of the partner?).   

Stage 3: Assessment

After the investment survives the first and second stages, the opportunity is then passed along to the respective Yieldstreet investment team responsible for the relevant asset class. For example, a multi-family equity ownership opportunity would get passed along to Yieldstreet’s real estate team and a litigation opportunity would be passed along to Yieldstreet’s legal finance team.

The investment team’s work plan begins with a review and evaluation of the due diligence conducted, and assumptions drawn, by the originator or internal equivalent presenting the opportunity.

The investment team will conduct their own assessments on the investment opportunity. This next step is one in which the breadth and experience of Yieldstreet’s teams can play an important role in identifying issues with a potential transaction. The team will evaluate components of a deal including:

  • Investment Thesis
    • Market trends and industry analysis, study of key players and stakeholders in the investment project, financial potential with emphasis on growth potential & cashflow and reviewing sensitivities, including possible negative outcomes
    • Assessment of Collateral Valuations support
      • Review of any financial architecture for enhanced returns
      • Insurance policies
      • Appraisal process
      • Cash flow characteristics, legal documentation and security perfection
    • Asset Third-Party Reports
      • Appraisal, condition, environmental, field exam, insurances, etc.
    • Borrower / Sponsor
      • Management bios, background and experience, background check & investigations, personal financial statements, tax returns, bank statements, etc.
  • Corporate & Investment Overview 
    • Organizational, legal, and capital structure
  • Underwriting & allocation
    • Evaluation of key strengths and weaknesses of the transaction, including the financial and legal structure of the transaction
  • Documentation & legal
    • Review of key legal agreements, review of servicing and collection policy and procedures and other relevant documentation such as sub-advisor agreements and security perfection
  • Monitoring
    • Continuous monitoring of debt service coverage, financials, forecasts, budget collection policies, collateral tracking, etc.
  • Performance validation
    • Investment performance details including granular investment data and external validations

In many instances, the investment teams will also work with and rely on industry-leading specialists. This may include additional market research to confirm certain assumptions that will influence an investment’s potential return or may include an industry expert to assist in providing a different perspective on a potential investment. 

Yieldstreet carries out deal transaction “post mortem” reviews to compare outcomes to

underwriting thesis to ensure continual learning and improvement where appropriate.

Stage 4: Committee Review

If the Yieldstreet investment team responsible for an opportunity determines to move forward, the next steps are passing through additional checkpoints and committees, which are composed of different groups of resources for each investment strategy.

For each investment, the respective Asset Class team will prepare a detailed Investment Committee memo outlining the investment thesis, associated risks & mitigating factors and downside protections. The Investment Committees are designed to help identify any potential risks and scrutinize and challenge the investment team’s conclusions. Each Investment Committee is responsible for evaluating, identifying and approving the investment limitations or constraints and will determine appropriate investment sizing based on portfolio construction and concentration guidelines. This process calls for an ongoing dialogue between the sponsoring investment team, investment teams from other asset classes, capital markets, internal risk management professionals and legal.

Basic to this process are the Green Light Committee (GLC) and the Credit Committee (CC). An investment team formally submits every potential offering to the GLC, often soon after the investment team has begun its review. The GLC is a formal opportunity for the teams to identify key considerations and risks that the investment team will need to address and review before moving forward. 

The Credit Committee (CC) considers opportunities later in the process, ensuring that any considerations or questions raised before the GLC have been appropriately addressed. The Investment Committee then considers the opportunity once more, and will only clear an opportunity for the Yieldstreet platform following a vote of the Investment Committee that excludes the presenting investment team. 

Stage 5 – Investor Decision

Once an investment opportunity has made it to the Yieldstreet platform, it still is subject to what we consider the most important vetting stage: our investors’ own decisions. Yieldstreet is ultimately all about empowering investors to exercise their own judgment, based on their own investment philosophies, and educated by the great wealth of information available to all of us. Just because we are comfortable offering a deal on the platform does not mean it is the right deal for any particular investor. That is why we urge investors to carefully read the offering materials – including the description of the opportunity and the critical risks we have identified and disclosed – when considering whether to participate in any of the opportunities that they see online.

1. As of 12/31/2021, based on number of investment opportunities