Sourcing Yieldstreet opportunities and the role of origination partners
At Yieldstreet, we work with a variety of partners across each asset class to bring deals to market. Origination partners play the critical role of bringing opportunities to Yieldstreet for launch consideration on the platform. Yieldstreet only works with origination partners that are vetted by Yieldstreet’s internal Originations team. Let’s take a closer look at the role that an origination partner plays in the lifecycle of a Yieldstreet offering.
What exactly are origination partners?
Before we jump into the role that origination partners play, let’s take a closer look at who exactly origination partners are.
Origination partners are a key element of the ‘supply’ side of Yieldstreet’s business. The term ‘origination partner’ is a catch-all for the mix of institutions that source and review deal opportunities. They are individuals or firms that Yieldstreet works with to identify the opportunities that ultimately become available on the Yieldstreet platform. They can include direct borrowers, brokers, banks, investment funds, real estate development firms, and other specialist institutions in their respective markets. Broadly speaking, the origination partner’s role is to source opportunities, perform borrower and collateral due diligence, and provide guidance on the terms of the underlying loan with the Borrower. Many originators also service the loan after it has closed. Origination partners also may themselves fund all or part of the underlying loan. Yieldstreet uses different underwriting criteria for each asset class to help determine the offerings on the platform.
The underwriting criteria may include requirements like deal size, the Yieldstreet portion of the loan, where the loan sits in the capital structure, the type of collateral securing the loan, loan length, rate, and other risk factors.
When the originator also services the loan, the origination partner also typically manages the transaction and the relationship with the Borrower. Origination partners are also expected to intervene if any issues arise, as they generally continue to hold a piece of the investment. The origination partners Yieldstreet typically works to provide varying levels of service as part of originating an opportunity and managing it throughout the course of its lifespan.
What are the sources of Yieldstreet opportunities?
Most Yieldstreet opportunities are initially identified by one of three types of origination partners:
Originators
Originators can vary in size from a one-to-three person firm with specialists in their field to much larger institutions. Originators have historically included entities extending loans, such as private credit funds, private money lenders, and specialty finance companies. More broadly, they can include local, regional, and national banks, vertically integrated real estate development firms, and other specialist institutions in their respective markets.
Originators often commit their own capital in transactions and seek potential partners to co-fund or participate in the opportunity with them. Some have their own sourcing and sales teams to identify transactions, talk with potential borrowers, and publish underwriting or credit guidelines to generate visibility and deal activity. Originators often play the role of the servicer, wherein they manage the transaction, maintain the Borrower relationship, oversee payment processing, and, depending on the circumstances, may take the lead role in any workout or recovery process in the event of non-payment or default.
Direct Borrowers
Yieldstreet may establish a lending relationship directly with a Borrower because of a Borrower’s need for capital, desire to accelerate growth or other business needs. These Borrowers are often underserved or ill-equipped to engage with traditional lenders like a local bank, national bank, or other sources of capital. They may also seek out alternative lenders such as Yieldstreet and its origination partners to benefit from expedited timing, familiarity with non-traditional asset types, etc.
Brokers and Bankers
The third major source of opportunities is introduced by brokers, bankers, and other intermediaries. These are individuals or firms who play a facilitating role because they have access to the investment and may be looking either to place the entire investment with an institution or break it up for sale to different parts of the market. Typically, brokers and bankers make introductions to Originators or directly to prospective Borrowers.
What does Yieldstreet look for in origination partners?
Yieldstreet looks to identify a number of key factors when evaluating a potential origination partner. Some of the characteristics we look for in origination partnerships are data-driven, while others are more subjective.
We look for origination partners that would be good partners for us to work with and who would be capable of managing the underlying loan. Some attributes we look for:
- The market the origination partner operates in.
- How long they’ve operated in that market.
- How successful they have been in that market. This may be determined by looking at their loan tape, which is a history of their loans and payment details, which gives us an indication of overall investment performance.
- How well their transactions have performed in terms of appreciation of the underlying asset, consistent payment of interest, and principal payment over the life of a loan.
- How they have handled workout scenarios such as the renegotiation of loan terms, forbearances, events of default, to evidence their ability to deal with challenges.
Data, of course, cannot replace subjective and qualitative assessments. We look at their reputation and who their own partners are when it comes to building relationships and identifying suitable origination partners.
The Yieldstreet Originations team and Investment Officers spend time to build relationships with a broad mix of origination partners in the marketplace. Typically the relationship starts by gauging deal flow and suitability within the Yieldstreet underwriting parameters for the specific asset class and we look for origination partners with the right experience and expertise.
What is the role of an origination partner in a Yieldstreet offering?
Evaluating origination partners
The Originations team at Yieldstreet has regular conversations with a variety of potential origination partners as they bring in opportunities to be evaluated. When we discover an opportunity that meets our investment criteria, more details of the opportunity are fleshed out.
Due diligence
Due diligence to evaluate the origination partner
Yieldstreet tries to gain a thorough understanding of the origination partner’s track record so that we are comfortable that they are good at what they do, understand their industry, and conduct appropriate due diligence. We would also look carefully at the specific information about the transaction itself which we would use in our internal modeling and due diligence process to ultimately make a decision on whether to participate in the transaction.
Due diligence to evaluate the opportunity
The next step in this internal due diligence process is negotiations around the commercial terms, capital stack, and where we would be placed in terms of priority in the event of a default or non-payment.
Each asset class has its own set of attributes that are negotiated. But generally, we evaluate the key factors of each opportunity, which includes the loan-to-value ratio (LTV), the loan duration, and other details about the asset itself, as well as our priority as a secured lender in a default scenario.
Launch and servicing
Once an opportunity is funded, it will launch on our platform. From there, it is monitored by Yieldstreet’s Portfolio Management team. Depending on whether we have an external origination partner in place and the specific services that they might provide, there may be parts of the transaction that are directly handled by Yieldstreet after that.
An origination partner’s role as servicer
Post closing, the origination partner acts as the primary servicer of the underlying loan. This means that the origination partner is responsible for all communications with the Borrower and monitoring of the underlying loan, which primarily consists of the following:
Cash management and administrative services. This includes, but is not limited to the following:
- Handling of all cash reserves and escrows which may include taxes, insurance, pre-funded interest, capital improvements, and any other holdback.
- Payment collections, reconciliations, and invoicing for all due payments, namely principal and interest.
Performance and reporting requirements. The origination partner is responsible for monitoring the overall performance of the investment and ensuring that the Borrower remains compliant with all terms and conditions stipulated in the underlying loan documents. This includes adherence to all covenants (financial, reporting, and information) which could include any of the following:
- Performance triggers, such as Debt Yield, Debt Service Coverage Ratio (DSCR), or LTV (loan-to-value) tests.
- Post-closing conditions, such as ensuring that a lockbox has been set up to trap operating cash flows.
- Financials and operating statements, to ensure the Borrower’s cash flows remain healthy and sufficient to cover debt services.
Loan modifications and default-related workouts. In instances where the underlying loan needs to be modified or worked out, Yieldstreet supports the origination partner to assess the appropriate strategy. All workouts will typically involve the appointment of outside counsel and sometimes, depending on the complexity of the situation, a third-party consultant.
Yieldstreet’s internal Portfolio Management and Asset Class teams monitor the status of all transactions through the assessment of all reporting materials and through calls with the origination partner, typically on a weekly or monthly basis depending on the complexity of the investment.
In scenarios where a Yieldstreet entity, or affiliate, is the direct Lender to the Borrower, our internal team acts as the servicer and is responsible for all of the requirements stated above. In these instances, Yieldstreet will typically appoint a third-party servicer to handle the cash management and administrative servicing functions.
As you can see, the origination partner plays an important role in bringing forth the opportunities that Yieldstreet offers investors. They are also responsible for managing the underlying loan and act as important partners throughout the life of an investment. If you have more questions about our originations process, please contact us at [email protected].
This communication and the information contained in this article are provided for general informational purposes only and should neither be construed nor intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice. Any link to a third-party website (or article contained therein) is not an endorsement, authorization or representation of our affiliation with that third party (or article). We do not exercise control over third-party websites, and we are not responsible or liable for the accuracy, legality, appropriateness, or any other aspect of such website (or article contained therein).
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