After deciding on assets that we want to offer–whether a set of legal cases or a series of real estate properties, Yieldstreet must utilize a legal investment structure for those assets.
An SPV—also called a special purpose entity (SPE)—is an investment structure that is technically a subsidiary of the company that created it. That means it is reported on a separate balance sheet, has a scope that is just a subset of the parent company’s activities and is financially independent of the parent company and from other SPVs under the parent’s umbrella. Essentially, each investment structured as an SPV is its own limited liability corporation (LLC).
In the case of Yieldstreet investments, Yieldstreet is the parent company. We set up a new subsidiary—a new SPV—each time we add a portfolio to our marketplace. Investors who choose that portfolio are pooled into the SPV. Yieldstreet acts as the managing member of each SPV, which in the simplest terms means we service and distribute the funds and inform investors of any important administrative matters. If any complications arise in the portfolio, Yieldstreet, as managing member, will handle them. Usually, though, the SPV operates in “auto mode” and, once formed, simply runs as initially outlined.
SPVs are able to operate in “auto mode” in line with investors’ expectations because each SPV is formed with a clear and limited scope. Additionally, investments in Yieldstreet’s SPVs are never recycled—which means that in addition to having a limited scope, they have a strictly limited timeline. As soon as enough litigation within a portfolio settles to pay out all principal and interest owed to investors or all real estate principal within a portfolio is paid down, the associated SPV closes. We refer to this as self-amortization: each time there is a principal pay-down, the SPV “amortizes” and gradually fades away until it naturally closes and investors’ initial capital and returns are released back to them.
SPVs are far from new. In fact, many types of companies have used SPVs extensively for three decades. Because SPVs operate independently of their parent companies, they can be effective tools for managing risk. Financial institutions and private businesses regularly use SPVs to finance and trade assets ranging from cars to homes to college tuition to industrial equipment. Some governments have even used SPVs to set up public-private partnerships for crucial but expensive projects like infrastructure revitalization.
Our decision to structure investment offerings this way hinged largely on two key features of SPVs: clarity and bankruptcy remoteness. What do these benefits mean for you as a current Yieldstreet investor or someone considering adding Yieldstreet investments to your portfolio?
First, because all capital is funneled directly into a select SPV, as an investor you know exactly where your money is going. Each SPV is created for the specific and limited purpose of funding the alternative assets listed in a single portfolio. That opportunity is completely independent of other portfolios on our marketplace, so you can be sure that your money is financing—and your returns are dependent upon—only the assets that you personally chose to participate in. Further, you have certainty about the events that will trigger the release of your capital and returns. Because each SPV is self-amortizing, money will never be recycled unless you actively choose to keep your money at work and reinvest your funds into a new portfolio. Instead, as soon as the portfolio’s principal is fully paid down, the SPV ends and the money therein is released.
Second, and most importantly, each Yieldstreet SPV—is bankruptcy remote from both Yieldstreet as a whole and from other opportunities that we offer. In other words, the default risk on an SPV extends only so far as that SPV’s underlying assets; the SPV does not absorb any default risk from Yieldstreet or from assets grouped into other opportunities. If anything ever happened to Yieldstreet, Yieldstreet would simply forfeit its role as managing member to another investor in the portfolio, and the SPV would continue to generate interest and self-amortize as planned.
While the SPV structure is, in many ways, beneficial to Yieldstreet investors, it places certain limitations on our investment process. For example, because each SPV is its own LLC (Limited Liability Company), Yieldstreet is currently limited to accept no more than 99 investors in an investment opportunity, per SEC restrictions. This cap, which is commonly known in the crowdfunding world as the “99 Investor Problem”, has been in place since the 1940’s. Fortunately, there is currently legislation being reviewed to raise it to 500 investors.
Next time you consider investing, keep these attributes of SPVs in mind. At Yieldstreet, we believe that SPVs are a good way to offer innovative, high-quality investments while keeping investor risk to a minimum.
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.