Due diligence is a key step in the investment process, and is especially important for private market opportunities. Compared to public markets, where information is easily accessible – though not always equally digestible for different classes of investors – in private markets there are more limited disclosure requirements
The key goal of due diligence is identifying potential red flags – reasons NOT to invest despite attractive return potential and suitability. Here is an example of what the process looks like at Yieldstreet:
Before Yieldstreet’s due diligence on the investment opportunity kicks off, there is a review of collateral – the real assets against which the investor has recourse in the event of a default – for eligibility, which includes an appraisal of the specific asset. While diligence checklists can be different at Yieldstreet depending on the credit team, collateral review is part of all of them.
Subsequently, a term sheet – a preliminary agreement between the parties – is negotiated between the parties. The negotiations can usually take approximately 2 to 4 weeks, as every clause needs to be agreed upon. A sample term sheet can be found here.
Once the investment is “greenlit” – it is given preliminary approval – the term sheet is issued, together with an engagement letter. A final additional screening can then be assigned to a third party provider when needed. This is simply the first phase of the process – before the due diligence process begins. In some ways, an engagement letter dictates the terms of the future relationship between the parties, but its entry into force is subject to the investment opportunity passing due diligence scrutiny.
Subsequently, Yieldstreet’s teams begin an in-house due diligence based on a “four-factor” proprietary risk assessment approach.
In addition to that, our teams request third-party investigations (such as, for instance, background checks) using leading industry services based on aggregate risk levels.
When the teams have completed their respective due diligence checklist and underlying analysis, the next step in the process is to present the transaction to the Credit Committee, the forum responsible for providing final approval of a transaction, and clear it for subsequent launch on the Yieldstreet platform. Credit Committee members include Yieldstreet founders, as well as legal and risk teams. The credit teams pitch the transaction, articulating why that specific one can be a sound investment for Yieldstreet and its clients.
Yieldstreet’s origination engine cultivates and manages relationships with partners – more than 2600 firms – to deliver consistent supply. In 2021 alone, Yieldstreet’s origination engine sourced in excess of $12B in transaction value across more than 1000 opportunities from 500 plus partners. Crucially, less than 10% of investments reviewed are selected to be distributed on the platform, a testament of our robust diligence process.
Once the deal is distributed, a key role in the management of the position is taken by our Portfolio & Risk Management team – an independent function that is integrated into Yieldstreet’s investments processes at every juncture, from pre-transaction diligence and underwriting reviews at the investment level to oversight of portfolio level concentration and ongoing management.
While there is no guarantee that Yieldstreet’s selection will be the best one for investors, the company is incentivized and motivated to provide what it believes to be the most appealing, and best performing investment opportunities.
Ultimately, a strict due diligence process can help mitigate idiosyncratic risk in private market investing. As opposed to the clear information asymmetry that continues to plague public markets, where only institutional investors can count on strong analytical tools as well as access to bank research, Yieldstreet does the research work on behalf of retail investors – and on the investor’s side – rather than in competition with them.
1 A telling example is the quarterly earnings reports published by publicly traded companies, which are there to help investors make informed decisions about companies financial performance. Other disclosures are related to organizational and financial data.
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.