Yieldstreet’s origination process: How we choose our investments

June 27, 20224 min read
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Key takeaways

  • In private markets, idiosyncratic risk is usually a more significant driver of investment performance than broader market risk. 

  • This type of risk can be mitigated by careful due diligence, which includes vetting the debt issuer as well as the collateral. 

  • Yieldstreet prides itself on its due diligence process, which helps select attractive opportunities across asset classes and build trust with investors. 

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.

Due diligence and approval

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.   

Deal closure and portfolio and risk management

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. 

Conclusion

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.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetalternativeincomefund.com. The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

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YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

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