In my research into building an alternative asset portfolio, I am reviewing various platforms that feature illiquid and privately offered assets. These platforms vary in the manner in which they market themselves to investors and who exactly can buy them. In my previous review of Masterworks, the platform used series A+ funding. This is a relatively new vehicle also known as the “mini IPO” which allows the platform to open an LLC for each investment, in this case a work of art, and then distribute ownership in this work of art up to an amount of $50 million. Yieldstreet takes a different approach, they are going for the accredited investor and qualified buyer money for the most part. In this post I will take a look at some of the main features of private market investing and some of the offerings currently up on the platform.

Yieldstreet was founded by entrepreneurs Milind Mehere and Michael Weisz. Milind was the founder and CEO of Yodle which was an online marketing company for small to medium businesses and acquired by Web.com in 2016 for $342 million. Michael was previously at a credit opportunities hedge fund where his team specialized in asset based loan transactions with a niche in the legal finance market. They seemed to have brought on a team to serve as marketers and directors with a good amount of experience in the alternative asset space and consistently place them in director roles at many of the companies they form, more on company formation will come below.

The website explains the philosophy of the founders, who it says had to turn away smaller investor money when they worked at larger companies because the funds did not have the infrastructure to deal with smaller investor amounts in a cost efficient way. This captures the story of innovation in the financial technology space and the digital space in general: it can aggregate funds and cater to niches of investors that may have been too widely disbursed to efficiently market to before. It seems as though issues of scale and being blocked out of investments by wealthier investors may have been one of the motivating factors behind the founding, which is exactly the type of philosophy I am looking for.

Starting Out

Yieldstreet comes off as a good starting point for newly accredited investors. Accredited investors are those who make at least $200K a year or have over $1 million in investable assets. It also now includes financial professionals with certain licenses like the series 7 or series 65. This essentially means that anyone can now become an accredited investor provided they can pass an exam. If you are not a financial professional and want to invest through platforms like Yieldstreet, I recommend the series 65 exam which is the Uniform Investment Advisor Law Examination. This exam can be taken by anyone and no degree is required.

I signed up to the site via their app which asks you a number of questions before gaining access to the investments space where you can see the funds they offer. The company has not embraced the new definition of accredited investor so they still ask about income and net worth. I answered affirmatively on these even if I didn’t tick every box only because I know that due to the new definition, I am most definitely an accredited investor.

If you’ve never looked at private equity or private placement offerings it is quite different from what you may be used to when it comes to stocks. Some things to note when it comes to these types of investments are:

• Illiquidity – Know that you will not be able to just dump your shares if things go wrong. Some platforms are attempting to create secondary markets for people to buy and sell shares in the companies they buy but this will be limited. You most likely will have to hang on to these shares until the term ends or you are bought out by the fund managers, which is not always and option.
• Term Structure – Many of the investments have a fixed term, this means they are not open ended like owning a stock. You may purchase equity but it will be in a newly formed company which will then buy assets and potentially sell them off at a later time. When a sell off happens, the company is wound down and any capital remaining is given to investors.
• Fees and Carried Interest – Like anything private, both ongoing management expenses and profits will be higher. Management fees will vary but could be as high as 1.5% of assets invested. There is also carried interest. Carried interest is a term used from 16th century mercantile sailing expeditions. Essentially it meant that captains of a ship took a 20% take of the profits from the goods carried on their ship. The term stuck and we still use it today. In private markets, this means a percentage of the profits that will go to the general partner who administers the investment on the limited partner’s (the investors) behalf. This can be anywhere from 2.5% to 20%. Carried interest sometimes also includes a hurdle rate where the return has to reach this amount before carried interest can be charged.
• Capital Calls – You don’t always get to invest all your money at once. Rather you may be subject to capital calls in the first few years of a facility. This could leave you with the option to have to invest the cash in the mean time and then come up with it quickly when a capital call is announced. If you don’t pay you could be charged penalties or be liquidated from the fund, this is a feature that is specific to these types of investments.

Opportunities

You will also notice when you join a platform like Yieldstreet that there may only be 3 or 4 opportunities available on the site at any one time. This is because much like a private equity firm, the platform raises funds based on the opportunities at hand, they also will limit the size so that it can conform with the investment thesis and not get overwhelmed by too much capital which can start to erode opportunities. Currently, the opportunities, which may be similar to those offered going forward, are as follows:

• Fixed Income – There are some attractive fixed income options on the site. There is a short term notes program that yields 4.5% on an annualized basis for 6 months, way better than even the bond funds with 5 year durations many may hold which yield even less. There is also the Prism Fund, a 3 year fund which claims to be diversified into all types of assets such as preferred shares, art subordinated debt etc. This fund aims to pay out 8% annually to its investors. The thesis driving the returns makes sense: assets are riskier and less liquid so they offer a premium on return. It’s also worth noting that the Prism fund has a note about the option to use leverage, how much it doesn’t say and you may have to wait a while after you’ve invested to find out more: it will only update you once annually. The short term fund pays dividends monthly while the Prism fund pays quarterly. What I would like to see more prominently displayed are the fees and the projected net return. From my initial examination of the prospectus of the Prism fund it wasn’t clear if the projected return was net of fees. If not, a 6.5% pre-tax return isn’t very enticing, especially given the fact they are using leverage. You could easily purchase a PIMCO closed end fund that used leverage to match this return and is much more liquid. The minimum amount required for the Prism fund was $20,000.
• Aircraft Leasing – Another opportunity offered seemed to be more attractive for long term investing was aircraft leasing. This fund aimed for returns of 10% to 14% over a period of 8 years with an option to extend for 1 year with a limit of 3 total extensions. Airlines lease anywhere from 25% to 50% of their aircraft and parts so this fund was looking to buy the aircraft and engines and lease them back to airlines that would then recover when people are able to travel more freely again. There also may be advantages in terms of shielding lease income with depreciation expense. This could offer the possibility of some of that 10%-14% coming back tax free. The general partners structured this to be free of additional capital calls and have an admin fee of 0.25%. Carried interest would be 2.5% with a hurdle rate of 6%.
• Real Estate – Currently there is a real estate fund looking to purchase the first lien mortgage of class A office space in Northern Virginia. Anyone working from home can tell you that commercial real estate isn’t the safest bet right now and the returns match this. The fund looks to return 8.5% over 2 years with a $10,000 minimum commitment. Again my critique here is that the fees are not prominently displayed and may eat into that 8.5% return.

Overall

So now you are aware of who can sign up, the basic structures and some of the types of funds you can invest in. Overall I would say Yieldstreet does offer some attractive opportunities for short term fixed income. The 180 days fund at 4.5% is a nice one with no fees. I also like the return potential and tax shield offered in opportunities like the aviation fund.

Where I would advise caution here is in the fees, the structure and liquidity. As is usually the case, if you want to see the fees you will have to really dig into the prospectus. Even then the projected return net of fees is not always clear, were I ready to invest, I would likely want this clarified via phone or email by a person.

Investors would also have to be quite mindful of the structures too as there may be added annual fees, tax reporting forms to process and capital calls although it seems in some structures Yieldstreet offers to do some of the work for investors by avoiding capital calls and placing the capital waiting to be invested in their short to medium term funds. Investors should be aware of this because it adds risk on top of risk.

The app itself seemed to be on par security wise with bank apps most of us have. A Face ID was required every time I logged into the app and a bank account can be linked to the site to draw funds from. Minimum capital requirements are also worth noting, many opportunities start with at least $10,000 minimum.

If you are comfortable with the above, have the money to invest and are willing to lock up capital for long periods to achieve a higher return, Yieldstreet could be a viable option for you. This will take a bit more work for investors, especially around tax time but given valuations in the stock market currently, the added return potential may be worth it.

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