A fast emerging fintech company, New York-based YieldStreet, is looking to make its alternative investment products mainstream, following the company’s seed funding round. Finance Magnates spoke with two of the firm’s founders again to learn more about YieldStreet's recent growth, current developments, and future plans to disrupt finance.
As a Registered Investment Advisor (RIA) with the Securities and Exchange Commission (SEC), YieldStreet is able to structure its product offering in ways that cater to accredited investors' needs and relevant regulatory requirements, while combining the expertise of its management with innovative approaches to fintech.
By combining the skill-set of the firm’s trio of founders across risk-management and origination, marketing, and technology, YieldStreet delivers a unique product and is preparing to further expand, as explained to Finance Magnates during an exclusive call with Michael Weisz and Milind Mehere - two of the company's co-founders.
Democratizing via fintech
To put in perspective how YieldStreet is democratizing alternative investments for the masses, investors making even a minimum investment of $5,000 are treated equally alongside other investors even if they have millions of dollars invested in the same deal.
For example, one of YieldStreet’s largest deals to date, for $12 million, had a total of 55 investors where 22 of those represented funding amounts in the $10-$25,000 range, 32 investors with +$25,000 - $1 million range, and one investor with $4 million or nearly a third of the deal represented.
Milind Mehere
Source: LinkedIn
Similar trends were noticed across its previous deals which represent incredible investor diversity as related amounts coexisted within a deal on the same equal terms – a truly democratic approach thanks to its technology structure as administrative processes would otherwise be too cumbersome for smaller-size amounts.
$50m line and Series A plans
As investors fill up deals once they become available on YieldStreet, the company plans to obtain a debt facility or revolving credit line for $50 million during Q4 that will allow it to add Liquidity to pre-fund deals using its own balance sheet and making them available to investors at a faster rate.
In addition, YieldStreet will even co-invest alongside its clients, according to plans shared with Finance Magnates, as the company also prepares to make these otherwise illiquid opportunities fungible by creating a secondary market so that investors could exit early before the typical 1-3-year period.
this [funding] will help us accelerate our growth.
Bringing alternatives mainstream
YieldStreet screens its opportunities from alternative markets to find deals that are asset-based and not linked to credit or credit-based, and combines its proven asset management and technology, yet also makes sure that the originators that represent these deals are highly vetted.
In essence, YieldStreet matches investees with investors, while helping ensure that both sides adhere to standards that match an overall strategy for finding high-yield asset-based investments while minimizing any inherent risk probabilities using a highly selective process.
An example of how selective YieldStreet is, from nearly $400 million of deals brought to its alternative investment platform, it rejected over 90% and provided its investors with only the resulting highly vetted asset-backed investment opportunities, helping fund almost $40 million worth of high-yielding alternative fixed-income products.
From the barely 10% of deals that were approved to be offered on its platform, YieldStreet investors have already realized nearly $8 million in returns that have been paid back to them – including principal and interest/earnings, from across the nearly $40 million in funded deals.
As yields go lower and lower globally investors are looking for every bit of incremental yield...
Finding yield in troubled waters
Given the current market environment with global stock markets volatile after events such as Brexit , and US indices reaching new highs, volatility is taking on a new meaning for investors that have to stomach large swings. And while this may be attractive to day traders and speculators, accredited investors or those with longer-term views may be feeling challenged to find something more steady that also returns a high yield.
The largest daily inflow into a corporate bond ETF was recorded last Thursday, as $1.1 billion in new funds went into LQD - the world’s second largest bond ETF according to reports by Bloomberg earlier this week. The article quoted Peter Tchir, Head of Macro Strategy at Brean Capital LLC, who said: “As yields go lower and lower globally investors are looking for every bit of incremental yield, whether investment-grade, high-yield, or even dividend stocks.”
In addition, higher-yielding corporate bonds may typically be associated with lower-grade credit, posing higher risks that investors might not feel comfortable with taking, and despite the plethora of alternative platforms available, many debt-based products have no underlying asset beyond a form of credit (i.e. unsecured with no collateral).
With long-term yields close to zero, however, and the majority of available assets correlated to financial markets, including credit markets, finding high yield in asset-based alternatives that are not correlated can be challenging – but apparently not for YieldStreet.
Thanks to technology and the combination of proven asset managers along with a highly refined risk-management process, YieldStreet filters deals using a systematic approach which only approves exclusive high-yield/lower-risk opportunities which it provides to accredited investors on its platform.
Fixed income: credit vs. asset-based
The word fixed-income may bring to mind credit-based products - for most investors - such as debt instruments like treasuries, corporate bonds, and other related instruments which have their underlying collateral based on credit instead of an asset-based security.
The big difference here is that credit grades are correlated to the market whereas assets have a more measurable minimum value – such as the lowest price a house would be sold at auction or the resale value of a new automobile or used car – the prices of which are comparably more stable.
Just as certain mortgage loans were riskier than others, either with high loan-to-value (LTV) rates or questionable borrower credibility, there was also a market of mortgages that were nearly unscathed through the financial crisis and many of which are still earning yield and interest.
YieldStreet has a number of checks and balances in place not only to screen opportunities but also to help ensure that a non-biased approach is used from its credit committee so that deals are funded based on their merit, and this is done one investment at a time as each opportunity varies.
The company has approved 23 deals on its platform since launching, with 2 currently open and 2 in the pipeline as other deals just added in prior weeks had quickly filled up to capacity within days.
So what’s the alternative [asset]?
While investments backed by real estate assets is just one alternative area that YieldStreet focuses on, the other opportunities it provides reflect three other asset categories including individual and legal assets, and commercial business assets, among other assets that could qualify under its pre-established set of criteria when screening opportunties.
Even assets such as settlement amounts from lawsuit contracts within litigation finance which reflect the robust and comprehensive legal system in the U.S has provided investment opportunities for many years to investors, yet not known to the masses.
Beyond Litigation finance
Litigation deals represent a good portion of opportunities both past and current that are on the YieldStreet platform, yet such deals often represent a portfolio of settlement cases instead of a single case, this can be compared to an ETF with an underlying holding that is so diversified that even if one of its holdings failed its portfolio could still recoup the change or even not be affected.
However, volatility in electronic capital markets often spreads faster because of the interconnectedness between credit markets as valuations are tied to both securities and corporate and government debt instruments, among other related variables that can change quickly.
Therefore, alternative assets can have their place in an investor's portfolio as a means to reduce risk because of the lower correlation since differences in correlation is really what makes diversification of value - and not just the quantity of assets.
Otherwise, a portfolio of 1000 stocks could still be subject to the effects of a global sell-off, whereas adding even a single alternative asset with close to zero correlation to the rest of the portfolio could reduce its overall risk significantly.
...because the investors are making a fixed income – a fixed yield of 13% per annum, the full value of each individual investment is not necessary to achieve the goal.
Crowdfunding asset-based alternatives
With regard to risk and diversification, Mr. Weisz explained during the call regarding the YieldStreet platform: “The investment offerings we have are diversified portfolios, so for example, in the current open offering there are over 100 individual micro-advances in that portfolio. Over 16 years, almost 100,000 individual pre-settlement litigation investments and almost $500 million in on-balance-sheet funding, the originator has held a principal loss rate of 4.2% consistently year-over-year.”
Michael Weisz
Source: LinkedIn
He added: “In order for our portfolio to break-even it would have to be closer to a 20% default rate, that would be a 500% increase in default. So we do expect that there will be a case here and a case there that’s gonna fail, so of the 118 cases I’m sure one or two might fail –that’s part of the business, but the other cases in that portfolio are accruing at a rate that it quickly wipes out the loss of the others.”
He further explained: “Now because the investors are making a fixed income – a fixed yield of 13% per annum, the full value of each individual investment is not necessary to achieve the goal, so inherently in each one of the offerings that we make its already diversified for the investor.”
Mr. Weisz followed with an example: “By putting $5,000 dollars in, its not that – that inventors is being matched with a pre-settlement case that’s $5,000,” and added how “it's going into an entity whose asset is a pool of 118 investments – so pro-rata $5,000 worth across all 118 cases.”
Interestingly this crowdfunding-style approach reflects on both sides of the deal for both investors and for each diversified offering they join.
Scaling growth
Since the seed round was announced just a few months ago, YieldStreet has shown considerable progress on the number of deals and funding amounts that it has since helped facilitate, as it prepares to iterate new products and develop new technology in order to prep for the next phase of growth.
In response to questions about what it would take to scale the operations, Mr. Milind emphasized at the end of the call how all this would not be possible without technology, and that the company is already seeing its digital marketing efforts payoff with 25% month-on-month grow rates as it prepares to scale its business further with a new round of funding or Series A financing expected, in addition to the planned $50 million credit towards the end of 2016.
He added: “This [funding] will help us accelerate our growth,” and reiterated how the expected capital will help it pre-fund its deals, co-invest alongside clients, and create a secondary market that will add and move liquidity throughout its alternative assets at a faster rate – increasing fungibility – as the firm maintains its high standards of selectively screening and hosting opportunities on its fintech-fueled YieldStreet platform.
The last startup that Mr. Milind co-founded, Yodle, was acquired by web.com for $342 million, so leveraging technology in a new offering - and along with YieldStreet’s unique product combination and management expertise – is something the company may be well-positioned for to help bring its alternatives more mainstream and commonplace on Wall Street.
One of the firm's advisers and brand ambassadors, NFL legend Ray Lewis, shares his views on investing with YieldStreet in the following video on YouTube:
