Image Source | Getty Images
A digital platform that offers alternative investments to the masses is attempting to broaden its appeal with a new fund created with BlackRock, the world’s biggest asset manager.
For the last five years, New York-based start-up YieldStreet has been giving its users access to a category of deals that had previously been the domain of institutions like hedge funds or billionaires’ family offices.
The investments — usually private loans in the real estate, shipping, legal or art finance sectors — offer potentially higher returns than say, the typical Vanguard bond fund. But the $1.3 billion in transactions YieldStreet has crowdfunded so far have always been individual deals, meaning users didn’t have access to an all-in-one diversified fund.
That’s why YieldStreet created the Prism fund, which will contain a mix of the company’s relatively esoteric investments along with corporate and sovereign debt managed by BlackRock. The fund has targeted a 7% annual distribution rate, paid out in quarterly increments, and 1.5% in management fees and administrative costs, according to documents viewed by CNBC.
The company’s partnership with BlackRock, a behemoth that manages $7.4 trillion for investors globally, may signal that crowdfunding platforms are ready for wider adoption. BlackRock spent 18 months vetting YieldStreet for the Prism partnership, according to co-founders Michael Weisz and Milind Mehere. YieldStreet is one of a group of new platforms with names like Lex Markets, Cadre and Artivest that emerged after the 2012 JOBS act made it easier for companies to raise funds.
“By combining BlackRock’s expertise in fixed income investing with YieldStreet’s technology know-how, this fund provides investors with attractive opportunities beyond their usual sources of income,” Robert Stanley, BlackRock’s global head of fixed income product strategy, said in a statement.
For investors in the Prism fund, YieldStreet will aim to liquidate the assets of the fund after four years and return the initial principal. The 7% distribution rate means that a $10,000 investment would yield $700 every year, Mehere said in a telephone interview.
“It’s a fund that’s not designed to be aggressive, it’s for passive income,” Weisz said. “It’s a fund where you’re getting access to some of the best management talent that exists in the credit space.”
The traditional boundaries between retail and institutional investors have begun to blur. Blackstone, the world’s biggest alternative asset manager, has long catered to institutional investors but is now fueling its growth from individuals, gathering $26 billion in 2019. Private equity firms are now attempting to persuade regulators to open up more of their products to retail investors. They say that in an era when companies have delayed going public for years, small investors have been locked out of the best gains.
In that vein, the appeal of YieldStreet, according to its co-founders, is that it gives users access to the type of high finance deals that huge institutions and the wealthy use to generate income.
Still, with products as arcane as student-housing mortgages or loans to cargo vessels, one could question their suitability for retail investors. Users must be accredited investors, which the Securities and Exchange Commission defines as individuals who earn more than $200,000 a year or have a net worth over $1 million.
“Anybody could put money out; it’s about bringing it back home,” Weisz said. “You have to understand the collateral that you’re investing in. If we invest $6 million in a $10 million building, even if s— goes sideways, we’ll still foreclose, we’ll go through the process and ultimately we’ll collect because there’s enough equity in the building.”
‘Winter is coming’
In its five years in operation, YieldStreet has returned more than $100 million in interest payments and $500 million in principal to its investors, according to Mehere. Those returns, and the fact that it hasn’t yet lost principal in an investment, has created trust with the 200,000-plus users on its platform, the company said.
The idea for YieldStreet came from the market crash of 2008, said Mehere. He bemoaned the fact that he was overexposed to stocks and didn’t have access to the same income-generating assets as wealthy investors, he said.
But YieldStreet’s entire track record has occurred during an epic bull run in risk assets fueled by unprecedented central bank actions. The trade-off for higher returns is usually higher risk, and in the next downturn hard-to-value assets like the ones YieldStreet invests in could become troubled.
Weisz says he understands that market conditions will turn at some point and often reminds his co-founder that “winter is coming.”
“I’m not here to tell you that Milind and Michael are the world’s smartest investors and there’s never going to be something that goes wrong,” Weisz said. “We understand that when winter comes there will be challenges, but we take comfort in knowing that there’s underlying collateral. We feel confident and comfortable with what that represents, and so far we’ve been right.”