Citi’s fintech incubator unit – the spread products investment technologies team (Sprint) – on Wednesday announced a strategic partnership with digital wealth management platform YieldStreet Capital, which is focused on opening up access to institutional-quality investments for individual investors across a range of asset classes, such as real estate, marine finance, art finance, legal finance and commercial loans.
Citi launched Sprint in September 2018 as a strategic equity investment platform focusing on innovation across its spread products business.
"We are not a VC fund. Everything we do has to be strategic to Citi’s overall mission. All our investments are in spaces in which the spread products group already operates," Matt Zhang, managing director and head of Sprint at Citi, tells Euromoney.
This can range from lending to modular housing business Factory OS to investing in digital mortgage provider Better Mortgage Corp – both active in the broader housing space. Sprint is also focusing on market innovation, for example investing in alternative market analytics platform T-REX and automating BWICs in the bank’s own collateralized loan obligation (CLO) trading business.
Rebalancing investor access to alternative investments is likely to be a growing trend in debt and private credit, and is it is something that Zhang is firmly behind with the new partnership. “We are putting opportunities in front of investors that have the right education. This will provide momentum to the space which is very interesting," he says. “What the platform is doing is a good thing."
The tie-up with Citi will certainly give YieldStreet much-needed scale. Founded in 2015, it has written more than $1.2 billion of business, but the new partnership is designed to originate up to $2 billion of investment opportunities over the next 24 months. "We have been working on a partnership with Citi for the last couple of years,” explains Milind Mehere, CEO of YieldStreet. “This is our first large commercial partnership with a big financial institution. Demand has exceeded supply on the platform for some time and Citi sources and originates across many different asset classes which will give us a level of scale and ultimately benefit our investor community."
In early 2019, YieldStreet closed a $62 million series B financing round, with investment from Edison Partners, Greenspring Associates and Soros Fund Management. Soros Fund Management has also renewed their warehouse facility with the firm from $100 million to up to $250 million.
We have always believed in knowledge-based investments. We take a lot of time to educate investors and invest in these assets conservatively and transparently- Milind Mehere, YieldStreet
YieldStreet essentially acts as a gateway to private credit opportunities for accredited retail investors – those that have a net worth of at least $1 million, excluding the value of their primary residence, or have had an income at least $200,000 each year for the prior two years. It offers opportunities in three 0-12% yield buckets: the 0%-4% yield bucket is deemed “safe”; 4%-8% is called “market”; and 8%-12% is “market plus”.
Partnerships such as this, while opening up the investment landscape, do raise questions over whether retail investors should be encouraged to invest in high risk “market plus” types of structured credit. Mehere is adamant that they should. “We have always believed in knowledge-based investments,” he says. “We take a lot of time to educate investors and invest in these assets conservatively and transparently. They should be part of a broader portfolio but typically investors can't get in to a $15 million portfolio with a $10,000 or $20,000 stake.”
Regulation and investor protections for accredited retail investors are very different to those for the typical institutional buyer, and it will be down to YieldStreet to make sure that investors are put into appropriate yield buckets. The firm is growing fast and as the space develops it is likely that the type of retail investors involved will broaden. YieldStreet acquired individual retirement account (IRA) platform WealthFlex in December last year, which will allow clients to invest automatically through IRAs. It also bought Athena Art Finance in April last year for $170 million from the Carlyle Group.
There is certainly no shortage of retail demand for this and supply of suitable opportunities seems to be a challenge. When Euromoney spoke to Mehere in early January there were no investment opportunities available on the platform – so the Citi tie-up could be a game changer. “There is tremendous synergy between the Sprint group and what we are doing,” Mehere says.
Opening up spread product asset classes to a new type of accredited retail investor is an interesting move for Sprint. “We are looking at the space that spread products is operating in today and where it will go in the next few years,” says Zhang. “It is important to have a say in shaping that.”