Ah, the question of yield!  

It seems from the conversation that everyone believes there is a good fairy in the universe eager to thrust fantastic opportunities on those eager to have their dollars work harder.  

It amazes me that this is the case, and my retort is often to be curious why those that have great projects or opportunities would pay more out to investors for use of their capital.  

Investors are often puzzled when I ask this question because they’re really just thinking about optimizing their arrangement and don’t think about how the proposed partnership opportunity is accounting for the value that the sponsor brings to the table.  

The best sponsors often have far more opportunities with capital than they have projects to fund and therefore are too choosy about investing in their opportunities.  

The yield they offer to limited partners is generally structured in a way to attract capital with a sufficient preferred return and offer an upside that creates alignment that invites investors the opportunity to benefit if the project and the sponsor hit a home run.  

The game for limited partners is to find sponsors who have the character, track record, and expertise to deliver on their claims while also offering enough juice to make the investment worth the squeeze.  

The stock market over a long period delivers on the order of 12% - which can vary a bit depending on your horizon and the yield of the investment.  

Without quibbling over the right number, it stands to reason that a private investment should deliver over this to account for the risk of holding more investment in a less-diversified investment that is subject to similar events and systemic risk from the broader economy.  

In my opinion, mid-teens is a good starting point for discussion for these types of investments viewed through an LP’s lens.  

Does chasing this extra yield make sense? Limited partners should think about this in the broader context of their overall portfolio.  

The risk capital they have to invest may be 5% or 10% of their holdings and represent a $25k to $250k total investment. 

By definition this capital is allocated for higher risk and higher return investments that co-vary differently than other, more typical, securities instruments offered for sale on large exchanges.  

So as is the case with most financial conversations, how one invests depends on several things, and that is why having a conversation to discuss the merits of the investment should include a knowledgeable sponsor and possibly other members of your team.  

A good steward of your funds should welcome the opportunity to respond to tough questions and will take the time needed to walk you through the risks and how they’re being managed.  

All investments carry risk, and a good response plan will indicate that the sponsor has been through market cycles, understands risk, and has strategies to deal with them as they arise. 

The extra yield that the investment carries, and whether or not it is a good investment relative to others, depends to a large degree on the quality of the plans for downside risk if it manifests.