Although some of the most severe credit conditions may have slightly eased for companies seeking cash, there remains wide scope for investors to profit by supplying funds in innovative ways, as US alternatives investment house Yorkville Advisors argues.

Yorkville, a firm based in New Jersey, rolled out a fund in April this year called Yorkville Advisors II, based on the same model as its eight-year-old Yorkville Advisors I fund. The portfolios seek to profit by what are called Standby Equity Distribution Agreements, or SEDAs. The latest fund is open to investors inside and outside the US.

Typically, a firm such as Yorkville acts as a statutory underwriter for companies to distribute blocks of shares in the public market. During a specific period, such as two years, a company has a right, not obligation, to use the SEDA. If it does so, Yorkville will be legally long of the dollar amount of the company’s stock. Yorkville then sells these shares over a five-day period and deposits cash into an escrow account. As there will be additional shares that the company that is being financed must deliver to Yorkville, these shares, once sold, are Yorkville’s profit.

Investment returns on the firm’s first SEDA-linked fund have been robust, which will be clearly appealing in a fund market ravaged by heavy market losses over the past 18 months. The fund has earned annual compound returns of around 20 per cent.

As part of its earnings, Yorkville is also paid a fee for providing these SEDA deals, explained Tom Anderson, director, investor relations, told WealthBriefing in a recent interview.

So far, Yorkville Advisors II has about £10 million under management; Mr Anderson said he expects the fund to hold about $100 million by the end of this year.

“As we raise money, we will have capital that we can lend out. We’ve already been very busy and we have an extremely deep pipeline [of business],” Mr Anderson said.

The SEDA arrangement means that Yorkville gets a pre-defined profit margin and it says it does not carry credit or market risk, so there is no risk to Yorkville’s balance sheet, as can happen with traditional underwriting deals.

“Yorkville believes there are significant barriers to entry which protect its SEDA franchise. First, most Wall Street firms generally do not offer this form of financing as they believe it has the potential to cannibalize their lucrative secondary distribution business,” the firm said in a note explaining this sector.

Yorkville said it pioneered the SEDA financing structure in the US in 2001 and says this technique can be exported abroad, and has been used in countries such as Australia, Italy, Brazil, Germany, Hong Kong, and India.