The YMC Risk Framework

In private investments, the business itself is only one of the problems.  Even if the investment performs, you still have to get your money back.  That's where you can run into trouble at many different points.

It doesn't matter if you hold a loan, equity, LP interest, joint venture, receivable, a physical building or an operating company.  The steps required to get paid are similar, and so are the places where those steps can break.

Some of the steps include checking the documents, dealing with competing stakeholders, confirming legal entities, understanding the priority of claims, and maybe even going through the court system.  This may lead you to cross borders, wade through different currencies and almost always means waiting.  Any one of these issues can stop the money from returning.

Most investment memos only focus on whether the asset will perform.  The memos treat everything else as routine administration.

Risk is not one thing

Most memos use "risk" to mean one thing: the asset might not perform, the borrower stops paying, the company doesn't grow, the tenant might leave, the fund may not return capital.

Those are certainly clear ways to lose money, but they are not the only ones that get you.  In illiquid deals, that risk is known upfront and you have already known about it and priced it in.

What gets you is the unnamed risk further down the process - the one the memo treated as paperwork.

The YMC Risk Framework

We built the framework to give a clear, consistent way to identify and explain the risks that standard memos miss.  It lets us state the problem in one sentence, with a clear methodology to act on it.

The framework is ten risks arranged in the order the money has to travel to come back, grouped under three questions: Is it real?  Do you own a claim?  Can you turn it into cash?

It is designed to be a veto list, not a scoring system.  Averaging is how you take a fatal problem and dilute it into an acceptable looking investment.

One: is it real?

Information risk. Is what you were told true, and is it current? Do accounts arrive late and get explained afterwards? Are you using a valuation that nobody has tested since the round or the appraisal that produced it. Are related-party dealings described as ordinary trading. Every risk below this one is measured using these numbers, so if this is broken, the rest of the analysis is probably fiction.

Counterparty risk. This risk is more about behaviour than performance.  How does the counterparty behave when it actually costs them something.  A partner who honours obligations, or even eats the shortfall when things turn sour is a very different animal from one who stalls, litigates or moves assets around.  In a good year, the two look identical, which doesn't tell you much about the risk you are taking.  

Manager risk. Who holds the keys between you and the asset. A GP, a sponsor, a servicer, a trustee, a managing partner, an operator.  In the words of Charlie Munger, "Show me the incentive and I will show you the outcome." A manager whose own economics are already worthless has no reason to take your exit seriously, especially one with a better lawyer and a long time horizon.

Two: do you own a claim?

Entity risk. Which specific legal person owes you, and does it hold anything. Not the brand on the letterhead, not the group, not the person who shook your hand. The entity that signed. A guarantee from a company with no assets is worthless, and so is a shareholding in a vehicle that turns out to own nothing but a PO Box.

Capital-structure risk. Where you sit and who is allowed to move before you do. Lenders ahead of you, preferences stacked above your equity, a co-investor with consent rights you don't have. Your outcome may depend on the incentives of whoever ranks above you, and a senior party quietly preparing to act can erase everything junior to it.

Legal risk. Do the documents give you rights? Covenants, security, transfer rights, consent rights that let you act while the problem is still fixable. Read the exit clauses before the fees. Most people do not, then discover a right of first refusal that kills the sale.

Three: can you turn it into cash?

This is the part that most people skip.

Enforcement risk. A right you cannot use is not a right. The documents may say one thing. Enforcement asks what happens when you try: court speed, insolvency freezes, recognition of foreign judgments, whether anyone will actually hand over the asset or the register. Cross-border claims often die in this gap.

Country risk. How the jurisdiction behaves. Slow courts, lost filings, tax clearances, foreign-ownership caps, capital controls that stop money leaving. An eighty-cent recovery you cannot remit is not eighty cents.

Currency risk. What you get paid in and what it is worth when it arrives. Hedging does not fix capital controls above it. You can do all the work in dollars and end up paid in something else.

Time risk. There are two clocks. Theirs: how long the process takes and what decays, or is walked out of the door, while it runs—inventory is used up, buildings dilapidate, licences expire, key people leave. Yours: whether you can still wait or continue funding the ongoing legal bills, if any.

They compound

The risks feed each other in order.

Slow enforcement turns six months into eighteen. The asset decays, so new money has to come in senior to you. Your position gets worse. The extra time can also push you into a different currency or control regime.

One problem becomes several. None were priced because none were looked at.

A big discount does not fix a broken process for getting paid. It just makes that broken process look cheap.

How we use The YMC Risk Framework

We use it as a veto. One broken risk stops the process no matter how good the rest look.

Last year we turned down a well-priced deal on entity risk alone. Real business, real assets, real cash flow. The security was granted by a company that did not own the assets. Everything else was fine. It did not matter.

The same ten questions work for equity, LP interests, joint ventures, or receivables. Only the labels change.

If you already own the position, run the questions in reverse. They show which risk broke and why something that should have taken months has taken years. That is the start of fixing it or deciding to take the loss.

If you do not own it yet, we run this process for you before the money moves.  We work on a fixed fee and you get a short note naming the risk we could not get past.

The honest floor

Our framework sorts risks, it doesn't price it.  That's a different exercise.

Knowing that enforcement is weak tells you nothing about what the position is worth.  You still have to make that call with judgement and a number.

It will not make a bad jurisdiction collectable or a $500K claim interesting to a slow court.  It doesn't replace the need for local counsel and most importantly, it cannot always see a well-built fraud.

What it does reliably is stop you from answering the wrong questions.  Most people underwrite whether the investment will work. The better question is whether the money can reach you if it does.