1. What are the underlying assets of the investment? What is collateral and when is it relevant?

“Put simply, assets are property a company owns or controls that can be expected to drive future value. For example, an art gallery may own blue chip art and, of course, a grocery store has its brick-and-mortar building and inventory. Often, investments derive their value from their claims on the underlying assets and the cash flows those assets generate.

When it comes to evaluating an investment, understanding the underlying assets helps address several considerations: what types of risks and returns an investor could expect, and whether the investment can provide diversification within an investor’s portfolio.

A business’ underlying assets can also hint at its risks and opportunities. Assets that create or hold value in many different scenarios may carry less risk than assets whose value may fluctuate or deteriorate in certain scenarios. Investors should also consider how underlying assets may or may not contribute to the diversification of their portfolios. For instance, adding an investment in art to a portfolio that already holds a lot of art investments won’t add the same diversification benefit as an investment that’s exposed to other markets, such as real estate.

Another consideration related to the underlying assets is when an investor is evaluating opportunities in the debt or lending space. For example, some private debt investments are secured by collateral. Collateral may help reduce the risk a lender has by giving the lender a claim on the assets if, for example, a borrower has trouble meeting the terms of their borrowing. (There are many types of collateral—we’ve broken down the different types of collateral used in real estate, art finance, and litigation.)

Certain steps to consider:

• Get a clear idea of how an investment’s underlying assets might generate cash flows or drive future value.

• Evaluate scenarios where those assets might become more, or less, valuable or vulnerable.

• Consider whether those assets are similar or different compared to the rest of your portfolio. Varying assets help contribute to greater diversification.”

https://www.yieldstreet.com/resources/article/6-things-a-prospective-investor-may-want-to-ask-when-evaluating-an-alternative-investment