Structured finance: mitigating risk and diversifying investments

July 2023
Lending is a tricky business. There are numerous, specific risks – and these risks can often be high enough to deter investors. However, when the financing is precisely tailored, with stipulations that protect lenders, these investments can provide strong portfolio diversification and returns. This is what we call “structured finance.” 

At its core, structured finance is a way to provide credit to companies with complicated financing needs while protecting lenders. Specific mechanisms built around a company’s actual practices and assets ensure that investors are protected, borrowers receive capital and products meet needs.

I like to use wind farms to explain how structured finance works. When you are building a wind farm, assets must be located in one place in order to produce energy. And those assets can’t be sold easily on eBay should the company go bankrupt. In short, it's not a good candidate for standard asset-based lending – the loan must be structured differently.

So, let’s expand on this. Thanks to increased energy demand, this wind farm already has a contract to sell power to a utility company. With a structured loan, we can use that contract as collateral: a guarantee to receive cash flow and ensure debt repayment. However, the risk profile of the transaction has changed – there are now two players to assess, the borrower and their customer. The terms of the loan must ensure that the utility company can actually buy the power produced. This could be done, for example, through a contractual clause that requires a minimum credit rating.

To take this example even further, consider that wind power is an intermittent energy source. As such, we need to account for periods of wind drought. This means structuring the debt with buffers to mitigate the adverse effects of reduced energy production and sales. We can also use financial modelling to stress test scenarios to understand financing resilience. In short, each transaction involves a wide range of risks that must be assessed and hedged.

This is the unique differentiator of structured loans: creating a contractual framework for ensuring repayment while providing funding to a business. 

Allianz Trade Investment Partners invests on behalf of Allianz entities in debt provided–and, typically, structured–by banks. These investments are not open to retail investors; our work is private market investing. While the public market is dominated by tradable shares available to any retail investor, the private debt market comprises a few investors investing in products that are not widely available or tradable.

Private market products come in many forms, from private equity and venture capital to direct lending and real assets. We invest predominately in private debt with real assets underlying in a wide range of sectors. This includes core infrastructure, digital and telecoms, and renewable energy – such as loans to finance wind farms!

Our work is always meant to complement the investors’ goals. We can account for our clients’ needs, the bank's rules and the borrowers' desires to invest in a loan that works for all parties. In addition to providing credit for special cases, structured products are a great way to diversify portfolios, as we can mix sectors, underlying debt, countries, rates and tenors. Just as critically, these investments remain strong regardless of macroeconomic conditions thanks to the strong sponsors, solid structuring and essential sectors involved in the transactions. 

At Allianz Trade Investment Partners, we are experts at investing in structured transactions that have the best potential to transform credit into returns. In the three years since our launch, despite challenging market conditions, we've deployed almost $500 million, and are targeting $1 billion while diversifying our mandate. And this is only the beginning of our growth.

We consistently have access to excellent opportunities thanks to our strong relationships with our partner banks and the exceptional network that comes with being a part of Allianz Group. As a result, we can offer our investors a steady and diverse deal flow that meets their needs.

Wei Tan

Investment Solutions Portfolio Manager
Allianz Trade