Structured Finance - Why Should I Care?

Every time someone asks me what I do professionally, and I tell them I work in finance, I usually see their eyes roll, and then comes the usual response “you mean like a banker”.

No.

I have never been a “banker”.

Finance is so much more than just a banker in a suit opening up an account and asking you to deposit your money into an investment fund.

This is the consistent response from people who either work in finance, or don’t work in the industry.

But then again, why should anyone care?

Well you should care, and here’s why.

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A New Business Partner

One of the leading causes of business failure (excluding factors like fraud and other negligence) is a lack of money; either in the form of sufficient cash flow, or sufficient capital.

One of the traditional definitions of money is that it is a “Means of Exchange”, and a “Store of Value”.

In real life language we know this to mean that the more money one has, then theoretically, the more opportunities one is able to take advantage of.

It’s the basic principle behind why we all work so hard to earn as much money as we can.

Opportunity however, does not necessarily mean “a new venture” or “a new investment”; many times it can simply mean: “I was able to survive the hard times”.

The problem is that sourcing capital has become significantly harder since 2008. In the aftermath of the financial crisis, banks pulled back from corporate lending, and they never fully returned. This created a gap in the market which has not disappeared. It grew, and keeps growing.

Into that gap stepped a different kind of financier. Not a bank. An institution that raises its own capital and puts it to work financing businesses that banks are no longer willing to look at.

The difference is not just who has become the main provider of finance. It is how they provide finance. Where a bank offers rigid, standardised products, non-bank institutions will structure a solution around the specific needs of the business; its cash flows, its assets, its operating cycle. They are more expensive than a bank. But they are also more flexible, more commercial, and able to act more like a business partner rather than just a man in a suit, not empathetic to your specific needs.

The catch is that this kind of capital tends to find its way to larger businesses first. The upper-middle and large corporate markets are well served. Small and medium-sized businesses — the ones that often need it most — remain heavily underserved. The age-old problem: when you need money, nobody wants to lend it to you. When you have money, everyone does.

Civilization requires infrastructure, but infrastructure requires alchemy.

So why does this all matter?

And if you don’t work in finance, why should you even care?

The infrastructure you are working with or selling or marketing didn’t build itself.

A new cruise terminal, boutique hotel district, ski lift upgrade, new doctors rooms, better public transport networks, even the keyboard I am typing this on, all gets developed and built using some form of Project Finance or Structured Finance.

The new project your division is working on was likely funded through some form of Structured Finance solution, and its the reason why your budget and key deliverables become such a talking point with the finance division.

A really interest example is the “bed tax” that hotels charge (the small levy charged on a hotel-room-night) are most likely securitised. In other words, this future cash flow is turned into a financial product that you can buy, and with the money raised, that is sometimes used to fund marketing budgets for the hotel.

An even more compelling example are Catastrophe Bonds.

A Catastrophe Bond is a type of insurance product that pays out when a particular catastrophe occurs (this is simplifying things, but it captures the overall point).

A tourism-dependent economy can be wiped out by one single catastrophic event, like a hurricane, earthquake, or pandemic.

The Caribbean Islands have the Caribbean Catastrophe Risk Insurance Facility (CCRIF) (link)

It is a pooled, structured, risk-transfer vehicle (another word for financial product). Basically investors will buy this financial product in return for a yield. But when the catastrophe occurs the capital from these investors is paid out to the respective government agencies of the Caribbean Islands.

It’s this cash payout that can keep tourism budgets alive, and even fund the key “recovery campaigns”.

We Are All Connected

But, have you ever stopped to think where these Non-Bank Institutions get their capital from - the very capital they are giving to you?

The most likely answer is: YOU.

The largest providers of capital to these institutions are pension funds, insurance companies, and even sovereign wealth funds.

So the kicker is, YOU are essentially, indirectly, financing all these projects that keep economies going.

Which is why when the finance department gets itchy about budgets and timelines, just remember that the missed deliverable will land up impacting the return on investment for the Non-Bank Institution, which may impact the return on investment to the pension fund… which you could be invested in.

Finance matters. Finance is not something that happens to other people in other buildings. It is the infrastructure beneath everything — the businesses you work for, the hotels you stay in, the roads you drive on, and the retirement you are working toward.

That is why you should care.

If you found this interesting, and would like to learn more, get in touch.

PS. There is a way to raise capital without needing a Non-Financial Institution, and involves setting up your own financial opportunity.