We use the tools of mechanism design, combined with the theory of riskmeasures, to analyze how a cash constrained owner of an asset with knownstochastic returns raises capital from a population of investors that differ intheir risk aversion and budget constraints. The issuer partitions the asset’scash flow into several asset-backed securities, one for each type of investor. Theoptimal partition conforms to the commonly observed practice of tranching intosenior debt, junior debt and equity. Tranching endogenously arises due to thedifferences in risk appetites among agents, and in the budget constraints theyface.