Alex Song, Head of Finance at Ramp, notes that during the past two and a half years, the Fintech company has been “fortunate” enough to raise more than $620M “in a mix of equity and debt financing.”
According to Ramp, this is a considerable amount of capital by any metric, but especially “so relative to [their] low operating burn.” As a result, they have “a meaningful amount of excess cash on [their] balance sheet that [they] likely won’t deploy operationally for at least one, two, or even more years into the future.”
As Head of Finance, Song explains that capital allocation is one of his “major responsibilities.” As a result, he needed to figure out a way to “allocate and invest all of this excess capital.” Like every Corporate Treasurer or CFO, he’s “tasked with efficiently managing investments by maximizing returns while also ensuring it’s available when the company needs it.”
At the same time, Song also has “a fiduciary responsibility to [his] stakeholders and Ramp’s investors, and [he has] to make sure [their] capital is invested in a prudent manner.”
Song further explained that Corporate Treasurers focus on “two main things” in determining asset allocation:
- Preservation of Capital. We need to invest in safe things, hence the focus on Government Treasuries and investment grade corporate bonds, which are generally defined as AAA to BBB rated securities.
- Liquidity. We need to manage around operating expenses, runway, and any other liquidity needs, and hence, the asset allocation decision is typically made with an eye toward the various outputs of our operating model (the topic of a future blog post).
He further notes that as all market participants might know, the current yield environment is quite challenged.
“We are 10+ years into a zero-interest rate environment and easy Fed monetary policy. One consequence of that is traditional bonds and fixed income securities are not producing compelling investment returns.”
He also mentioned that for context, investment grade (IG) bonds currently “yield on average 3-3.5%, but the average bond in the IG universe is also a 12 year bond.”
So that means we need to “take 12 year duration risk just to get to a 3-3.5% yield.” He pointed out that most corporate treasuries “aren’t interested in taking duration risk that long.”
He also shared
“Firstly, because you may need to tap into that cash well before the bonds mature. Secondly, the mark-to-market risk on that bond is quite high from an interest rate sensitivity perspective, so you’ll be saddled with all sorts of unrealized gains and losses, which will create noise in your financial reporting.”
“Therefore, for most start ups, SMBs, and even mid-market companies, Corporate Treasurers largely focus on the < 1-2 year horizon for their fixed income investments. However, if we want to stick to shorter maturities for liquidity and working capital considerations, yields are even more challenged …. As an example, Ramp’s main fixed income and ETF investments mainly consist of less than 1-2 year IG paper, and they yield roughly 25-75bps.”
He also shared that after the team started “diligencing” stablecoins in earnest, they learned about some “very cool and compelling characteristics of this market.”
He also mentioned:
“USDC is one of the world’s leading digital dollar stablecoins, with $36B in circulation as of mid-November 2021. It is fully backed by cash and equivalents and short-duration US Treasuries, so that it is always redeemable 1:1 for US dollars (USD). For the Ramp team, stablecoins seem to offer a happy middle ground, where we’re able to take advantage of the upside embedded in the massive growth of the crypto ecosystem, as well as the transparency, rigor, and safety of a well-run, (and most importantly) conservatively-managed financial product.”
He also noted:
“The key insight is that there is actually a large and vibrant ecosystem where there are natural borrowers of USDC (for technical reasons related to the contango of the BTC futures curve).”
He added that USDC borrowing and lending actually “facilitate a significant amount of trade settlement, clearing, and money movement in the crypto-enabled financial ecosystem.”
He also noted that as a holder of USDC, one can “generate a reasonably high yield as a market participant.” This serves as “a mechanism in the crypto markets not unlike that of overnight repo or term repo in the traditional banking markets,” Song explained.
As a Corporate Treasury who is holding a “reasonable amount” of excess USD, there are a number of blockchain-enabled firms that can help to “convert that USD into USDC and facilitate the transaction just described,” Song noted.
He also shared that they’ve “spent the last few months working specifically with the Circle team, and as of several months ago, have deployed a significant amount of our Corporate Treasury into the Circle Yield product.”
For more details on this extensive update, check here.