Keep a thought for corporate treasurers as they consider where to invest their excess cash.

With central banks slamming the taps on monetary expansion over the past decade, interest rates in low or negative territory, and an inflationary environment on the near horizon, many treasurers are being forced to rethink the way they invest their cash.

“The low interest rate environment has forced everyone to be more creative in how they approach investing and what they expect from them,” says Sebastian Ramos, executive vice president of global trade and products at Institutional Cash Distributors (ICD), a San Francisco-based short-term investment portal that gives treasurers access to over 300 investment products.

Ramos says treasurers want additional returns without excessive additional risk while maintaining access to cash. In the early stages of the pandemic, public money market funds were the ‘vehicle of choice’, according to the authors of a November 2020 report from the Investment Company Institute’s Covid-19 Market Impact Task Force . Inflows into public money market funds in March 2020 totaled $ 834 billion. Some treasurers have also looked at high yield alternatives such as short bond funds, he adds.

“Almost half of the companies we speak with plan to hold high cash balances, and some are even considering increasing their liquid cash balances amid the uncertainty of the Delta variant and the uncertainty around their. supply chain, ”said Karen Ly, Head of Global Liquidity Solution. Specialists, Global Transaction Services at Bank of America (BofA). “We see our clients focusing on optimizing their existing structures and identifying opportunities to reduce costs and interest expense. “

Bitcoin warming

The treasury professionals ICD works with are unwilling to sacrifice cash in search of yield, Ramos notes. However, the current economic climate has forced some companies to rewrite corporate investment rules and put some of their cash at risk in exchange for better hedges against inflation and currency devaluation. Earlier this year, MicroStrategy, Marathon Digital Holdings and Tesla raised eyebrows when they announced that each had invested some of their cash reserves in bitcoin.

One of the biggest Bitcoin games came from business intelligence firm MicroStrategy, which as of June 21 held 105,085 bitcoins, acquired for an aggregate purchase price of around $ 2.7 billion and an average purchase price of around $ 26,080 per bitcoin including fees and expenses. Bitcoin is now the main asset in its cash reserve strategy. According to MicroStrategy’s second quarter earnings report, as of June 30, the company’s bitcoin holdings had a non-GAAP market value of $ 3.7 billion.

MicroStrategy President and CEO Michael Saylor, who predicted Bitcoin’s demise in 2013, has become a corporate evangelist for cryptocurrency. Why the about-face? According to Saylor, macroeconomic conditions – inflationary and expansionary fiat environment, free flowing credit, and historically low interest rates – mean companies need to recapitalize with assets that will appreciate faster than the rate of monetary expansion. . For MicroStrategy, this asset is bitcoin.

It is an investment philosophy shared by Marathon, one of the largest bitcoin miners in North America. In January, the company exchanged cash in cash for $ 150 million in bitcoin using NYDIG, a New York-based financial services company dedicated to Bitcoin. “We did this because we had excess cash on our balance sheet, and we believe Bitcoin will be worth a lot more than it is today,” said Fred Thiel, CEO of Marathon.

Thiel acknowledges that Marathon is a bit unusual, as it is a Bitcoin miner, so he feels comfortable with it as an asset class. “I understand the conservative nature of treasurers,” he adds. “You work with currency risk; volatility risk; potential short-term cash requirements; worry that your money will not be available when you need it to convert it back to fiat money. We are much more comfortable with these risks.

But Thiel maintains that there are more companies holding bitcoin than he suggests. “People don’t want to be seen as advocates, so they’re not going to talk about investing large amounts of assets in this space,” he says. To gain bitcoin investment experience, Thiel suggests treasurers start with a relatively conservative amount, 1% to 5% of their cash reserves.

“It’s getting easier and easier to invest in bitcoin every day,” he explains. “Banks are adopting tools to make it easier for people to buy and hold bitcoin. Exchanges like Gemini and Coinbase have large institutional trading desks. It’s so ingrained in the financial markets that in two years you’ll be looking at it from a corporate treasury perspective, doing your risk analysis, acquiring it, and holding it. After that, it will be no different than owning any other asset. “

But for now, holding bitcoin on a company’s balance sheet is not the same as holding other asset classes. On the one hand, it is classified as an intangible asset, which means that if its price falls, companies must write down the value of their investments as depreciation. Additionally, any bitcoin used or sold is often taxed on capital gains in most jurisdictions because they viewed it as an asset.

The finance function needs to get involved when a company wants to have cryptos on its balance sheet, says Juliet Grabowski, managing director and partner of the Boston Consulting Group (BCG). “Financial executives need to be aware of any move towards crypto, both to maximize value and minimize risk,” she says. “Financial functions should help define the key elements of governance [acceptance criteria], make the associated investment decisions [hold or translate into home country currency] and work appropriately within key risk processes [anti-money laundering and know-your-customer precautions]. “

Mission-driven investments

Despite the potential for returns above inflation, Bitcoin’s price volatility, the fact that investor protections for digital assets are not foolproof, and the poor environmental record of many cryptocurrencies remain brakes for many. many financial leaders.

“Many treasurers are still not comfortable with cryptocurrencies,” says Ramos of the ICD. But some are increasingly turning to environmental, social and governance (ESG) investment or social impact investing. ESG-related investments have not been affected by the low interest rate environment, says Ly of BofA. “Customers seem more than ever interested in this asset class. But they are drawn to it for reasons other than performance.

Once a company has accurately forecasted operating cash levels, says Ly of BofA, treasurers can deploy strategic cash into social impact investments. These include investing in minority-owned businesses, affordable housing funds and community development banks. Coffee giant Starbucks set up a $ 100 million community resilience fund in January to support small businesses and community development projects in black, Native American and other non-white neighborhoods.

In June, online payments provider PayPal announced it would “deposit $ 135 million of its capital into mission-driven financial institutions and management funds that help underserved communities of color tackle barriers to economic equity ”. One of the financial institutions PayPal works with is CNote’s Wisdom Fund, an Oakland, Calif.-based financial technology and impact investing platform provider, a fixed income vehicle that lends to women-owned businesses, and its FDIC-insured Promise cash management account, which deposits cash with mission credit unions and community development finance institutions (CDFIs).

“Senior corporate executives are now exploring what more they can do to present themselves as a good corporate citizen for their employees, customers and shareholders,” said Catherine Berman, CEO and co-founder of CNote. “Now there are some really exciting opportunities to maintain their commitment to capital preservation and liquidity, while supporting social justice through impact investing. “

Money invested by companies, Berman says, is used in a low-income community, funding things like affordable housing or the creation of a health clinic. Most of the companies CNote works with have large cash reserves and allocate between 1% and 2% of their cash flow or make an initial commitment between $ 20 and $ 50 million. The money is usually invested in cash deposits at one or two years. “Most treasurers say they want this to be a lasting commitment,” she adds. “It’s not just a press release or an overnight filing.”

But how do companies know if a CDFI or minority depository is safe and if their money will have a real impact? It is also difficult for them to open large-scale accounts at these establishments without setting up a dedicated team to manage them.

“We’re helping them do it more cost effectively,” Berman says. “Businesses want to make sure they’re lending to people of color and delve deeper into the thousands of mission-driven community depositories. It’s more about validating that money does the right things.


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