Spare a thought for corporate treasurers as they mull where to invest their excess cash.
With central banks turning the monetary expansion taps on full blast for 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 how they invest their cash.
“The low interest-rate environment has forced everyone to be more creative in how they approach investing and what they want out of it,” says Sebastian Ramos, executive vice president of Global Trading and Products at Institutional Cash Distributors (ICD), a San Francisco–based short-term investment portal that provides treasurers with access to more than 300 investment products.
Ramos says treasurers want additional returns without excessive additional risk while maintaining access to liquidity. In the early stages of the pandemic, government money market funds were the “vehicle of choice,” according to the authors of a November 2020 report by the Investment Company Institute’s Covid-19 Market Impact Working Group. Inflows to government money market funds in March 2020 totaled $834 billion. Some treasurers also investigated higher-yielding alternatives such as short-duration bond funds, he adds.
“Nearly half of the companies we speak to plan to hold elevated cash balances, and some are even considering increasing their liquid cash balances amid the uncertainty of the Delta variant and uncertainty around their supply chain,” says Karen Ly, head of Global Liquidity Solution Specialists, Global Transaction Services at Bank of America (BofA). “We see our clients focused on optimizing their existing structures and identifying opportunities to reduce costs and interest expense.”
Warming to Bitcoin
The treasury professionals with whom ICD works are not willing to sacrifice liquidity in the search for yield, notes Ramos. However, the current economic climate has forced some companies to rewrite the corporate investment rulebook and put some of their cash at risk in return 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 part of its treasury reserve assets in bitcoins.
One of the biggest Bitcoin plays came from business intelligence firm MicroStrategy, which as of June 21 held 105,085 bitcoins, acquired for an aggregate purchase price of approximately $2.7 billion and an average purchase price of roughly $26,080 per bitcoin, including fees and expenses. Bitcoins are now the principal holding in its treasury 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 chairman and CEO Michael Saylor, who had predicted the demise of Bitcoin back in 2013, has become a corporate evangelist for cryptocurrency. Why the about-face? According to Saylor, the macro conditions—inflationary and expansionary fiat environment, credit flowing freely and interest rates at an all-time low—means companies need to recapitalize with an asset that will appreciate faster than the rate of monetary expansion. For MicroStrategy, that asset is bitcoins.
It’s an investment philosophy shared by Marathon, one of the largest bitcoin miners in North America. In January, the firm swapped a cash treasury for $150 million in bitcoins using NYDIG, a New York financial services firm dedicated to Bitcoin. “We did it because we had excess cash on our balance sheet, and we believe Bitcoin will be worth much more than it is today,” says Fred Thiel, Marathon’s CEO.
Thiel acknowledges that Marathon is a little unusual, as it is a Bitcoin miner, so it feels comfortable with it as an asset class. “I understand the conservative nature of treasurers,” he adds. “You’re working with currency risk; volatility risk; potential short-term cash flow needs; concern that your money may not be available when you need it to convert back into fiat currency. We’re much more comfortable with these risks.”
But Thiel argues that there are more companies holding bitcoins than let on. “People don’t want to be seen as advocates, so they’re not going to talk about investing large amounts of assets in that space,” he says. To gain experience investing in bitcoins, Thiel suggests that treasurers start with a relatively conservative amount—from 1% to 5% of their cash reserves.
“It’s getting easier to invest in bitcoins every day,” he explains. “Banks are adopting tools to make it easier for people to buy and hold bitcoins. Exchanges like Gemini and Coinbase have large institutional trading desks. It’s becoming so ingrained in financial markets that in two years you’ll look at it from a corporate treasury perspective, do your risk analysis, acquire and hold it. After that, it will be no different from holding any other asset.”
But for now, holding bitcoins on a company’s balance sheet is not the same as holding other asset classes. For one thing, it is classed as an intangible asset, which means if its price drops, companies need to write down the value of their holdings as an impairment. Also, any bitcoin used or sold often attracts capital gains tax in most jurisdictions, as they considered it an asset.
The finance function needs to get involved when a company wants to have crypto on its balance sheet, says Juliet Grabowski, managing director and partner at the Boston Consulting Group (BCG). “Finance leaders need to be on top of any moves toward crypto, to both maximize value and minimize risk,” she says. “The finance functions need to help define key elements of governance [acceptance criteria], drive related investment decisions [hold or translate into home country currency] and appropriately work within key risk processes [anti-money laundering and know-your-customer precautions].”
Despite the potential for above-inflation returns, Bitcoin’s pricing volatility, the fact that investor protections for digital assets are not ironclad and the poor environmental track record of many cryptocurrencies remain turnoffs for many finance executives.
“Many treasurers are still not comfortable working with cryptocurrencies,” says ICD’s Ramos. But some are increasingly turning to is environmental, social and governance (ESG) investing, or social-impact investing. ESG-related investments have not been affected by the low interest-rate environment, says BofA’s Ly. “Clients seem to be more interested than ever in this asset class. But they are attracted to it for reasons other than yield.”
Once a company has accurately forecast operating cash levels, BofA’s Ly says, treasurers can deploy strategic cash into social-impact investments. These include investing in minority-owned companies, 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 payment 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 to fight barriers to economic equity.” One of the financial institutions that PayPal works with is Oakland, California-based fintech and impact-investment platform provider CNote’s Wisdom Fund, a fixed-income vehicle that lends to women-owned businesses, and its FDIC-insured Promise cash management account, which deposits cash with mission-driven credit unions and community-development financial institutions (CDFIs).
“Corporate C-suite executives are now exploring what more they can do to show up as corporate citizens for their employees, clients and shareholders,” says Catherine Berman, CNote’s CEO and co-founder. “Now there are some really exciting opportunities to maintain their commitment to capital preservation and liquidity, while supporting social justice through impact investments.”
The money companies invest, says Berman, is put to work in a low-income community, funding things like affordable housing or creation of a health clinic. Most of the corporates CNote works with have large cash reserves and allocate anywhere from 1% to 2% of their cash or make an initial commitment between $20 million and $50 million. The cash is usually invested in one-or-two-year cash deposits. “Most treasurers say they want this to be a sustainable commitment,” she adds. “It’s not just a press release or overnight deposit.”
But how do companies know whether a CDFI or minority depository institution is safe and whether their money will make a real impact? It is also difficult for them to open accounts at scale at these institutions without setting up a dedicated team to manage them.
“We help them do it more cost efficiently,” says Berman. “Corporates want to make sure they are lending to people of color and have a deeper dive into the thousands of community mission-driven deposit institutions. It’s more about validating that the money is doing the right things.”