Alex Song is the Head of Finance and Capital Markets at Ramp, a corporate credit card issuer and expense management company based in New York. Prior to joining Ramp in 2020, he spent more than a decade as a private credit and structured credit investor in the hedge fund industry.
How to generate ROI on our untapped capital
Over the past two and a half years, Ramp has been fortunate enough to raise over $620M in a mix of equity and debt financing. This is a significant amount of capital by any metric, but especially so relative to our low operating burn. As a result, we have a meaningful amount of excess cash on our balance sheet that we likely won’t deploy operationally for at least one, two, or even more years into the future.
As Head of Finance, capital allocation is one of my major responsibilities. As a result, I needed to figure out a way to allocate and invest all of this excess capital. Like every Corporate Treasurer or CFO, I’m tasked with efficiently managing investments by maximizing returns while also ensuring it's available when the company needs it. At the same time, I also have a fiduciary responsibility to my stakeholders and Ramp’s investors, and I have to make sure our capital is invested in a prudent manner.
The traditional options available to a Corporate Treasurer
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.
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). E.g. How much cash will we need in 6 months? 12? What about 24 months out? Where this exercise shakes out for most CFOs is a strong focus on matching asset and liability duration, as well as deep markets for liquidity purposes
As all market participants know, the current yield environment is 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. 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. Most corporate treasuries aren’t interested in taking duration risk that long. 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 than what I described above. 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.
In the below table you can see an illustrative snapshot of our core investment portfolio from a few weeks ago.
|Average Life||0.96 years|
|Effective Duration||0.95 years2.28%|
|Yield to Worst||0.41%|
You don’t have to be a former 10+ year bond trader on Wall Street to know that while the portfolio above looks safe, the yields are not very compelling. That’s one of the reasons why, as Ramp was closing its $300M Series C fundraising this past summer, I started to look around for other options to enhance our yield, without exposing us to outsized risk. In the below table, I outline a small sample of the investment opportunities the Ramp finance team evaluated.
* Good time to note that nothing in this article should be construed as investment advice. Please do your own work!
|ETFs and Mutual Funds||
ETFs with very short dated investment grade underlying holdings
|Short dated IG bonds||
Corporate and Treasury notes with short dated maturities and very high ratings
The new option for Corporate Treasurers: Stablecoins
Once the team started diligencing stablecoins in earnest, we learned about some very cool and compelling characteristics of this market. There is already a lot of outstanding literature on USDC and Stablecoins out there, so we won’t belabor the point. In summary, there is roughly $150B of Stablecoins currently outstanding with USDC specifically being one of the world's leading digital dollar stablecoins, with $41B in circulation as of mid-December 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.
The key insight is that compared to traditional bank transfers, Stablecoin movements are generally rapid, highly efficient, cheap, and open 24/7. Hence, 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 which I won’t delve into here). USDC borrowing and lending actually facilitate a significant amount of trade settlement, clearing, and money movement in the crypto-enabled DeFi ecosystem. 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.
What about actual implementation? As a Corporate Treasury who is holding a reasonable amount of excess USD, there are a number of blockchain-enabled companies that can convert that USD into USDC and facilitate the transaction I described above (Circle, Genesis and Anchorage, to name a few). Circle, as the sole minter of USDC, can provide seamless, scalable and near instant settlement in and out of the dollar digital currency – a powerful foundation for generating yield on that USDC. We have 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.
As of November 17, 2022, Circle Yield is not accepting new loans. We are evaluating future updates to the program.
In an ideal state, the user experience for Circle Yield should feel like a Certificate of Deposit (a CD that you can get at any bank): you lock up your USD for a specific term, with the expectation of a certain annualized yield. After the term matures, you have the option to take your money back, or you can roll it again. There are also a number of providers in that list above who enable “open term” products, which enable day to day liquidity without locking in a specific term. Interest accrues daily and is paid out monthly in USDC. At any point in time, if you have unencumbered USDC, you can convert it back into USD and put it back into a bank account.
Circle Yield investments are fully secured and overcollateralized with bitcoin collateral. They also generate higher yield compared to traditional bank rates and many fixed income markets. In the table below, you can see an illustrative Circle Yield fixed-term structure from late October 2021.** As you can see, for the short dated nature of the instrument, the return profile is significantly higher than what you can achieve with traditional fixed income securities.
* Good time to note again that nothing in this article should be construed as investment advice. The rates quoted above are purely indicative and are subject to market conditions, availability and approval.
**For more information around returns and Circle Yield, please click here.
That being said, this wasn’t a no-brainer. We spent over 4 months diligencing the various risks and mitigants associated with this type of transaction. Here is a very abbreviated list of topics we focused on:
- AML/KYC of the underlying borrowers
- Loan management and reporting requirements
- Collateralization management and overcollateralization provisions
- Crypto macro dynamics and market microstructure
- Liquidation and margin call provisions
- Audit-ability and attestation reports
- Counterparty capitalization and corporate governance
- Tax and Financial Reporting implications
- CeFi vs DeFi
A comprehensive summary of all of our analyses and conclusions would span many pages, so I will spare you. Suffice it to say, for all of the finance nerds out there (like me), when all is said and done, the trade construction ought to result in a financial instrument that feels similar to a short dated Covered Bond. Covered Bonds are fixed income instruments (historically popular in Europe) where your fixed income securities have dual-recourse to both the underlying asset (typically mortgage pools) and the credit counterparty (the company issuing the product). You can see where the parallels are in this example.
Hedging out most of the major risks and structuring various protections for our assets was no easy task, but we were so glad to be able to work with a team as professional and diligent as our partners at Circle. The work continues even to this day.
Takeaways & Learnings
I’m glad that the executive leadership are enterprising and entrepreneurial enough to let us participate in this exciting new Treasury product. We had the ability to be creative, thoughtful, and deliberate with our portfolio construction (we’ll publish another blog post in the future about crafting the Treasury Policy). We’re super fortunate to have the flexibility to research and delve into the Stablecoin market with the best of the best.
While the majority of our Corporate Treasury remains invested in conservative investments (like the ones we summarized in the first half of this Briefing), we are glad to be one of the first non-crypto companies in America to deploy a meaningful allocation of our Corporate Treasury into USDC through Circle Yield.
Given how persistent some of the existing market dynamics are in the crypto space, I wouldn’t be surprised if we increase our USDC allocation over time. The whole Ramp team is eager to see how this market evolves and grows over the coming years.
Originally posted 01/13/2022 at Ramp
The information contained in this article is not and should not be construed as investment advice. the information and opinions provided herein should not be taken as specific advice on the merits of any investment decision. investors should make their own decisions regarding the prospects of any investment discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.
The information contained on this website has been prepared based on publicly available information and proprietary research. The author does not guarantee the accuracy or completeness of the information provided in this document. All statements and expressions herein are the sole opinion of the author and are subject to change without notice.
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Terms apply, please see Circle Yield’s disclosures here.