The Briefing: How Ramp’s early adoption of stablecoins increased our Corporate Treasury returns
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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.
- 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). 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.