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.
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!
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, 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.
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 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 financial 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 help to convert that USD into USDC and facilitate the transaction I described above. Some of these players include: Circle, Genesis, Anchorage, and Compound, to name a few. 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.