Reducing the Burden of Cash Investment

by Jennifer Doherty, Global Head of Commercialisation, Liquidity & Investment Solutions, Global Liquidity and Cash Management, HSBC and Phil Cowley, Director, Institutional Business Development, UK, HSBC Global Asset Management

As part of HSBC’s ongoing commitment to maintaining an in-depth understanding of customer needs, and delivering solutions and services accordingly, we recently conducted an analysis of liquidity management trends across treasury departments of corporations in a variety of industry sectors. The study revealed some interesting trends amongst technology, media and telecom (TMT) corporations that are relevant both for companies within the sector, but also a wider group of corporate participants who demonstrate similar characteristics in liquidity and investment management.

The burden of surplus cash

Many TMT companies are characterised by being cash-rich, and therefore, their liquidity needs tend towards investment of surplus cash rather than securing access to routine borrowing for working capital purposes. In theory, liquidity management amongst cash-rich companies is relatively straightforward: once cash has been received, treasurers can then determine how best to use it, such as whether to centralise or repatriate cash where it is feasible to do so, and how best to invest it. However, the TMT sector is distinctive in the sheer volume of cash that many treasurers need to contend with, which is often far higher than those in the energy sector, for example. Unlike some other sectors, TMT companies, (with the exception of telecom companies in some cases), have relatively low overheads, with less need for major investment in infrastructure or ‘bricks and mortar’. Technology companies further reduce their infrastructure costs by outsourcing manufacturing, while both technology and media companies, tend to promote a more flexible culture of home working and ‘bring your own device’ than more traditional industries.

Well-established objectives….

The first step for many technology and media companies, in particular, to deal with their cash is to centralise into large cash pools, typically in the US and UK, with one or two further centres in Asia. For telecom companies, which often operate more domestically, their centralisation structures will depend more on the geographies in which they operate. While TMT companies are often the most innovative in their product lines, services and business models, they remain conservative in their investment decisions. In particular, security of capital remains a primary objective. As with all corporate treasurers, segmenting cash into different tranches with different return, duration and liquidity requirements (working capital, reserve cash and strategic cash for example) is a key element to a successful investment strategy. Given TMT firms will often have larger amounts that they can allocate to longer-term reserve and strategic cash than many other industries, they are often in a better position to compromise on short-term access to liquidity for these tranches. As a result, they are in a position to access a broader spectrum of instruments across a wider array of tenors than companies that need more immediate access to cash.

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… but a new investment environment

Over recent years, prompted first by the global financial crisis, but latterly by the ongoing low interest rate environment and regulatory change, particularly Basel III and money market fund (MMF) reforms in the US, many treasurers of TMT companies have reviewed their investment strategy. For example, under Basel III, not all deposits are of comparable value to banks, so their appetite has been reduced. For TMT businesses, this is less of a consideration than for treasurers of non-bank financial institutions, for example, where there is declining bank appetite for deposits. TMT treasurers, on the other hand, can still expect that cash deposits have a value to their banks, whether operating or non-operating balances, and therefore there will continue to be an appetite. In addition, MMFs can play an important role in corporations’ investment policy, particularly to hold cash required for working capital purposes, given their benefits of security through diversification of cash holdings while providing daily liquidity. MMFs are also subject to regulatory reform, with new rules being implemented in the US later this year, and under review in Europe, which will bring about some changes to how these funds operate; however, they continue to provide a valuable alternative to TMT companies that have utilised credit limits with banks, and therefore looking for other receptacles of short term cash. 

However, given the large and often growing cash balances than many TMT companies maintain, treasurers are seeking to maximise their investment opportunities as far as possible across an array of instruments and tenors. This includes both on-balance sheet and off-balance sheet instruments such as MMFs and other types of investment funds, including separately managed accounts, and instruments such as commercial paper, gilts and US treasuries, repos and time deposits, which may have played a less significant role in some TMT treasurers’ investment strategies in the past.

Treasurers also need to ensure that they are able to take advantage of innovative investment solutions that banks are developing to be attractive to investors whilst allowing them to fulfil their Basel III obligations, such as 33 day or three month notice accounts. Asset managers are also identifying areas that can add value to investors, including products that take account of the changing liquidity appetite of banks as the primary issuers of money market instruments. As a result, it is important to review emerging opportunities regularly, and update investment policies accordingly.

A new generation of investment innovation

As well as managing large volumes of cash, our study emphasised the importance of automation and efficiency amongst TMT treasurers. In many cases, these companies are already leading the field in adoption of sophisticated treasury management technology integrated with online dealing portals as well as electronic banking tools. As a result, these companies are amongst those best-positioned to adopt HSBC’s automated investment solution that links accounts directly to HSBC and third party MMFs. By seamlessly integrating cash and liquidity management activities with investments, treasurers gain the benefit of diversification, same-day access to liquidity, and potentially higher investment returns without compromising on visibility or control over cash.

Given the volume of cash that TMT treasurers need to manage, we are anticipating that TMT treasurers will be interested in exploring further development to this automated investment solution that HSBC will be rolling out in due course. For example, by allowing treasurers to define their investment policies and limits within the system, funds can then be invested automatically within these parameters, enhancing automation and control over the cash investment process.

It is not only in the provision of investment instruments and liquidity solutions that a global bank such as HSBC adds value to TMT companies. Many large multinationals in this sector work with four or five partner banks, and given the scale of the investment challenge that many of these treasurers face, the benefits of harnessing these banks’ expertise and detailed market knowledge should not be underestimated. By doing so, treasurers gain access to timely market updates and information on emerging solutions, but also have the opportunity to contribute to the wealth of knowledge that informs the way that banks such as HSBC design, deliver and support solutions to our clients.

Jennifer Doherty Global Head of Commercialisation, Liquidity & Investment Solutions, Global Liquidity and Cash Management, HSBC Jennifer manages the Global Liquidity and Investments advisory team at HSBC. She leads an international team of liquidity advisors who are responsible for structuring complex client solutions across multiple geographies and jurisdictions. A seasoned professional with 13 years banking & financial services experience, she has extensive experience of managing product portfolios and developing bespoke solutions for corporate and institutional clients. Based in London, Jennifer is responsible for defining our liquidity product propositions to ensure we meet and exceed our client’s needs.  Prior to joining HSBC, Jennifer held a number of liquidity related roles at Bank of America Merrill Lynch. Before that she worked in the core liquidity team at the Royal Bank of Scotland.