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.
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.