By Nancy Mar, Ph.D., Linda Ruiz-Zaiko, Ivan Troufanov
In 2015, data flash storage company Pure Storage decided to go public. But a salient concern was what to do with the proceeds. Management wanted to invest the cash, but there was no one in-house who had the expertise to structure and manage a portfolio.
The finance team realized it needed the expertise that comes with a treasury function before going public. The team moved quickly and established treasury operations three weeks before the IPO.
Strategic investment plan
When a company receives a sudden and substantial influx of cash from an IPO or secondary offering, senior management and the board of directors will be very focused on how the proceeds will be invested and safeguarded. Best practice is to formulate a strategic investment plan for the overall investment of the company’s domestic and offshore balance sheet cash. It forms the framework for the investment program. Large cash pools can result from IPOs, mergers, debt issuance, and secondary equity offerings. Proceeds may be earmarked for future acquisitions, capital expenditures, stock repurchase, R&D, joint ventures and working capital.
Even as a pre-IPO, private corporation, quarterly volatile investment returns can significantly impact the company’s earnings. Once a company becomes public, investment results become more visible as they have the potential to adversely impact earnings per share.
Developing a plan that ensures liquidity, diversification, risk-adjusted returns, and volatility is important to gain the support of the board of directors. A risk/return analysis by security sector, maturity/duration, credit quality, diversification and concentration risk can provide interesting insights. This analysis should also include risk control techniques to manage interest rate, market, and specific risk. Quantifying net realized loss constraints will allow management to better define their risk tolerance.
Investment policy statement
The strategic investment plan provides the overarching structure for the investments. The investment policy statement (IPS) is a more detailed description of how the portfolios will be invested. It includes eligible investments, credit ratings, duration, maturity, and overall portfolio requirements. The IPS should constrain the potential for the inadvertent introduction of leverage or indirect credit concentrations. The policy will also establish standards and risk control criteria for the custodian, loss constraints, broker/dealer standards, counterparty criteria, manager authority and identify potential conflicts of interest. Risk controls will include compliance criteria, manager performance metrics, relevant benchmarks and procedures for policy exceptions.
Current treasury infrastructure
Today, Pure Storage is a public company and the banking structure has been changed to enable future growth, scalability, efficiency and visibility. It also has investment portfolios that earn a good return for the commensurate risk while keeping capital preservation and liquidity as its top priorities.
Domestically, Pure Storage has established an account structure with a nationally chartered bank where accounts are segregated by purpose and ZBA to a parent account, which sees little actual activity itself. It has automated the AP function so that weekly XML payment files are approved within its ERP system and directly uploaded to the bank’s payment processor via a secure host-to-host connection. All electronic payments types are now included, such as ACH, wires and single use accounts, the last of which also provide the company with a rebate as a percentage of AP spend. Checks are now the payment type of last resort. Similarly, by the time of this publication, AR will have been streamlined with automatic invoice matching.
Internationally, Pure Storage is in the process of opening local currency and USD accounts in each country directly with an internationally recognized bank. All international accounts will now be completely transparent and consolidated under one bank portal, access to which will be administered by treasury instead of local service providers. Monthly funding of international entities will be made in USD as opposed to local currency to mitigate FX exposure on the local currency accounts. The mirror USD accounts will enable Pure Storage to create a notional pool with its main offshore entity as the pool parent. The infrastructure to do so is being built at onset. An additional benefit of having visibility into activity on local accounts is the ability to start gathering data for forecasting, which would enable Pure Storage to begin a hedging program in the near future.
Pure Storage currently has a roster of registered investment advisors to manage its investment portfolios. Assets are held in custody with a third-party custodian, and pre-set transfer rules have been established between Pure Storage’s custodial accounts and main cash accounts. Investment guidelines have been rewritten to be more expansive while still taking into account the risk profile of senior management. Compliance to policy is reviewed on a daily basis through an investment portfolio reporting tool and any exceptions are reviewed and escalated to the CFO. Nancy Mar, Ph.D., corporate treasurer for Pure Storage Inc.; Linda Ruiz-Zaiko, president of Bridgebay Financial Inc.; and Ivan Troufanov director, assistant treasurer for NetSuite; will participate in the panel session, “Scaling Treasury Infrastructure for Rapid Growth”, at the 2016 AFP Annual Conference in Orlando
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