In this episode of Controllers Classified, host Erik Zhou is joined by Eugene Spevakov, Treasurer and Head of Corporate FP&A at 6sense. The conversation begins by tracing Eugene’s path, highlighting his start in civil engineering and his transition into treasury and corporate finance. It then does a deep dive into the primary responsibilities of a treasury function and Eugene’s focus areas at 6sense, including the design of an investment portfolio to optimize yield and reduce banking fees. The theme throughout is how to effectively manage the risk by identifying what you can control and scenario planning for what you can’t.
In this episode of Controllers Classified, host Erik Zhou is joined by Eugene Spevakov, Treasurer and Head of Corporate FP&A at 6sense. The conversation begins by tracing Eugene’s path, highlighting his start in civil engineering and his transition into treasury and corporate finance.
The episode then dives deep into the primary responsibilities of a treasury function: cash and risk management (aka, you need to be able to move money from point A to point B safely). Eugene spends time explaining what both mean and best practices associated (tip: prioritize cash preservation, liquidity, then yield). As a part of that, he reflects on the SVB collapse a year ago, and how that galvanized a lot of companies to take a hard look at their cash and risk management processes.
The conversation pivots to Eugene’s focus areas and accomplishments at 6sense. He shares how he built the company’s first official treasury function, executed a senior secured credit facility, and designed an investment portfolio to optimize yield and reduce banking fees. As a part of this, he spends a few minutes on the macro environment, including the end of the ZIRP era and the influence of geopolitics. His primary point? Manage the risk you can control, and scenario plan for what you can’t.
This is a “don’t miss” episode for finance leaders looking to build effective cash and risk management strategies.
Key Quotes
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Eugene: [00:00:00] Ultimately, treasury and finance in general is a service organization within the company. You know, we serve our stakeholders, internal and external. So, as these stakeholders move faster, you need to make sure that you can respond to their needs.
Announcer: Welcome to Controllers Classified, the podcast where we take a deep dive into the dynamic world of controllers, Accountants and finance leaders, and hear how their ever evolving roles are redefining accounting and the future of business.
And now, here's your host, Erik Zhou.
Erik: Welcome to Controllers Classified. I'm your host, ErikZhou, Chief Accounting Officer at Brex. Today, I'm honored to have Eugene Spevakovkov, treasurer and head of corporate FP& A at 6sense. Thanks for being on the show today, Eugene.
Eugene: Thank you, Erik. Excited to be here. Appreciate you inviting me to the podcast.
Erik: Can you [00:01:00] maybe start off by giving the audience an intro to yourself and maybe a little bit about what 6sense does?
Eugene: Sure. I'm, as you mentioned, Treasurer and Head of Corp FP& A at 6sense. In addition to those functions, I currently handle AP as well.
And 6sense is a very exciting SaaS company. We're in a space called RevTech. So, in a short, we help our customers find their customers faster and more efficiently. We use all kinds of cool technology, including AI, and it's actually been using AI before AI became such a hot craze, and actually that's part of the reason that I was excited by joining 6sense.
Erik: I heard a rumor that maybe you weren't always in finance. To start off your working career. So I am curious about how you ended up in treasury management and what your background is for that.
Eugene: Yeah, I guess most treasurers, most treasury folks. Didn't [00:02:00] go to the undergrad saying they're going to be the best treasurer ever out there.
So yeah, let me kind of give you a little background on myself. I started out as an engineer. My undergrad was in civil and environmental engineering. I was, I liked the environmental part because I thought I was going to save the world from all the pollution. and create a sustainable lifestyle. After my undergrad, I had two jobs in the engineering field.
The first one was very exciting when I first started it, but it became very tedious, very fast, and I left it very quickly. It was for a small small professional engineering design firm where I designed buildings, and I did the same design over and over again, so I became tedious. And then I went to AT& T, which was back then called Southwestern Belt Corporation, or SBC, where I designed and managed my projects.
And I loved that job because I was in control of my area. I was responsible for specific geography. So I did everything start to finish within my [00:03:00] function. So I loved it so much that I became scared that I'd become complacent, and I decided to go to business school to kind of challenge myself and expand my horizons to learn new things.
So after two years of business school, I was very fortunate to get hired back AT& T in something called Finance Leadership Program, which was a three year rotational program with, One year rotation, one year in each rotation. So I did a couple of BU finance rotations. What were those
Erik: rotations, if you don't mind me asking, between the three years?
Eugene: So the first one was in a long distance business unit, which was a dying business unit. It was 2006 and everybody was switching to cell phones and cutting cords. And you saw the number of subscribers kind of doing this. It was just on a downward slope. It was. A little bit depressing, to be honest.
You're looking at a business that's dying. And just to give you an idea how fast it was dying, when I joined it in the beginning of my rotation, we had over [00:04:00] 20 people on our, in, in our team. When I left a year later, we had I think four people on my team. So they were shutting down a business unit.
It was a good experience though, but it was kind of like one of those things, probably not the best place to start your finance career. The second rotation was in a BU that deals with U verse. U verse was a flagship product for AT& T to roll out broadband. So that's, that was the age when You know, internet was booming and everybody wanted faster, faster access to the internet.
So U verse was one of those fiber to the neighborhood type of projects. It was super exciting. We were growing very fast. We were growing as fast as we can add technicians to put on the field to basically do the installation. And then for my third rotation, you know, all these rotations you have a say where you go.
You don't get necessarily a pick, but you get, get a vote. So for the third rotation, I chose treasury and treasury is one of those things that I was always interested in [00:05:00] markets. I was always interested in external things outside of the company. And I was also doing all my CFAs. So I was doing my level three at the time when I chose this rotation.
So I thought that the CFA curriculum that I was studying aligns well with treasury rotation. I was fortunate enough to land in treasury. And since then I love treasury so much that I stayed there for many years. Unfortunately for me, my treasury rotation took me to Texas and I wanted to get back to California.
I was newly married. My wife stayed here. It was kind of difficult arranging employment back then between the two of us. And you know, one story short, I wanted to get back to California and I'm joking around that I kept my job and I changed companies. So I love being in treasury. And I made the transition back to California.
Erik: For those first two, and I know you worked on treasury and maybe treasury isn't attached to a specific business unit, but for the first two rotations, you talked [00:06:00] about the business units. Were you like in an FP& A role or a finance role? Yeah, it was.
Eugene: Yeah, it was an FP& A role to support the business unit.
So I was the finance guy for the business unit, AT& T being a very large organization, there are several layers of FP& A. So there's the corporate FP& A that sets the targets, and then the business units take those targets. And they're basically the boots on the ground to connect operations to the finance financial targets that they give us.
Erik: Makes sense. Can you, so, okay, so then you took your third rotation, now you have a career in treasury. What are your current responsibilities at 6sense as its treasurer?
Eugene: Yeah, so at 6sense, and one of the reasons I, Was excited to join 6sense because I've been in treasury for so long, and I was stepping beyond treasury, even my prior roles, but I wanted to kind of expand and go beyond treasury.
So I took on treasury and there was no official treasury function before I joined. There's always treasury work that's being done, [00:07:00] even though it might not have been official. Personnel dedicated to treasury. So my first order of business was to kind of build it by the treasury function, get up and running, but also taking initially responsibilities for AP.
AR and payroll. So a lot of the FinOps responsibilities, which was fun, you know, learning new stuff. And you also in an environment that's very fast paced, very fast growth, kind of this late stage startup, things are constantly moving, constantly figuring out, you know, being an engineer deep down, right? I'm always looking to solve a problem.
Erik: You mentioned a little bit about how Right, you went to 6sense, the treasury function wasn't yet established, so you helped to establish that. But, the processes, it was just informally done, like people were doing treasury without even calling it that. Like, what are those processes that you see people do, and they don't have a treasury department, but it's just like, they have to do it.
You know, even though [00:08:00] they don't call it that.
Eugene: Yeah, I mean, we can get into kind of a little bit more into what treasury does in various treasury functions and various things that treasury is focused on. But the primary function that the company starts with, and every company, big or small, would have it, You need to get cash from point A to point B, right?
Money, money needs to move around. You know, that's treasury's job to make sure that this cash is managed. The cash comes in on time, the cash goes out, the cash goes to the right place. The cash has a place to stay. So like somebody needs to open bank accounts, somebody needs to set up wires. Somebody needs to do some kind of cash reporting.
Luckily, if somebody needs to do some kind of cash forecast, maybe some companies don't do it, but it's kind of nice to have an idea what your cash is going to do. Then if you have any international operations, you have some kind of foreign exchange component, even if you're not hedging, you don't have to hedge, but.
[00:09:00] You still need to operate in foreign currency, so maybe there's some foreign currency conversions. Then you have the capital markets aspect because every company is funding, maybe you've got a lot of equity funding, but you still need to deal maybe with some debt, potentially you want to take on some other types of funding, so that in smaller companies usually falls to the CFO.
And cash management falls to usually the controllers. So it's kind of split between those two groups.
Erik: And would you say that, you know, operating a treasury function, I kind of see what you're saying in terms of, because even at Brex, we have a treasury function now, but in the old days, we did all those things.
We made sure wires went out. We made sure payroll got paid. We made sure, you know, we settle up with MasterCard every day for our card receivables, right? So we make sure we have enough money in the bank account in order to make that payment every day. Would you say that when you create a formal treasury function, you're just bringing it all together?
Eugene: One thing that you would do is obviously bring it all under one [00:10:00] roof, right? So various things. I haven't mentioned insurance, right? Somebody needs to go about insurance. Well, you know, most folks not familiar with insurance and outside of treasury. So you rely on the broker. So you get your policies as just another example.
Now I can all go to treasury. Now I can all stay in one place. And. You know, the two aspects of treasury that, that I see is cash management and then risk management. So I see, and then there's a combination thereof where you have to kind of deal with funding capital markets. So there, the cash management part exists almost from the get go of organizational, I guess, formation, right?
It's that opening bank accounts, sending cash, receiving cash, right? So the cash management. People kind of get it, they understand it. The risk management part is more elusive because you don't really know what risk you're subject to if you don't look for it. And you might not [00:11:00] even be affected by it unless something bad happens.
Risk is kind of one of those things. You might go your whole life without experiencing some catastrophic event, or it might come up tomorrow. So managing risk is a whole different animal, which, depending how you got to treasury, you either kind of come through the path where you really understand risk, and then you learn the cash management part, or vice versa.
So if the function didn't exist, And it's really the cash management part is being done first. So that part is understood. The risk is a little bit, again, more elusive.
Erik: Like a question about how to apply it in real life. And I don't know if this applied to 6sense or, so we're a little over one year since SVB right now.
Right. So this is March of 2024. The crisis happened almost exactly one year ago, last March. Like what's the difference between a company that has a treasury function Versus a company that doesn't and both banked with SVB. Like, what are the, some of the changes, the differences that you would call out?
Eugene: Yeah. I mean, [00:12:00] I'd say in SVB, we're mainly lucked out. So I've talked to a lot of people that were very stressed because they really had a lot of a financial exposure. Having a treasurer, maybe fortuitously, I was able to launch a simply managed account where, you know, I started doing it. Maybe three, four months before SVB collapse, I was able to finish this project before SVB collapse.
So when that happened, the first question is like, Oh my God, where's our money? And the answer was very quickly. Our money is not actually SVB. Our money is with a custodian bank in a separate managed account, most of it. So that made it very easy for people to breathe, at least on that day. So that's one big difference.
You don't know how things would have shaken out. Right? But you haven't, having a treasurer with a focus on risk management had kept all the assets safe. The second part, I'd say, [00:13:00] you know, there's a difference between keeping your money in money market fund, even if it's with SVB versus keeping it on deposit with SVB.
And folks that kept money on deposit with SVB were a lot more nervous. So if you have money in money market funds, what you lose is. With SVB going down is maybe access for the time being, but you will get your funds because that's not, that was not part of SVB's assets. But if it's a deposit, that's a different story.
So I was talking to a number of folks and there was a product SVB, I forgot what it stood for, but I think it's called TAS. It's like an yield enhanced product where A portion of your cash. Yeah, I remember that. Yeah.
Erik: I, T A S. Yes. Yes. I remember that. Yes.
Eugene: Yeah. And I purposely stayed away from it. I've said like, well, okay, I can pick up 20, 30 basis points, but I take on a counterparty risk.
To me, it was natural. It just didn't feel it was worth it. And I always thought, okay, if I ever have to [00:14:00] explain to anybody why we did it, if something happens, I won't be able to explain it. So yeah. I said, no, stay away. We'll just do the money market suite, right? So that's the difference. But on the surface, you know, if you're not really thinking from the risk perspective, the counterparty risk perspective, it's like, well, that's a pretty good deal.
I get actually 20, 30 basis points, maybe 40 basis points, right? So it's those kinds of things, just small things that you're not really necessarily thinking about unless you put on your risk hat.
Erik: Thinking about kind of like just trends and challenges that you're facing today, With the treasury function, you know, how, are there any kind of like things that you will call out from that angle in your job today?
Eugene: Yeah, I mean, part of us, it just, we continue to grow and, you know, treasury function continues to evolve. So there are things that still work to be done, right? It's not necessarily. A challenge for all treasury functions, but we still, you know, migrating some of the bank accounts from some of the acquisitions, [00:15:00] but we're still, you know, post SVB, we wanted to have kind of this two, two bank cash management structure, you know, I said, when SVB collapsed, I said, this is A Lehman moment for cash management.
So the risk was not necessarily, yeah, you can park your money somewhere else. You lose the plumbing. How do you get, how do you make the payroll the next day? Right. Well, we literally had to make the payroll on Monday. So I think the payroll was. Wednesday and it needs to be funded on Monday. Well, how do you fund it?
Even if your assets are safe, but you need to get it somewhere. So you don't want to be in a situation where you kind of stuck. I mean, we had a backup option using custodian bank. It's not the best option, but at least we had an option, but we said, going forward, let's have this kind of two tier structure also with SVB collapse.
Yes, SVB is kind of back in business in the US, but for example, UK account went away. So we're trying to consolidate some of our [00:16:00] international accounts under one umbrella and have, also have SVB as kind of the backup cash management bank. So that's one challenge again, not all treasuries face this challenge.
If I step away and kind of say, well, what are all treasuries? Like, what should be on Treasurer's mind, regardless of what company you're at. I see two themes, honestly. One is kind of this more of a data dependency and having data moving faster and faster in the company. So decisions are made based on data throughout the company.
Data becoming available more faster. There's more data. And treasury just needs to keep up with that. Does it mean better systems? Maybe, yeah. Maybe that's the answer. But you need to make sure you don't fall too far behind.
Erik: What kind of data would you prioritize to try to get faster? Like, is it just like knowing at all times where the money is at which bank account?
Maybe in which currency? Maybe in which securities? Or like, what, Because there's so much stuff [00:17:00] that you can try to pull, but, you know, if you were to prioritize the data that you want to get on a more real time basis, what would that be?
Eugene: Yeah, I mean, having visibility is always great, but I think that's always been there.
I think it's more on the forecasting side and just trying to be prepared for what the business does. I mean, ultimately, treasury and finance in general is a service organization within the company. You know, we serve our stakeholders. Internal and external. So as these stakeholders move faster, you need to make sure that you can respond to their needs.
So if, for example, the business is able to make decisions quicker and pivot. And decides to, I don't know, expand geographically. Well, you need to get in front of it to make sure that you're there to support the operations. If the business says, Hey, we see lots of opportunity, we're going to launch a new product.
Okay, well, what does it mean for your working capital? You know, do we have the funding? Like, what kind of liquidity do I need to look at? So it's things like that. When business [00:18:00] decisions are made faster, treasury And finance in general needs to support it. Are you ready? Sometimes what you do needs to be in front of the business.
Like, again, you go into a new country, well, you need to have infrastructure in place. It takes time to open big accounts. So, and again, this is just one simple example, but there could be numerous things That you have to do in order to anticipate the business needs.
Erik: So you work at a SaaS company now, when I looked at your background, you've also worked in the treasury functions of different companies, like, I think like a manufacturer, like a tech manufacturing company, right?
And that might be more kind of working capital dependent, different cashflow model. What are some of the differences that you see between today's, the company that you're at today and what you operated before? Like what's changed for you?
Eugene: Yeah, I mean, I'd say one, I get to experience firsthand the differences between manufacturing software companies and there are significant differences.
I mean, I'd say to some degree, some finance aspects of software are easier, [00:19:00] some are harder. You know, revenue becomes more complicated in a software company, but a lot of things within finance could become easier, right? You don't have inventory to deal with, and that has its own implications. You don't have necessarily manufacturing variances to deal with.
You don't have as complex of a supply chain to deal with. So whether you do an insurance, you know, it's a lot simpler just because it's supply chain simpler. You have less property planning equipment, right, so there's less risk to your property, there's less capital needs, it's a very different business model, right, it's a high margin business that takes kind of a long time, it takes a lot of time to develop, but once it gets going, it's a high margin business in manufacturing.
It's very different. It's the margins are much lower, more capital intensive, you know, yes, it's subject to the same cycles, but you know, it's a small things like, you know, even like let's take credit collections as an example, [00:20:00] right? It seems like this shouldn't be any different than credit collections, but when I was in the semiconductor company doing credit collections, you constantly have these.
Disagreements with a customer, whether the clock on the net term starts when you ship something or when you receive something. They're saying, well, we start our terms when we receive something. Like, no, it's on the shipment date. But there's constant disputes like that. You don't have that in software.
It's like there's, you build it. There's nothing to ship. And imagine how big those disputes got during COVID because the shipment times just became incredibly long. And that's just a small example. Then if you think about warranties. Right? All the warranty reserves that finance needs to deal with.
All of the other inventory issues like, you know, there's too much inventory in the channel. You need to do all kinds of write downs and adjustments. And, you know, when I was at SanDisk, you know, speaking about inventory and challenges, SanDisk was a memory business. And memory was decreasing the price, if you look per unit of memory, for like a [00:21:00] petabyte, for example, the price was dropping 30, 40 percent a year.
Imagine sitting in an inventory that's depreciating 30, 40 percent per year, imagine the accounting implications of that. So yeah, they're very different nuances. It affects treasury. I mean, insurance, let's say, is a very different animal in software world because you have a lot more cyber concerns.
Whereas in the manufacturing world, we'll have a lot more business interruption concerns. So yeah, you know, it's all finance, it's all treasury, but it's just a very different flavor of it.
Erik: I have a question for, you mentioned the warranty reserve. I think that's really interesting. And I'm just curious, you know, when you're thinking about managing the warranty reserve, that must mean that you're managing cash almost on a working capital basis, right?
Because you're considering some kind of reserve or some cash that you need to set aside for your warranty. You know, are you able to also leverage your short term assets to fill that reserve? Or do you, did you always, like, how do you think about how much liquidity you [00:22:00] needed to manage those kinds of obligations on a short term basis?
Eugene: Yeah, I mean, that makes any sense. Yeah, no, it does. Luckily, You know, I was never too concerned about warranty reserves and treasury. It was more on the accounting side because I think that the short term kind of liquidity needs payments to suppliers would far outweigh any kind of warranty reserves.
Sure. The working capital cycle is very different. And actually when the business. When the business picks up, it sucks up a lot of working capital, the business slows down, it kicks off a lot of working capital. And those dynamics would way overshadow any kind of, you know, changes in, in warranty reserves, for example.
Erik: You know, one thing I've always kind of, I've always wondered, is we always hear about you know, and Brex is a tech company, right? We're VC backed. And then as a VC backed company, oftentimes you're burning money to grow the company, right? And so when you [00:23:00] calculate your burn, oftentimes you come up with a runway.
And then that runway is based on like every single dollar, like it's every last cent at the company. But then I think to myself, there is no way that, like, like, you start being non operational when you start hitting into your working capital, right? You have to have some amount of cash set aside that you can't burn to pay kind of like your short term obligations week to week.
And the moment you start biting into that, then you're already You know, you can't just actually burn your last penny. Like, I mean, I don't know if you've thought about that or subscribe. Yeah. Like that's, I've always been curious about if these burn numbers or runway numbers are actually like the truth.
Eugene: Well, you always have to have a cushion, even if you think you got it. Well buttoned up, you always have to put a cushion because, you know, one thing I say, the only thing we know about a forecast that it's wrong. So, you know, math, risk, you know, you have to give yourself some room. [00:24:00] So that's absolutely true.
But I mean, you have You know, you have other means to do that too, right? I mean, you put a credit facility in place, they have revolvers, they have some capacity to tap into additional liquidity. I mean, revolvers are great for any kind of working capital fluctuations, right? To give you that extra buffer.
But, I mean, I'd say VC backed companies are probably in a better shape than PE companies from cash management perspective because we have that initial pile of cash that comes in with funding that, you know, daily cash is not a concern. I mean, a lot of PE companies, they don't have that. Run a lot more cash lien, and they really need to get a very good handle on their cash forecast, short term, medium term, long term.
Yeah, I mean, you have to have a good forecast, and there's, again, there's very short term forecast, and there's the 13 week forecast, and you gotta forecast a few years out. And if you think that you might be getting into trouble, right? If you think there's a [00:25:00] less than negligible risk of something, you got to plan for it.
You got to figure out how you can get the funding.
Erik: One other question that I have is, so you've been in treasury and, you know, we talked about going from a manufacturing company to the software company, I'm also curious if you felt any differences coming out of the ZURP era. So we were just in ZURP, zero interest rate period for a long time.
Way different now. Fed funds is at like, you know, 5. 5 percent of the top end. Like how has that changed your management style for cash at 6sense?
Eugene: Yeah. So one, I guess we were fortunate to secure the last round of funding. Kind of a little bit earlier on, early 20 and 22. So once you have the cash, you kind of have the luxury of having the cash.
Second, we did execute a hundred million dollar credit facility about a year ago, which gave us additional cushion. And by the way, you know, we're talking about cash forecast. I have to say that [00:26:00] there's a lot of levers that the company can pull and control. So you have to have, you know, a good plan. Yes, there are things you cannot control the external demand environment, but you can control your expenses.
So cash forecast becomes crucial because it's not just, you know, the whims of what the business does. You can give feedback back to the business and kind of it's a two way conversation, but kind of getting back to the question of, you know, rising interest rates. In general, when interest rates go up, your cost of capital goes up.
So, in theory, you should be really prioritizing, you know, how you deploy capital. That's in theory. In practice, once you have the cash and you have a plan, you still execute to that plan. But specifically to me, one thing that happened, right, with higher interest rates. All of a sudden, now you make money on your cash.
So now you're more careful as to how you invest cash. You know, at zero, okay, I don't earn money here. I need to be, you [00:27:00] know, I can, I need to squeeze cash. I don't need to, you know, necessarily be that careful or chase every dollar. Now time to basically cash is money, right? The interest that you can earn.
So that's very kind of first tangible impact. The other one, if you have. A model in which we had where if you have a cash sweep account that sweeps in the money market fund, and if the fees are charged based on the interest that you earn. Well, suddenly fees are going up, right? So depending on the structure of your investments and expenses, you might want to realign those investments.
And that's part of the reason, you know, I launched a separately managed account because the fee structure in a higher interest environment was much more favorable with a separately managed account than otherwise. So that's one aspect on the economy. The other one on the risk side. I'd say, you asked before kind of what's, what are challenges for treasuries.
I'd say if you're managing risk, [00:28:00] right, you have to look at all the risk out there. Yes, there's geopolitical risk that you can control, but I think there's a lot of financial risk that you can't control either that you're subject to. For example, you know, the world in general is taking more and more debt.
Is there going to be another debt crisis? If there is, you know, we're all going to be, You know, subject to it in one way or form, and we just need to be able to, you know, at least if we cannot fully prepare for it, but at least be cognizant that it could happen, right? Things, you know, people don't think that something bad or catastrophic can happen until it happens.
And then once it does, it was like, well, of course it could, right? It's like, well, of course Lima could collapse, but like three months before, nobody thinks of it. Like, of course, like SVB can go under. You know, but three months before, nobody thinks of it. So, again, you've taken out so much debt worldwide and money is cheap, especially at zero interest rates.
It just kind of fuels that, that debt binge. Now that the money is more [00:29:00] expensive, maybe it kind of mitigates things, even though, So, I don't know, we can talk about, you know, the where the money's flowing and the whole like asset allocation and, you know, if you have consumers super leveraged with credit card debt going up, but at the same time, Bitcoin's all time high and the same that Bitcoin's mainly fueled by retail investors.
So it's like, so what's happening? Like. A retail investor is taking money out on their credit cards and buying Bitcoin. So there's something going on with where, how much money is sloshing around the system and where it's going. And with high interest rates, I think some of that risk is hopefully being mitigated because when the money becomes more expensive, It gets allocated more prudently.
So again, that's kind of one of those tangential things that maybe we'll never see any impact at all, or maybe the impact is going to be catastrophic. And then, you know, at least if you're, if you can think ahead a little bit, maybe be a little bit more [00:30:00] prepared.
Erik: So you mentioned that you started a new investment portfolio at six cents, you know, and I get it.
While interest rates are this high, why not sweep it to a money market fund to earn yield? Why is it sitting in a checking account, not earning anything or et cetera, right? When creating the portfolio though, like I know that it's not just to optimize for yield. So what are all the things that you consider when coming up with that separately managed account or the strategy behind it?
Eugene: Yeah, the mandate. You know, it's always the same and you talk, no matter how many companies you talk to, I've seen the same order priority, preservation of capital, you know, ample liquidity to meet your needs and then yield, yield always comes third. So yes, there's definitely the yield component. In this environment though, because the curve is so downward sloping it's You know, what you earn in money market funds is probably more, or at least not that much less [00:31:00] than what you earn in a separately managed account, depending on your portfolio.
But this regime, first of all, this regime will not last forever, right? At some point, the curve will normalize. So, if you don't need the money, if you don't need immediate liquidity, You are paying for it in some way, shape or form. So it makes sense to go further out of the curve. If you don't need overnight liquidity, then money market funds off.
Erik: And just for our listeners, what do you mean by that? So instead of a money market fund, what's a different kind of instrument that you would consider if you don't need the money today?
Eugene: Yeah. I mean, you can invest in various corporate cash, invest in various high grade, short term fixed income. So it can be a T bill.
It can be some kind of a treasury instrument. Maybe it goes up two years, maybe it goes up three months. Six months, it could be a corporate bond. You know, there are other things like municipal debt. Sometimes it's, you know, common. It could be some kind of an asset backed security that's securitized either.
By credit card loans or auto loans, there's different instruments. [00:32:00] And depending on the company and their risk appetite, they would choose what instruments they allow into their portfolio. What kind of max maturity that would allow, what kind of minimum credit rating that would allow and so forth.
So it gives you broader. Universe of things to invest in. And by the way, you can have a separate managed account and just tell your manager, listen, things are so uncertain. I might need the money tomorrow. Keep it all in money market fund. That's very doable. The most times you kind of diversify, you say, okay, I have maybe 300 million in the next two months.
I might need 40 of it. So keep 40 very liquid in money market fund. The rest, let's go off further. On the curve and maybe pick up some treasuries, maybe pick up some corporate bonds, maybe some bank debt, maybe some manufacturing companies, debt and so forth. So it just gives you more flexibility. The other thing that separately managed account gives you is you can do a very customized portfolio, right?
I [00:33:00] call it QSIP line of sight. So you know exactly which QSIP, which is the identifier of each particular instrument that you're holding. So. You can say I have 3 million of this particular paper that's mature in this particular date, and I have 5 million of this one. So, whereas in Money Market Fund, the assets are commingled.
You don't really know exactly what you're holding. Whereas with this portfolio, you know exactly where your exposures are. What you're holding, what maturities are, and so forth. And I'll give you one other example of a benefit of a separately managed account. You get the flexibility, right? You can work with the manager and say, I want a duration, which is roughly average maturity, or how sensitive your portfolio to interest rates fluctuation.
I want a duration, say six months, I want nine months, I want one year. And what it gives you is, you know, it changes your risk exposure, right? So, for example. Right now, if I look at [00:34:00] 6sense, we have, you know, we're well funded, so we have cash in the balance sheet. So, my risk is that interest rates decline significantly, and I, my interest income will decline, right?
So yes, we have, you know, if you have a little bit of debt, but if your cash exceeds any debt that you have, Then your risk is declining interest rates because you're going to earn less on your cash. So if I want to mitigate that risk, well, if you keep it in a money market fund there's no way to mitigate it.
But if you have a separate managed account, you can actually manage, okay, let's go further out on the curve and let's increase the duration of portfolio. So you kind of, so to speak, locking in interest rates further out there. Even if the curve is downward sloping because there's an expectation that Fed will cut interest rates.
Okay. When that happens, your money market will yield less. So that's all baked in there. What the risk is that the rates will get cut faster than what's priced in. And then your money market yield will drop faster than what's currently expected. [00:35:00] So you can lock in against that risk, which you have with the flexibility of might have a separately managed account.
And by the way, we also have some, you know, we have global footprint, so we have some expenses in foreign currency, so we're exposed to dollar declining. Well, generally if US interest rates decline faster than expected, especially if they decline faster relative to other countries interest rates, dollar will weaken.
So you have exposure on FX side and on interest rates. That's very correlative or compounding. So what separate managed account allows you to do is to tweak that duration and push, push the duration further out or increase the duration to offset some of the risk that you're facing.
Erik: Honestly, what you're describing gives you a little bit more peace of mind, frankly, almost like on, on cash inflows from those instruments maturing on the set, assuming no credit issues, of course, but like, you know, you wouldn't.
[00:36:00] Invest in anything that has significant credit risk. Anyway, that's not the job of a corporate treasury person.
Eugene: Yeah. Yeah. And if you think about we taking risks somewhere anyways, so I mean, a lot of portfolios invested, for example, in government securities, that's, you know, the risk free standard, but if you have money at any of the banks, even if.
You know, the systemically important banks, you still have exposure to them. You can, at the same time, hold their paper, right, and have similar exposure. The other thing it allows you to do is you can diversify, right? Nobody says you need to hold, put all your assets into one or two securities, right?
I mean, by default, investment policy should actually specify How much exposure you can have, what kind of concentration you have to any one particular issuer. So it's diversified. I mean, you do have other risk mitigation strategies in there.
Erik: What's the level of cash? Like, like when you talk about a separately managed account, here's what I'm thinking.
If I only have X amount of cash, if I do a separately managed account, if I start thinking about [00:37:00] building a portfolio of ladder treasuries, that sounds great, maybe I get a few extra basis points, I get more security in terms of my cash inflows, on the accounting side, I also think about, well now I have to do, I don't know, like, Fair market value of all these securities.
I have to do the accounting for them specifically. There's a whole other disclosure table that I have to give on my audited financial statements. And so, so there's this new process on the finance side that we have to undertake in order to support the SMA. What's the amount of money that You would need to have on hand to make something like this worth it.
Or are there other considerations potentially besides just cash on hand?
Eugene: Yeah, no, I think cash on hand is probably the main consideration and you're absolutely right. There's a lot of administrative headache associated with it, so you got to make sure that the juice is worth the squeeze. There's also, you know, you also have to understand your fee structure.
So a lot of times, you know, the asset managers would charge you to manage [00:38:00] your portfolio. And a lot of times the fee structure is sliding scale. So the more assets you have, the cheaper it is on average. So you have to take it all into consideration. I'd say to me, just kind of a quick and dirty benchmark is about a hundred million.
But, you know, a small company can probably make the case of 50 million, but I just don't see below 50 million unless you have a lot of manpower and you want to get folks involved into all kinds of aspects of asset management and accounting for fixed income. I don't think it'd be worth it, anything under 50 million.
Erik: Usually 100 million is a good threshold. And then even then, I think, well, here's the thing, at Brex, we were well funded, but then one of the things we always considered was Because we're in the credit card business, we have to settle up with MasterCard for all the previous day's transactions every day.
Right, right by 10 a. m. Pacific Time or 1 p. m. Eastern, that wire needs to have hit our MasterCard Settlement Bank. And so, [00:39:00] you know, even though we may have had cash on hand day to day because we get collections it's going back and forth, right? There's everyday work and capital needs for making the payment and then receiving the collections from customers and so on and so forth.
And so that, like, even though we may have had that much money on hand, we also stayed away from. Some of those ideas because of those daily needs.
Eugene: Yeah, I should clarify my answer. It's a hundred million of cash that you're able to invest, right? If you need something, you know, if you need to keep a certain cushion on hand, it's not as investable.
It's something that you can afford to invest beyond your, you know, daily or very short term liquidity needs. Makes sense.
Erik: I mean, I mean, treasury management is definitely something, especially going into the current era. Like it's just becoming top of mind for many people. People are figuring out or like trying to think about how to extend their cash while interest rates are high.
They're trying to take advantage of the moment to, so to speak. So I think everything you [00:40:00] mentioned today has been extremely useful. And even for me, like, I want to take that back and try to think about how to apply some of these things on the team at Brex. We're kind of coming up upon like the end of the segment.
So I also want to make time for. What I think is maybe the most fun part, which is that finance leaders are fun too. We have fun. We take, we tell jokes. We have great stories. And I was wondering if you have anything to share about an interesting treasury debacle or an accounting joke or finance joke of sorts.
Eugene: Well, first I'd say I tell people that Maybe it's true for accountants, but treasurers, you know, with a risk mindset, we always worry about things. So, you know, if you want to have a fun party, don't invite treasury people, cause we get, we always look at the worst case scenario. We always concerned about what could possibly go wrong, but yeah.
I mean, in the accounting joke, I think, I don't have a specific joke, but I think it's kind of cool [00:41:00] and kind of funny in a way. You know, I'm thinking back to this movie, The Accountant, like how Hollywood. Made an action movie, put an accountant in the center of the action. So that's that, that's kind of crazy.
You know, I was still waiting for a sequel. Maybe we'll call it because they should watch if you're a Ben Affleck fan, you know, And the movie is entertaining, but it's just kind of, it's kind of interesting now the accountant is, you know, going around shooting people and blowing things up, where you think of an accountant as being, you know, one of the most quiet people on the planet that just sit there and focus on numbers.
Erik: I'll remark on something you said earlier, you joined 6sense and I think what you said was about four months before SVB went down, you did move the money away into a separately managed account. And I agree with you, like, counterparty risk is a real thing, like, you know, that FDIC insurance is only for 250 grand, and any amount of money you put in that bank [00:42:00] above that, you're basically a general creditor.
Yeah. Right, if not for the Fed bailing out the bank and all the deposit holders, which you don't know if it's going to happen for sure, only the FDIC part is guaranteed. You know, I think that's real risk and it's shown here's the thing. You go back in time, call it December of 2022, right? Four months before it happened.
No one is thinking about this potential.
Eugene: Yeah. The things about risk is nobody's thinking about it until it happens. And once it happens, it was obvious, you know, of course it was going to happen. I mean, but there is, I mean, we live in California here, you know, when's the last Devastating earthquake and Loma Prieta was, you know, it was big, it was painful, but it was not on a scale of, you know, close to the worst ones.
And I mean, the worst earthquakes, you know, you have the 1906. Right. So when things don't happen for a long time, it's like, yes, there's a risk of earthquake, there's a risk of this, there's financial risk. So if you think of [00:43:00] what potentially can go wrong, you can at least kind of position yourself, okay, if this happens, here's an implication, here's the worst case scenario, here's how I'm going to handle it.
If you don't think about it, then you kind of get caught off guard. And I don't know I've, I think there was some cheesy movie somewhere. I have no idea what it was, but somebody said, you know, chance always favors the prepared ones. Like, okay, you might not be able to prepare for everything, but at least if you can anticipate and don't get caught off guard, you will usually fare better in a scenario.
Erik: When I think about risk, I think of a line graph almost. Let me get out a line graph, but I think of two axes, the X axis and the Y axis, and then the Y axis, I think about severity of if this were to happen, like how significant of an impact it would have on our operations negatively, and then I think about on the other axis, like, how long would I have to wait?
Like, what are the chances of this thing happening? And like, you know, the lower the chance, [00:44:00] it doesn't mean it's not going to happen, but maybe it just happens once every 20 years or once every 10 years or so, right? And there's a little bit of like, you know, even if the chance is low, like maybe this is something that would happen only once every 20 years.
If the severity of that incident happening is so significant, you know, to your point, is that worth the extra 25 basis points? Well, Eugene, thank you very much for joining the show today. It was lovely to have you.
Eugene: Yeah, awesome. Thank you so much. That was very exciting, and I appreciate you having me over here.
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