AMC Speak

Rich insights on adding value to your SME clients

Neeraj Mittal, Sr VP & Head - Institutional Sales, DSP Blackrock

20th November 2015

In a nutshell

Neeraj Mittal has long and rich experience dealing with corporate treasurers across India, in his capacity as head of DSP Blackrock's institutional business. He shares great insights from his interactions with these investors, which can help you enhance your advisory inputs to your SME clients, especially in their cash management endeavours.

Neeraj discusses the bucketing approach adopted by corporate treasurers in managing their cash surpluses - an approach which can equally be applied by SMEs too. He also takes us through the due diligence checklist that most corporate treasurers adopt, when selecting debt funds - which is perhaps equally applicable for advisors in your own due diligence process.

WF: Neeraj, you have rich experience in dealing with corporate treasuries on their cash management needs, ranging from ultra short term needs to longer term horizons. It will be very useful for advisors who deal with SME and ultra HNI clients, if you can take us through how corporate treasuries plan their cash flows and what kinds of solutions they typically look for each need.

Neeraj: Cash management is a core activity for corporate treasurers. While each treasury department in a corporate has its own working style, there are some broad commonalities in their approach towards cash management. These can be grouped into three buckets: (1) working capital, (2) core cash and (3) strategic cash.

Working capital, as the name suggests, refers to cash required to finance day-to-day business operations. This money can be drawn down at very short notice depending on business requirements. Most of the companies draw comfort from having quick liquidity on hand in case of any business requirement. For this purpose, treasurers prefer liquid/ cash funds for the working capital portion of their surplus. Risk appetite for these kind of investments is practically absent.

The next bucket is core cash. This is cash that is not required for day-to-day business operations, but may be drawn down at regular periods (e.g. salary/ vendor/ dividend payments). This has a longer tenor horizon, and outflows are also a little more predictable and can be planned sufficiently in advance. For this bucket, treasurers usually opt for a mix of ultra short term and short term funds.

The next bucket is strategic cash. This portion typically comprises of planned cash flows which can be used for long term portfolio investments, financing planned expansion projects, acquisitions, or any strategic business opportunity. The time horizon here tends to be reasonably long, and from the treasurer's point of view, the drawdown is planned sufficiently in advance. Due to the relatively long term nature of this cashsurplus (typically, 12 -36 months horizon), treasurers are comfortable with a mix of short term funds and duration funds. Macro economic factors and interest rate movements are critical factors for this bucket of investments.

When advisors deal with SMEs, the concept of bucketing cash into 3 compartments is the right way to go about it. There is good value that an advisor can add to his SME client, by helping them approach cash management in a systematic manner.

WF: That's very useful. Once the bucketing is done, when treasurers perform due diligence on fund houses, what are the most common aspects that all of them consider?

Neeraj: We have prepared a checklist based on our interactions with corporate treasurers:

Let me elaborate on some of these points. When a treasurer asks whether cash management is a core business for the fund house, what they are trying to assess is the resources that the fund house has put into managing money in the ultra short term and short term space. Is there a dedicated fund manager for this part of the business or is this segment a fringe activity? How serious is the fund house in this product segment?

In assessing the fund management experience, one of the important considerations is longevity of the team and the manager within the fund house. High turnover in the fund management team can be a negative from the investor's point of view.

When evaluating credit quality and liquidity, treasurers frequently ask many questions on underlying credits and what are the risk management practices AMC follows. They also look at in-house credit research capabilities of fund house.

Fund size also plays an important part in their consideration set. In general, very small size funds are not preferred. They usually look for a fund size of around Rs. 1000 crore and beyond.

It could be very useful for advisors to prepare their own checklist for due diligence of a fund house, in order to systematically go about understanding and short listing fund houses in the debt space. I hope that the checklist that I have shared can be a good starting point for advisors, in this context.

Share this article