Finely Tuned Investment Strategies

Spotify’s diversified approach to investment helps shield its cash from market volatility. Partner J.P. Morgan Asset Management’s Empowering Change initiative delivers vital community development support

In just 15 years, Stockholm-headquartered Spotify has gone from nothing to 356 million monthly active users and 158 million subscribers. Its financials are equally impressive. As of 31 December 2020, the NYSE-listed firm had close to €8bn in revenue, with a balance sheet showing €2.4bn in cash equivalents and €650m in short-term investments.

“As a company, Spotify is usually cash-flow positive, which means that we receive our revenue subscriptions before we pay royalties to our record labels,” comments Niklas Muhrbeck, Head of Financial Market Activities, Spotify Treasury. When in 2016, Spotify issued $1bn in convertible debt, it simultaneously developed a more sophisticated investment infrastructure to cope with its huge cash stockpile. Working alongside long-term provider, J.P. Morgan Asset Management (JPMAM), the partners created a structure that could incorporate a diversified investment portfolio, helping Spotify to shield its cash investments from market volatility.

With investment yield from triple-A to double-A-rated corporates no longer a given, positive income in euros or even in US dollars means pushing the yield curve in terms of longer duration or additional credit risk. For a corporate investor, this approach demands expertise in credit analysis and a sufficiently large treasury and risk operation to manage the day-to-day processes.

Like most companies, Spotify conducts an annual revision of its treasury policy, amending as required. But with its new ‘step out’ investment model, Muhrbeck also considers policy updates during the year, “making changes as we see fit” to leverage new investment opportunities as they arise.

As a global operator, Spotify’s approach sometimes requires its treasury to educate the company’s transatlantic senior management teams and board on matters of regional product variations, explaining how these can be accommodated within treasury policy. It has also required treasury to decide between directly managing its cash investment or outsourcing the work to an asset manager. With the broad objectives of preserving capital and maximising returns, it was decided to manage approximately one-third of its investments in-house. “The duration of these investments is typically 90 days, so that’s our operational cash to facilitate our short-term payments,” explains Muhrbeck.

The lion’s share of Spotify’s investments, including MMFs, is outsourced to portfolio managers, each abiding by the same treasury policy and investment mandate. Now, with a focus on deploying robotic process automation (RPA) where possible, treasury is absolved of much of the day-to-day investment processing requirements, and can instead focus on value-adding activities, especially in areas with a direct impact on net revenue, such as FX.

To be able to diversify portfolios confidently, superior cash flow visibility is essential, Muhrbeck advises. With Spotify’s payments flowing through its new TMS, treasury has that visibility. “It means we can optimise exactly how much cash we need in the short term so we can maximise the yield somewhere else, without having to redeem the funds because of an unexpected outflow,” he explains.

The variety of approaches taken by its appointed portfolio managers realises different yields for Spotify. To keep track, it uses a benchmarking tool, however, standard benchmarks were not necessarily optimised for its specific portfolios. To counter any imbalance, Muhrbeck deploys hybrid benchmarking to reflect the split of the portfolio more accurately.

Today, the optimal investment infrastructure that Spotify’s treasury has established in partnership with JPMAM, combines with its enhanced cash visibility to deliver an investing masterclass truly worthy of the 2021 Corporate Recognition Awards for Best Investment Strategy.

JPMAM: Empowering change

Spotify’s selection of JPMAM as partner for this winning solution is reinforced by JPMAM’s own success as outright winner in TMI’s T4G Awards for Best ESG Liquidity Innovation. The accolade acknowledges the work of JPMAM’s Empowering Change initiative.

Launched in 2021, this unique programme, and its Empower share class, has been opening doors for institutional clients who want to work with minority depository institutions (MDIs) and community development financial institutions (CDFIs), but are often limited by investment policies that prohibit them from making meaningful contributions.

The Empower share class is available across four of JPMAM’s money market funds and is exclusively distributed by partner minority-owned and diverse-led financial institutions. This allows MDIs and CDFIs to gain access to institutional clients, generating a new recurring revenue stream, further empowering them to grow their banking footprint, improve and advance their capabilities and further support their communities. As an institutional client’s AUM grows in the Empower share class, so will the MDI’s/CDFI’s revenue. At the same time, corporate investors gain access to financial institutions that will support their own socioeconomic goals.

As part of the initiative, JPMAM is donating 12.5% of Empower management fees received to support community development programmes. It will also provide MDIs and CDFIs with access to JPMAM resources, including training, education and marketing, as well as its digital investment platform, Morgan Money.

Empowering Change is an industry first. It demonstrates JPMAM’s commitment to advancing racial equality, as well as its ability to innovate and deliver solutions that meet the needs of today’s clients. “Empowering Change is a social mission, aimed at driving systemic change within underserved communities,” says Paula Stibbe, Global Head of Liquidity Clients, J.P. Morgan Asset Management. “MDIs and CDFIs play a critical role in delivering positive change in the communities they serve. We are immensely proud to be parterning with them to create new economic opportunities aimed at advancing racial equality.”

As a transformational solution, pitched at the heart of the community, TMI is delighted to present JPMAM as its outright winner of the 2021 T4G Award for Best ESG Liquidity Innovation.