$500M AUM: Unlock Massive Cashflow with a TRA Strategy

Hey, welcome to another episode of Making Billions, I'm your host, Ryan Miller, and today I have my dear friend Andy Lee.

Andy is the founder and CIO of a $500 million fund called Parallaxes Capital. Andy and his team have built their fund by providing access to investing in a fascinating asset called Tax Receivable Agreements for institutional investors. He's been featured in publications such as Wall Street Journal, Bloomberg capital allocators, NBC, Forbes and more.

So what does this mean? Well, this means that Andy understands how to build a fund, raise capital and provide steady cash flow to his investors.

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[THE GUEST]: Andy is the founder and CIO of a $500 million fund called Parallaxes Capital. 

Transcript

Ryan Miller  

My name is Ryan Miller, and for the past 15 years, I've helped hundreds of people to raise millions of dollars for their funds and for their startups. If you're serious about raising money, launching your business or taking your life to the next level, this show will give you the answers so that you too can enjoy your pursuit of Making Billions. Let's get into it. 

Ryan Miller  

Does it ever feel like investment bankers don't tell you the full story on how they make their clients rich on their IPO? Well, my next guest is one of those investment bankers, and has built an investment fund to half a billion dollars in just a few years from what is called a TRA strategy. It's making his clients insanely rich, and he's going to show you how you can do it too, while still hedging against rising taxes, all this and more come in right now. Here we go. 

Ryan Miller  

Hey, welcome to another episode of Making Billions, I'm your host, Ryan Miller, and today I have my dear friend Andy Lee. Andy is the founder and CIO of a $500 million fund called Parallaxes Capital. Andy and his team have built their fund by providing access to investing in a fascinating asset called Tax receivable agreements for institutional investors. He's been featured in publications such as Wall Street Journal, Bloomberg Capital Allocators, NBC, Forbes and more. So what does this mean? Well, this means that Andy understands how to build a fund, raise capital and provide steady cash flow to his investors. So Andy, welcome to the show, man. 

Andy Lee  

Thank you for having me. I've been a fan of some of the content that you've put out, educating your audience about some things I was somewhat esoteric. Might that be search funds, among others, like it's a real educational resource that you're delivering to this community. So I'm thankful for that. 

Ryan Miller  

Yeah, well, we're thankful for you been rated in some of the top 5% in the world, and it's all because of amazing guests just like you. So we're happy to have you on the show, calling all the way in from the Big Apple. So let's jump right into it. Let's talk about tax receivable agreements. Just like any alternative investment manager, we invest in alternatives. Now this one is a new one that I've never heard of, and when you and I spoke before the show, I really got a good sense of what this is and how valuable that you're onto. So maybe you can help me understand and for the audience, just walk us through real basics. What is a TRA, tax receivable agreement?

Andy Lee  

Yeah, TRA's, remind many of what pharmaceutical royalties were in the early 2000s as well as what musical royalties were in the 2010s, long dated annuity like cash flows that are uncorrelated to broad up market indices. And so as we think about the evolution of capital markets associated with those other opportunity sets, that's what we're looking to deliver our investors on the correlated cash yielding, streams of cash flows. In terms of what we're doing, think about a TRA simplistically as a factoring arrangements between two obligators. So an example of that might be H R Block. Here in the US, we file our taxes on April 15 of a given year, and the US government might say, Ryan, you've been a phenomenal citizen of the US. We're going to pay you $1,000 in two weeks. H R Block might say, Ryan, instead of waiting two weeks for the money, what I just gave you $900 today for that $1,000 in two weeks, just a factor in our arrangement delivering dollars today in return for more dollars over time. We do that for public companies, names such as a REMAX, a Shake Shack, a duff and Phelps, large public obligors that are investment grade to near investment grade in terms of credit rating and we do that for as long as 10 plus years. That's all we do, in a nutshell.

Ryan Miller  

Wow, that's brilliant. I'm just curious, maybe you could talk about, let's unpack that a little bit. So where does a TRA or a tax receivable agreement? How is that generated? Like, where do these things come from? And the reason why I ask is, are there people that may have an asset not realizing they have an asset and they actually can monetize something that they thought they couldn't. So maybe if you could talk about how those get created, like I'm five. So keep it simple. Go easy on me, but a very simple explanation. How are these created?

Andy Lee  

Absolutely so I thought about tax more generally. It's the largest asset class in the world that no one has fully appreciated. So the example I gave you on personal income taxes as an example where most people aren't even aware that they could factor their future refunds in the same way, what we do is for the companies that we target, every company has inherent tax attributes associated with themselves that could include things such as net operating losses, stock based compensation that they're paying to them for employees, all the way to tax transformation transactions from a structuring perspective, such as a 338 (h) (10), or from an asset sale or a step up transaction, whenever a party sells a piece of real estate from one person to another. For what we do very specifically, we do it only associated with public names and so they here in the US. In order to be public, you need to be a C Corp, unless you are an asset holder that being an MLP, a RE, a BDC and a role fund and ETF, among others, if you are going public as an operating company, you need to be a C Corp. And so business that were in LLC format, a pass through partnership, a an LLP, among others. They make a transfer tax transformation whenever they go public into a C Corp, and during in that transaction, they create large tax assets for the public shareholders for which these companies are then sharing back their tax on the savings associated with the transactions to these holders via the creation of a tax receivable agreement. These agreements may last as long as 10 to 15 years, and so these underlying obligators have a nice, elongated annuity stream, and that might be something that they may desire to monetize longer term. And that's where we set it. 

Ryan Miller  

Okay, so that's, that's kind of where they come from. Now I know when you and I, and you're, you're introducing this concept to me, it was fascinating. And so I know there's you're converting to a C Corp, it's typically when you go public, and then you go through that IPO process, and when you do that switch over, sometimes from your regular Corp to, we call it the Upsy. And then when that happens is that the moment that that new asset is created? 

Andy Lee  

Absolutely. 

Ryan Miller  

Okay. 

Andy Lee  

Good study. 

Ryan Miller  

Thank you, I got a good teacher named Andy Lee. So appreciate that. So that's the cool thing, is that you basically say, I have this asset now I'm about to go public. You fill out your paperwork, you're ready to go. And this new asset, this tax receivable agreement, is you have the right to receive some type of value from the government through taxation. And then funds like Parallaxes and Andy, they come in and say, hey, do you want to cash that out rather than waiting a very long time to kind of get drip fed these, these little nuggets over time? How about we cash you out right now? How am I doing so far? Absolutely, that's how it works. Awesome, man. And so you built a fund. Parallaxes Capital, about 500 million under management doing it. Why would a shareholder sell to you or anybody with a fund? Why don't they just keep it? What have you found?

Andy Lee  

It's a function of the constituents that so that might be one private equity funds, two co investors of those private equity funds, and finally, founders and management team members. So let's hit the first two in order for private equity funded co investors, oftentimes they have finite fund lives. So typically, a private equity fund would raise for a 10 year duration with several extensions, but by the time you get to year 12 to 14, and you've taken a company public, sold down your equity, and then you're stuck with a asset that might last another 10-15, 20 years. Your LPs are like, Hey, we've had a successful fund. Let's just close it out, sell the assets and move on. Nobody wants a K-1 for $10 for the next 10 years. And so in that regard, private equity funds and income investors are looking to close out a successful investment and stop due to finite fund life considerations. That's the first item that I would focus on and on the other side of the equation, you then have individuals, oftentimes, founders, management team members, who might, for estate purposes, want to simplify their affairs, and so they want to sell. They are thinking about their next generation who might not appreciate an annuity. A individual who succeeds might appreciate an annuity. A 24 year old kid might not, and so they're like, how do I sell this annuity and give my kid cash and simplify their affairs? Because they're not going to know what to do with this. So that's one side of the equation. On the other side of the equation, you then have individuals such as, who might say, I Ryan gave me the option to invest in something that's going to be 100x where do I get the cash? How do I sell something in order to get cash that allows me access to this 100x opportunity? Okay, this is non core asset. It's in cash flowing through a few years. It's cute. I don't quite understand it, but it's enough money that I can go invest in with Ryan. Wonderful. We're happy to deliver liquidity for any of those range of situations, delivering a solution with the goal of getting money today in return for hopefully more money over time. 

Ryan Miller  

Brilliant. So it's just a way of taking something illiquid and you can transfer it to liquidity. But you know, to also answer the question I think I'm hearing is, why would they sell to you so liquidity, but also you can roll a I think you taught me this is just rolling an unproductive asset into a productive asset to say, yep, it's been locked up. Let me unlock this cash. I can roll it forward. So for those who are capital raisers, did we just discover a new strategy? And so if there are people who have sold out of a company or are about to and you're talking to them. This is an area you can explore. And you bring in people like Andy, and you can, you might even be able to say, Hey, Andy, this guy might want to liquidate. He's about to sell his company. He might want to liquidate his tax receivable asset. And then maybe you figure out some kind of liquidity. So this is, could be another way to unlock liquidity for you capital raisers out there. I know you follow me. I see you. So for the capital raisers out there. This is another way of saying, how do we take things and just start moving these assets around to unlock a little more liquidity? Would you say that would also be a productive use of a TRA?

Andy Lee  

Absolutely, look, ultimately, when it's all said and done, we're all selling solutions, right, and not all things are to a hammer everything with a nail. This isn't all things to all people, but in the right situation for those intellectual areas, that provides a solution of incremental value that one can deliver in order to unlock to Ryan's point value on the capital raising site. 

Ryan Miller  

That's brilliant. I love that. As you and I have got to know each other, you've told me a few stories, so I'm curious. You alluded to a little bit in the beginning. I wonder if you can unpack it and just talk about why is, say, Royalty Pharma, Parallaxes, True North Star, absolutely.

Andy Lee  

So there's a business called Royalty Pharma that's traded on the NASDAQ ticker is RPRX, and it's an incredible business. They started in 95 one of the pioneers in the pharmaceutical royalty space. So think about them as buying royalties associated with your favorite drug. And in that regard, every time you pay $10 for a drug, they may get $1 of that revenue. And so they've done that for probably the 40 of the largest drugs here in the US, and they're just getting a passive royalty associated with that. And that's something that's incredibly valuable, especially in historically, when we were in a yield starved environment, being able to deliver some yield as well as growth on future deployments is something that's incredibly valuable. And so for us, as we think about our growth as a firm, our goal is to be able to deliver that same uncorrelated yield to public investors, and so what time that is includes a contemplated potential listing, as we are able to scale our asset base to meet the needs of the public investor.

Ryan Miller  

Brilliant. And you know that being said, I'm curious like, who can invest in TRAs, and I'd love to know your perspective being in this industry for a while. Who are those people that invest in these things?

Andy Lee  

Yeah, so for us, at least, primarily driven by the firm that I came out of. I came out of a firm called Lone Star Funds down in Dallas, Texas. They have raised an over 100 billion, and that's a firm where most of the LPs are primarily sovereign wealth funds as well as large endowments and foundations, and so just given that familiarity with that kind of strategy, as well as the legacy of the firm that is also our LP base, primarily because they are familiar with style of investing that Lone Star had and invested subsequently thereafter, obviously it's something that some retail investors and high net worth and family offices may have interest and however, like from a customer acquisition cost perspective, that's not where the Lone Star name resonates. And so our LP basis primarily be the institutional investors of the world. 

Ryan Miller  

Okay, so institutional investors, so investing in that is almost like buying a call option on rising corporate tax rates. Is that right? 

Andy Lee  

Absolutely. So if you think about a net operating loss, think about that $100 net operating loss as your volume, think about the tax rate, corporate tax rate as your price. The multiplication number two is then your revenue. So 100 by today's 21% is $21 of cash flow tax savings, obviously to the extent that it went down to, let's say, a 15% that's $15 and the correspondingly went up to 40% that's $40 so I think many of our investors view us as a nice hedge in the event that tax rates went down. We obviously have a linear relationship with it on the downwards, but that obviously benefits the rest of their portfolio. However, tax rates were to move up, that obviously hurts their portfolio. That is a benefit to us as a firm, and so in that regard, they view us as a nice hedge in the context of a broader book.

Ryan Miller  

Brilliant. Okay. Final question for you, how does one start making billions in TRAs?

Andy Lee  

Absolutely. My close friend of mine loves to joke, the more you put in, the more you get out. Obviously, that scale is a big element of that. I think there are a number of elements that I might suggest the in investing more generally, you need to make several macro as well as micro calls. So from a macro perspective, you need to have for TRAs, you need to have a domain expertise. You need to have the go to market motion, as well as the capacity to underwrite these overall opportunities. Because very few things in life are rocket science, with the exception of rocket science itself. And so finding the opportunity whereby you are on the crossroads of both corporate finance taxation as well as commercial capabilities is very challenging. And so in that regards, making a call on a macro is incredibly important. Similarly, on the micro, you need to be able to execute at a very high level, and that is on a day to day basis, building relationships such that whenever someone thinks about selling a TRA that you are first in line. And so those are a number of the elements that I might say, allows for one that, in time, can deliver significant fortunes. 

Ryan Miller  

And where do you go about finding these people? Like, is it you just go on Edgar and look at people who submit intentions to go public? Or, how do we. How we find something like that? 

Andy Lee  

Yeah, absolutely. As with all things, things are, these are all publicly filed opportunities. And so we have a team in India that basically works through the filings in order to find the underlying data, which allows us to then access the opportunity set. So it's not rocket science to find. It's just long, tedious work related in order to scrape the underlying filings to find the right individuals and subsequent to that, that's where the work starts. On our side, here in the US, our job done is to reach out and get in front of these holders that might be via a cold email, a cold call, or if we're fortunate enough to get a warm introduction, those are some of the formats and avenues through which we've tried to engage with parties at large.

Ryan Miller  

Brilliant. So final thoughts, is there anything else you would like our fans around the world to know? Any way to reach out to you? Anything at all?

Andy Lee  

I think there are, in terms of outreach, LinkedIn probably is the best avenue for us to engage. We're active on there and looking to meet the smart, hard working personnel that listen to your show in your community. I think there are avenues through which seeking to become educated on the space. You've done a big job in that regard, helping people demystify opportunities, and so I'm very thankful for your time and your audience, sir.

Ryan Miller  

Yeah, well, it was certainly great to have you. So just to wrap things up, explore assets on your balance sheet or the balance sheet of others that you're going to make an offer to find ways to liquidate. TRAs are certainly one of those top areas focus on cash flow. Cash is king. And if we can do that and really provide, as Andy says, some some intelligent solutions that's kind of our job. If we can provide those solutions to unlock value or cash flow, at the very least for investors, that is a solution. And finally, invest in funds that do this. If you're looking for a hedge against rising taxes, there's Parallaxes, there's other ones out there, but really, just work with a professional like Andy and his team, and you do these things, and you too will be well on your way in your pursuit of Making Billions.

Ryan Miller  

Wow, what a show, I hope you enjoyed this episode as much as I did. Now, if you haven't done so already, be sure to leave a comment and review on new ideas and guests you want me to bring on for future episodes. Plus, why don't you head over to YouTube and see extra takes while you get to know our guests even better, and make sure to come back for our next episode, where we dive even deeper into the people, the process and the perspectives of both investors and founders. Until then, my friends, stay hungry, focus on your goals and keep grinding towards your dream of Making Billions.