According to the Wall Street Journal, this episode’s guest Andy Lee is “The Tax Whiz With the Strangest Hustle on Wall Street”. He’s the founder and CIO of Parallaxes Capital, and he joins us to talk about tax receivable agreements (TRAs). Andy explained what TRAs are, how they come about for companies going public such as Shake Shack in 2015, and why he’s investing in them. Disclaimer: Nothing in this episode should be construed as financial or investment advice.
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About this episode’s guest: Andy Lee, Founder and CIO of Parallaxes Capital
Andy founded Parallaxes Capital in 2017. Previously, he was with Lone Star Funds, focused on investing in the Americas. He began his career at Citigroup.
Andy graduated from the University of Illinois at Urbana-Champaign with a Masters in Accountancy and a Bachelors in Finance and Accountancy.
Andy has been featured in publications including Wall Street Journal, Capital Allocators, Institutional Investor, NBC, Forbes, ReOrg Radio and Fitch’s LevFin Insights. He has spoken at events and conferences for organizations such as the Association of Asian American Investment Managers (“AAAIM”) and leading academic institutions including the University of Illinois, University of Pennsylvania and Texas Christian University (“TCU”)
When Andy is not working, he enjoys taking his corgi (Taco) on long walks.
Fun Fact: Andy, rarely one to back down from highly ambitious goals, ran a marathon less than 180 days from ACL, MCL and PCL surgery.
Source: https://parallaxescapital.com/our-team/
What’s covered in EP237
- Introduction. (0:00)
- TRAs for companies going public in the US. (6:18)
- TRAs agreements and their value for private equity investors (i.e. pre-IPO owners). (12:52)
- Tax refunds, risk management, and investment opportunities. (19:57)
- TRAs and investment strategies. (24:47)
- TRAs and their potential as a diversified investment. (30:55)
Takeaways
- TRAs convert future corporate tax savings (e.g. from depreciation expenses) into current income streams.
- TRAs provide long-dated, typically 15-year income streams that can be sold by pre-IPO owners (e.g., private equity investors).
- Private equity firms use TRAs to increase their earnings from the sale of businesses they’ve invested in.
- Ideal Candidates for TRAs are large, stable companies with predictable long-term profitability (e.g. Shake Shack), rather than high-growth tech startups which often lack immediate profitability.
- US tax expertise is required to properly analyze and invest in TRAs.
Links relevant to the conversation
WSJ article about Andy, “The Tax Whiz With the Strangest Hustle on Wall Street”: https://www.wsj.com/finance/investing/tax-whiz-strange-hustle-wall-street-d51ddbc6
Parallaxes Capital: https://parallaxescapital.com/
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Transcript: The Tax Guru the WSJ says has Wall Street’s “Strangest Hustle”: w/ Andy Lee, Parallaxes Capital – EP237
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Andy Lee 00:04
Tax is the largest asset class in the world that no one’s ever heard of. It’s a very much part of the fabric of our society. Like there are so many avenues through which tax assets are expressed and are monetized.
Gene Tunny 00:26
Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you could join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, and welcome to the show. In this episode, I talked to the man that the Wall Street Journal has described as the tax whiz with the strangest hustle on Wall Street. It’s Andy Lee from parallaxes capital and we’re talking about tax receivable agreements T RAS. What on earth rtra is and why has Andy invested in them? How did companies like Shake Shack end up bound by T IRAs? Stay tuned to find out. Please be aware that Andy’s firm parallaxes capital is a big investor in TRS and nothing in this episode should be treated as financial or investment advice. I would love to hear your thoughts on the discussion that I have with Andy today. So please get in touch and let me know what you think. And if you have any questions, my contact details are in the show notes. As sponsor this episode is Lumo coffee a seriously healthy organic coffee with three times a healthy antioxidants of regular coffee. Lumo coffee offers a 20% discount for economics explore listeners until 30 April 2024. Be sure to check out the show notes for more details. Without further ado, let’s dive into the episode. Enjoy. Andy Lee from parallaxes. Capital, welcome to the programme.
Andy Lee 02:09
Thank you for having me.
Gene Tunny 02:11
It’s a pleasure, Andy, I’m keen to learn about this very exotic, very interesting, and, you know, asset class I hadn’t heard of before before I learned about what you’re doing these tax receivable agreements, so keen to chat about that to start with? Could you tell us about parallaxes? Capital? What’s the idea with the name? How did you come up with the name? Absolutely.
Andy Lee 02:38
So a parallax is an astronomy term. Whereby you look at a planet from a different vantage point to arrive at a different perspective of an object. So there are several meanings in the name, the first being an ode to my old firm, it was called Lonestar funds. And so looking at a person having a different perspective, the more secular meaning around was that many people look at problems from a singular point of view. And in order to solve an equation, like you need to look at it from multiple perspectives, to arrive at multiple solution sets. And so the plural of parallax parallax cysts. And so that was as parallax was unavailable. parallaxes was, and so that was helpful. But also it talks a little bit to my faith. I’m a Christian. And as a Christian, and we’re not so much focused on the here and now, but more focused on eternity. So a very long term perspective.
Gene Tunny 03:41
Very good. Yes, it’s a it’s a good name. I always remember those that classic 1970s film with I think it was Warren Beatty, the parallax view, which is one of those great 1970s conspiracy films that I’d recommend. So yeah, very, you know, top marks on the name. So well done. I’ve got to ask me, what is parallaxes? Capital? What? So if you’re a, you’re a fund manager of some kind, or what are you actually doing?
Andy Lee 04:10
So we’re an investment manager based in the in the US and we have raised six funds dedicated to the strategy of monetizing tax receivable agreements. So a tax receivable agreement, think about it, like a long dated annuity that is not too dissimilar from a streaming royalty on metals or mining, musical royalties of pharmaceutical royalties. So long data annuity like cash flows, that we provide upfront liquidity for to holders of these assets in order for them to have to recycle that capital to do other more productive items.
Gene Tunny 04:55
Gotcha. Okay, so, a couple of things there just immediately long dated how long and by the upfront liquidity? I mean, what is this? Is this a repurchase agreement? Or are you? Are you buying them outright? What’s, how do you how are you? What’s that involve?
Andy Lee 05:16
So are the two questions the first duration lies? It’s typically a 15 year piece of paper. Just to provide a perspective on it, we actually have fun one was a 21 year of fun to hold the paper. I know I look very young as an Asian American, it’s a gift, as I’ll call it. But people weren’t sure if I was even 2001 When I went out to raise our first fund. On the second question, it is the latter. Do what you suggest that we buy these outright from counterparties, including the likes of private equity, their CO investors, management team as well as founders, providing them upfront liquidity for what is otherwise a unloved and misunderstood asset.
Gene Tunny 06:02
Okay, gotcha. Right. And what is the asset itself? So there’s obviously a stream of income coming from somewhere for this to be valuable, what is the actual underlying asset? Absolutely.
Andy Lee 06:18
Think about it almost like a tax refund, that one might receive after they file their taxes. So some here in the US, every April 15, individuals have to file their taxes, fulfilling their tax obligation to the United States. Oftentimes, many of these individuals have overpaid their taxes. And so on April 15, they would file your taxes, the US government would say, hey, Jean, you’ve overpaid your taxes by 100 bucks, we’ll pay it to you in two months. For many individuals, they might want the money immediately. And so there are businesses such as the likes of an h&r block, that would say, June instead of waiting for $100, in two months, we’ll give you $95. Today, a Buy It Now price, we do the exact same thing. But not for consumers. We do it for corporations, where they have 15 years of refunds available to them, that would come due. And so instead of waiting every year to get that annuity, they want that money today. And so we prospectively provide them that factoring solution upfront proceeds.
Gene Tunny 07:37
Ah, okay, I think okay, this is starting to make sense. Right. So what type of companies are we talking about? I mean, what from my reading? And looking into this, it looks like is this is this highly relevant to the tech sector to startups?
Andy Lee 07:55
I wish I’m the only one, it may not be the most relevant that attack sector is primarily driven by the fact that many tech firms here in United States are very focused on growth at all costs, relative to profitability, many of them, or the vast majority of the tech sector runs unprofitably Primarily because the market prior to 2020, to value them on growth, more than they did on cash flows, primarily because they believed that these were long data annuity streams. And the SAS businesses were long data annuity themes, and that whenever they stopped growing, they will become incredibly profitable. That obviously then come to fruition whenever growth stopped. So that’s not the where we primarily transact names that we’re are associated with, include the likes of a REMAX, a Shake Shack, yeah. Duffin Phelps, so large corporates that are investment grade near investment grade businesses, there’s also the Edit element that as quickly as a tech business disrupts a industry itself is vulnerable to being disrupted. And so for an investment manager like myself, focus on the space that we’re in, like, we don’t focus on the next year or next five years, we have to believe that a business is going to be a going concern for 15 years. So that’s a very different perspective or lens that you have to look at a opportunity, primarily because you might be a great business today. Do I believe that you’re gonna be a great business in 15 years, if you’re not a great business? Senior, you might be a great business for five years that will result in me getting a return of my capital. Ultimately, I’m in business to get a return on my capital. And if you’re no longer in business in your six, I got my money back. And then I just wasted a huge opportunity cost for my investors.
Gene Tunny 10:08
Yeah, yeah, gotcha. And how does this tax receivable agreement? come about? Then? And also, I mean, okay, so I guess maybe I need to go back a bit. What’s generating this, this tax refund primarily? What is it that that is generating these potential tax refunds that will be coming in the future and that you’re able to then you buy you effectively buy those tax refunds off the companies? So I guess I’m interested in what’s generating them, if there are any sort of commonalities. And also then how do you go about making that agreement? What’s the contract look like? Is it regulated? Or is there a standard form? Can you tell us a bit about that place? Andy?
Andy Lee 10:55
Yeah, absolutely. So the most common version of that is, whenever a company is going public, they enter into a specific tax transaction in the US transforming their business, from what we call a flow through, which is a partnership or an LLC becoming a C corporation, that transaction is known as the up seat transaction, that transaction enables the company to be a beneficiary of large tax assets that will become available to them over 50, typically 15 years. So that’s an incredibly valuable asset. As a result of entering to these transactions, they enter into the agreement, the agreement is relatively rote. It’s while it’s a cottage industry, much of it has been rinse and repeat it over 30 years has been around since the 1980s. And so something that as well Warren precedents, as well as presidential documents for them to follow. And so for us, these are ultimately ended up in the hands of what we call a natural holders. So in the private equity context, private equity firms have tenure fun lives. So they take a company public, and oftentimes, they sell down the equity within the 10 years that their funds allow for them. These, if you took a company public in your A these assets, then start a 15 year clock. So in your two to three, it will be your 11 for private equity fund, you’re looking to move on and sell these positions. And that’s where we stop at we’re a second during market liquidity provider for these
Gene Tunny 12:51
assets. Rod okay. And I mean, you talk about large tax assets. What if, if I understood your terminology correctly? What are you talking about? Are you talking about what is it is a depreciation or is it the things that Yeah, Okay, gotcha
Andy Lee 13:10
items that can be depreciated or amortised. So raw. What what what’s an item that depreciate a car? A building on land is not depreciable because like obviously land is the land. But things are amortised include things that aren’t intangible in nature. So customer relationships, among others, that might be available intellectual property, among others.
Gene Tunny 13:37
Gotcha. So this is a way for these companies to to get well to get to get cash to reinvest in their operations or to you know, for working capital, whatever. Can you explain what is it? What’s in it for them? Because I mean, they they sacrifice this, you know, the this tax, you know, this expense that they can use to reduce their, their tax liability in the future? They get the upfront cash, what is it? Is it is it out of desperation that they’re going into these agreements. So how
Andy Lee 14:11
I would make a slightly different connotation. Remember, I mentioned that the sellers are private equity firms, or investors among others. So at the time of the IPO, these assets are owned by the company. Remember, pre IPO, the Board of Directors got our fiduciary duty is to maximise value for pre IPO shareholders, the public markets, we as in the US have seen a massive move away from active to passive investors. active investors are very focused on understanding what intrinsic value are, and so they’re very focused on understanding the free cash flow capabilities and generation of a business. However, on the other side of the equation passive Investors are more algorithmic, algorithmic or systematic in nature and are focused on among other things, revenue, multiple growth rates, EBIT, da multiples, price earning, none of which really captured the value of tax assets, primarily because they’re less standardisation across things such as capital expenditure, and intensity of a business, working capital, cash taxes. And so as a result of not necessarily the attributes that they seek being captured by the evaluation metrics, these tax assets are ignored. And so private equity firms are saying, Look, this fundamentally improves the free cash flow generation of a business. If you’re not going to give us an incremental value, incremental value for it, we’re going to extract it for ourselves by entering into a tax receivable agreement. So the holders of these cash flows are more sort of private equity firms. As a result of the finite fund lives, we step into the breach to provide liquidity to.
Gene Tunny 16:12
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 16:47
Now back to the show. What’s an example of a private equity firm as a Carlyle Group? Is that the sort of group you’re talking about, or KKR?
Andy Lee 16:57
Yeah, all of these massive mega funds all have trs, primarily because they had it for the investment manager themselves when they went public. And subsequent to that the principals realise the disconnect in how the the various markets private and public markets think about it differently. And if they’re extracting value from their portfolio companies, as private equity got more and more competitive?
Gene Tunny 17:25
Yeah. Yeah. I mean, it’s, it’s interesting to me, it’s one of these, these niche types of investments. I mean, honestly, I hadn’t heard of them before. You know, actually, there’s not Nishioka. Well, tell me more.
Andy Lee 17:42
Tax is the largest asset class in a world that no one’s ever heard of. It’s a very much part of the fabric of our society. Like there are so many avenues through which tax assets are expressed, and are monetized. In the US, we have the concept of tax credits, that are now that were historically transferable or monetizable. And now they have direct pay. I don’t know you’ve been to Europe, with your significant other, and may have gone shopping in that regard. In the in Europe, there is what they call it the value added tax for which is a foreign or you can get a refund at the airport. Yep, there’s a huge business, global blue, that’s currently owned by Silverlake, that generates hundreds of million dollars of EBIT da by running the VAT tax refund programme at the airport. Similar to the example I gave you on individual taxes, that in commercial business that basically says to travellers whenever to depart in the EU, hey Jean, instead of waiting to get a check to Australia for that 1000 euros will just give you $700 Today, and they earn a sweat relative to that. There are so many businesses like that, across that run the gamut. And the lack of understanding creates the opportunity because it is the single largest opportunity set that doesn’t have commercial elements to it. And intellectual capital that has been brought to bear. Why is that? primarily driven by the fact that tax professionals here at least here in the US, when people hear attacks, they literally run away all the plug your ears, that like that’s the last thing they ever want to talk about. Every year we have to file on April 15. People consider it like being worse than going to the dentist. So like it’s something that is a very misunderstood and underappreciated even though there’s clear value add that can be created an economics that can be derived from it. Yeah,
Gene Tunny 19:56
yeah, for sure that that example you gave is a very good one. And that’s really helped crystallise in my mind. And so you’re, you’re doing what they’re doing. But with, well, you can compare what you’re doing with what they’re doing, you’re doing it for big corporations or for the private equity companies that have invested in them, they want to get out, you come in, you provide some liquidity, and you take this stream of these, these benefits that they can get from reducing their taxable income so that they will pay you that benefit associated with that in the future. You’ll get it from you get it from the company itself, too. Can you tell us what the agreement like who’s the contract or the Yeah,
Andy Lee 20:42
the agreement is between the TRA holder, then the private equity firm, now parallaxes. And the company every year, yeah, post tax filing season, the company has obligated to deliver a notice to the holders, if they utilise the asset, and the calculation of the refund, at which point of time, they have to repatriate the refund to the holder of the TRA. And so for which every q4 is a little bit like Christmas, we a little bit of an early Christmas, where we started collecting payments for the underlying payment stream. Gotcha.
Gene Tunny 21:24
Okay, so with the example you gave of the business was a silver like the global blue that does the refunds, or they will pay you up front? The VAT or the VAT refund? And they there’s a there’s a discount applied? So they get a benefit they’re taking on? Suppose they’re probably taking on less risk if they’ve got receipts? How do you think about that risk? I mean, what risk is there from, from your point of view? And how do you manage that risk? Yeah,
Andy Lee 22:00
yeah, three primary forms of risk that we manifest. The first and foremost is credit risk. So in global blues example, the EU governments failing and choosing not to, or stepping them on the pavement. For us, it’s more, it’s entirely around is the business going to exist? To the point about do I believe that this is a durable franchise, and will be around in 15 years. And so I have to believe that the company is a going concern will be a going concern, profitable and will exist in earnest. And so that’s a big part of our underwrite. And our focus on these businesses, we’re not looking for a flash in the pan, were looking for long, durable franchises. One on credit risk. The second risk is you never lose your tax asset. Like in the same way, if you don’t go, you don’t use a global blue solution, you still are eligible for the refund for multiple years. So you can go, you can fly back to Australia, on your next trip to Europe, you can file your tax refund. And that has we can do it’s the exact same thing, tax assets never get lost. They’re merely deferred. And so that has the potential to impact our IRR, which is a time weighted measure. But obviously, it’s an extent we collect it, then it doesn’t hurt our total profit dollar or mo YC on the opportunity. The last aspect is around corporate tax rates. So think about a tax acid as being the derivative of two variables, one at the tax asset itself, the notional value of a tax asset, so think about a net operating loss of 100. Think about the tax rate being your price to let’s just say 25% 100 by 25 results in a $25 cash flow. To the extent that tax rates went down and to 20%, then the tax acids 100 by 20, or $20 to the extent and went up 100 by 40, then you get $40. And so relative to most other asset classes, we have an inverse relationship to the primarily because if tax rates went up, equities likely would see some form of a correction downwards. Conversely, on the way up, ever when tax rates went down, equities would likely rally. We have an inverse relationship to that. And so for many of our investors, they view it as a nice tail hedge relative to potential policy changes here in the US.
Gene Tunny 24:47
Gotcha. Okay. So you mentioned a term before MOC. So that is multiple on invested capital. So just clarify that. That makes sense. Right? So, yeah, just thought I’d ask you about that, that risk. Because, you know, whenever you’re swapping these, or you’re taking on these, or that the stream of benefits and you’re providing upfront money, that can be risky. And we saw what happened with Lex Greensville, from the green cell family, which is a dime in Brisbane and Queensland, which is south of Bundaberg, which is where the green cell family farm is. And, you know, he was he was doing great things, but then, you know, he got into got into trouble because he thought he found this, you know, this this thing, this part of the market that no one really was properly servicing before and was providing, you know, he was buying the invoices, I think, wasn’t he and then we’re providing that supply chain finance. And then, you know, it was all working until the pandemic and and companies started delaying payments, and then the whole thing fell over for him. So he was in. And that was a real shame. What happened there real, real, real shock. So yeah, I just just wanted to ask you about the risk, because I like I just wonder, is there a risk here that? Yeah, I just want to make sure you’re I mean, I’m sure you are, you’re crunching the numbers, you’re highly experienced in this in this industry?
Andy Lee 26:22
Yeah, I think for Greensville, I mean, Dale had on the asset side of the equation, to your point, there started to being deferrals or delays to the cash flows that they were receiving, there was a little bit of an asset liability mismatch, whereby they was the liabilities they borrowed heavily, and would deliver at an incredibly aggressive rate. And so that resulted in them being unable to fulfil their obligations on the liability side of the equation today. We have also achieved securitisation. Today, our book is unlevered as we have paid it off, but that is something that we are incredibly conscious about. And look, there’s always that under inherent tail risk. The point is like you should never have too much of a mismatch. And so inherently, it’s we’re always very concerned about not having too high of a leverage level that we will be unable. Should there be shortfalls in our expectations or under writings. Yeah, yeah.
Gene Tunny 27:30
Right might have a look at some of the, what you’ve got on your website. There are some interesting things here on your website here. So I’ll put a link to that in the show notes. So parallaxes capital is an alternative asset manager and as a market leader in monetizing tax receivable agreements. Okay, so I think I’ve got a much better understanding of what that’s all about. And the stats you’ve got on your website, I don’t know if these are still current, but it says 20 Plus tax receivable agreements, purchase so they’re, so they could be large companies like Shake Shack or whatever. REMAX you mentioned that you’ve got these tax receivable agreements from and then it’s $750 million of an discounted principal balance purchase? Could you explain a bit about what what that seven 50 million figure means? Please, Andy,
Andy Lee 28:25
absolutely. Remember the example that I gave you as to the value of a tax asset such as a net operating loss multiplied by a tax rate of a 25%. We own across our portfolio $750 million of cash effective tax assets. So if you want to understand what our notional number is, you do that 750 divided by a 25% tax rate. And you would end up with like $3 billion of notional. So 30 million is what our portfolio over the next 15 years will deliver back to us should deliver back to us. Rod,
Gene Tunny 29:06
okay. And do you provide any indication of what the potential rate of return to investors is?
Andy Lee 29:14
on a net basis? We deliver call it a 15% return. Ron, okay.
Gene Tunny 29:21
Gotcha. And, Ron, so that’s obviously going to compare favourably to to more traditional asset classes, but of course, you know, risk associated with that, and nothing we’re saying here is we’re not I’m not offering any financial or investment advice, of course. Right. And who’s investing in your funds? Andy? So you’re in New York City, I believe. Who who’s investing in your funds? Is it family offices? Is it is it investment, Marilee
Andy Lee 29:54
endowments and foundations as well as small pensions? Right and Oh, CIOs,
Gene Tunny 30:00
endowments, foundations and small, small pensions Did you say confirm
Andy Lee 30:05
as well as address or CIO firms?
Gene Tunny 30:09
Sorry, I’m not familiar with that acronym IC, sorry, what type of firms and
Andy Lee 30:14
outsource Chief Investment Officer firm. Think about smaller endowments may not have the sufficient scale to hire their own research teams to allocate capital. And so they aggregate capital into a larger firm, who then deploys money on their behalf in an outsource format. As a result of that bundling, they’re able to capture economies of scale as well as gain access to best in class managers,
Gene Tunny 30:46
broad Okay, without necessarily recommending, in particular, outsourced CIO, cio firms, you know, any examples of them? I’d be interested in following up on those I can’t say I’ve really come across many of them. There
Andy Lee 31:00
are some huge ones such as a partner’s capital. A Hamilton lane, a stepping stone. Yeah, a Cambridge associates. A RCEP.
Gene Tunny 31:15
Yeah, right. Now, it’s fascinating. I mean, one of the things that our previous guest on my show, David Bahnson, who’s with oh, gee, the name of his firm escapes me, but it’s quite a, he’s got quite a reasonable amount of funds under management. He’s over at over on the West Coast. I mean, one of the points that he makes on on his capital brief show is that the the capital markets in the US are just so deep. There’s just so much. So so much money, obviously, with so much talent and so much creativity and innovation. And, you know, this is what I’m learning today is what I’m seeing today. Is is part of that it’s part of that story. It’s it’s all it’s it’s really fascinating. Yeah, so yeah, thanks for thanks for all this. I’m sorry. So my questions might be, might be a bit bit basic, but I’ve, yeah, there’s
32:14
a lot. We’re all learning together.
Gene Tunny 32:16
Very good. Very good. There’s a lot I’m unfamiliar with in this in this space. So it’s really good. My final question and it relates to a book I’ve been listening to recently. It’s Tony Robbins, his new book, The Holy Grail of investing. I’ve been listening to it on Audible. I don’t know if you’ve come across it at all. But it’s, yeah. It’s very good. Because I mean, one thing about Tony Robbins is that he just knows all of these ultra successful ultra wealthy people and he’s able to pick their brains. So he’s talking to people like Ray Dalio and, and I think Paul Tudor Jones, I think was a client of Tony Robbins. But what he picked up from Ray Dalio is this idea of this holy grail of investing and he asked Ray Dalio for some advice and, and Ray Dalio is best advice to him was, what you’ve got to find is eight to 12, uncorrelated investments for your portfolio. So he’s talking about things that, yeah, they’re uncorrelated, so they’re not going to vary. You know, what’s the right way of thinking about this there? Because the returns are so I suppose unexpected or random relative to everything else, that if you get enough of them, then you should you can outperform the market. So even if the markets in a downturn, you can still be, you can still be doing okay. So I think that’s the that’s the basic idea. I probably haven’t explained that well enough to come back to that. But I think it’s an interesting concept. And, I mean, how do you see this your tax receivable agreements? How do you see them as part of a diversified portfolio or as part of trying to achieve this, this collection of uncorrelated investment assets that Ray Dalio would call the holy grail of investing? Do you have any thoughts on that?
Andy Lee 34:10
Yeah, absolutely. So like, look, there are so many different opportunities that are as a result of an inefficient and inefficiency, opaqueness of a market as well as size of markets that create incredible moats for one to be able to harvest what I might describe as alpha from it. And that alpha isn’t necessarily something that is academic in nature, is just driven by inefficiency. That can be an opportunities like what global blue does. They have a regulatory moat. Like, no one day Oh, there’s only one kiosk at any given airport. There’s only one way for you to get a refund unless you want to go Go home and send multiple stamps and mailing your refund, that inherently has have some exposure to obviously discretionary spending, among others, but you’re looking for opportunities where they’re just such inefficiencies and markets that you’re able to harness that operational alpha, um, that can be created as a result of sourcing. And so like, I think Elliott says, is incredibly well, that they seek to sweat their assets. What they do isn’t difficult. It’s just incredibly laborious. And so that’s what we try to do at parallaxes playing in non traded markets, ie there are no brokers. Unlike a, you can’t buy this on a Bloomberg or on your friendly broker, like those are things that that require you to go out and transact on a individual by individual basis. Is it hard to do? No. Is it something that many want to do? Also very much, that’s not something that many desire to do? The best and the brightest here in the US aren’t looking to make their living and become a master of universe and tax? That’s just not something that occurs? No,
Gene Tunny 36:14
no, certainly isn’t. I think it’s so fascinating. You mentioned I mean, alpha, so you’re going for that excess return, you’re talking about excess return relative to typical market returns. And then you mentioned Elliot, and I’m trying to remember the I don’t know, I can’t remember the name of the whole firm, but as Elliott, the is that the firm that buys distressed debt, and then Sue’s the countries that it’s that it’s bought the debt from
Andy Lee 36:41
most famous for Argentina. Yeah, gotcha. Or Argentina or seizing having seized a warship from Argentina. Rot.
Gene Tunny 36:48
Yeah. Wow. Okay, I’m gonna have to cover them in a future show. That’s fascinating stuff. Okay, Andy, that that’s been do
Andy Lee 36:57
something that many are unwilling to do. Yeah. How many investment firms are willing to confront a country and confiscate a warship?
Gene Tunny 37:08
Yeah, it’s, it’s bold. It’s certainly Absolutely. Right. Okay. And it has been terrific. I’ve learned, I’ve learned a lot. And yeah, so again, it’s an illustration of just those deep capital markets and just the level of, of ingenuity, the level of rigour that is being applied to finance Well, in the US and worldwide. So this is, this is terrific. Oh, finally, I should ask is this just is this mainly a, what you’re doing this? Is this mainly applies to the US, does it? Or do you see it happening in other countries
Andy Lee 37:50
that technology can occur all over the world? Um, that’s likely not something that I thought parallaxes can pursue. Primarily because tax is a very local domain of expertise. You’re not going to have a US tax preparer. help prepare your Australian taxes. They’re just not familiar. They’re barely familiar with Canadian bumper rules, or Mexican tequila taxes. They’re very much not familiar with Australian. It’s just a local domain of expertise. Gotcha.
Gene Tunny 38:20
Okay. Right, Andy, anything else before we wrap up?
Andy Lee 38:24
Nope. Thank you so much for taking the time. No worries, I
Gene Tunny 38:28
will put a link to parallaxes capital on your on the in the show notes. And yeah, refer them to to your material. So if you’re interested in you’re in the audience, and you want to learn more about tax receivable agreements, you can you can check out Andy’s website. Andy, you’re obviously one of the great authorities on this issue. So I would definitely refer people to us. So Andy Lee from parallaxes capital. Thanks so much for your time. I really enjoyed the conversation. Take care and be well rato thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.
39:47
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Credits
Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.
