Andy Lee is the king of a lucrative niche in the financial markets. Being king is not easy.
Andy Lee is the king of a lucrative niche in the financial markets. Being king is not easy.
Lee invests in tax receivable agreements, increasingly common agreements that put cash in the pockets of companies' early investors. Not many investors know how they work, and a surprising number of people don't even know they have them.
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Lee invests in tax receivable agreements, increasingly common agreements that put cash in the pockets of companies' early investors. Not many investors know how they work, and a surprising number of people don't even know they have them.
This gives Lee the opportunity to buy up the cash flows of so-called TRAs at a discount and include his profits in the payout. Getting to this point requires in-depth knowledge of tax, investment and law, as well as a lot of persistence. To finalize a recent contract, Lee had to obtain handwritten signatures from up to 114 people within seven days. “I want to punch myself in the face,” Lee said. “It’s not rocket science, but there aren’t many people in finance who like to do something like that.”
Lee does. He averages 32 calls per week in hopes of closing deals. He has pursued potential sellers to the extreme, once hosting a charity 5K race in hopes of getting his guest of honor, a TRA owner, a deal.
Lee, 33, founded Parallaxes Capital in 2017, creating a fund that aims to transform TRAs into a new asset class by creating a secondary market for investors.
“In a relatively small and not particularly well-known area, Andy is by far the biggest fish in the pond,” said Albert Chang, head of M&A, tax and structuring advisory at RBC Capital Markets.
Lee often begins cold outreach to people with TRAs who are surprised to hear from him. A company founder responded to Lee's pitch with a crying emoji. “I don’t know what a TRA is, so probably not for me,” said the founder.
Lee had the public financial records to prove that the founder had a TRA and a price that Parallaxes would pay for its future cash flows. Through thousands of conversations and individual deals like this, Parallaxes has invested more than $300 million across four funds. Two more are currently being collected.
As Lee recruits TRA holders, he informs potential investors. “I was sent the deck, and at first I didn't really understand what it was,” said Gilbert Calderon, chief investment officer at M4 Capital Management, a single-family office in Chicago known for buying esoteric investments. M4 finally signed An.
Other early investors included foundations that understood TRAs because they themselves were beneficiaries. A family office sold its own TRA payment rights to Parallaxes. Instead of cash, a stake in the company's first fund was taken.
According to investors, Parallaxes' first two funds returned about 15% annually. Later funds performed better because some of the companies whose TRA rights they owned were acquired and the TRAs were paid out early.
TRAs are most commonly used to capture tax benefits when companies structured as partnerships or limited liability companies go public. The pre-IPO investors remain invested in the original operating company, while the new shareholders own shares in a new listed company, which then holds shares in the operating company.
When the original investors sell, their shares in the operating company become new shares in the publicly traded holding company. This triggers the creation of the tax claim, which can reduce the company's tax burden.
A TRA shares these savings with early investors and offsets some of the tax burden from their sales. Almost all TRAs split the tax credits 85/15 between investor and company, which is considered a win-win situation for both parties. These payments to pre-IPO owners typically span 15 years.
Parallaxes offers TRA beneficiaries cash upfront in exchange for these potential future payments. The offers are similar to upfront payments for structured litigation resolutions or winning lottery tickets that pay off over time. In its average deal, Parallaxes offers a TRA holder around $4 million and typically expects to get back 2.5x their investment.
Investors like TRA cash flows because they have tax advantages over bonds and are not highly correlated with public markets. However, if a company does not generate high enough profits or tax rates fall, TRA payouts may take longer or be smaller than expected. The biggest threat to a TRA is bankruptcy.
Lee began college at 16 and attended the University of Illinois Urbana-Champaign, where his father had received a doctorate. in computer science and his mother has a master's degree in accounting with a concentration in taxes. Lee graduated with a job offer as an analyst at Citigroup in New York.
But his father would only co-sign Lee's lease in New York if he had a college degree. Lee chose the same master's degree in accounting as his mother because it required minimal in-person attendance and included an open-book final exam.
At Citigroup, Lee worked on a transaction in which Cloud Peak Energy, a coal producer spun off from miner Rio Tinto, pressured its former parent company to sell its TRA obligations at a steep discount. Lee realized that Cloud Peak was essentially paying 36 cents for every dollar of cash flow that would accrue under the TRA.
Lee left Citigroup and joined private equity firm Lone Star Funds, where he was tasked with developing new investment ideas. He introduced a fund that would invest in tax debt agreements. His bosses at Lone Star, which manages $86 billion, balked at the small size of the market.
Lone Star encouraged him to start his own fund, and some of the firm's partners were among his first investors, Lee said.
Then the hard work of finding investments began. Building substantial positions in specific TRAs can mean tracking down dozens of people and convincing them individually to sell their TRA rights.
The company finds people in public records and plans its pitch. Lee enjoys walking with Taco, his five-year-old corgi. He will hire athletes to make short cameo videos to help get deals across the border. A Duke University graduate received a message from Jay Williams — the star point guard on the school's 2001 national champion men's basketball team — imploring him to sell his TRA.
Parallaxes is currently pursuing deals that dwarf the size of its first fund. But with more money comes potential headaches, such as the deal clause that led to Lee chasing the 114 people behind 34 beneficiaries to a TRA. Parallaxes had seven days to get the majority of each company's owners to sign a document confirming the deal. Lee and his team did it.
Write to Ben Foldy at [email protected]
The tax expert with the strangest buzz on Wall Street The tax expert with the strangest buzz on Wall Street
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