Today, we have an exciting episode with our special guest, Andy Lee. The host of The Deep Wealth Podcast and post-exit entrepreneur Jeffrey Feldberg interviews Andy who is the founder of Parallaxes Capital. Andy shares some valuable insights about a little known tax strategy called a Tax Receivable Agreement (TRA) and how to unlock hidden enterprise value in your business.
Andy Lee is not just any financial expert. He founded Parallaxes Capital in 2017 after honing his skills at LoanStar Funds and beginning his career at Citigroup. Andy has a wealth of experience and has been featured in top publications like The Wall Street Journal, Forbes, and NBC. He often speaks at major events and academic institutions.
As Jeffrey Feldberg, our host, says: "Andy, welcome to the Deep Wealth Podcast. An absolute pleasure to have you with us. And Andy, I'm curious because there's always a story behind the story. What's your story? What got you from where you were to where you are today?"
Andy Lee started his educational journey early. By the age of 17, he had already graduated college. When asked about this, Andy humbly responded, "I would say I'm semi intelligent. I would not go that far to say I'm super smart."
Andy’s academic journey led him to pursue a Master's in Taxation, where he identified his keen interest in tax receivable agreements (TRAs). Early in his career at Citigroup, Andy found tax matters fascinating, sharing: "Tax is such a large, unexplored world."
Imagine having a roadmap for success that guides you in making the right financial decisions for your business. That’s what today’s episode of the Deep Wealth Podcast is all about. Jeffrey Feldberg dives deep into the mind of Andy Lee, the genius behind Parallaxes Capital. Founded in 2017, Parallaxes Capital has already made a mark in the financial world by navigating hidden tax opportunities, helping companies of all sizes maximize their value.
Andy shares, “I started my career at Citigroup, where I worked on the buyback of a tax receivable agreement between two parties, a major mining company and a coal producer. During that transaction, I found tax to be a fascinating, unexplored world. But I moved on, furthering my career at LoanStar Funds down in Dallas, Texas.”
The complexities of the financial world could deter many, but not Andy. His drive to explore new investments led him to create the Parallaxes Capital, specifically to deal with tax receivables.
What Are Tax Receivable Agreements (TRAs)?
Let's break down what a TRA is: “A TRA creates a tax liability for a buyer, but also an asset for the seller. In 2017, it was a large but growing market. TRAs let private equity firms create value without waiting for years.”
TRAs can transform your tax liabilities into tangible assets. It's more than just clever accounting—it's a strategic approach to amplify your business's worth, especially in merger and acquisition scenarios.
TRAs are a special type of financial agreement often used in mergers and acquisitions. Andy explains that during these transactions, tax assets are transferred from the seller to the buyer. However, the value of these assets is frequently ignored in public equity valuations due to passive investing trends.
To put it simply, Andy says: "Every primary market will need a secondary market. For drones, you can look at boats, what are water rights? Who owns those water rights? For cars, it's obviously via roads. And for planes, you can't fly over someone in the country. So, there are guardrails through which that you can understand."
Parallaxes Capital’s core mission revolves around Tax Receivable Agreements (TRAs). Andy explains, “In any M&A transaction, there are inherently tax assets being transferred from the seller to a buyer. Sophisticated private equity firms saw that public market investors ignore the value of tax assets, so they kept the tax benefits for themselves."
He breaks it down further, “We provide a factoring solution where instead of waiting 15 years for the money, we give you dollars today in return for more dollars over time.” Think of it as selling your future earnings for immediate cash—a classic win-win scenario.
Jeffrey delves into how Andy spots new opportunities in emerging markets. “For drones, you can look at boats and what are water rights. For cars, it's roads. Planes can't fly over someone in the country due to air rights. We provide a secondary market liquidity solution just like these.”
What does that mean for today’s business owners and entrepreneurs? Simply put, your present challenges might be Andy’s next big opportunity. Anticipating market trends and developing future-ready investment strategies are Andy’s special powers.
Different stages in business offer different opportunities. For startups and established corporations alike, Andy emphasizes the significance of strategies rooted in understanding tax implications. “Whether you're gearing up for a liquidity event or planning long-term growth, smart tax strategies can make your business more valuable,” says Andy.
Jeffrey echoes this sentiment, “The Deep Wealth nine-step roadmap and the 90-day program stress the importance of having an astute tax advisor on board early. If you want to thrive, you need to keep as much of your earnings as possible.”
As Andy illustrates with a specific example, “Shake Shack had tax assets from when it was a pass-through entity before going public. We approached stakeholders and offered them money upfront for the value of these tax assets.”
Imagine the freedom that brings. Instead of waiting for several years to realize the benefits, businesses can get immediate cash injections to fuel growth, innovation, or even new ventures.
### Parallaxes Capital’s Role
Parallaxes Capital specializes in buying these TRAs from private equity firms once their finite fund life is up. By doing this, they provide immediate liquidity to firms and take on the future value of those tax benefits.
Andy states, "We service as a factoring solution, so think about what pharmaceutical royalties were in the 2000s, what musical royalties were in the 2010s. We effectively capture and help provide a factoring solution where you might not want to wait 15 years for estate planning purposes or just a need for liquidity where you have a significantly better investment opportunity set."
One of the biggest takeaways? “Invest in tax. By understanding your tax implications, you’re not just saving money—you’re making educated decisions that will benefit you long term,” Andy asserts.
Sales is another crucial lesson. “Sales is the single most important skill set in life. You’ve had to sell your significant other on marrying you, your kids on eating vegetables, people to buy your business, and people to work with you and for you,” reminds Andy. Sales is everywhere. Learn it, master it, and you’re set for life.
For potential sellers, Andy advises, “Clean books are essential. You don't want buyers discovering hidden issues at the one-yard line. Transparency and foresight build trust and save time.”
As for buyers, understanding and leveraging tax strategies can make deals more appealing. “For private equity firms, I tell them that working closely with tax advisors helps drive incremental value.”
Clean Books and Surprises in Due Diligence
Jeffrey emphasizes the Deep Wealth nine-step roadmap, particularly stressing the importance of due diligence. He advises: "We absolutely insist at Deep Wealth and the Deep Wealth Mastery Program that we do an internal audit before we ever speak to an investment banker, before we're ever in market."
Andy agrees, warning that no one wants tax issues to create a crisis of confidence late in the transaction process. He states: "No business is perfect. Everything that you love has works on it in some way, shape, form."
Parallaxes Capital is leading the way in addressing untapped tax opportunities, but the journey is far from over. “Today, our focus is on businesses that are north of $800 million in EBITDA, are public, and are investment grade. In the future, we hope to extend our services to startups and smaller businesses,” Andy shares.
The road ahead is exciting. As Andy and Jeffrey discuss, tax is the largest market asset class in the world, influencing every sector and industry. By becoming savvy in tax strategies, you could unlock immense value and potential for your business.
As the podcast wraps up, Jeffrey asks a fun question about what advice Andy would give his younger self. Andy’s answer is straightforward and powerful: "Sales. You need to learn sales."
According to Andy, mastering sales is essential because it's involved in every aspect of life, from convincing your kids to eat veggies to selling your business. He couldn't stress this enough.
Final Takeaway: Invest in Tax
Andy’s final piece of advice for our listeners is to invest in understanding taxes. He says: "Tax is the largest asset class in the world and it permeates the social fabric of our civilization."
So, whether you are a new business owner or you've been in the game for decades, having a strong grasp of tax can put you leagues ahead. As Andy puts it, understanding tax can help you better prepare and strategize for driving the outcomes you desire.
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