The Everyday Millionaire Show
The Everyday Millionaire Show
Mastering Tax Receivable Agreements with Prodigy Entrepreneur Andy Lee (Full Podcast)
Unlock the secrets of Tax Receivable Agreements (TRAs) with real estate and financial expert Andy Lee. Journey with us from Andy's humble beginnings in Champaign, Illinois, to his high-stakes career in New York City, as he unpacks the intricate world of TRAs. Discover how these agreements, originating in real estate transactions, have evolved into powerful tools for large-scale investors and corporations.
Meet a prodigy turned powerhouse entrepreneur who, after graduating high school at 15, now runs a thriving firm in New York. This episode reveals the critical transition from academic achievements to mastering the corporate world, where sales skills and relationship-building eclipse technical know-how. Learn about this entrepreneur's innovative business model and their unique two-year shot clock strategy that fuels their drive for success.
Welcome to the Everyday Millionaire Show with Ryan Greenberg and Nick Kalkas. Alright guys, welcome back to another episode of the Everyday Millionaire Show. We're here with Andy Lee. That's right, andy Lee, you like Andrew, or Andy, andy, andy. I actually had a friend in college named Andy Lee as well Interesting.
Speaker 2:We grow on trees.
Speaker 1:So, Andy, where are you coming from today?
Speaker 2:Unfortunately. New York City.
Speaker 1:Oh goodness, I'm from Long Island originally but I escaped and I've been down here in Maryland ever since and it was a good escape, Amazing.
Speaker 2:Born and raised in.
Speaker 1:Where are you On the Chesapeake Bay, or yeah, I Good escape, amazing Born and raised in.
Speaker 2:Where are you On the Chesapeake Bay?
Speaker 1:Yeah, I'm just outside of Annapolis, in the suburbs of Annapolis. It's a beautiful place. Are you born and raised in New York City?
Speaker 2:Champaign Illinois.
Speaker 1:Oh, so that's a change up. That's a change up from Illinois. Goodness, okay, little country bump. Change up from, yeah, from Illinois.
Speaker 3:Goodness.
Speaker 2:Okay, little country bumpkin.
Speaker 3:Are you living in New York now?
Speaker 2:Unfortunately.
Speaker 3:yes, why do you say it like that?
Speaker 2:Is it just too hectic in New York? New York is full of grinders and that probably brings out the worst of my personality, and so, trying to find the notion of balance, I've really struggled here. So, someday I'll make it out of the rat race, but we'll eventually get there.
Speaker 1:Nice, nice. So one of the reasons we kind of booked this I have no idea what a TRA is. We're both real estate investors. We invest heavily in single family and small multifamily real estate. And I saw this and I was like a TRA. Usually you hear about something, you kind of know it, but you don't really know it. In this sense I have no idea what this is. So I'd love you to kind of run us through what first is a TRA, and then we'll get into your business and such Sure.
Speaker 2:So simplistically think about let's start with, on the asset side of the equation, whenever you buy a piece of real estate, you get the benefit of a step up transaction that basically changes your basis to your purchase price relative to a seller who might have heavily depreciated his real estate previously. So that's on one side of the equation. You have a large step up that has gotten allocated to, among other things, land, the structure, fixtures, improvements, and each of them have their own appreciable life. Might that be one year, five years, seven years, 15, 27 and a half, 39 years and non-advertisable. Have you ever heard of the up-REIT transaction?
Speaker 1:I don't know what a REIT is.
Speaker 2:So effectively. What a number of large scale investors have done in the real estate space is to execute a REIT transaction where they have contributed their properties in kind into a public REIT and gotten units back In that transaction. The REIT got a full step up and so that was valuable to them. So the corporate world where I come from has adopted technology that technology that technology is known as the up REIT transaction and transformed it into the up C transaction, up C Corp. So that's on one side of the equation. On the other side of the equation, the seller who sold it to you obviously incurred significant tax liabilities whenever they sold Effectively. What happens is that whenever the amortization or depreciation is realized, the buyer is then giving them a kickback, saying in return for giving us a huge step on the basis, we're going to share that benefit back to you, helping you reduce your cash tax savings. So we've done this across the likes of Air Remax, a Shake Shack, a Dufferin Phelps so large corporate businesses that are investment grade in the public markets.
Speaker 1:So this is more for, like, a big corporation, rather than for single family owners or small multifamily owners. Confirmed.
Speaker 2:That's right.
Speaker 1:So that's an interesting thing and I was reading about it and it just came. This whole thing just came out about 30 years ago, Is that right?
Speaker 2:Just about yes, that's right 30 years ago. Almost feels like yesterday, I guess.
Speaker 1:So I guess what my question is what made this thing come out? Was it a change in legislature that made this like a viable investment strategy? Because you know, it's not something that seems very popular amongst us. So what, where did it come from? And kind of what was the history behind it coming out?
Speaker 2:Absolutely. It entirely came out of the real estate world. As you guys will know, real estate guys have two advantages to them. First and foremost is they oftentimes never pay taxes, they defer, die and then get the basis step up. And then, two, they get the benefit of significant amounts of leverage. The REIT world got transformed to the C-Corp world In the US. For tax purposes, you cannot be a pass-through entity whenever you go public. So you can be a REIT, you can be an MLP, a BDC or a C-Corp. You cannot be an LLC or a partnership. And so businesses many businesses here in the US are LLCs. So asset management businesses like my own are LLCs and whenever they've gone public think the likes of Blackstone and Apollo Carlyle they went public and they went from being a partnership to becoming a C-Corp and in that transaction they adopted technology from the REIT world to create the up-REIT, up-c and thereafter create a tax receivable agreement.
Speaker 3:Okay, how did you get into this?
Speaker 2:I'll ask backwards let's start with that Just about everything in life. I went to college a little early. I went to college when I was 15 and when I graduated I was 17 and at that point of time I was just too young to sign a lease in New York City. So my dad was like you're gonna go get a PhD. My parents are professors. And I was like NFW, am I gonna do a PhD? I'm gonna spend five years of purgatory in my best years of my life. No way. Unfortunately, because I couldn't sign a lease, I had to meet them in the middle. I did a master's, and I did a master's in taxation. Post that.
Speaker 2:I started my career at Citigroup and M&A and there I learned about a TRA as a result of a transaction between Real Tinto and Cloud Peak. Two mining majors and I thought that was fascinating Went down to a private equity firm down in Dallas called Lone Star Funds and the entire thing there was. They said you will only get promoted if you were able to create something, and so I was like what in the world does one create? I think what got a lot of laughs in the organization is that, if you, I thought that drones were inevitable in our lifetimes. Then you would go buy all the air rights along the Hudson, and anytime Bezos flies a drone across, you would charge him a toll.
Speaker 2:Unfortunately, public easements like Liberty State Park, george Washington Bridge made it incredibly challenging for our investment thesis, and so that never got off the ground. What got off the ground is we created and monetized two tax receivable agreements and ultimately the firm said how much can you deploy annually? I said 150 million bucks. He said that's tiny, it's not worth, that's a rounding error for the firm. And so he said well, why don't you go do this? We'll give you some money to go do it. If it doesn't work, I'll come back in two years. It's been six years. We've raised six funds, about half a billion dollars across the cap of capital.
Speaker 1:And this is all we did Nice, so I think we skipped over this too quickly but how did you end up in college at 15 years old?
Speaker 2:Very much, monkey. See monkey do so. I went to college one block or two blocks from my parents' office to the high school that I went to was basically every professor's kids. There were about 60 of us who went to college at 15. My sister included, who was two and a half years older than me, was part of the same program, and so it's one of those things where you don't really know or understand that it's odd that you're going to college early because everyone else in your class is doing it, and so that was a class that we pursued.
Speaker 1:And with that I mean I imagine you seem like a very smart guy, but all these people that went to college and did you have issues like socially at that time? Because, being a 15 year old and most people in college are, you know, 18, 21.
Speaker 2:Did you ever ask anyone how old you were when your freshman year of college?
Speaker 1:No, but I feel like I would have known if somebody was significantly younger than me in my freshman year, because I felt like a little guy, you know, with all these like adults. Or I went to a big university I don't know where you went, but, like you know, there's adults there and I felt like a child on my freshman year and I was 18, 19 years old. So I think it would just feel from your perspective like there was all these you know adults around and you're still a kid at that time.
Speaker 2:Absolutely so. There was a little bit of imposter syndrome, don't get me wrong. What's funny is that my sophomore year I became a resident advisor. So I was 16 and I was a resident advisor of a graduate board. And I was a resident advisor of a graduate board. You can probably envision my amusement at telling everyone to turn off at 11pm and confiscating people with alcohol when I was 5 or 6 years younger than they were. But no one really asked that question back then. Perhaps I played it up well, but it was amusing.
Speaker 1:Yeah, that's interesting and then I guess we can go on after this. But another question is all the people in your program, were they ready, like academically, all to go to college, or did some of them flunk out because it was like too hard?
Speaker 2:I think people were similar to me in that they graduated earlier than your typical four years, so they were incredibly well prepared. Many of them went on to pursue graduate degrees relatively early.
Speaker 1:Okay, that's interesting. I've met a couple people that have went to college early. My brother graduated high school a year early, but like 15 is different than 17. There's like a lot of development in those those years, I feel like. So that's interesting, and if you're a woman, I wouldn't ask you this but how old are you now?
Speaker 2:I'm 34.
Speaker 1:34. Okay, so we're about. We're all the same age here, so that's cool. So the do you think that the experience that you got in college early helped you prepare for, you know, the job that you're doing now or the firm that you're running now?
Speaker 2:I think, the elements that I didn't fully appreciate.
Speaker 2:Um, and this was probably a little bit of my upbringing they always describe first-time founders being product focused, second-time founders being distribution focused.
Speaker 2:I think, being Asian-Americans, it's even more exacerbated that we care so much about product and, as you all know, it's not the smartest person who gets and achieves the most. It's oftentimes the individual who was probably best at sales because ultimately you have to sell your wife on marrying you, your kids on eating vegetables like you run the gamut, like every day you're selling in some way shape form. And someone who grew up both prizing themselves on product ie debt capabilities, oftentimes that does not jive well. So I would say it was a rude shock to my system whenever I hit corporate America, when I realized that being just good at your job wasn't going to be sufficient, like you needed to be able to build relationships, rapport, build trust, grow up together and that will all skill sets that really took a significant amount of time for me to understand and then start to build and refine and grow into. So I would say that probably was not the best upbringing for what I do today. But you deal with the hand that you're dealt right.
Speaker 1:Yeah, it seems like you did it. You're dealing with it pretty well. So this firm that you have, it's your firm. Do you have partners in this firm?
Speaker 2:Unfortunately, not today, not yet. Our aspirations are to bring more people on board who would be partners longer term.
Speaker 3:How long have you had the firm? For? Seven years Seven Is that when you moved to New York, when you started it.
Speaker 2:That's right.
Speaker 1:And I guess New York is the place to be for this kind of product sale or this kind of sale. Is that the only place there's major cities, kind of thing?
Speaker 2:So I would say New York was more so of a fail fast, and so I tell entrepreneurs all the time that as much as their opportunity cost is of the amount of money they're giving up, it's also a big function of their time, and so I felt that I wanted to give myself a two-year shot clock through which I would either be successful and the firm would take off and survive, or I was going to go back to my old private equity fund, and so I asked myself where would that be most conducive for me to just grind, and New York was ultimately that answer. We have constantly been on a two-year shot clock whereby I said we're gonna achieve x, y and z in two years, and if not, I'm gonna go back to my old firm. We've gone through, obviously, a number of those shot clocks. We've exceeded our expectations and grown significantly, but it's a helpful mentality, I think. Bezos always say it's day one or day zero, and so having that urgency that New York brings to bear is something that I found to be incredibly valuable in our development.
Speaker 3:How many employees do you have?
Speaker 2:That are onshore and offshore of all 13 of us altogether.
Speaker 1:So when you know just by talking to you, do you have other businesses that are doing now exactly what you're doing? Since this is such kind of a new I mean 30 years is a blip on the radar right. People have been buying and selling real estate since the beginning of this country. This is a new, fairly new thing. How many do you have a lot of competition in this space? Are people popping up and figuring this out?
Speaker 2:So tax is the largest asset class that most have never even heard of. So let me give you two examples of competitors that you guys have probably used but never thought about. So have you guys gone to Europe and had your wives buy themselves nice bags by chance?
Speaker 1:Not in Europe. No, not in Europe, but yeah.
Speaker 2:So typically individuals who have unfortunately experienced that unfortunately, my wife has bought some stuff Whenever they go to the airport, they're entitled to what is known as a vet tax refund. And so the vet tax refund would basically say hey, ryan, we're going to pay you $1,000 in two months. Whenever you get home to the US, there's a business at the airport called Global Blue. It trades on the New York Stock Exchange today and all they basically say is Ryan, instead of waiting for $1,000 in two months, we'll give you 900 bucks today. All you do is factor it against a vet tax refund, h&r Block.
Speaker 2:Whenever they file you file your taxes on April 15th the US government says Ryan, you've been a phenomenal citizen. You've overpaid your taxes, you've over withheld in your W-2. We're going to pay you $1,000 in two weeks. H&r Block says I'll give you $900 today. All we're doing in all these transactions is effectively just factoring, delivering dollars today for more dollars over time. I do it for corporates and businesses that are public and investment grade, but there are so many other opportunities within tax to perform the same opportunities.
Speaker 1:Interesting. So it's just a middleman, basically. That's all it is. So you're taking a little chunk, paying it off, okay. So it's starting to make a little bit more sense. And when you say you buy a bag and you get a tax credit, what in the corporate world? What are those credits? Those are the like cause. You know, I don't have a W2 job, but we just pay the government right For our. I own a couple of different companies based around real estate. We just pay them, but we don't expect them to give us money back. Essentially, what? Where is that?
Speaker 2:So, if you get like you bought a piece of new real estate.
Speaker 1:you might do a carry back might you, yeah, so, yeah, so, like a like a future depreciation kind of thing, a cost seg study? Is that what you're? Is that what you're talking?
Speaker 2:about, and then you might carry back and amend your historical taxes okay and then the irs might say ryan, we owe you a refund as a result of the taxes and we might. They might say we owe it to you in a couple weeks, but you might need cash now. There is this home run deal that Nick has brought you and he's like we need to fund today to get this deal done. You're like I. I mean, I have a receivable from the U S government that's coming in a couple of weeks. God knows the IRS is going to. I'm going to be going to pay me, but like I just need dollars today.
Speaker 3:There are solutions to be had for that, okay, so is that essentially?
Speaker 2:what you're describing now. That's what your company does.
Speaker 1:We do that for public businesses it's a little bit of arbitrage on what they're going to get back. You just give it to them and accelerate away. So essentially you are a giant check cashing facility, right like. People come into you they say, hey, I'm going to get this money in six months. If it's a million dollars now, if you give me 900k right now, we'll we'll do the deal and then you make 100k.
Speaker 3:That's essentially what it is right is there a certain percent that you guys like to see, like, let's say, they're going to get a million in six months and they want money today? Is there a formula percent that you guys like to see, like, let's say, they're going to get a million in six months and they want money today?
Speaker 2:Is there a formula? We do it for 10 to 15 years, so we typically seek to buy it for 40 cents on the dollar. So you're going to get a million dollars over the next 10 years, $100,000 a year. We'll give you $400,000 today, gotcha $100,000 a year.
Speaker 3:we'll give you $400,000 today, gotcha, and then you'll collect. Do you reach out to? I guess it's not the government, right? That was just an example. So where was that other money that you're going to receive if you take it off of their hands? Where is that coming from?
Speaker 2:It's still coming through the government, right the government. They have cash tax savings that they're not paying to the US government. I'm then collecting.
Speaker 3:Are they able to just sign that over to you then, or how does that work?
Speaker 2:Unfortunately not. I wish that was a clean lockbox, Matt. That's not, unfortunately, how this works today.
Speaker 3:Is there any downside to that? Then? Can the person who has control over it say, after they get that $400,000,?
Speaker 2:is there any way around, then that's my risk, which is why we underwrite primarily public businesses that are investment grade okay, and then so you're taking 60.
Speaker 1:What is your like net at the end of the day? I'm assuming that you have like a syndication of capital investors that give you money to buy these assets, and then the 60% that you're getting. What does that break down to after you pay? I'm sure your expensive New York City office and all that other kind of stuff.
Speaker 2:So we tend to think of us originating in the high teens.
Speaker 1:Okay, so that's a pretty good return for and it's heavily underwritten assets. So you're looking at businesses for their long-term profitability and how successful they've been over time and that's going to tell you, okay, can you just give me an example of, like you know, shake Shack and I guess I can kind of think of a couple in my head, but maybe for the listeners like why would a highly successful business need to take 40 cents on the dollar right now when they could just hold it, hold the same note for 10 years and get the full amount?
Speaker 2:What would be some scenarios that like a very highly underwritten and tradable company. Why would they do this? So let's start with I don't think many people even understand tax, unfortunately, as we've migrated away from active investing to passive investing I think I just heard a stat that it's a nine to one ratio today passive to active. So passive, your 401k pensions, among others, buying ETFs and mutual funds. Active being your long short hedge fund who is actively on an intrinsic value basis, valuing things as things have moved away ETFs, among others, that are focused on things such as index inclusion, among others, or index composition. More specifically, they buy almost indiscriminately, so they're not saying this should be worth 10 times. They're like this is 10 percent of the of the S&P 500, we're buying Apple, microsoft, the next up, and so, as a result, they are not valuation discriminating, discrimination, the Tory in that, in a way that they should be so active.
Speaker 2:Investors are very discriminatory. They're like you trade for a hundred X, I prefer to buy the business as a 10 X right Makes sense, like they are very focused on their returns. Etfs, mutual funds they're not. They're very insensitive to price and so let alone an item such as a tax asset. So they look at things from a revenue growth and EBITDA multiple, among others. They don't ever think about free cash flow, because free cash flow is very hard to standardize between one, changes in working capital to capital expenditure intensity and finally, debt to capitalization, which drives interest expense, and the fourth one is cash taxes. Like those four items are incredibly hard to standardize in an algorithmic model, and so, as a result, they ignore those four items. And so for us, like to a smart investor, if I said to you, think about two businesses, one, that are equal for all intents and purposes.
Speaker 2:They have $100 million of NOI each and each trades for a 5% cap rate, you would say that's a $2 billion piece of property. But if I said that one of them comes with $2 billion of light tax credit low-income housing tax credit you would say, hey, the one with the low income housing tax credit is worth more than the one. Without All things being equal, public markets disagree. They're like we don't care, we don't discriminate the fact that one has it, one does not. We're paying the same for both, and so smart private equity investors have been extracting this asset for themselves. I'm providing liquidity to those private equity investors in a secondary liquidity format.
Speaker 1:Okay, so they can take that money, invest it and turn it into more money faster than essentially waiting.
Speaker 2:Correct, because what we buy are long-dated annuity streams. Think about them like a musical royalty, a pharmaceutical royalty. People want to compound and get enterprise value. They don't want cashflow streams. Many don't in a private equity game.
Speaker 3:Can you explain a little bit about what the beginning stages of your business looked like, when you first moved to New York and maybe the first six months of you starting your business?
Speaker 2:It was an absolute grind. I think there's no other way to say it.
Speaker 3:What are some of the things that you had to do to get it off the ground?
Speaker 2:So, first and foremost, was proving to myself that there was a business to be had. So could we get a deal done? As you all know, you guys probably talked to a bunch of individuals who aspire, have aspirations, to be fund managers. Aspire, have aspirations to be fund managers, and oftentimes the easiest way to ultimately end up raising a fund is to get deals done. And so I was under the notion that we should seek to get our deal locked up. We got it, we bought it, we got under exclusivity for a single transaction, and then I went to my old the partners at my old private equity fund and said hey, you said you would help me back me for a deal. Here's a great deal, why don't you do it? And they said wonderful, here is X million dollars, now go raise the rest of the money from our friends. And I was like okay, makes sense. And I went to Ryan Nick and they're like okay, makes sense. And I went to Ryan Nick and they're like you come, highly recommended.
Speaker 2:But as much as I like the deal, I hate the idiosyncratic risk of the deal. I'm like okay, so what do you mean by that? You're like we might try to do a fund. And I was like, but that's not what I was raising, I'm looking to raise for a deal. And so I went back to my old partners and they're like, are you stupid? They basically just gave you a fund, so let's just do a fund. And so I fell ass backwards into it after call it for three months and we got our first deal done in the fund format and then we were able to aggregate five other deals into the transaction before we went and got ready to raise off on two.
Speaker 1:Okay, interesting and what kind of like. So for a new asset class I call it new, it's 30 years old. Whatever new asset class like this what are some of the struggles in selling it to people? Do you have to educate a lot of people in this or in people in that world? Do they kind of just know what this is, more than you, the joe schmoe real estate guys like we are?
Speaker 2:no, there's a ginormous educational element requisite for it. Like I'll find one. Um, after we have raised a bunch of it to close that single deal. I went out and did 800 meetings to get 16 out of tickets. So that's a 2% yield. So I was just kissing frogs like none of them Nice. And so it's a lot easier to raise after you have a couple of deals under your belt and it just takes time. And so I always tell aspiring fund managers just get a deal done. It makes everything so much more tangible and understandable to people that you can point to.
Speaker 1:So in our space. Like you mentioned before, one of the benefits to what we do is that it's highly leverageable right. We can put down 20% on an asset and the bank will give us the rest. Is that something that happens in your space? Can you raise money from institutions like banks, or do you have to go private investor, private money kind of thing?
Speaker 2:So we had a facility that we raised in 2021 from a large bond market. We paid it off early this year and we are approaching the public markets, the asset-based security markets, for it. So think about it as your version of a CMBS loan. We're approaching those markets today. Okay, because we were able to achieve an investment grade rating on our portfolios.
Speaker 1:Okay. So now those institutional we call it institutional money, whatever you want to call it that now they're starting to get interested because you have a proven track record in this space and a portfolio and a portfolio.
Speaker 2:They always want to. Instead of as good as your track record is, they always much rather underwrite the asset. Can they get comfortable around the asset? If they can get comfortable around the asset, they'll then figure out if you have a durable track record for them to back you.
Speaker 1:So it's almost similar to raising syndication money for real estate deals in a sense, where you go private money, you prove that you can do it and then the banks start giving you money. That's essentially kind of the short story on how both of us got started.
Speaker 2:Absolutely. Look, life is all the same.
Speaker 3:It's crawl, walk, run yeah so like what's the minimum amount that somebody that you seek at a time from an individual or from a company that you're looking to raise money?
Speaker 2:um we are. Investors are primarily endowments and foundations. We rarely take individuals as above On the low end about $5 million.
Speaker 1:Okay, so you're looking for big companies that want to invest with you, not necessarily like an accredited investor that might have $100,000 to throw into a fund to hopefully get a 10% yield.
Speaker 2:Yeah, we are a qp oriented vehicle and alcohol effect purchaser and so, in that regard, um, we just have higher minimums and it's also one of those items where, just given that our product, you guys are incredibly sophisticated, um, it's a difficult educational sale and so we primarily focus on the institutional channel because of the larger checks associated and the fact that they may have some more familiarity with the assets.
Speaker 3:And it's probably just as much work too. Right In our space you hear a lot of people saying it's the same amount of work to buy one single family house as it may be to buy a bigger multifamily. You still got to do the same underwriting. It's just bigger numbers, essentially.
Speaker 2:Absolutely.
Speaker 1:So when.
Speaker 2:My old firm. They had raised north of $100 plus billion, and so, as it pertains to brand recognition, they had brand recognition among sovereign wall funds like large pensions, large endowments and foundations like they did not have. Their minimum check was 75 million dollars, so, like a typical high net worth wouldn't have been a target for them, and so they had never built brand recognition associated with that clientele and so like. When I I left, that was a little bit of incongruence as to the people who would fund us initially and the LPs that they had, which made it very challenging.
Speaker 1:And when? So how that? How does that work with? When they give you the money let's just say it's a minimum of $5 million how does your structure for them go? Do they get paid like a monthly, like for us? We raise private money. I buy a building, I refinance the building, after I stabilize it and renovate it, I get my investors money back, but in the meanwhile we pay them a monthly you know dividend, whether it's a 10% or 12%, whatever, uh, annual return. We're paying them, you know, most of the time per month, or we hit them off at the end at the refi. How does that work for the investors that are investing in your fund? Do they get a monthly dividend check? You know it's a big, these are big numbers that we're talking. Or is it like there's an end game where they're going to get 85 million or a hundred million back, or how does that work?
Speaker 2:Yeah, so we pay them out once a year, million back, or how does that work? Yeah, so we pay them out once a year, typically in December.
Speaker 1:So think about it as one animal truck. And that's just a percentage of what are. You know, they put 75 in, they get X percent, and then here you go.
Speaker 3:Here's your profit. That's right. What's the most common? Is it the same percent that you give, or is it kind of negotiated back and forth most of the time With our LPs or with?
Speaker 2:the companies that we buy them from. Um, with your lps, yeah the lps, uh, with our lps, um, we have the traditional fund structure, um, so that is, you return the principal, then the prep, then you get carried and and it's an 80-20 split typically. So, like the cash flows are, whatever the cash flows are, on an annual basis and we send all the money back that we receive. So that can change yearly depending on the maturity of the portfolio.
Speaker 1:Okay. And then your LPs that you are trying to get involved. If they were underwriting you, they would look at okay, what asset are we buying, how many years till maturity? That's kind of underwriting that they would have to do, right, because if they bought into something now that had a 15-year maturity on it, they have to kind of be in that thing for the long haul with you, right.
Speaker 2:That's right.
Speaker 1:Okay, and so when you're going out and you're selling this, are you looking at pension funds and that kind of like managers of equity firms that have access to this kind of capital? That's right, nice. You said we were sophisticated, but this sounds a whole lot more sophisticated than what we do. So it's interesting there's almost nothing in life.
Speaker 2:That's rocket science, with the exception of rocket science. So everything is addition, subtraction, multiplication, sometimes division, which is really just multiplication by a fraction.
Speaker 1:Yeah, that's a good way to put it. So now, what are some of your goals moving forward with this fund? I know you're not a huge fan of New York City. What kind of are your goals to get out of that rat race? Do you have ideas to sell this company to a private equity firm eventually, or sell off pieces?
Speaker 2:We're on the path to go in public or sell off pieces. We're on the path to go in public. Our goal is we have a North Star called Royalty Pharma. They are a pharmaceutical royalty business that has aggregated and rolled up a number of drug royalties. So think of your typical Humira's of the world where we may pay $10 for a drug and they might get a dollar royalty for it. Like they've gone public, they've trained like a rockstar on a dividend yield basis. I'll go in. Our job is to do the exact same thing that, um, that whole process of going public.
Speaker 1:Now we both own and operate small businesses here. I have about 60 employees over the couple of businesses that we own, but none of never did I think of like trying to go public with it. It's not probably a viable thing. What makes some companies like yours viable to go public? Is there a number? Is there like what? What made you think, okay, now it's time that I start to think about going public. What would be the benefit for you and what does that look like?
Speaker 2:I think it's a number of items. I think the first and foremost is competitive advantage. The cost of private dollars tends to be more expensive than public dollars, and so in that regard I want to have an advantage cost of capital by having a public equity that I can do transactions with One, two. It then gives me a public currency for me to do in-kind transactions, so someone has a tax asset. I'm willing to give them stock in my business in return for their tax asset, and so there are a number of items. You need to be institutional, and so it forces a discipline upon the organization. That is incredibly beneficial and it drives down our cost of debt significantly. So there are a number of those items that I might describe that enable us to pursue a competitive advantage that a public listing may procure.
Speaker 1:Does it also add? Like the way you just described it I'll dumb it down a little bit is like a bunch of red tape essentially to what you have to do. Do you have to hire more people in your company to kind of manage the regulations and that kind of thing?
Speaker 2:absolutely, but I would consider it almost a discipline, like can you do you really have as durable of a business as you make it out to be? And so, like, I fundamentally believe that I'm building a durable business and, in that regard, the red tape that is put and enforced upon us is just something that I view as the next avenue through which we should be able to meet that standard.
Speaker 3:That's a good way to look at it. Is there a certain valuation before a company can go public?
Speaker 2:I mean. Well, you can go public in Canada for a relatively low value. It's more so a function of but you. The goal, like I mentioned, is a public currency that's valuable. If you are a micro cap with no liquidity, that's not valuable. No one wants it like a penny stock this is worse, um than a private business, and so, like my sense is that you want to be in the $3 to $5 billion of Coup before you even contemplate taking the first step. Anything below that probably, is premature.
Speaker 1:That's interesting, okay, and do you?
Speaker 2:You wouldn't list a real estate portfolio with $5 million of red tape costs when it's only $100 million. Right, it would destroy all the NOI.
Speaker 1:Yeah. So do you invest in anything else besides into your company, into these TRAs?
Speaker 2:I'm not smart enough in that regard. Life is about edge, right? I don't pretend that I have edge in real estate. I don't pretend I have edge in fixed income or anything like that. I have edge in one domain, and one domain only. So all your edges are in the TRA.
Speaker 1:They're all in the TRA basket, correct, nice. So what are some of your day-to-day tasks with your company? Now You're an owner-operator. What does your day-to-day look like? Are you selling this? Are you out there educating? Are you just managing employees in your office? What does your day-to-day look like?
Speaker 2:So, on a weekly basis, I do something on the order of magnitude 30 plus meetings. Externally, there are a number of internal meetings as well, as well as service provider meetings or stakeholder meetings that I need to be part of, but those do not count towards what I might describe as the external facing discussions, and so think about those as one-to-one sales discussions. Like discussion that we're having right now is potentially a one-to-one sales discussions. Um, like discussion that we're having right now is potentially a one-to-many discussion, and so finding avenues to engage with as many people as possible that we are targeting is a big element of what we do, okay interesting.
Speaker 1:So you're out there, you're taking meetings, educating people, selling people, still managing your people yeah, still doing the same, the same thing.
Speaker 2:So that's like not none of it's rocket, like it's. The volume of meetings that we do results in the more people being educated about what we do, to the extent there's a cohort of those individuals who will want to take the next step and understand, have a deeper understanding of what we do. Eventually we move down the funnel to they might want to buy what we do from an investor perspective and, on the flip side, we educate sellers on the value of their assets. Some may not want to take the next step, others may, and then we just keep moving them down the funnel and so, like the top of the funnel is the most important part of the game, and so constantly filling that and ensuring that we are top of mind, building awareness, growing um the base through which we're ultimately channeling through our sales funnels, is incredible element of the business, in addition to the sales, uh, the face-to-face sales meetings that you do have, do you also?
Speaker 3:how do you market the business as well?
Speaker 2:So having marketing, I would say, is one of those elements that was incredibly challenging historically, and so when I think of marketing and the once in many discussions it's been a function of can we deliver a value to people that they would find A to be valuable and B would make their lives better? And so what information can we share that people might find to be interesting? And so, with the rise of asset-based finance, people have been looking for uncorrelated products, and so we have published a bunch of thought leadership on the space. We can literally put people to sleep with thought leadership, like we have 150 plus pages of single space documents for people to go to insomnia with, of single-spaced documents for people to go to insomnia with, and so that's one avenue where you can create leverage.
Speaker 2:You write. Once people can read it thousands of times. Among others, conversations like this, where we get the benefit of your platform and we get to educate a bunch of individuals that we might not be able to touch on a one-to-one basis. That reduces, um, our customer acquisition cost, among others. And so, as I think about marketing, it's a part of the process that we constantly need to be building and growing into that's interesting.
Speaker 1:I was kind of wondering. I was like okay, so you're talking to a couple of, like you know, small business guys. We got some real estate in your world. This, what we do is a couple of bucks, right. So what value do the individuals bring? Is it when you go public they might put money into that stock? Is that what you're kind of targeting? Because right now, nick and I don't have 75 million dollars to put into your fund and I think a lot of our listeners you know with um, you know maybe the exception of somebody that knows, somebody that owns this big company or something. But like for the, for the regular person, if you're targeting pension funds and stuff like that, are you targeting people that might work for those funds or people that are going to invest in the future into your stock?
Speaker 2:absolutely so. I think it's about brand awareness, right, like you want to have to be in the ears of people such that whenever they do encounter you, when you do engage with them, then you're like I heard you on a podcast that I'm. I love ryan's podcast. I heard it, um, and I heard you on it. Yeah, I'd love to take that meeting, like it makes that first conversation so much more, so much warmer, as they feel like they know you that's a yeah.
Speaker 1:That's probably one of the reasons we like to do the podcast is we get to talk to people. We typically focused on a lot of the hyperlocal people that are in our industry, what we would call, like you know, higher level investors that have, you know, hundreds to thousands of properties that are units, you know, depending, and um, we get to talk to them and learn from them and learn from people like you. So it's it's sort of the same, uh, same thing. So that's uh, that's pretty cool, uh, so what is? I'll put it in the description on the YouTube channel and stuff, but what is the name of your business and how could people find any information about it?
Speaker 2:Yeah, um, it's Parallax's Capital, um. We're active on LinkedIn and we love engaging with people on that platform and I have been a big fan of you guys and what you guys have been doing educating people. I enjoyed the episode that you guys have with the bigger pockets, guys.
Speaker 3:Oh nice.
Speaker 1:Yeah, yeah, that was a good one for us, that was a full circle moment and we started our real estate journey listening to him and then, you know, got to go to his house and you know, talk and do all that stuff.
Speaker 1:So that was cool. We definitely appreciate your time and we want to make sure that our listeners get able to get in touch with you. So, guys, check out the link in the description. We have all the links from your assistant or whoever contacted us to get you on here. So I'll put all that stuff in there and hopefully somebody learned something about TRAs today, cause I definitely, I definitely learned a lot and I was my head was spinning a little bit, um, but in the end it's kind of a simple arbitrage game and and, like you said, it's not rocket science and now I kind of have a good grasp, I think, on what, what you're doing. So that's pretty cool and congratulations on all the success with building this company and learning about something that I would say you're in the very small minority of people that know about it.
Speaker 2:The tallest midget is how I describe it.
Speaker 1:Yeah, I mean I would say that if I go around, we have an event that we're hosting this week. I'm going to ask a couple people do you know what a TRA is? I bet you most of them are going to say no. So it's cool that-.
Speaker 2:Now you sound incredibly smart.
Speaker 1:Yeah, exactly that's what I'm going to use. I'm going to now go talk to my wife and make her seem silly. But no, Andy, we definitely appreciate your time and this will come out in a couple of weeks. We'll get in touch with you and hopefully one day our business lives will cross no-transcript.
