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Today, we’ll cover highlights of an interview Lincoln Archibald had with Saish Setty of Parallaxes Capital about demystifying tax receivable investments!
Parallaxes Capital provides liquidity to tax receivable agreement (“TRA”) stakeholders by monetizing otherwise long-dated assets and anticipate that TRAs will continue to become more common in the coming years while they lead the pack.
Let’s dive into the interview!
Elevator Pitch on Parallaxes Capital
Lincoln: Give me the elevator pitch on Parallaxes Capital!
Saish: We’re turning corporate tax into an asset class, and we’re seeking to provide investors with an uncorrelated return! We were founded in 2017, and since then, we’ve raised and deployed over $300 million via our flagship vehicle. I’m on the investment team, and I started my career at Wachtell Lipton in the finance groups, and also spent some time at Paul Weiss.
Understanding Tax Receivables
Lincoln: Talk to me about tax receivables.
Saish: Tax is the largest asset class that is hidden in plain sight. A TRA is a contract where one party agrees to pay out the benefits it realizes as it uses certain tax assets, like a tax credit or a depreciation deduction. As those generate tax savings, you pay it out to a third party through the TRA. Given the structure, TRAs can be used in almost any context where you have tax benefits.
For example, let’s say you take a private M&A transaction. Right now, it’s common to use rapid warranty insurance, where you shift transaction risks to an insurer. But, you could have a disagreement on the value of the target’s tax assets. The buyer and the seller can have very different views on when these tax savings can be realized. So, you could use a TRA there to separate the values of the tax assets and either hold it or sell it to a third party.
I mentioned M&A, but one of the most common situations for a TRA is a company’s IPO. These IPO TRAs are what we focus on. When you IPO a company, you can often structure it so that the IPO itself will generate substantial tax benefits for the company. We estimate that 10% of domestic IPOs in recent years have included a TRA.
The Mechanics of TRAs
Lincoln: So, it’s basically transferable tax credits?
Saish: One key difference is that you’re not actually transferring the tax assets/credits. The company keeps the tax assets, and as they use them to generate tax savings, they actually pay it out to the TRA holders.
Why Implement a TRA?
Lincoln: Why would someone put a TRA into play in their business?
Saish: Academic theory suggests that TRAs do not negatively impact a company’s equity valuation. They are extensively disclosed in a company’s filings. If you’re taking a company public, and you think that public markets are agnostic to the value of these tax assets, then you’re incentivized to structure a TRA, put it into place, and keep those assets.
Capital Deployment
Lincoln: You said that you’ve raised and deployed over $300 million. Was that through one or multiple funds?
Saish: Multiple funds. We’re trying to prove to others that we can deploy capital quickly. So, we’ve been raising vehicles almost annually and deploying them promptly.
Conclusion
That’s all we’re covering from the interview today, but click here to continue demystifying tax receivable investments!
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DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.
