Parallaxes Featured on TresVista Talk Podcast

Parallaxes Capital (“PC”) Founder and CIO Andy Lee joined Abilash Jaikumar on TresVista Talk Podcast to share his learnings and experiences from founding PC. Andy talked about his background and education as well as his professional journey that ultimately led him to developing the strategy of investing in Tax Receivable Agreements. Andy says in order to stand out and differentiate himself from others, he had to venture into an esoteric space that no one had heard of and pave his own path. Andy also shared some tips about growing a business and what it takes to become a good entrepreneur.

Watch the full interview here:

See below for a full transcript of the podcast:

Andy	At the junior levels, you prize the ability to process, you prize the ability to build clean judgment. But if you think about what private equity really is, there are four avenues of value add that we bring to bear and that’s one, sourcing, two, selection, three, value add or asset management, and four, your exit.
Abilash Jaikumar	Hello, this is Abilash Jaikumar, Co-founder and Managing Director of TresVista. On today’s TresVista talk, I’m joined by Andy Lee, Founder and CIO of Parallaxes Capital. Andy, thank you so much for joining us today.
Andy	Thanks for taking the time.
Abilash Jaikumar	Before we start talking about Parallaxes, if we can maybe take a step back and talk about your journey and how you got to Parallaxes, you started in 2017, not so far into your career, can you maybe give me some background of where you started?
Andy	I am from Champaign, Illinois. It is in the middle of nowhere, a little country bumpkin. I had the option to go to college a little early. And when I graduated, at which point of time my dad said, I’m not signing your lease in New York City, you need to go get your PhD. I didn’t really want to do that. Unfortunately, because I couldn’t sign a lease in New York, I had to do a graduate degree. I did a Graduate Degree in Taxation. You’ll ask why so specific. It was primarily because of two attributes that I price frankly: one, no course of participation, so you didn’t need to show up to school, and two, an open book exam at the end of the year. For someone who was really lazy, that was an absolute godsend. I started at an M&A at city and there my old boss basically said “don’t you have a master’s in taxation? You are going to work in this assignment”, and basically got staffed on a project on a buyback of a TRA between Cloud Peak, a Coal Producer, and Rio Tinto, a global commodity producer. And, so, I thought to myself, this is super interesting. Someone should provide third party liquidity for it. Fast forward, I went to a private equity firm called Lone Star Funds. There I was basically told the only way that you get promoted here is for you to create something, and so there were a number of endeavors that we sought to pursue. The one that really got off the ground was in monetizing tax receivable agreements. And so, six years ago, some of the partners said “this is too small of an opportunity set, but why don’t you go do it? We’ll give you some money to go do it”, and so I left, we raised four funds over the last five years, and it’s been a journey.
Abilash Jaikumar	I want to go back to something you said and make you reconcile it and explain it to me. How does someone gets a PhD see themselves as lazy?
Andy	I did not get a PhD. I got a master’s in taxation. But I would say it’s a little bit of monkey see, monkey do. My sister also graduated relatively early. She’s actually way smarter than I am. And so, it’s one of those things where if you see an older sibling of yours pursue something, you just naturally want to just follow in their footsteps. Little did I know that she was doing something that was unusual. For me, that was just natural, and my parents were obviously wanting to gain economies of scale and drop us off at all of the same SAT prep classes among the others, so they got some leverage in that regard on us. They got us out of the home most importantly.
Abilash Jaikumar	You know, it’s interesting because what you’re talking about is ultimately the sources of motivation. I think a lot of people when they hear the word lazy, they think people are unmotivated. But people have different forms of motivation, and clearly you are highly motivated, but your motivation is a little bit different. So, what is your motivation? What motivated you along the way post-college? What motivated you?
Andy	I think the function of bringing your own reality into this world and so each of us, yourself included, you had a vision of what TresVista was going to be in the longer term. For me, and what I do today, like tax is likely the largest asset class and no one’s ever heard of. I mean, the two things inevitable in life are, one, death, and two, taxes.
Abilash Jaikumar	At a wedding over the weekend in Morocco and there was a public garden where a bunch of us went to during some downtime and enjoy the garden. Everyone’s walking to the left and it’s like lap that you go through the garden and there was nobody really standing off to the right, but a lot of people going to the left. So, my first reaction was I’ll go to the right because nobody’s there. And one of my friends said, “Everyone’s going to the left. It’s inductive reasoning, we should go to the left.” I thought that was an interesting perspective he had because my perspective was the exact opposite, right? If everyone’s doing something, then it’s not automatic that’s what I should be doing. Now, you started the conversation. You saw your sister doing something, you modeled after them. But later in your career, you were looking at what people aren’t doing. What has that been like trying to do things people don’t do? How do you lean into that? How do you preserve your own sanity when everyone around you might be saying, why are you doing what you’re doing?
Andy	I think it is so much easier. If I wanted to compete in leverage buyouts, which is what I historically did when I was at Lone Star Funds, that would be incredibly difficult to differentiate myself as an Asian American in what is a relatively competitive space. I will be competing against the blue chips, who might have gone to a Harvard, Stanford, Penn, who have worked at Goldman and subsequently moved on to a KKR, the best and the brightest. Like doing what I do today, and when you pave your own path. Like, you are your own competition. Like, where you can go as a firm. Like, you are your own limiting factor in so many regards. Yes, it is challenging in some ways, but it’s so much easier than others. Raising something that was relatively esoteric, like what I do today, was actually way easier because there was no preconceived notion of what a team that monetizes tax assets should look like, versus a traditional private equity firm, where you would need to have two decades of private equity under your belt, several operating partners, and a large team to bring to bear value-added strategies. There was no notion of that for what I do.
Abilash Jaikumar	So, your motivation to be lazy, in some ways, is strategic, right? How do you minimize the effort you have to do to maximize the output, which, when you think about investing is always what you’re trying to do, isn’t it?
Andy	Asymmetry, I mean like, think about one of the biggest areas of asymmetry is the cold email. Like you have almost unlimited upside as to what could come from a cold email and minimal downside. Most of time, you just end up in spam or just get deleted. Very few people are willing to spend the effort or time to invest in just writing cold emails. And that’s something that almost from a get-go, like when I was a kid, I did that. And so, it’s been a great source of competitive advantage over time in terms of building and compounding that network.
Abilash Jaikumar	Prior to starting your own business and now being in to it for seven years. What’s the biggest thing you learned that you wouldn’t have anticipated in building a business?
Andy	Sales. Almost something that I didn’t fully appreciate, especially in private equity, is there’s such, at the junior levels, you prize the ability to process. You can price the ability to build clean judgment. But, if you think about what private equity really is, there are four avenues of value add that we bring to bear and that’s: one, sourcing, two, selection, three, value add or asset management, and four, your exit. And each of which, if you think about it, it really is – sales really comes to the core of it, even though at the senior levels, while not priced at the junior levels. You got to sell a management team on partnering with you above all else. You have to convince them to change things that they’ve not done historically, might that be embracing digital enhancements, or changing their business model from the likes of recurring revenue versus discretionary sales, to ultimately convincing a buyer that you guys are the platform of choice and why they should pay up for it, above all else. So much of that is just sales in and of itself. And that was not something that I thought a lot about growing up. Like, where you prize the technical skill sets. Like, when you go into banking you’re told that you should learn – you should get into M&A. Little did people know that M&A is the worst paid group at the senior levels. It’s not the rainmaking group, it’s just a processing group.
Abilash Jaikumar	Well, I always tell people, if you get senior enough in whatever it is you’re doing, you’re going to become a sales professional. If you’re not doing sales, you’re not senior.
Andy	A 100% and that’s not something that they teach you growing up.
Abilash Jaikumar	Yeah. Well, nobody grows up that says “when I grow up, I want to sell.” right? But, it’s definitely something senior people do because it’s hard, right?
Andy	Even for astronauts, they have to instill confidence in the selection committee, that they are going to be able to do their mission and above all, that even at the cost of their own life, they will complete the mission.
Abilash Jaikumar	Yeah, the first sale most people make is selling themselves, whether selling themselves to university or the company to hire them. The challenge for most people –
Andy	Their wives?
Abilash Jaikumar	What was that?
Andy	Their wives.
Abilash Jaikumar	Yeah, that’s the biggest sale, right?
Andy	Or kids. You have got to teach your kids to eat vegetables. That’s a difficult sale.
Abilash Jaikumar	That we cannot sell. If you figure out how to get a kid to eat vegetables, please let me know. For both people, when they sell something, they sell it sporadically. You don’t get a job every Tuesday, so you prepare, and you sell it once, and then you don’t do it again. So, it’s not a skill one develops, right? But when you think about developing skills, a lot of people say things like oh, they were a natural born salesperson, right? And maybe some people are but others aren’t. But like any skill, it can be developed, so how did you develop this skill over the last seven years? So, you learned. It was necessary. So, what did you do? How would you approach it differently now if you could give yourself advice.
Andy	It was a really painful transformation just to be very clear. To all conversation prior to this call, like it has been growing pains, as I might describe it. Initially you start off as an individual contributor. Over time you become a manager, and then you become a leader and visionary. Each of these are different skill sets, especially from a sales perspective. Like from a team manager perspective, you’ve had to, among others, sell people on why they needed to do something for a client that they might not want to do and why would it be beneficial to them and their careers longer term? Like, you subsequent to that you don’t have to sell clients on why you were the partner of choice relative to some of your other competitors, and why you were going to do a better job and how you’re going to deliver for them an outcome that was incredibly beneficial to them. Those were different levels of sales. If you asked me, like six years ago, when we started off on one, I did almost 800 LP conversations to end up with 16 investors. So, a 2% yield. And that was trial by fire whereby you’ve got pitch and own your sales and marketing endeavors, understanding how to qualify people. Do you think you have capital? Do you allocate to an emerging manager? Are you willing to move out on the risk spectrum as it pertains to a new asset class that has not been touched before? All of those forced m to learn how to prospect, to generate leads, and ultimately close on people. And as painful as that journey was through our conversation, it was what was necessary to get us to where we are today. And I’m forever thankful for some of the difficult conversations that we had, that were incredibly uncomfortable in that moment. But now as a result, we’ve been refined, and I can deliver a message that is significantly more concise, and with a lot more confidence than where we were seven years ago.
Abilash Jaikumar	You know, you had the good fortune, maybe you didn’t feel like it in the moment of starting this process early in your learning. Well, a lot of people depending on the company they’re at the industry in might not be in a sales role till they’re 40. Can very easily, be an accountant, and be on the delivery side in an audit firm, and not have to sell anything till you make partner, and all of a sudden you’re in a role that you’ve never done before, and it can be a daunting. Now, learning something new in your 20s, often people are much more open to getting their rear end handed to them for lack of a better world because you’re in that learning mindset still. But as your career goes on, the gaps between feeling like an intern get longer and longer. At this stage of your career, obviously, there’s still tons of stuff to learn and grow from, but how do you lean into it now? How do you approach it mentally versus how you might have approached learning and development seven years ago?
Andy	Absolutely. So, to be clear, we try to focus on making everyone uncomfortable. And I always tell my team if you’re comfortable, you’re not growing. There are only two zones in that regard. Even to this day, I probably send one to five cold emails a week to people that I just want to meet, might that be on the business development side, or just interesting individuals that I would like to find avenues to connect with. And so that brought us into places that yield if you’re willing to write a relatively custom email. It’s actually relatively high. And so that has served me incredibly well. And so, am I comfortable doing it now after doing it for, call it, seven years? Yes. But there are other avenues, might that be public speaking, an avenue like this, where we’re sharing our story is not something that comes second nature. And so, finding avenues like this to push myself onto the frontier has helped us grow our capabilities, but also our reach over time versus doing a one-to-one discussion.
Abilash Jaikumar	There’s an old adage, a great salesperson can sell ice cream to an Eskimo. And I’ve always said a better salesman will sell them a jacket. Now, at the core of sales is still having a great product or service, can you take this moment to talk a little bit about what Parallaxes is doing for its clients?
Andy	Yeah, absolutely. So, we seek to deliver our clients which are endowments and foundations, an uncorrelated return, that is cash yielding in nature, and serves as a call option on corporate tax rates. And so those are aspects that some view to the be almost a holy grail in nature. A truly uncorrelated return agnostic of economic markets is incredibly valuable in the context of large portfolios. And so, that’s what at least what we seek to deliver and some of the aspects as it pertains to the product itself, like we play within a small segment of the larger tax market. And so, in that regard, many of the items and technologies that we bring to bear today are avenues for us to potentially express ourselves in similar formats in the future. But life is about crawl, walk, run. Before we’re ever willing to endeavor else and to explore new avenues within tax, we need to master our current domain, and we’ve done that by utilizing resources, such as TresVista. Like your team has been incredibly helpful in helping us build out our knowledge of our asset class. By undertaking underwritings of almost every single name in our universe have helping us to start from the 80 yard line whenever a transaction comes to the four versus the one-yard line. We’re not starting and learning what a business does. We’re starting with a relatively curated understanding of what are the items that we care the most about prior to us engaging in earnest with a seller. So your firm is a part of our competitive advantage longer term, and for which I’m very thankful for you and your team.
Abilash Jaikumar	This idea of competitive advantage, when you’re starting a business, you look for that white space where there are the fewest players, right? But for us, we said, “Okay, outsourcing, we didn’t invent outsourcing, but can we do something or a different target market that is otherwise ignored?” So, we focused on high value and outsourcing for the buy side and peak advisory firms. And if you do something well and you do it alone, well, it’s going to invite competition. And so, how do you think about preserving your position as the industry leader in this new space as the space gets a little less niche? What timeline do you think it will become less niche and invite more competition?
Andy	Absolutely, and competition is inevitable, it’s a when not an if in my mind generally. We talk a lot about why we have first mover [advantage] today. It’s really a first to scale game whereby you have so much in the way of competitive advantage that is not impossible to overcome, just incredibly expensive to overcome. So, some of the aspects that we brought to bear is that we’ve spent the last five years building a repository of credit underwritings for every single name within our portfolio with the help of your team. And that’s something that all members of our team are constantly being kept aware on a weekly basis whereby we share with them each of the underlying credits. And such that everyone understands whenever a deal is coming, that what are the major risks that we want to have addressed in our final diligence? And that everyone’s not asking what is ophthalmology? Like, that’s something that has been addressed over the last five years as how we think about that risk, are we constructive on that risk and what are the items we want to focus on on a go forward basis. So, we starting with the eighty-yard line, not the one yard line. So that would be what I would describe as our first advantage. Our second advantage is that we’ve sought to build whole positions across the universe whereby we are effectively owning a portion of the overall asset, and to the extent that we like the exposure, we incrementally seek to originate. And it’s so much easier to build exposure in a name after you already have exposure to it both internally and externally, but that just takes time. And I think there are a number of items about the final piece – is cost of capital. We have been constantly seeking to drive down our cost of capital. In different formats, by killing risk, the more risk we can kill across the opportunity set for our investors and stakeholders at large, the more value we effectively create, and by seeking avenues to return capital. And so, the more capital we can put in the pockets of our investors, the more they’re willing to give to us over time. And so that’s done by achieving things such as a securitization, we are in the process of getting a credit rating. And so, might that perceived risks or actual risks, we have sought to address them over time in a number of different formats.
Abilash Jaikumar	So, given the current macroeconomic backdrop that we’re operating, actually look back over the 7-year history of Parallaxes, you’ve operated in many complete distinct backdrops, right? How has the experience of going through these transformative times shaped how you build your business and how do you view the current backup for what your opportunity is and what’s your crystal ball and where do we go from here?
Andy	So, to be clear, I will answer in two formats. One, at the asset level as to what we buy and how it performs, and two, at the management company or business that I run – Parallaxes Capital. And so, from an asset’s perspective, what we seek to deliver to our investors is an uncorrelated return, to the extent that we didn’t deliver that value proposition over the last seven years, then we’re basically out of business. And so, as a blessing and a curse, 2020 was effectively one of the worst times for us, where everyone was up and to the right. We are an uncorrelated asset class, in that regards, like we clip a healthy return, but we’re not generating two times in a year, unlike some of the growth equity strategies that had a phenomenal run during COVID. But correspondingly, in a downturn, like what we’re seeing today, we are delivering that same uncorrelated return while there has been a downdraft in the overall market. And so, from an asset perspective, we’ve done what we said we set out to do. From a business perspective, Parallaxes Capital, that’s been more challenging. Obviously, it’s incredibly hard to address concerns as everyone sees their colleagues or people they did banking and private equity with getting really rich during COVID. But correspondingly, they are not fearing for their jobs on the way down, like where we are today. And that’s been incredibly helpful. And as you build a team, they gain tenure. As you build trust, that’s been incredibly helpful in managing, making sure that no one gets too high on the way up and no one gets too down on the way down, that we’re constantly executing on what we seek to deliver not only for our investors but also for our stakeholders, like our employees in time.
Abilash Jaikumar	It’s interesting, these times of layoffs and instability in a lot of companies. Prior to financial crisis, it happened every three to seven years like clockwork. It wasn’t as jarring as it is to people as it is now, because now 15 years, you go through a downturn – you have got a lot of people like yourself, who are in real position of leadership who’ve never had to go through these situations before, right? I remember I was an analyst in banking, tech banking 2001. We negotiated clauses in our leases that if I get laid off, I can terminate my lease because that was a reality. So, when you know that, then you value your position very differently, you don’t get so greedy that someone made money because you see what you have, which is stability, it’s risk return. Yet you can get really rich buying lottery tickets. The risk profile usually isn’t worth it. Any parting words of wisdom or sage advice for potential investors?
Andy	I think it goes back to our conversation on sales. Selling is the most valuable skill set. You’ll have to sell [yourself] to your future wife. You’ll have to sell your kids on eating vegetables. You have to sell investors as to why you’re going to be a steward of their capital and earn for them healthy returns. You have to sell your employees as to why you are a good steward of them and their careers and their families. Everything in life is sales. There are some elements whereby people say is it product or is it sales, and I think there’s a healthy debate to be had in that regard. But for most in the private capital space, being able to have a leader that is able to sell his stakeholders as to where they’re going and execute upon that plan is incredibly valuable and that requires you to refine and hone that skill over time. And if you look at the leadership across any mega fund, they are basically just sales personnel and they’ve mastered it at the highest levels. And so, if you ever aspire for that seat, you just got to start doing it in small formats, selling your VP or management team on doing things that are constructive to their endeavors, and convincing them of your position. And so, everything starts in a crawl, walk, run fashion, start crawling as quickly as possible.
Abilash Jaikumar	I think, you said selling to employees where they’re going. I think that’s an important thing a lot of people miss. It’s easier to sell today. Selling the future is much harder because it’s a vision and that’s the hardest sale, right? But it’s the thing that matters a lot more. Often, people like buying but they hate being sold to. But the things that matter the most are things they often don’t think exist or that they need, then that makes it harder. So, when you move into a white space, it’s easier because you don’t have the competition. It’s harder because you have to explain to people why there’s a white space.
Andy	Absolutely.
Abilash Jaikumar	It’s been our privilege to be your partners in this growth story and we’re very excited to continue to be your partner you continue growing. Thank you so much for taking the time to speak with me today, Andy.
Andy	You’re welcome.