Parallaxes Capital launched its podcast TRAilblazing, your go-to resource to understand what tax receivable agreements are and what the marketplace is about.
Tax receivable agreements have existed for years. But they are a nascent asset class and often misunderstood. This podcast is here to demystify it for you.
In our inaugural episode of TRAilblazing, host Andy Lee (Founder and Chief Investment Officer of Parallaxes) is joined by guest Albert Chang, Managing Director and Head of M&A Tax and Structuring Advisory at RBC Capital Markets.
Albert shares his unique insights regarding the process of educating the market about TRAs, and the inherent challenges and opportunities they hold for both buyers and sellers. Discussing his career path, Albert emphasizes the importance of staying nimble and ready for unexpected opportunities. Tune in to explore the distinctive risks and potential returns associated with TRAs, and gain advice for those aspiring to make their mark in this niche yet fruitful domain of finance.
You can read the full transcript here:
| Andy Lee | Albert, thanks for joining us today. |
| Albert Chang | It’s great to be here, Andy. Thanks for having me on your podcast. |
| Andy Lee | It just feels like yesterday that we were working together back when I was at Loan Star. It’s almost been a decade. |
| Albert Chang | Yeah, you know, it’s kind of funny in this industry, you meet folks and you never quite know how those relationships will develop and then what types of transactions you’ll get to work together. So most of your listeners are probably familiar with your general background, but you know, from my perspective, I had a chance, of course, as you know. We first worked together back when you were at Lone Star, working on the IPO of one of your portfolio companies. And from there, in my seat, I had the privilege of watching you start Parallaxes, really a true pioneer in the space of investing in tax receivable agreements. So it’s been a really fun pleasure on my end to watch the growth of your organization and to, as a professional that works in tax receivable agreements, work alongside you at times, work on the other side of the table with you at times, but in any event to kind of watch you develop as a professional pioneering in this space. So it’s been a real pleasure. |
| Andy Lee | Thank you for that. But tell us about yourself and how you found yourself into the wonderful world of tax. |
| Albert Chang | Yeah, sure. So for those of your listeners who maybe are not familiar with my full background, I’m a managing director here at RBC Capital Markets. I sit in our mergers and acquisitions group. And I am the head of our M&A tax and structuring advisory. And so what that entails is as part of our investment banking practice in advising our corporate clients, my role is to really be a specialist that focuses on the more complex structuring parts of the transaction advisory we do. Most of that is in the M&A space, but there’s a good chunk of that that’s also in the capital market side, both on the debt and the equity side. And that can be tax driven, which is, as I’ll go into, is really more some of my background. But it can also be a variety of non-tax issues as well, whether it’s capital structure, financing, accounting, regulatory, legal. So basically anything that’s not quite center of the fairway, that’s what falls into my world. My story really begins actually before I got into investment banking. So I started my career actually as an attorney. I went to law school and then worked for a large law firm here in New York City, big corporate law firm, did a lot of M&A work and capital markets work. And I basically got a call out of the blue one day from a recruiter, and I was a tax lawyer at the time, that invited me to apply for a job opening at an investment bank to work on what I do now, which is structuring and transaction advisory. It was a call I was not expecting, came out of the blue. I didn’t actually even really know that much about the job. But as I learned more about it, I became more enamored with the idea. Some of the things that I would be doing I thought would be a really great fit for my own personal interests and professional interests. And so I made the career change and went into investment banking. That was about 12 years ago or so and have been working on the financial side of the advisory business ever since. |
| Andy Lee | Amazing. So when and how did you first learn about TRAs? |
| Albert Chang | So I first learned about Tax Receivable Agreements as a young lawyer, when I was at, I worked at Cravath, Swain and Moore and we did a, we advised on a lot of initial public offerings for both issuers as well as underwriters. And as people in the TRA role, they’re most likely familiar with, tax receivable agreements can oftentimes come up in the context of an IPO, because when a company initially goes public, there are certain circumstances in which it makes sense to put in a tax receivable agreement, particularly if that company has a lot of existing valuable tax attributes that are difficult for capital markets and equity investors to evaluate and value, or if they anticipate that future tax attributes will be generated. And so my first encounter with the TRA was actually as a young attorney for a company that we were taking public, and it was my job at the to kind of draft and review public disclosure documents related to what this investment was about, different characteristics of the company. And in this particular case, it was a company that was going to go public with a tax receivable agreement, which was not uncommon at the time. And so again, as a young attorney, it was up to me to first learn what a TRA was, to learn the market conventions around TRAs, and ultimately to reflect those characteristics and those descriptions in the documents that would be made available to investors. |
| Andy Lee | How have you seen your clients’ perceptions change on the topic of TRAs from your time at Cravath? |
| Albert Chang | Yeah, you know what? TRAs are kind of an interesting asset class and product. What I would say about tax receivable agreements is if you look across the landscape of all public companies, and TRAs are principally a product that you find in the United States with public companies. If you look across the entire landscape, you actually, as you know, Andy, there’s quite a few TRAs outstanding. So if you just look at the universe of public companies, there’s a lot of companies out there that have tax receivable agreements. Certainly it goes into the triple digits, right? We’re talking about more than 100 companies that have tax receivable agreements. Oftentimes, so as it relates to individual clients, we in our business, we deal with corporate clients, management teams, boards of directors, and even owners of businesses, when the topic of a tax receivable agreement comes up, frequently it is the case that for these constituents, it’s their first time learning about a tax receivable agreement. Because you really wouldn’t know what a TRA is until you’ve had an opportunity personally to work on one with, say, a company that you work for. And so a lot of it is about education. And so certainly there’s professionals like yourselves that deal with TRAs regularly. And I think, you know, there are players in the market that have a chance to really study TRAs, form a view on the various aspects of the TRA, and then potentially have that perception change over time. But most of our clients actually are just learned, most of the people I deal with are learning about TRAs for the first time. And so part of my job is to educate them on what a TRA is, why they exist, what we’re trying to accomplish when we put a TRA into place. And usually when we do that, and we’d like to think we do a pretty good job of that, our clients understand what a TRA is and then make a decision on whether it’s the right fit for their particular situation. So I guess broadly speaking, I would say it’s harder to track on an individual by individual basis how views of TRAs evolve over time, because actually in this market, it’s frequently the case that even for very experienced and sophisticated finance professionals or business professionals, they may only encounter a TRA once in their entire career. So I think it’s a little harder to track the evolution of views in that sense. What I will say is if you take a step back and you look on a more macro view for the market, if you look just look at the prevalence of TRAs, for example, TRAs have really been pretty widely accepted I would say in the IPO market for the last 15 years or so. And so when it comes to institutional investors, I would say every year we get fewer and fewer questions about like, what is a TRA or explain to me how that works and why we have that in there. So I think there’s an increasing market understanding of what tax receivable agreements are and what purpose they serve. So that’s one observation I would make on the macro level. And then, of course, as you know, Andy, and largely due to the work of folks like yourself, the secondary market on TRAs where existing holders of TRAs can then sell their interest to other interested investors, that’s certainly something that has become more prevalent, I would say, over the last, call it, probably seven or eight years. |
| Andy Lee | AL Incredible. So, look, you’re the most prolific seller of TRAs. So I would love to hear, what was the process of educating the market on TRAs when you first sold them. |
| Albert Chang | AC Yeah, so I think it’d be helpful, just helpful context for your listeners. I appreciate the compliment very much. And Andy is being factually correct, but I think some additional context is needed. So for a very, very long time, there really was no secondary market for tax receivable agreements. And for myself, as an investment banker, we’re in the business of providing solutions to our clients and helping them think through issues. So it wasn’t so much an intentional effort to try to go out and sell tax receivable agreements. They actually, the very first time that type of opportunity came across my desk was when one of our existing clients, a private investor at the time, held onto a tax receivable agreement, but it wasn’t a natural, it was born out of an equity investment that they had in a portfolio company. And it wasn’t something that they naturally wanted to hold onto for their fund. That’s not what their fund was about. And so they came to us to say, hey, do you think you could find a buyer for this particular piece of paper? And so that’s really how that type of opportunity came to us. And when we found when we were ultimately able to accomplish that transaction for that particular client and find a buyer for that tax receivable agreement you know, naturally we thought to ourselves, hey, are there other clients that we have that might be in a similar situation? And that might want to monetize an existing tax receivable agreement, which while having a lot of attractive features as an investment, maybe doesn’t quite fit within their investment mandate. Maybe it’s something that they really stumbled upon by virtue of what would not be a conventional private equity investment in one of their portfolio companies. And so I would say that’s kind of how it started. We were just looking for solutions for our clients. It wasn’t necessarily about trying to invent a new asset class or start a new business, but a client actually approached us with a solution that they were hoping to get, enlist our help to solve. We found a solution and we tried to just think through what other clients could benefit from this. |
| Andy Lee | Great. What should buyers and sellers know before pursuing a transaction? |
| Albert Chang | Yeah. So, I think buyers, I typically expect if you know that you’re in the market for a tax receivable agreement, I’m going to assume that you’re pretty up to speed on what the nature of the investment is and that that is an investment that fits your investment objectives and investment philosophy. So, broadly speaking, folks that are familiar with tax receivable agreements understand that they’re typically long dated pieces of paper. Frequently tax receivable agreements, the payout periods can span well over 10 years, up to 15 years typically, depending on how much time remaining is remaining on the instrument and how many payments have been made already. But we’re talking about a pretty long duration piece of paper, certainly compared to other conventional fixed income products. It’s a investment opportunity that I would say has fairly unique risks and exposures. So payouts and tax receivable agreements are contingent on tax rates, and that is by design. The idea is that the holder of the TRA is the party that bears any risk in tax change. The whole idea of a tax receivable agreement is we’re gonna shift the burden of living with the risk of being able to utilize tax roots attributes. We’re gonna shift it from the company or one party to another. So the whole idea is that that burden shifts. So that is a unique risk, if you will, investment risk, if you will, that when it comes to tax receivable agreements. And that’s one I think that is requires some judgment and there’s not necessarily a formulaic way to underwrite that. So if someone were to ask like, what are the odds that corporate tax rates in the US will change from the current 21% federal rate to some different rate? That’s a very hard question, I think, to answer with a lot of precision. It requires taking a view. There’s a lot of uncertain factors that go into it. It relates to legislation and political environment and things that are very hard, I think, to put a specific number on. It’s also not something that’s very easy to hedge. There’s not a natural way to hedge that type of risk. So, from a buyer’s perspective, understanding that, hey, it’s long dated. There’s some unique risks. It’s also not very liquid. There’s not a readily available market, as you know, that you can go out and buy and sell these things. They’re typically either bilaterally negotiated or negotiated with a small group of prospective buyers. So it’s still a bit of a Rolodex business. In that sense, those are unique or semi-unique aspects of investing in tax receivable agreements. But that said, there’s certain pockets of investment capital that are okay with all those features and are looking to take on those types of idiosyncratic risks in exchange for the types of returns you can see in tax receivable agreement type investments. So I would say from a buyer’s perspective, those are typically the considerations and related questions that we come across. Again, most buyers, if you already find yourself in a place where you’re looking to invest in this type of asset, I think have gotten comfortable with those questions and considerations, but those things I think are important for prospective buyers to understand. And then on terms of parties that may be looking to sell an interest in a tax receivable agreement, I think it can often come down to the inverse of some of those things that I’m talking about. So are you looking to exit the investment perhaps because some of those features of a tax receivable agreement are not necessarily a good fit for your particular portfolio right now? Maybe you are looking for more liquidity or more, you don’t want the concentrated risk on something like tax legislation, for example. I think sellers should understand how a TRA fits within their broader investment portfolio objectives. And frequently it is the case that because there are some unique features of tax receivable agreements, that sellers are perhaps looking to just monetize the investment and to sell that off to someone else so that they can then redeploy the proceeds and the capital into some other type of investment. As you know, Andy, oftentimes the difficulty in TRA transactions is finding a middle ground where there’s a price that makes sense for both the buyer and the seller. It’s not a readily tradable instrument where you can go on Bloomberg and look up a price and use that as a guideline for determining how transactions ought to be valued. So naturally, we find that to be one of the obstacles that must be overcome to reach a meeting in the minds between two different parties. But again, I think there certainly are parties where it probably does make sense for you as the holder of a TRA to sell it and do something else with the proceeds. And there certainly are folks like yourselves, a buyer universe that has invented this product has kind of understood it in a way where it makes sense to hold tax receivable agreements as part of an investment strategy and who are willing and ready buyers for the asset. |
| Andy Lee | What is preventing the adoption of TRAs from becoming more and more like rep and warranty? You’ve seen proliferation of rep and warranties in the last decade. How do we make TRAs like that? |
| Albert Chang | Well, I think you’re right in the sense that reps and warranties has become an insurance product that is regularly used as part of a lot of M&A agreements. I think one of the reasons why tax receivable agreements is not as prolific as something like rep warranties is because in just about every M&A deal, there will be representations and warranties made by the seller. And so it’s an inherent part of every transaction that someone might need protection along those lines. As I alluded to at the outset of this podcast, tax receivable agreements were really created and invented to address specific scenarios, which are typically either M&A or capital markets transactions where there is a differing opinion on the value of a corporate tax attribute. And tax receivable agreements are essentially a way to risk share the usage of those tax attributes appropriately and to be able to allow transactions to occur without having the uncertainty of that value of the tax asset be an obstacle towards completing the transaction. And not every transaction has that type of fact pattern where you have a delta in the valuation of a specific tax asset. So, I think that’s one reason why you see the TRAs being less common than something such as reps and warranties insurance, which you see frequently in M&A deals. That’s certainly a big driving factor. I think what we can say about tax receivable agreements is it can be a very useful product, and it can be a very useful value bridge in the right situations. So certainly, in our world as investment bankers, we wanna make sure our clients understand all of the available solutions to them. And so, it’s our job when the right fact pattern exists to educate our clients and let them know that something like tax receivable agreements are available to bridge value gaps. And so in terms of kind of expanding the universe of TRAs, I would say, you know, we should continue to make sure that in the right circumstances, the right parties understand that tax receivable agreements is an option. I think that that’s certainly part of our job as advisors to make sure our clients are aware of all the options on the table. And then I think there’s a related question, but maybe it’s not what you were getting at, which is, can we create a more liquid market once TRAs are out there where it makes it easier to facilitate secondary transactions? And I think that frequently is just a matter of educating the market, especially holders with tax receivable agreements on what exactly it is that they hold, helping educate those holders on does it fit for you as an investment tool? And if it’s not the right type of investment, does it make sense to offload that to another type of investor who may value that instrument differently than you might? |
| Andy Lee | Absolutely. So, what is the hardest part of your job today? |
| Albert Chang | Well, I can talk about the tax receivable agreement part of my job, which is, you know, it’s not, it’s a small part of what I do, of course, because most of my work is still in the world of advising mergers and acquisitions and IPOs and debt raises and other types of capital raises. But since your listeners are pretty focused on TRA specifically, I can focus on that part. Look, I would say, and you know this, Andy, tax receivable agreements, they are, even though they’re, you know, you could argue that it’s a fairly prolific piece of paper out in the market today, there’s still a challenge to helping educate investors on whether there is a transaction that could be done. I think in general, there’s still in certain pockets of the financial world, a fairly limited understanding of tax receivable agreements. And so, the market is probably not 100% there yet. And so, as someone who works on the advisory side, trying to help clients think through solutions related to tax receivable agreements, oftentimes it can be more challenging, identifying where are the more actionable transaction opportunities and being able to focus our efforts on areas where there’s a higher likelihood of finding a solution that will work. Because again, if you look across the entire universe of tax receivable agreements, there are many, many tax receivable agreements out there. And then within each tax receivable agreement, you might have a large number of holders. It could be a few dozen holders or more. And so, it is somewhat dispersed in that sense. And it can be sometimes more of a challenge to identify, you know, what specific areas of tax receivable agreements are more fruitful and ready for a transaction. |
| Andy Lee | Amazing. So, you’ve had a distinguished career. What advice do you have for the next generation? |
| Albert Chang | Yeah, you know, that’s a really broad-based question, and I could probably go on and on for a long time, you know, in general. I love hearing that type of question on other podcasts and other recordings because I love hearing other people’s answers as well. I think each professional story is frequently unique and has a lot of interesting twists and turns and aspects, and there’s something to learn, I think, from every story. In my case, as I mentioned at the at the outset when I was describing the beginning of my career, my start in investment banking really began because I received an unexpected call and an invitation to apply for an opportunity that frankly I didn’t even understand that well at the time. And over the years, I’ve come to appreciate the fact that in a lot of careers, the way careers develop, frequently it is the case that there is a pivotal moment that really, when you look back, was very hard to anticipate. So, there’s a degree of fortune and luck and serendipity, I think, in all of that. And so, what I love to tell young professionals that are looking forward to their career, certainly I think one ought to have a plan, and one ought to have an idea of what are things that interest them and that inspire them and make them want to work hard and motivate them. I think those are all very positive things and strategies that I would advise any young professional to adopt. But at the same time, I tell young people to be ready for something that might come out of left field because you never quite know what types of opportunities will come up there. So, stay nimble and continue to develop your skill set because there may come a unique opportunity one day that maybe is not exactly what you had in mind, but that you do have the skills for, and if you find yourself in the right place, at the right time, with the right backing, you can pursue. In fact, I think back on how our relationship started, Andy, when you were at Lone Star, and if I had to guess, I mean, I’d love to hear from your perspective, but if I had to guess, I would have guessed that before that IPO, you probably never could have imagined starting something like a TRA fund, and yet here you are now years later having accomplished so much in the space. So, I do think for the young people that are listening out there, if you talk to enough people and you hear their career arcs, you will hear that theme enough. And so, I encourage people to be prepared and to have a plan and to build up their skillset, but also to understand that opportunities tend to come out when you don’t necessarily expect them or maybe come out of from places where you aren’t quite expanding. |
| Andy Lee | Absolutely. There’s so much serendipity in life. But I’ve been incredibly blessed to have friends like yourself as we’ve gone through this endeavor. |
| Albert Chang | Well, yeah, it’s been great working with you, again, in a variety of capacities. Sometimes we’ve been negotiating against each other where I’ve been representing a client, you’ve been on the other side. We’ve been fortunate enough also to help you think through some of your issues related to your fund and how we can be helpful to funds overall for funds like Parallaxes and also other funds in similar situations. So, it’s certainly been a pleasure working alongside with you and with you as part of transactions. It’s also been great to watch the rise of Parallaxes and the work that you guys have been doing in the TRA space. |
| Andy Lee | Absolutely. So, Albert, many of you tax professionals to have boring personalities. I feel like you might have something to share with us to dispel that notion. |
| Albert Chang | I have heard that one before and I do have to defend folks that work in various areas of tax. I do think that when you get a chance to know these professionals, yes, they’re experts in their field. They’re very good at what they do. They spend a lot of time becoming experts in their field. But I’ve had a chance to get to know a lot of folks over the years and pretty much regardless of the individual, once you have a chance to get to know someone, they all have you know, really interesting hobbies and stuff that they can talk to you outside of the tax world. So, I have to kind of defend the general field a little bit there. But in terms of myself personally, what are the kinds of things that I’m into? I actually think my interests are fairly conventional. I’m a big sports fan. I love to watch football. I like to play golf. There’s a number of ways in which if I had more time, there’s probably limitless things of things that I would like to do. I like to do outdoor activities, hiking, and just spending time outdoors with my family as well. I’ve got two kids and my wife, and any chance that we get to spend time together as a family is obviously a very cherished time. And then, you know, as someone that’s lived in New York City for the last 17 years, I’ve been fortunate enough to dabble in various things that the city has to offer. So, I think one of the great things about New York City is the food scene and restaurants, so we love to try out different places, different cuisines from the entire gamut, and New York City is a pretty special place for that, so we’re lucky to have that in our backyard. |
| Andy Lee | Amazing, thanks for sharing, sir. |
| Albert Chang | It’s great to be here, and thanks for having me. |