Investing in Tax Receivable Agreements, with Saish Setty, General Counsel, Parallaxes Capital

Episode Summary

In this episode of Signals by AlphaSense, host Nick Mazing sits down with Saish Setty from Parallaxes Capital. The conversation begins with a deep dive into the world of Tax Receivable Agreements (TRAs), an emerging asset class whose prominence has grown over the last few years, and are an increasingly common feature in Initial Public Offerings (IPOs). TRAs are transferable corporate tax assets that historically have had little secondary market liquidity. Interestingly, TRAs might be the only asset class that benefits from higher corporate tax rates. 

The discussion then shifts to the valuation of TRAs. Saish explains the three main considerations when valuing a TRA: understanding the tax collateral, forecasting taxable income, and constructing a discount rate. He emphasizes the need for a deep understanding of the tax benefits, or assets subject to the TRA, which requires extensive knowledge of the tax code.

The episode concludes with Saish discussing the market inefficiencies that their strategy benefits from. He shares the BAIT framework (Behavioral, Analytical, Informational, Technical inefficiencies) and how Parallaxes Capital has an edge due to its domain expertise and different view on duration. Saish also touches on the ESG angle of TRAs, highlighting how they further social and governance goals. 

Guest-at-a-Glance

💡 Name: Saish Setty

💡What he does: General Counsel

💡Company: Parallaxes Capital

💡Noteworthy: Saish is a specialist in TRAs and shares his unique insights into this emerging asset class.

💡 Where to find Saish: LinkedIn

Key Insights

The BAIT Framework: A Unique Approach to Market Inefficiencies

Saish Setty introduces the BAIT framework (Behavioral, Analytical, Informational, Technical inefficiencies) as a tool for identifying market inefficiencies. In addition, he explains how Parallaxes Capital leverages this framework to gain an edge in the market. They focus on areas where other investors may not be looking, weigh information differently due to their deep tax knowledge, and take advantage of technical inefficiencies where market participants buy or sell assets for reasons unrelated to fundamental concerns.

Decoding the Valuation of Tax Receivable Agreements

Saish breaks down the process of valuing a Tax Receivable Agreement (TRA). He outlines three main considerations: understanding the tax collateral, forecasting taxable income, and constructing a discount rate. This process requires a deep understanding of the tax code and the ability to predict taxable income accurately. The discount rate is built by aggregating perceived risks, including credit, duration, illiquidity, and legislative risks.

The ESG Potential of Tax Receivable Agreements

Saish discusses the ESG (Environmental, Social, Governance) angle of TRAs. He suggests that tax-related strategies can be a powerful tool to incentivize good behavior and affect ESG goals. TRAs, in particular, can further these goals, especially in the social and governance aspects. For example, companies can support tax policies that promote long-term value creation rather than just tax minimization. This perspective offers a fresh look at how TRAs can contribute to sustainable and responsible business practices.