The Exchanges

Q So that sounds more like a step up type business than a business with an NOL. When you look at those two different investment opportunities, How do you assess the pluses and minuses of those two different types of TRAs?

A Yeah, so net operating losses are incredibly challenging for us to underwrite because our entire value prop to many of our investments were endowments and foundations is that we seek to deliver an uncorrelated return. A net operating loss TRA is incredibly correlated to the economic performance of a company. I would also articulate that oftentimes there is a bid ask between us As well as the sellers, insofar that they have a more bullish view of when a company would utilize its NOL, and versus relative to what we might be willing to underwrite. Where we are more focused on is the step-up TRA, primarily because for many of the names that we are underwriting, they can see almost a 60 to 80% drop in their earnings metrics, might that be an EBITDA-oriented metric, and see no changes to their overall payment. Often the one thing that people fail to understand is you never lose a tax asset, you merely defer it, which has the impact on your IRR, but not necessarily changing your MOIC on an opportunity.

AI assessment note: “net operating losses are incredibly challenging for us to underwrite because our entire value prop”

Q How do you think about your exit strategy with these investments?

A So there are a number of avenues. Obviously this is annuity and self-amortizing. First and foremost is the inherent cash yield that we get on an annual basis. But look, we're pursuing a path similar to the leaders in the pharma royalty space, as well as the musical royalty space who have undertaken the process of Consolidating their holdings and ultimately listed them. Our goal is to undertake a similar process. We did that in 2021 and are in the process of completing our second merger. But on a go forward basis, our goal is to originate these assets and subsequent to that, um, contribute them into our overall portfolios with the long term exit strategy of potentially going public.

AI assessment note: “with the long term exit strategy of potentially going public.”

Q What are some of the other things that affect your investment?

A There are two other risks, the first of which is bankruptcy risk. As mentioned, they are an unsecured obligation, and so a lot of our work relates to the credit worthiness of these companies. I think the item across the industry that is not well understood is that they are oftentimes IG or near IG names, and they oftentimes are large scale and with access to public markets. And so on average, we see the industry being approximately 400 plus of EBITDA, less than two times leverage, so less than a billion of indebtedness. And they oftentimes have a market cap in the five to ten billion dollars of code. And so the LTVs across the opportunities are relatively low.

AI assessment note: “There are two other risks, the first of which is bankruptcy risk.”

Q What's the competitive environment like for investing in these assets?

A It's more so a lack of competitors, and there are really five rationales as to why that is. I think the first that I alluded to is the domain expertise requisite to underwrite the opportunity set. Most deal professionals here wear tax and they just run away. The second rationale is around the Return expectations. The third rationale is around the fact that the duration of the opportunity oftentimes makes it incredibly challenging for people to clear committees insofar that if you were a hedge fund with one year locks and you had a one year asset, everyone could do it. If you said that you need to have eight to 10 year funds, that starts becoming incredibly challenging for many of the more credit oriented firms who have six to eight year vehicles. To originate the opportunity. The fourth reason is around the sourcing of the opportunity and the size of each opportunity. The average opportunity is between 15 to twenty million dollars. If you are a large-scale manager with several billion dollars to deploy, that can be challenging to spend a significant amount of time to deploy 15 to twenty million dollars for each check. And the fifth reason and final reason is we're trying to make it challenging to compete against us. Several of the things that we've done to do that includes the likes of pre-underwriting the opportunity set to the extent that we can deliver our sellers speed and …

AI assessment note: “It's more so a lack of competitors, and there are really five rationales”

Q You threw out TRA, Tax Receivable Agreement. What is a TRA?

A The simplest way to think about it is a tax receivable is merely a contract between a oftentimes public company with a pre-IPO holder. So names in our portfolio that some might recognize include the likes of a Remax, a Shake Shack, a Duff and Phelps. So large scale businesses. What it is, is The contract effectively refunds the holder for the cash tax savings a corporation may receive. So tax assets that one might recognize or be familiar with include the likes of a net operating loss. These net operating losses will be realized over time and generate cash tax savings, which will be valuable to both the corporation and the pre-IPO holder. The reason this option he said even exists today is It's primarily a function of the fact that public equity investors oftentimes don't ascribe much, if any, value to tax assets. If you think about a business, they might look at it on a revenue growth basis or an EBITDA multiple, both of which don't capture the inherent value that tax assets deliver to a corporation. Knowing as such pre-IPO holders, might that be leveraged buyout firms? Co-investors or management team members are attracting it for themselves through the utilization of a tax receivable agreement.

AI assessment note: “a tax receivable is merely a contract between a oftentimes public company with a pre-IPO holder.”

Q What was it like going to college at age 15?

A It was interesting in many regards, insofar that when you're a freshman, no one ever asks you how old you are. The common ages would be 1718, 19, and so it was a challenge fitting in, but my sister had also gone to college relatively early at 15, and so I basically just followed in her footsteps. That dynamic definitely did create some interesting stories. My sophomore year, I was a resident advisor for a senior heavy dorm, and on the campus of Illinois, we have a tradition for St. Patrick's known as unofficial. As you can probably tell from the name, it was a day where the campus just basically goes buckwile. My job as a resident advisor was to police the halls and ensure that nothing got out of hand. You can probably appreciate my amusement being a seventeen-year-old resident advisor taking care of otherwise 21, twenty-two-year-old residents who are of legal age and confiscating their alcohol and having to pour it all down the drain.

AI assessment note: “being a seventeen-year-old resident advisor taking care of otherwise 21, twenty-two-year-old residents”

Q Which two people have had the biggest impact on your professional life?

A There are definitely two individuals who have made a significant impact on the first of which is Greg Beard. I still remember calling him. I struggled to break into investment banking coming out of Illinois, primarily because many of the investment bankers were seeking juniors and not a freshman or sophomore. And so in that context, I was scratching my head as to how I could get an internship. And I thought about who is the stakeholder That an investment banker might care about, and I realized there was something called private equity. I wasn't quite sure what that was. I called a number of private equity individuals. One of them was Greg. He was at Riverstone, and he said, I actually also went to college at 15. You remind me of my story, and so I'll make a number of calls on your behalf. Ultimately, that ended up in a summer internship, but he's been a mentor throughout my life. The second individual is Jamie Sholem. He's also from Champaign, middle of nowhere, and has been a big brother for me throughout this process, understanding how to navigate the institutional investor landscape, but also how to necessarily counter position and enable yourself to achieve what something that a little country bumpkin might never have even imagined.

AI assessment note: “There are definitely two individuals who have made a significant impact”

Q When you've gone through the process of educating a company about the value of this asset, then I imagine you have to go through a negotiation to try to figure out the price because you're not just highlighting the asset, you're trying to buy it at a discount to what it's worth. So how does that process play out?

A We're pretty upfront about our cost of capital and how we think about it, and that's a function of a number of items. Might that be the underlying credit risk of the business, but also when we believe that we're actually going to get paid, and we share that. Oftentimes, from a qualification of a seller perspective, many of them don't want to engage at that price level, and that's fine. Our job is to educate them as to what we can get done, And it's important for us to know if there's a transaction to be done or not for us to cut bait on a opportunity that may not exist because we have just different price expectations of what makes sense.

AI assessment note: “We're pretty upfront about our cost of capital and how we think about it”

Q So let's walk through how you've structured your business to invest in this asset and maybe just walk through the process. So how do you initially source these transactions?

A It's a lot of brain damage. I would say there are no intermediaries in the space that we deal in as a function of a number of things. Domain expertise as well as the size of each underlying opportunity prevents many intermediaries from engaging in earnest on this space. As we think about it, these are large public companies who oftentimes file, among other things, The overall TRA document or the underlying LLCA, and should they not, there is some grunt work that is undertaken to understand who the pre-IPO holders are. Once we have a list of those names, it's a matter of enhancing the underlying information and then seeking to get either warm introductions or seeking to co-email them as part of the overall sourcing process. Our job is that oftentimes we are the educator of the holder of the asset, fresh of the IPO, and so a lot of what we do is getting in front and staying in front of these holders, educating them about the TRA, the value that it can deliver them over time, but also providing them the option to sell the TRA should they ever want liquidity. As you think about some of these holders that run the gamut, from a sponsor down to a management team member, they may, for different reasons, want liquidity. Might that be finite fund life considerations, or just a desire and an opportunity cost conversation. And so our job is to serve as the educator to them as to what their…

AI assessment note: “seeking to get either warm introductions or seeking to co-email them as part”

Q How does the tax regulatory environment potentially impact what you're doing?

A I think many who are facile with tax would look at our portfolio and say, all we are is a factoring items that have existed in tax code for almost a hundred years and are protected by lobbies, including the real estate lobby. We fundamentally follow the same principles that many of these that have been well Honed in tax code, and so there are many other asset classes that would hurt in earnest prior to it really affecting us, but that is something that we spend a lot of time thinking about, but is a macro factor that we candidly have no control over or ability to influence in earnest. We actually tried to hire an advisor who had previously been a former IRS commissioner

AI assessment note: “many other asset classes that would hurt in earnest prior to it really affecting us”

Q What is the credit underwriting that you do?

A All credit underwriting is non-differentiated relative to what a credit manager in direct lending or in the distressed world might undertake. What we're looking to do is understand, A, is the business going to remain a going concern? And because, B, we have a different lens as to the world that we live in primarily because we're not originating seven-year pieces of paper where we believe that our takeout is a refinancing or that via debt pay down. For us, seven years is oftentimes the window through which we receive the majority of our cash flows. But in order for us to make not just a return of capital, but a return on capital, we really need the year eight through 15 cash flows to have a profit. And so we have to underwrite, do we believe this business is going to remain outstanding for 15 years? Though it's at least the underwrite, which makes it challenging for certain businesses that some may view to be fads, where they have hero products, Among others, and those can be incredibly challenging to underwrite. One of my favorite stories from underwriting is when we were seeking to better understand the realtor market as part of understanding a RIMAC. And as part of that, we sought to have one of our team members take the New York realtor examination. Sadly, I would share that I was the one who volunteered. The one thing that I would Save positively is that I actually passed. …

AI assessment note: “we have to underwrite, do we believe this business is going to remain outstanding for 15 years?”

Q And what are the actual operational logistics of that? It sounds like there could be a servicing component to the transaction.

A Many of these are large-scale businesses, and so one of the things that they don't want to do is to publicly announce that they are undertaking an IRS audit. Among the other things that a TRA holder has is information rights as to understanding how the company filed its taxes, the accounting policies, as well as practices that they necessarily utilize in the filing process, and that allows us to monitor As a TRA holder with information rights, how the company was undertaking it. These large public companies do not want to be perceived as having to be too aggressive in the view that should they undertake an IRS audit, it would be something that would have a negative implication onto their public stock.

AI assessment note: “a TRA holder has is information rights as to understanding how the company filed”