Jack: Welcome back, everybody. I'm Jack Heald for the OZExpo today. We are talking with Paul Saint-Pierre of PSP Advisors. Paul, welcome to the show.
Paul: Hi Jack. Thanks for inviting me to the show today.
Jack: Certainly good to have you here. Well, I see that you've got a pretty interesting background, especially in regard to how you got to the Opportunity Zone environment, but before we talk about Opportunity Zones, let's talk about you. Who are you? How'd you get started? How'd you end up here?
Paul: All right, well I'll try to keep it short because it can be a long story. You know, Jack, I probably have close to it 35 to 40 years of professional experience. And when I first finished graduate school at Berkeley, I got into real estate consulting and real estate advisory work and the real marquis assignment then was advising major institutional investors, i.e. pension funds. Firms like CalPERs and 9X and Alaska Permanent Fund; really advising them on the design of their investment strategy for real estate and helping them on the execution of that strategy, which would help them pick real estate money managers, asset managers, help them pick funds. Real private equity, real estate funds, executing on the performance measurement of those funds. Doing buy, hold, sell, doing a lot of troubled workout stuff and also helping some of those investors enter into one-off co-investments. From there, I went onto the REIT world. I was a portfolio manager for a startup real estate securities fund when the REIT market was about $7 billion. So, I went through the massive expansion and growth capital market growth of that industry. I had a significant REIT experience with both private REITs and public REITs. I've also created a brokerage market to transact and private equity real estate interest to help pension funds, sell their interests and find buyers for those interests.
Jack: You know what? I'm going to stop you right there. I wouldn't ordinarily do this, but…
Paul: Yeah, OK.
Jack: I read your comments to the IRS, back in what was it, February?
Paul: February 14.
Jack: And I noticed that one of the things that you pointed out to the IRS was at the end of the 10-year holding period, the requirements that ...
Jack: yield to an unrelated party and you were talking about this kind of stuff. I see where it comes from. Now we're going to circle back around and hear more about that. So, I didn't mean to jump in the middle of your stuff there, but I thought that was interesting. I'm going to hear more about that. Okay.
Paul: Yeah. So, just jumping forward, Jack, throughout this decade I served as chief financial officer of two significant business development companies. Business development companies are the twin to REITs, they invest in private, middle-market companies. They provide debt, they provide equity. And I think I bring the bilateral exposure of many years in real estate, investment strategies and funds and vehicles coupled with about 10 years of experience on the private equity side, which is really what the Opportunity Zone program is all about: bringing together a real estate and businesses for the betterment of these census tracts.
Jack: So tell me about your company, PSP Advisors and specifically the role that it serves in the OZ Market.
Paul: Sure. Thanks for asking. When I look at the OZ market, I think of a barbell where on one side you have investors, in the middle you have the intermediary, which is the fund, and on the other side of the barbell you have the investees. What are those companies and projects that are going to receive this precious equity capital?
So, PSP advisors is set up as a registered investment advisor. It just became registered as probably the only registered investment advisor that provides alternative strategy investment services to investors that could be corporate investors, institutional investors, high net worth investors. But it's really to help investors navigate through the world of alternative investments, which I define as real estate corporate credit, private equity. Fund to fund Opportunity Zone strategies is merely a subset of those three or four key strategies. On one hand I'm positioning to advise investors on navigation and education around alternative investments, including Opportunity Funds. And on the other side of the barbell, I'm focusing on what's called qualified Opportunity Zone businesses, particularly non-real estate businesses to help those businesses get ready for showtime, help them get ready to business, prepare their business plans and help them get ready to enter the dance with qualified Opportunity Funds. So, that's primarily how I'm positioned. I also have many years of fund experience and that seems to be pretty well serviced, but I'm also available to help a fund sponsors think through their strategy on funds.
Jack: We just got guidance from Treasury last week; the guidance we've been waiting on for quite awhile. I know you had a comment letter. I know you presented to the IRS. Tell me about what you've seen, so, far in the guidance, what were you happy with, and where you think there might be some holes still.
Paul: Yeah, Jack, in my comment letter to the IRS, it was really some strong suggestions to improve the Opportunity Zone investment sector on behalf of investors. So, I was addressing to enhance the exit strategies for investors after 10 years and also to protect what I called chain link deferral. So, I was happy to see that the IRS added those investor-friendly provisions to create more choices for investors as they're investing in Opportunity Zones for many years. So, it's giving them alternative exit strategies. It's given them alternative strategies to swap out of one position and move to another while protecting their tax benefits.
Jack: You know, I will confess, I started reading the guidance and I realized I had better ways to put myself to sleep. One of the comments that you had made was the concern about when you exit a position as an investor, you're required to sell to a non-related party. Was that addressed and if so, how?
Paul: Yes. I served several years in terms of trading, private equity interests for institutional investors. So, this really comes from experience. I felt that compelling investors to sell their interest, out of the QOF was going to, perhaps lead to significant discounts as those investors try to seek out counter-parties. It was addressed.
My recommendation was that the distribution of capital gains would be tax-free after an investor passed their 10 year anniversary. So, I was very happy to see that provision added So, that investors can just hold on for the long-term liquidation and harvest their tax free capital gains over a long period of time without forcing them into the secondary market to sell their interests. So, very happy about that outcome. And it was a big win for investors and alleviated some of their concerns about the vagueness of the exit strategy for Opportunity Funds.
Jack: Okay. I will confess, I'm not clear now because the point you made was that the requirement to sell to an unrelated party would almost certainly drive discounted prices. Are you saying that the unrelated party phrase that was addressed?
Paul: Now investors do not have to sell their interests in the fund, but as they receive liquidating dividends, liquidating distributions and that component that has capital gains, it will be tax free once an investor passes their ten-year holding period time period.
Jack: Alright. Okay. Now I get it. Thank you. Another comment that I thought that you made to the IRS, which really caught my eye because I've got kids who are of the age to be investors but are certainly not accredited investors yet. Was your comment about retail investors, is there any help or guidance about retail investors getting involved with the QOF?
Paul: Good point. You know, Jack, I've been, in my experience, I've serviced major institutional investors, the mass affluent accredited investors. In the last 10 years, I've been directly involved in the distribution of real estate and business development products to retail. And when I step back and look at the purpose here and the intent to lift up depressed neighborhoods, I feel that many of these funds being created, it would be great if everybody could invest in the things if they wanted to. It'd be great if people living in the communities could invest their money into qualified Opportunity Funds. Right now it's very common in the funds that are out there that the hurdle is to be an accredited investor, i.e. to have more than $10 million, more than $2 million in wealth accounts excluding your home or to be a qualified purchaser, which is more than $5 million. So, that's a relatively high hurdle. My goal is that these programs are created so, that anybody and everybody can invest in them, but it's gnarly. The issue is around security laws and what's the security being issued. But there are ways to create those securities. There are ways to create those offerings so that retail investors also can invest in these programs and improve these neighborhoods, these communities.
Jack: Hey, I want to go back and do a little bit of a Huey Lewis and the News
here and get back in time. Let's talk about 2008. It looks like you were involved certainly in the investment market, possibly alternative investments. Then 2008 comes along, credit default swaps, swaps, various sorts of collateralized debt obligations. Talk about your experience during that almost unprecedented period.
Paul: Yeah, I remember it very well. I was organizing a real estate securities mutual fund that would invest in real estate stocks around the world, REITs and REIT like investments. So, we were in formation in 2007 and we were launching and okay. And at the end of 2007 I remember distinctively, the headlines around Bear Stearns and the near instant collapse of Bear Stearns. And I remember distinctively…
Jack: I can quote almost to the day it happened.
Jack: I mean it is seared into my mind.
Paul: And I can call it the day that Lehman just shuttered its stores and kicked everybody out. And so, I felt that just these were very significant events. And I mentioned it to our management, these are significant events and we really need to understand risk.
We need to understand the risk and the performance that we're doing, but more importantly, how are we protecting the downside? I think that's really the lesson learned for all programs going forward is do we remember the lessons? Are we adequately protecting the downside? Because risk comes in many forms. Here there's a lot of focus on tax risk. But performance is everything. Losing money is not an outcome. I mean losing money is an outcome, but that's not the outcome that investors want. If you lose money, there are no tax benefits.
So, there's a lot of lessons learned fromfrom derivative investments and lack of transparency from the debacle, you know, the depression of 2007 to 2008. And, unfortunately, it's easy to forget, but we really need to remember risk and how risk can creep up so quickly and create very bad outcomes for investors where they don't control the outcome.
Jack: You know, listening to you talk about, "Have we learned the lesson?" I'm reminded that you and I have, would have grandparents who went through the depression.
Jack: And those folks, there was very little question about those folks learning the lesson. As I think about my experience going through 2008, I was actually short the market in March of 2009 when the Feds decided to start dumping dollars into equities. And that lesson, although there's certainly an intellectual component to it, that lesson was seared into my body. I mean, there's literally a visceral response and I suspect that's exactly what our grandparents’ generation had. They went through that. And it affects you, not only cognitively, it affects you viscerally, and these are lessons that are learned at a far deeper level than merely your brain, your memory.
Paul: You know. I also remember the 1980 debacle when the S&Ls were virtually put out of business due to real estate syndications and all of that. Again, that was a lack of transparency. Over capitalization. How you sill leverage. And again, investors losing money. So, we all have to remember that in one way or another we're dealing with other people's money and we are fiduciaries and the most precious responsibility that we have is we are managing other people's money. Now, that's why at the IRS hearing I said for the qualified Opportunity Funds, we have to make sure everybody in the room can invest money into these funds.
So, that they are looking at these funds and their checkbook is ready and they're ready to invest and then we'll really have something -- I coined a phrase on this one -- called skin in the gain -- GAIN. And that's the phrase I use, is "skin in gain" for the Opportunity Funds. It's who has "skin in the gain."
This is not just for the tax preferred investors. This is for everybody. Anybody can and should be able to invest in a Qualified Opportunity fund. Now there's taxable investors, corporates, the tax preferred investors and tax preferred investors are going to feel a lot more comfortable if they see other kinds of money that is pointed toward these deals. A point about that Jack, is when you look at how the tax bill was scored, for Congress, where they were evaluating the cost and benefit of the bill over 10 years. The congressional analyst penciled out three-quarters of money for this program would come from corporate investors and 25 percent would come from individual investors who are taxpayers, corporate taxpayers, individual taxpayers. We see a lot of gymnastics and we see a lot of scaffolding air pointed towards individual investors.
Where is the corporate taxpayer in all of this? I don't see much discussion about that. That's what I want to start talking about. How do we get the corporates to participate in this in a meaningful way? In the last year that corporate tax returns were prepared where there's data, I think It was about six years late, there was something like $700 billion of capital gains on corporate tax returns.
There's another $400 billion of capital gains on the financial statements of investment companies. And I'm going to take a wild guess here, but there's probably another $300 billion of capital gains on the tax returns for REITs. So, how do these corporates get involved to become investors and sponsors as well? I think that's the $1 million question that we really need to have that discussion about someday.
Jack: I would like to expand a little bit beyond that because what I hear as you speak, I would describe it as a real passion for protecting the investor. Where does that come from? That's more than merely an intellectual exercise there. I hear heart behind it. I hear passion. Where's that come from?
Paul: Yeah. You know? For most of my career I've served what's called a registered representative and registered investment advisor structures. A registered investment advisor is a creature created by the SEC. And when you're a registered investment advisor, your sole fiduciary duty is to look out for the best interest of the investors and not your own.
You cannot interlace that with trading ahead of the investor. You can't make any decisions that deteriorate the investor’s position. And so, it's all about the investor. What I was talking about before. So, this is in my DNA to my training. It's important, you know the SEC scrutinizes this stuff. To become a qualified registered investment advisor is very common in the investment company world and the institutional world in terms of this structure of registered investment advisors.
So, it comes from there. And you know, Jack, when I served as a chief financial officer of two business development companies in the last 10 years, when you face complex decisions that, where it may affect the advisor, it may affect the company and may affect shareholders. I always start my decision making from the circle of the shareholders. How, how does this treat the shareholders? How does our answer treat the shareholders? And then you go out from there, how does it treat the advisor, et cetera. But my thought process, when other people's money is involved is what is in the best interest of shareholders. And that's my passion.
Jack: Let's think outside the realm of investing. What are you best at outside this money stuff? What turns you on, what gets you excited? Who is Paul Saint-Pierre?
Paul: I'm always trying to answer that question myself. You know, I've been in the investment world for many years. I know we want to step outside of that. But I think I touched on it briefly, whether it's your personal life or your investment life or what you're doing with your own money or other people's money, I keep coming back to risk and return. And you can deal with risk and return in your personal life and in your investment portfolio. So, in your personal life, you go through life, you pick your college, you pick your career, you pick your partner, you decide how many children you want, et cetera. There may be other life events in there and a lot of those decisions feature risk and return.
Yeah. I think until actually the hardest thing for everybody to really grapple with is what are the risks and how do you qualitatively and quantitatively, decide what is the expected return from those actions. So, that can be layered in a personal life and your investment life and many other decisions that confront you. That makes this one of the toughest things to answer and that is the puzzle keeps me awake at night most of the time.
Jack: Well, that leads to my favorite question, when I have in these kinds of conversations. I suspect I know where the answer's going to go, but I'm going to ask it anyway. What drives you crazy? What just makes you want to pull your hair out?
Paul: What drives me crazy is when there's a lot of white noise around the minutia. And, if we just take qualified Opportunity Funds for example, right now it's all about tax. Everybody's talking about tax, this tax, that tax regulations, what's in the next phase. And you know, in a way that's great to get it right, but in a way drives me a little bit crazy because we've, we still haven't addressed the pitchers to how are we going to improve these communities for the social impact and the economic development impact. So, are we really doing good with our money and our investors money for the purpose it's intended and how do we protect the downside?
So, what drives me crazy as sort of these micro-level discussions without looking at the totality of the bigger picture, we all fall into that trap, right? We have to pull ourselves out of that and say, what's the bigger picture here that we're trying to accomplish? That's where the dialogue needs to go.
Jack: Well Paul, I think we're really getting a picture of what drives you, who you are. And it resonates with me as somebody who went through that 2007, ‘08, ‘09. The pain of it managing, recognizing and mitigating risk. I appreciate the conversation today. If our listeners want to get a hold of you to find out more about PSP Advisors and how you can help them, what's the best way for them to do that?
Paul: Thank you Jack. My LinkedIn page, which is Paul Saint-Pierre has a wealth of information about PSP Advisors. Its services, and my own professional experience. My email is Paul@psp-advisors.com and one of these days I'll get a website done. Business deserves a lot of attention to get this program right, but thanks for asking Jack. I'm easy to find on the Internet.
Jack: Well good. And I will remind our listeners that as always, Paul's contact information be available on the podcast webpage. Paul Is there anything that you want to add before we sign off for the day?
Paul: We’re at the first inning on this Qualified Opportunity Fund stuff, there's a lot of work to go, a lot more education. We have a long way to go and I know we'll get there. I'm very optimistic about the program.
Jack: Thank you. Paul Saint-Pierre of PSP Advisors. And for the OZExpo, I am Jack Heald. This is the OZExpo Podcast. We will talk to you next time.Announcer: This podcast is for informational purposes only and does not constitute legal tax or investment advice. For specific recommendations, please consult with your financial, legal, or tax professional.
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