Transcript

Announcer:
0:03
Paul Saint-Pierre's distinguished career has been marked by a single overriding passion to protect the investor, both individual and institutional from risks seen and unseen. We talk with him about the brave new world of Opportunity Zone investing and the risks there in, on today's episode of the OZExpo Podcast.:

Announcer:
0:26
Welcome to the OZExpo Podcast. Where we talk with the people who really know the Opportunity Zone market. From investors, fund managers and developers to tax experts, politicians and attorneys. The most influential voices in the Opportunity Zone industry are here on the OZExpo Podcast.:

Jack:
0:47
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:
0:59
Hi Jack. Thanks for inviting me to the show today.:

Jack:
1:03
Certainly. Good to have you here. Well, I see that you've got a pretty interesting background, especially as regards to how you got to the Opportunity Zone environment, but before we talk about Opportunity Zone, let's talk about you. Who are you? How'd you get started? How'd you end up here?:

Paul:
1:22
All right, well I'll try to keep it short because it can be a long story. You know, Jack, I've been, probably have close to it 35, 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 be help them pick a 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 a one off co-investments. From there, I went on to the REIT world, 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 So, I had a significant REIT experience with both private REITs and public REITs. I've also served as a, I 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:
3:13
Oh, you know what. I'm going to stop you right there because I wouldn't ordinarily do this, but yeah,:

Paul:
3:20
Yea, okay.:

Jack:
3:21
I read your comments to the IRS, back in what was it, February?:

Paul:
3:25
February 14.:

Jack:
3:26
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 ...:

Paul:
3:36
Yea.:

Jack:
3:37
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, 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:
3:54
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, many years in real estate, investment strategies and funds and vehicles coupled with, you know, 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, for the betterment of, of these Census Tracts.:

Jack:
4:45
So tell me about your company, PSP Advisors and specifically the role that it serves in the OZ Market.:

Paul:
4:53
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, 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? Um, 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 and fund to funds Opportunity Zone strategies is merely a subset of those three or four key strategies that I just, So, 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 here, 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 tremendous, many years of fund experience and that seems to be pretty well service, but I'm also available to help a fund sponsors. Uh, think through their strategy on funds.:

Jack:
6:52
We just, we just got guidance from Treasury last week. The guidance we've been waiting for quite a while. 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 and you know, where you think there might be some holes still.:

Paul:
7:10
Yeah, Jack, I'm 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 the, 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, 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:
8:04
You know, one of the points that you made in your comments to the IRS. 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 with it as an investor, when you exit a position you're required to sell to a non-related party. Was that addressed and if so, how?:

Paul:
9:20
Yes. Um, I served several years in terms of trading, private equity interests for institutional investors. So, this really comes from experience. I think, 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 alleviate some of their concerns about the vagueness of the exit strategy for Opportunity Funds.:

Jack:
9:42
Okay. I will confess, I'm not clear now because the point you made was that the requirement to sell to an to an unrelated party would almost certainly drive discounted prices. Are you saying that it was, they're unrelated party phrase that was was addressed.:

Paul:
10:01
So, 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:
10:21
All right. Okay. Now I get it. Thank you. Another comment that I thought that you made to the IRS, which really caught my eye because, you know, 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:
10:52
Good point. You know, Jack, I've been, in my experience, I've serviced major, 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 look at, when I step back and look at the purpose here and the intent to, to lift up depressed neighborhoods, I feel that all of these, many of these funds being created, it would be great if everybody could invest in these 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 and wealth account excluding your home or to be a qualified purchaser, which is more than $5 million. So, that's a relatively high hurdle. My goal, I hope, is that these programs are created So, that anybody and everybody can invest in them, but it's gnarly. It's the issue is around security laws and what is, what's the security being issued. But there are ways to, to create those securities. There are ways to create those offerings So, that retail investors also can invest in these programs and, and improve these neighborhoods, these communities.:

Jack:
12:34
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 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:
13:06
Yeah, I remember it very well. I was organizing a, 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 and 2007 and we were launching and okay. And the end of 2007 and I remember distinctively, you know, the headlines around Bear Stearns and the, you know, the, the, the near instant collapse of bear Stearns. And I remember distinctively,:

Jack:
13:45
I can quote almost to the day it happened.:

Paul:
13:47
Yea.:

Jack:
13:47
I mean it is seared into my mind.:

Paul:
13:51
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, very significant events. And I mentioned it to our management, these are significant events and we really need to understand risk.:

Paul:
14:15
We need to understand the risk and the performance that we're doing, but more importantly, how are we protecting the downside and have we protected the downside? I think that's really the lesson learned for all programs going forward is do we remember the lessons? Uh, do we remember those 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.:

Paul:
14:58
And So, there's, you know, there's a lot of lessons learned from, from derivative investments and lack of transparency from the debacle, you know, the depression of 2007 to 2008. And, unfortunately, you know, it's easy to forget, but, we, 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:
15:36
You know, listenting to you talk about, "Have we learned the lesson?" I'm reminded, you know, you and I have, would have grandparents who went through, through the depression.:

Paul:
15:43
Yes.:

Jack:
15:43
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, when the Fed decided to start dumping dollars into equities. And that lesson, although there's certainly an intellectual component to it, for me, that lesson was seared into my body. Um, I mean, there's literally a visceral response and I suspect that 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:
16:37
You know. I also remember the 1980 debacle when the SNLs, were virtually put out of business due to real estate syndications and all of that. Yeah. Again, that was again, 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 it's 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.:

Paul:
17:31
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, well, I coined a word on this one. It's called skin in the gain GAIN. And that's the word I use, is "skin in gain" for the Opportunity Funds. It's who all 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 p referred investors are going to feel a lot more comfortable if they see other kinds of money that are pointed towards these deals. A point about that Jack, is when you look at how the tax bill was scored, for Congress. All right? Where they were evaluating the cost and benefit of the bill over 10 years. The congressional analyst penciled out 3/4 of the money for this program would come from corporate investors and 25% would come from individual investors are taxpayers, corporate taxpayers, individual taxpayers. We see a lot of, we see a lot of gymnastics and we see a lot of scaffolding air pointed towards individual investors.:

Paul:
18:57
Where is the corporate tax payer and 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's running about six years late, there was something like $700 billion of capital gains on corporate tax returns. There's another $400 billion of, 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 million dollar question that we really need to have that discussion about someday.:

Jack:
19:59
I would like to expand a little bit beyond that because I hear, what I hear as you speak. I would describe it as passion, a real passion for protecting the investor. Where does that come from? That's, that's more than, that's more than merely an intellectual exercise there. I hear heart behind it. I hear passion. Where's that come from?:

Paul:
20:24
Yeah. You know? Um, for most of my career I've, I've served and So, 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.:

Paul:
20:52
You cannot interlace that with, you know, trading ahead of the investor. You can't make any decisions that deteriorate the investors 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 has scrutinizes this stuff. To become qualified registered investment advisors is very common in the investment company world and the institutional world in terms of this structure 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:
22:10
Let's think outside the realm of investing. What are you best at ouside this money stuff. What turns you on, what gets you excited? Who is Paul Saint-Pierre?:

Paul:
22:24
I'm always trying to answer that question myself. You know, I've been in the investment world for many, 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 know, you, 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, 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:
23:54
Well, that leads to my favorite question, when I have in these kinds of conversations. Um, 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:
24:09
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 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, how do we protect the downside? So, what drives me crazy as sort of these, these micro level discussions without looking at the totality of the bigger picture, we all fall into that, 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. I think also:

Jack:
25:33
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, 8, 9. The pain of it managing, recognizing and mitigating risk. I appreciate the conversation today. If folks, 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:
26:02
Thank you jack. My LinkedIn page, which is Paul Saint-Pierre has a wealth of information about a PSP Advisors. It's services, my own, my own professional experience. Um, 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:
26:37
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:
26:50
Were at 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:
27:05
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:
27:17
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.:

Announcer:
27:31
This is a presentation of OutClick Media Corporation.:


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