Tax Receivable Agreements – an emerging asset class?

Are tax assets the largest asset class that hardly anyone has ever spent any time thinking about?

Tax Receivable Agreements (TRAs) are contracts that provide their holders with an ongoing stream of payments, typically for around 15 years. They are hybrids of debt and equity and come with a few unique features, including an inverse relationship with changes in corporate tax rates. TRAs that changed hands on secondary markets have historically yielded ≈20% p.a., nearly double the returns provided by comparable direct lending.

Will the buying and selling of TRAs grow into a widely recognised investment class?

Developments in the US IPO market suggest the secondary market for TRAs is set to expand.

Public-market investors, too, should pay attention to this little-known quirk of public company structuring. TRAs appear in a growing number of IPOs and may offer special-situation opportunities, while also introducing additional risks.

"TRA what?"

Even though TRAs have existed for 35 years, most US investors are not familiar with how they work – or, in fact, with their existence.

A TRA is a contract that typically exists between a public company and the pre-IPO shareholders of a partnership going public. The contract requires the publicly listed company to pay a portion of specific tax savings to the pre-IPO shareholders over a set number of years.

The contract provides an annual stream of cash and, as such, is similar to an annuity. Being long-dated and cash-yielding, TRAs can also be compared to royalties from pharmaceutical or music.

Just why do such TRAs come into existence, and what rights do they securitise?

Founders of companies and investors naturally gravitate toward tax-efficient structures. A regular US corporation typically pays 21% corporate tax on profits, but any dividends paid to shareholders then typically incur an additional 37% in dividend tax or 20% on "qualified dividends". Paying taxes at two levels is, understandably, unattractive if it can be avoided.

The US Internal Revenue Service (IRS) has created a range of so-called pass-through entities where the entity pays no tax; instead, taxes are paid by the owners after income is distributed. Best known among these structures are partnerships such as Limited Liability Companies (LLCs, not publicly traded) and Real Estate Investment Trusts (REITs, publicly traded).

Operating a business within a pass-through entity is tax-efficient for its owners, but it becomes a hurdle when taking the business public. An IPO requires the business to be organised as a corporation, meaning taxation once again occurs at both levels.

The solution lies in the so-called Up-C structure, short for Umbrella Partnership-C corporation. This structure uses inefficiencies in the tax code to generate a tax saving, and the right to receive a percentage of these tax savings on an ongoing basis over many years is an ownership right that can even be transferred among different owners.

How it works

In simplified terms, a new corporation ("PubCo") is formed to undertake the IPO. PubCo is the entity in which subscribers invest.

Using proceeds from the IPO, PubCo acquires an interest in an existing LLC. In other words, PubCo becomes a holding company, while the actual business continues to be operated by the LLC.

By acquiring a stake in the LLC, PubCo transfers parts of the IPO proceeds to the original LLC owners. It also creates an asset on its balance sheet equal to the purchase price of the stake. This asset can then be amortised (= gradually written off) over a period, usually 15 years. The technical term for this is an "asset step-up", as the value of the LLC is increased for accounting purposes on the acquirer's balance sheet (for more detail, see the recommended reading at the end of this article). The amortised amount reduces taxable income at the PubCo level, generating a tax saving.

This tax saving is then shared with the LLC founders who sold their interest to PubCo, compensating them for helping to create the tax benefit in the first place. Typically, founders receive 85% of the tax savings, while PubCo retains the remaining 15%. As ever, there are additional complexities – for example, it may be possible to structure these payments so they are classified as income taxed at a lower tax rate, such as capital gains.

The most important point is that, for the LLC owners, the beneficial effect of the TRA largely offsets the loss of being taxed solely at the personal level. Cynics might say this is about as close as one can get to having your cake and eating – and as the remainder of this article will show, they may well be right!  

Source: Mayer Brown "Up-C IPOs and Tax Receivable Agreements" (April 2025).

For a few remaining points – and especially the detailed technical aspects – matters can get quite complicated.

For example, it can be difficult to grasp that these structures typically involve the founders *not* owning any economic interest in PubCo itself. Instead, they remain invest in the LLC, holding the portion of their stake that they chose not to sell to PubCo. Their economic interest in the operating business therefore sits at the LLC level, not at the PubCo level. This means that outside investors subscribing to the IPO own 100% of the economic interest in PubCo. Voting rights for the operating unit then bring everything back into balance: PubCo investors control voting rights proportionate to PubCo's ownership in the LLC (exercised through PubCo's management), while the holders of the remaining LLC interest retain the corresponding voting rights which they can personally exercise.

In a typical Up-C IPO, the founders might sell 30-40% of the economic interest in the operating entity to PubCo and retain units representing the remaining 60-70%.

Such a structure is not necessarily static. For instance, the pre-IPO investors can later convert their remaining interest in the operating entity into PubCo common stock (albeit doing so introduces a series of additional tax issues which may or may not make it attractive to convert depending on that owner's personal tax situation). The company also has various options for making strategic acquisitions and compensating employees: it can issue not only PubCo stock and PubCo options but also partnership units in the operating entity.

By this point, most readers will likely have blanked out.

The illustration below should make this clearer. The link beneath it lets you download a technical, detailed explanation from law firm Mayer Brown. For those interested in more details, the deck explains the subject step-by-step.

Source: Mayer Brown "Up-C IPOs and Tax Receivable Agreements" (April 2025).

Why would anyone opt for such a complex structure, and how can this even be legal?

Up-C structures are nothing new. They emerged in 1990, when IPO lawyers realised they could use seemingly unrelated provisions of the tax code to maximise the proceeds pre-IPO owners could extract from an IPO. Through creative tax structuring, owners can extract up to 20% more value from the transaction.

In 2017, Christopher B. Grady wrote a seminal scientific article on the use of such structures. As Grady put it, going public through an Up-C structure is akin to "supercharging an IPO". In many ways, the Up-C structure is a stroke of genius that deserves recognition.

However, tax-efficient as it is, making use of these structuring options is not without controversy. The tax savings are created and shared in a rather convoluted manner. Subscribers to IPOs often don't understand how these arrangements work or what consequences they may face if the newly floated company doesn't progress as planned or requires structural changes.

Indeed, creating a TRA has long-term implications. For example, the founders of an LLC may have stopped working for the operating business long before the TRA expires. As a result, a company may find itself having to maintain a relationship with these stakeholders for up to 15 years, even though they are no longer actively involved and may now have entirely different interests. The owners of the TRAs, in turn, may find their income depends on a business they no longer work in or have control over. Putting a TRA in place creates a very long-dated set of obligations, and not only financial ones.

Recent proliferation of TRAs

As of early 2025, around 150 publicly listed companies in the US had a TRA outstanding, and more than half of them have come into existence since 2020.

The US IPO market has been improving, and a growing share of recent IPOs have been so-called sponsored IPOs – offerings backed by venture capital (VC) or private equity (PE). VC and PE firms often hold their portfolio companies through structures treated as pass-through entities for US tax purposes, meaning they face the tax issues described above when taking a company public.

Well-known companies that went public in recent years and put TRAs in place include Bumble (ISIN US12047B1052, Nasdaq:BMBL), Birkenstock (ISIN JE00BS44BN30, NYSE:BIRK), MarketWise (ISIN US57064P2065, Nasdaq:MKTW), and McAfee Corporation (since taken private). The recent wave of IPOs involving TRAs also includes companies that went public through a SPAC – a route some critics argue combines a convoluted structure with an unconventional way of going public.

To be clear: these firms' prospectuses have always contained additional disclosures explaining the Up-C structure. Investors reviewing such prospectuses will find a structure diagram, details on the dual-class stock structure necessary to make the arrangement work, and a separate section highlighting the additional risks factors introduced by certain features of the structure.

At times, the use of TRAs has already led to buyer's regret.

Retail investors typically do not fully understand these structures when buying into a company and may later realise that the set-up benefited the pre-IPO owners more than themselves. Who reads prospectuses anyway? A growing number of publicly listed companies have since faced pushback from their investors, once some of the structures' pitfalls became more visible.

Companies can also undergo a change of control, leaving the new owners with a structure that may be disadvantageous for any number of reasons.

Then what?

Unwinding and monetising TRAs

It is possible for a company to exit a TRA ahead of its expiry, and doing so may even create opportunities for advantageous deal-making.

For example, companies can choose to trigger an early termination of payments due under a TRA. Nothing prevents the counterparties from negotiating a lump-sum settlement of all estimated future payments expected to flow under the agreement. Complications arise when a publicly listed company doesn't have the cash to fund such a settlement, or when multiple parties with differing interests cannot agree on a solution and a stalemate develops. That is before even considering the challenge of valuing such an early payoff – or the difficulty of finding buyers for a highly specialised asset if the owner of TRA rights wishes to sell them in an individual transaction.

To determine the present value of future payments under a TRA, one has to look far into the future. Typically, at least five years remain when a company seeks to exit a TRA, and sometimes more than ten. Over such long periods, much can change. A profitable business may become unprofitable, in which case no tax savings would arise. The future earnings (and taxes) of some businesses will be easier to estimate than those of others. In addition, the relevant jurisdiction could raise or lower its tax rate. Somewhat counter-intuitively, a rising tax rate makes TRA payments more valuable, while low tax rates have the opposite effect.

Most recently, the tax changes implemented under the One Big Beautiful Bill Act (OBBBA) led to an overall reduction in corporate taxable income in the near term, which will have affected the present value of all existing TRAs. US law firm Houlihan Lokey examined this topic in its quarterly report on developments in the TRA sector.

The entire subject is extraordinarily complexity even at the level of basic mechanics – and individual circumstances ensure that no two cases are alike.

Such complexity also creates opportunities for investors willing to dig deeper. Early indications suggest that investing in TRAs is emerging as a strategy for those seeking higher ongoing yields.

Secondary market for TRAs

In 2005, less than 1% of US IPOs involved a TRA.

Over the past few years, this share has grown to around 8% of all IPOs.

Inevitably, this has led to an increasing number of TRAs being terminated early. In total, about 100 TRAs created by US public companies have been terminated during their lifetime. Roughly 60% of these terminations were due to M&A or take-private events, while the remainder was evenly split between companies buying back TRAs to simplify their structures and companies abandoning TRAs during bankruptcy restructurings.

All currently outstanding TRAs have a combined value of approximately USD 30bn. This makes the market large enough – just about – for specialised secondary buyers to consider buying TRAs from existing owners. Not all pre-IPO owners are willing to wait 15 or more years to fully collect the cash flows to which they are entitled under a TRA. They can simply sell their rights under the TRA and cash out early, provided they find a buyer willing to pay the present value of the future income stream.

The cash flows offered by TRAs combine elements of equity investing with elements of debt – along with a few unique features, such as the negative correlation with corporate tax rates. For example, if an investor believes the next US administration will significantly increase corporate taxes, they could get investment exposure to their thesis by buying up TRAs.

Source: Mayer Brown "Up-C IPOs and Tax Receivable Agreements" (April 2025).

At a time when direct lending typically generates returns of 10-12% p.a., investors buying TRAs on the secondary market can typically achieve 18-22% p.a. Those providing liquidity to sellers of TRAs usually acquire an asset that ranks senior to preferred and common equity in a company's capital structure, but junior to secured debt. They are rewarded for taking a long-term perspective in situations where sellers prefer (or need) short-term liquidity. By and large, these returns are uncorrelated with the broader market.

The price for these higher returns is the extraordinary complexity of the transactions. Typically, analysing and preparing a TRA purchase involves a two- to four-month process.

The upside includes opportunities to structure transactions in highly creative ways. Essentially, anything goes, provided all parties agree to the solution. For example, current owners can retain residual rights, while the buyer may establish special provisions if the company fails to generate sufficient profits during the initial term of the TRA. If a company wanted to terminate a TRA, it could typically be structured so that an outside funder provides liquidity if needed.

Source: Mayer Brown "Up-C IPOs and Tax Receivable Agreements" (April 2025).

Executing such transactions requires expertise typically found at special opportunities funds, private credit funds, and family offices. Deal sizes range from USD 25m at the lower end to USD 500m at the higher end, making them too large for most private investors but often too small for many institutional investors.

This naturally raises the question: are there any situations in which private investors with less deep pockets can still benefit?

Recent cases

In 2025, there have once again been several cases where public companies ditched their TRA while remaining publicly listed. Here are a few examples (in no particular order):

• Crescent Energy Company (ISIN NYSE:CRGY) announced the simplification of its corporate structure by eliminating its Up-C framework. By converting its multiple share classes into a single class, the company believed it was "aligning economic and voting interests". It anticipated "that simplifying its organizational structure and capitalization table will unlock shareholder value through reduced complexity, improving clarity of financial presentation, eliminating certain compliance and reporting costs, and enhancing accessibility for a broader pool of future investors."
• Bakkt Holdings (ISIN US05759B3050, NYSE:BKKT) announced plans to eliminate its existing umbrella Up-C structure through a reorganisation. CEO Akshay Naheta explained: "Simplifying our capital structure marks a pivotal step in positioning Bakkt for its next phase of growth. While the Up-C framework originally preserved pre-IPO tax attributes, we believe it has, over time, constrained Bakkt's access to a broader universe of institutional investors. Transitioning to a single-class structure enhances transparency, investability, and scalability – aligning Bakkt's governance with the long-term interests of all shareholders."
• Rocket Companies (ISIN US77311W1018, NYSE:RKT) collapsed its Up-CO structure into a single entity to "simplify its organizational and capital structure". As the company put it: "The Up-C collapse will simplify Rocket's organizational structure, enhancing equity liquidity, improving its ability to use its common stock as acquisition currency in acquisition transactions …. and creating a clearer corporate profile."
• Vivid Seats (ISIN US92854T2096, NASDAQ:SEAT) announced an agreement to terminate its TRA. By issuing shares to the beneficiaries of the TRA, the company freed itself from future payout obligations and can now retain all tax savings. Among other benefits, it expected USD 1m in annual cost savings from reduced compliance and reporting burdens. As the complexities described above illustrate, operating under a TRA typically requires significant ongoing work from lawyers and professional advisors.
• Bumble (ISIN US12047B1052, Nasdaq:BMBL) announced that it would spend USD 186m to settle all future payment obligations under its TRA and terminate the agreement entirely. The company aimed to reduce long-term obligations and create greater flexibility to pursue future growth initiatives.

Readers will notice a clear theme in these announcements – reducing complexity, enhancing investability, and creating the flexibility to pursue new growth opportunities. Clearly, restructuring or terminating a TRA can be a corporate event that generates both short- and medium-term benefits for shareholders.

As such, it's worth monitoring companies where changes to an existing TRA are either a real possibility or already underway. There may be short- or long-term benefits available to investors who act before the broader market recognises what is happening.

That said, these structures also bring additional risks. If there is one takeaway from this article, let it be an increased awareness that investing in any company with an Up-C structure can involve risks that are uncommon in other corporate settings.

The following section is likely the most relevant part for private investors who have exposure to US companies or are considering investing in US IPOs.

Emerging legal risks

For all the benefits an Up-C IPO offers, it also introduces additional risks.

With increased use comes increased scrutiny. Investors and their lawyers have already developed a range of legal arguments challenging aspects of these structures.

Recent cases include complaints that pre-IPO investors continue to exert voting control over the public entity, even though their sole economic interests exist at the level of the operating entity. This creates the risk that pre-IPO investors could support decisions that disproportionately benefit their own economic interests at the expense of public shareholders. Board-level governance can help manage these risks, but added complexity inevitably increases the potential for disagreements over what constitutes "fairness".

In the case of Schumacher v. Mariotti, shareholders alleged that pre-IPO investors were double-dipping on dividends and distributions at the expense of external shareholders. The company maintained that these matters were fully disclosed to shareholders. The case seems to be ongoing still.

A case that has already produced a notable decision was the May 2024 opinion of the Delaware Court of Chancery in a suit against Lone Star over the going-private transaction of a portfolio company it had previously taken public. Following the IPO of Foundation Building Materials, Lone Star retained a 65.4% interest, board seats, and the right to have the TRA terminated if the company was sold. The court found it conceivable that Lone Star's receipt of an early termination payment under the TRA could have incentivised a sale, even if remaining a standalone company would have been preferable for minority stockholders. This case has already caused reverberations for all future cases, as any takeover bid launched by a controlling shareholder that includes a TRA termination payment will now require an entire fairness review. Such a transaction must not only be approved by an independent special committee of the board, but also receive an informed vote from a majority of the minority stockholders.

Law firm Cleary Gottlieb's analysis of this legal case highlights the sometimes unexpected legal complications created by TRAs. It's now safe to conclude that courts are likely to apply heightened scrutiny to early termination payments, particularly when such payments are substantial or disproportionately benefit a controlling party. This, in turn, can drag out the M&A process and drive up significant legal costs. Overall, it's a mind-boggling subject that presents a risk minefield for independent directors who must navigate these structures when other directors recuse themselves due to conflicts of interest.

(Again, I do wonder how many readers are still awake at this point.)

Last but not least, disagreements often arise over the valuation of a terminated TRA. In the case of GoDaddy (ISIN US3802371076, NYSE:GDDY), external shareholders felt short-changed when IPO sponsors KKR and Silver Lake monetised their TRA rights by having GoDaddy buy them out for 850m. Shareholders alleged that the buyout price was excessive and constituted a breach of the duty of loyalty, given that directors affiliated with KKR and Silver Lake remained on the board. This case remains ongoing.

Although this is a relatively niche subject, legal issues related to TRAs can appear at surprisingly prominent companies. For example, Blackstone (ISIN US09260D1072, NYSE:BX) recently reportedly added additional risk disclosures related to potential issues arising from its TRA. The company's TRA requires payments to senior managing directors for tax benefits derived from the increased tax basis following its IPO reorganisation. Reportedly, there is a risk that this TRA could result in obligations exceeding the actual tax savings, potentially forcing Blackstone to incur debt to meet these payments. Clearly, this is not something that shareholders can simply ignore. Interestingly, the TRA is also referenced in S&P Global Ratings' recent report on Blackstone's unsecured senior note issuance. When Blackstone went public in 2007, its use of a TRA made headlines in The New York Times (see below) and Reuters. At the time, Blackstone issued a statement saying that "a front page article in The New York Times is filled with inaccuracies, myths, and misrepresentations that give a false impression of Blackstone's tax situation and that of its partners. Blackstone is not in any way taking advantage of tax loopholes, but rather is using a standard tax method used widely by private and public companies when business assets are sold."

Source: The New York Times, 13 July 2007.

Another potentially high-profile pending case involves KKR (ISIN US48251W1045, NYSE:KKR). A US pension fund alleged that the firm's founders, Henry Kravis and George Roberts, unfairly secured USD 500m worth of shares for themselves by terminating a TRA when they transitioned day-to-day management of the private-equity firm to their successors in 2021. The lawsuit also named co-CEOs Scott Nuttall and Joseph Bae as beneficiaries of arrangements that allegedly enriched them at the expense of other shareholders. While such practices have been common among industry titans, they may yet come back to bite the private equity industry. The Wealth Advisor reported in August 2024 that "judges issued several decisions in favor of plaintiffs in other instances."

In fairness, all of the companies facing these legal challenges vigorously argue that they are not at fault, and most of the cases are still ongoing. After all, EVERY corporate structure carries risk, and the rationale behind TRAs aligns with long-established accounting and tax principles. The Up-C structure has been an effective tool for addressing a complex intersection of tax, capital markets, and M&A challenges. It's reasonable to argue that its complexity, cost, and legal risks are outweighed by the tax savings and other benefits. A few legal issues along the way are to be expected and should not preclude the use of these structures.

Equally, it's reasonable to expect that as Up-C structures become more widespread, there will be increased scrutiny, a greater number of cases going awry, and heightened investor awareness.

TRAs will gain in visibility

It's an evolving landscape. Eventually, one high-profile case of an Up-C structure and its TRA going wrong will probably make front-page news and become widely known. The KKR case has the potential to attract significant notoriety if the company loses.

In the meantime, the number of public companies with TRAs in place is likely to grow. PE and VC firms have a backlog of portfolio companies they want to take public, with estimates generally hovering around USD 3tr in aggregate value. For many of these companies, implementing a TRA may be the obvious course once the IPO market provides an opening.

How investors will judge Up-C structures outside of IPO hype periods remains to be seen. For now, those who are aware of their exposure to these structures will likely proceed with increased caution. The sheer complexity alone – which this article has barely scratched the surface of – warrants prudence. Emerging and concrete legal risks will likely add to that caution, although experience suggests that at least some legal arguments will ultimately be decided in favour of defendants.

Many investors already view these structures as somewhat underhanded. As Brady noted out in his seminal 2017 review, critics have described Up-C structures as examples of "opaque secretive financial engineering", "gimmicks", or even "obscure dirty little secrets". To be clear, there is nothing illegal about them. However, there is a valid argument that sometimes, tax-avoidance structures can be too clever for their own good. This conclusion seems to shine through in the statements from several companies that have recently abandoned their TRAs.

That said, there are likely a few special situations where investors can benefit from TRAs:

• The stocks of companies that terminate TRAs to free themselves could be primed for an upgrade. For example, a company preparing for a potential takeover could increase its attractiveness to acquirers by clarifying its financial outlook through eliminating its TRA, which would require finding the spare cash to pay out the TRA's future obligations at a discounted rate in a single payment.
• Secondary market purchases of TRA rights could offer lucrative opportunities for yield-seekers – though this requires the ability to write large cheques and the willingness to put in a lot of work.
• M&A transactions involving companies with TRAs in place could create arbitrage opportunities for those who are faster and more skilled than other market participants at understanding how these situations play out.

Of course, this is a niche subject and will remain so.

But that's precisely where the opportunity lies.

TRAs are a nuanced and complex asset class where investors who actually read the legal documents can gain an edge and achieve compelling risk-adjusted returns. The potential for generating alpha will always attract interest.

As the TRA specialists at Houlihan Lokey concluded in their most recent report: "TRAs represent a unique and growing asset class that provides a bridge in negotiations between buyers and sellers when tax assets are present."

Given how new they are, there is likely plenty of white space for innovation. Who knows – investing in TRAs could one day become as mainstream as other once-esoteric asset classes, such as music and pharmaceutical royalties.

In any case, if you are a regular investor in US public companies, you can expect to hear more about TRAs in the future.

In the meantime, watch out for the risks discussed above in companies with outstanding TRAs!

For further reading on the subject, I recommend the following articles:

• "Finding the pearl in the oyster: supercharging IPOs through Tax Receivable Agreements" (Christopher B. Grady in Northwestern University Law Review, 2017)
• "Private Benefits in Public Offerings: Tax Receivable Agreements in IPOs" (Vanderbilt Law Review, April 2018)
• "Up-C IPOs and Tax Receivable Agreements" (Mayer Brown, April 2025)
• "What are 'Asset Step Ups'?" (Financial Edge, November 2020)
• "TRAs: A Little-Known And Even Less Understood Asset Class" (Forbes, February 2023)
• "The Up-C Goes to Court: Managing the Emerging Risks of an Advantageous Tax Structure" (Debevoise & Plimpton, Private Equity Report Spring 2023, May 2023)
• "How Tax Receivable Agreements Are Created And Why They Matter" (Forbes, March 2024)
• "How a TRA (Tax Receivable Agreement) Impacts Your Deals" (ReVerb, October 2024)
• "Comparing TRAs With The 'Belle Of The Ball,' Direct Lending" (Forbes, September 2025)

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