MLPs provide better alignment between investors and management than other corporate structures.
Liquidity for Sellers
MLPs present an attractive liquidity option for sellers because they can offer up-front liquidity, ongoing tax-shielded income and the potential for increased upside over time as the company continues to grow.
As partnerships, MLPs generally don’t pay corporate-level taxes. So MLP owners (and managers) don’t suffer double taxation on the dividends they receive from the MLP, which are often at least partially tax-deferred.
MLPs offer the opportunity for increased value because they are valued based on yield in a publicly-traded vehicle rather than on a private, EBITDA-based multiple.
Lower Cost of Capital
MLPs are valued on a yield basis and often have a lower cost of capital than other corporate structures.
MLPs consist of a general partner (GP) and limited partners (LP) interests.
The general partner is typically owned by management (and the prior equity investors). The GP runs the daily operations of the partnership, usually owns a 2% equity stake in the MLP and is entitled to receive incentive distribution payments that can greatly increase the value of their ownership over time.
The limited partners (or common unit holders) provide capital to the MLP and receive quarterly cash distributions in exchange. They have no role in the operations or management of the MLP and generally purchase LP units on the public market.
The MLP structure offers many benefits to their owners and managers, including the following:
The general partner can retain control of the asset while typically maintaining just a 2% equity interest in the partnership.
By owning the incentive distribution rights (IDRs) that are built into most MLPs, management can capture potential upside as they are able to successfully grow their companies and increase their cash distributions to investors.
MLPs are valued based on yield rather than EBITDA multiple. So assets structured as MLPs typically trade at higher valuations in the market than those same assets within a corporate structure.
Tax-advantaged capital for growth
Because they don’t pay corporate level taxes, MLPs often have an advantage in acquisitions over their corporate competitors as they can either pay more for an acquisition and realize the same cash flow accretion or realize more accretion from an acquisition at same acquisition price.
Access to capital
MLPs have traditionally enjoyed good access to capital, which makes financing acquisitions and organic projects feasible.