MLPs are companies that are structured as partnerships, providing tax and other benefits that they pass on to their investors.

MLPs must earn at least 90% of their income from qualifying activities related to natural resources—including exploration, development, mining or production, processing, refining, transportation, storage, and marketing—and real property leasing and sales. Most MLPs are energy-related, but we believe that the MLP structure can be applied to a much broader spectrum of companies. Currently, there are approximately 100 publicly-traded MLPs, ~70 of which are energy-related.

MLPs distribute cash quarterly to their investors and are valued on a yield basis. When public, MLP limited partnership interests (called “units”) are traded on public stock exchanges like the NYSE and NASDAQ.

Tax Savings

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.

Value Creation

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.

Alignment

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.

MLPs consist of a general partner (GP) and limited partners (LP) interests.

Limited Partners

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.

General Partner

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 MLP structure offers many benefits to their owners and managers, including the following:

Higher Valuation

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.

Control

The general partner can retain control of the asset while typically maintaining just a 2% equity interest in the partnership.

Future upside

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.

 

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