A master limited partnership (MLP) is structured so that the general partner of the partnership – often a corporation – takes on all of the risk and management duties for the company, while the limited partners – i.e., shareholding investors – have their liability limited to their investments. What’s more, an MLP doesn’t incur a tax liability by generating profits, but only when distributing profits to its partners – this difference in tax treatment can result in tax advantages.
An MLP differs from an “LP” – a normal “limited partnership” – because an MLP’s ownership interests can be traded publicly. In order to meet regulatory requirements for MLP tax treatment, MLPs must invest a stipulated minimum proportion of their funds in specific categories of investments, and they must distribute a stipulated minimum proportion of their proceeds directly to investors. This makes MLPs income-oriented investments.
There are two primary drivers for increased interest in MLPs:
- The low-yield environment: This has been caused by the ongoing monetary-stimulus operations of the Federal Reserve and other central banks. Since MLPs are yield-oriented, and since traditional yield-oriented investments are underperforming, yield-seeking investors are hungry for alternatives.
- The U.S. hydraulic fracking boom: This has increased interest in the energy sector, and many energy-services firms are structured as MLPs – but with the crossover appeal to yield investors, energy MLPs are even hotter than traditionally structured energy firms.
These two factors have led to an increase in the number of energy MLP offerings, including two that have been announced or launched recently: The Vertical Capital Innovations MLP Energy Fund (VMLPX), announced on May 31, 2014; and the Salient MLP Fund (SAMCX), launched on April 1, 2014.
Vertical Capital Innovations MLP Energy Fund
Vertical Capital Markets Group’s Vertical Capital Innovations MLP Energy Fund (VMLPX) will be sub-advised by Capital Innovations, LLC. Its team of managers has expertise in the energy industry and financial markets, and experience managing MLP assets with the perspective of an MLP owner, operator, and acquirer – sort of the same mindset adopted by private equity firms in takeovers. Durable cash flows will be a primary focus of the fund. Michael Underhill, the CIO and CEO of Capital Innovations, will oversee the initial portfolio construction and subsequent management of the fund, along with portfolio manager Susan Dambekaln.
Vertical Capital Markets Executive Vice President John Harline says that as the U.S. increases its oil production, thanks to hydraulic fracturing (“fracking”) and the shale boom, there will be a greater need for energy-services firms that transport and store natural resources. Currently, there are more than 130 such publicly traded MLPs with total market capitalization of nearly $500 billion. The Vertical Capital Innovations MLP Energy Fund will seek opportunities within this space in pursuit of a high level of risk-adjusted return.
Shale oil sales are projected to surpass $40 billion in 2014, up more than 11% from 2013’s total. Shale-oil firms typically rely on MLP energy-service firms for transportation and other value-added services. Europe’s desire to become less dependent on Russia for its energy needs is another potential driver of the energy MLP boom. “The greater need for energy infrastructure will be a boon for MLPs,” according to Harline. “The Vertical Capital Innovations MLP Energy Fund can help investors and advisors take advantage of this opportunity.”
For more information about the Vertical Capital Markets Group, visit the firm’s website.
The Salient MLP Fund
While the Vertical Capital Innovations MLP Energy Fund is still pending listing, the Salient MLP Fund (SAMCX) launched on June 17, 2014. The fund has $15.9 million in assets under management, and requires a $2,500 minimum investment for Class A and C shares, and $1 million for Class I shares. The management fee is 0.95%. This is Salient’s second mutual fund focused on MLPs. The firm also manages two publicly traded closed-end MLP funds: the Salient MLP & Energy Infrastructure Fund (Ticker: SMF) and the Salient Midstream & MLP Fund (Ticker: SMM). The boards of the two closed-end funds have approved a merger of the funds, which is slated for the fourth quarter of this year subject to shareholder approval.
Gregory Reid, a partner and managing director of Salient, says that the low-interest rate environment and economic uncertainty have increased investor-interest in alternative, yield-oriented investments: “Many investors seeking attractive yields, potential inflation protection, and distribution growth are turning to MLPs,” which he says have “demonstrated a compelling historical performance” since 2006. Focused on the “midstream energy industry,” the Salient MLP Energy Fund invests at least 80% of its assets in the energy MLPs, with the remaining 20% open to other energy opportunities, as well as money market funds, actively managed and indexed ETFs, exchange-traded notes, U.S. government securities, debt securities, and/or cash and cash-equivalents.
Reid says the fund’s strategy puts an “emphasis on seeking cash flow stability, balance sheet strength, and management experience.” He describes the firm’s mutual fund structure as “investor-friendly” with daily liquidity, quarterly distributions, and 1099 tax reporting.
For more information about the Salient MLP Fund, visit the fund’s page at the Salient Partners website.