The Global X research team has created a piece on the General Partners of MLPs, explaining who they are, how they are compensated, and where they stand in the current low energy price environment.
Read the full piece here
Who are the General Partners?
A General Partner is compensated for its management efforts through incentive distribution rights (IDRs), which are a form of carried interest. The structure of IDRs incentivizes a GP to increase the MLP’s distributions to its common unit holders. As the General Partner raises the nominal amount of distributions made by the MLP to predetermined thresholds, the GP receives an increasing percentage of the distribution.
- Because of the presence of IDRs, GPs are often considered a leveraged play on MLPs
- General Partners have more flexibility in distribution payments to shareholders than MLPs. In the current environment, some have elected to cut distributions to reduce debt and to organically fund growth projects
- General Partners are often structured as traditional c-corporations, which means that they do not have many of the tax complications associated with MLPs. Therefore, tax efficient MLP ETFs, mutual funds, and Closed End Funds often have a high percentage of their assets in GPs to avoid fund-level taxation.
Global X offers MLPX, a tax efficient ETF that invests <25% of its assets in midstream MLPs, and the remainder in midstream General Partners and energy infrastructure corporations.