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The General Partners of MLPs

Apr 26, 2016

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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.

Category: Articles

Topics: MLPs

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Investments in securities of MLPs involve risk that differ from investments in common stock including risks related to limited control and limited rights to vote on matters affecting the MLP. MLP common units and other equity securities can be affected by macro-economic and other factors affecting the stock market in general, expectations of interest rates, investor sentiment towards MLPs or the energy sector, changes in a particular issuer’s financial condition, or unfavorable or unanticipated poor performance of a particular issuer (in the case of MLPs, generally measured in terms of distributable cash flow).

The Fund invests in the energy industry, which entails significant risk and volatility. The fund is non-diversified which represents a heightened risk to investors. Furthermore, the fund invests in small and mid-capitalization companies, which pose greater risks than large companies. The Fund also expects to pay distributions, which will be treated as a return of capital for tax purposes rather than from net profits and shareholders should not assume that the source of distributions is from the net profits of the fund.

The Fund derives substantially all of its cash flow from investments in equity securities of MLPs. The amount of cash that the Fund will have available to pay or distribute to you depends entirely on the ability of the MLPs that the Fund owns to make distributions to their partners and the tax character of those distributions. Neither the Fund nor the Adviser has control over the actions of underlying MLPs. The amount of cash that each individual MLP can distribute to its partners will depend on the amount of cash it generates from operations, which will vary from quarter to quarter depending on factors affecting the energy infrastructure market generally. Available cash will also depend on the MLPs’ level of operating costs (including incentive distributions to the general partner), level of capital expenditures, debt service requirements, acquisition costs (if any), fluctuations in working capital needs, and other factors. The MLP holdings of the Fund expect to generate significant investment income, and the Fund’s investments may not distribute the expected or anticipated levels of cash, resulting in the risk that the Fund may not have the ability to make cash distributions as investors expect from MLP-focused investments.

Carefully consider the Funds’ investment objectives, risk factors, charges, and expenses before investing. This and additional information can be found in the Funds’ summary or full prospectus, which may be obtained by calling 1-888-GX-FUND-1 (1.888.493.8631), or by visiting globalxfunds.com. Please read the prospectus carefully before investing.

Global X Management Company, LLC serves as an advisor to the Global X Funds. The Funds are distributed by SEI Investments Distribution Co. (SIDCO, 1 Freedom Valley Drive, Oaks, PA, 19456), which is not affiliated with Global X Management Company, LLC.

Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the funds. Brokerage commissions will reduce returns.