MLPs: Understanding General Partnerships
- The relationship between an MLP’s general and limited partners can be difficult to understand.
- General partners typically receive incentive distribution rights as motivation to grow assets.
- OFI SteelPath is very selective in owning MLP general partners in order to lessen risk.
A master limited partnership's (MLP) equity ownership is typically divided between limited partners (LP) and a general partner (GP). The limited partners' interest usually equals 98% and is represented by publicly traded limited partner units. The remaining 2% is allocated to the GP.
GPs can appear attractive. Although GPs control just 2% of an MLP, they retain managerial control through the partnership agreement. Additionally, GPs are given incentive distribution rights (IDRs) to incentivize additional growth: Once an MLP's quarterly distribution rate eclipses a certain amount, the holder of the IDR receives an increasing share of total cash distributed by the partnership. Because of IDRs' design, though, investing in GP MLPs can present both significant risk as well as reward. Because of this, OFI SteelPath is very selective in owning MLP general partners, in order to lessen commodity and general economic risk to their cash flow.
To learn more, access Analyst Insight: Understanding General Partnerships.
Diversification does not guarantee profit or protect against loss.
Investing in MLPs involves additional risks as compared to the risks of investing in common stock, including risks related to cash flow, dilution and voting rights. Each Fund’s investments are concentrated in the energy infrastructure industry with an emphasis on securities issued by MLPs, which may increase volatility. Energy infrastructure companies are subject to risks specific to the industry such as fluctuations in commodity prices, reduced volumes of natural gas or other energy commodities, environmental hazards, changes in the macroeconomic or the regulatory environment or extreme weather. MLPs may trade less frequently than larger companies due to their smaller capitalizations which may result in erratic price movement or difficulty in buying or selling. Additional management fees and other expenses are associated with investing in MLP funds. The Oppenheimer SteelPath MLP Funds are subject to certain MLP tax risks. An investment in an Oppenheimer SteelPath MLP Fund does not offer the same tax benefits of a direct investment in an MLP. The Funds are organized as Subchapter “C” Corporations and are subject to U.S. federal income tax on taxable income at the corporate tax rate (currently as high as 35%) as well as state and local income taxes. The potential tax benefit of investing in MLPs depend on them being treated as partnerships for federal income tax purposes. If the MLP is deemed to be a corporation, its income would be subject to federal taxation at the entity level, reducing the amount of cash available for distribution which could result in a reduction of the fund’s value. MLP funds accrue deferred income taxes for future tax liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as capital appreciation of its investments. This deferred tax liability is reflected in the daily NAV and as a result a MLP fund's after-tax performance could differ significantly from the underlying assets even if the pre-tax performance is closely tracked.
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