During the past five years, public master limited partnerships (MLPs) have delivered median total returns of 15.1% versus 3.4% for the S&P 500. MLPs have outperformed the S&P 500 benchmark for the past 10 years as well. Currently, 46 of 59 MLPs are energy-related (owning pipelines, gas-gathering systems, liquefied natural gas shipping assets, propane and coal), and more are likely coming to market. Why? "They have been able to provide better returns, and with lower risk, than the S&P 500 Energy Index," analyst Yves Siegel with Wachovia Securities told Houston Energy Finance Group members recently. But MLPs suffer from a paradox, he said. How can they grow if they do not reinvest their cash flow into infrastructure, but instead, have to pay it out in distributions to unit-holders? After all, those with the greatest distributions tend to trade at higher multiples. MLPs have to access growth capital, whether equity or debt, through the public markets, but Siegel thinks that's good. "If their project is not good enough to attract that external capital, then maybe management needs to rethink the project." In 2005, MLPs very successfully tapped public markets, raising about $10 billion in debt and equity, and there were 10 IPOs in the sector, including two offerings by general partners. Although MLPs are primarily popular with retail investors, Siegel sees that changing eventually. "As MLPs grow larger and there are more of them, institutional investors can't ignore this class of investment," he said. Consolidation between MLPs will happen, he added, but investors should make sure that any merger is more than just an exit strategy for someone, and instead, is creating a viable long-term business model.
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