Once a staple of the MLP sector, IDRs are fast going the way of the two-way football player and dodo bird as Alerian reports the vast majority of MLPs no longer have IDRs.
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As master limited partnerships (MLPs) attempt to attract new investors, incentive distribution rights (IDRs) continue to lose popularity. IDRs haven’t totally disappeared from the MLP space, but the majority of the sector has eliminated them.
According to Alerian, about 86% of the companies in the Alerian MLP Infrastructure Index have eliminated their IDRs. These rights provide higher distribution rates to the general partner (GP) of MLPs. The easiest way to think of an IDR is like trickle-down economics in that they’re designed to push GPs to raise distributions so they can increase their own share.
The increased cost of capital for MLPs is one of the primary reasons for this elimination as the higher distributions reduced available cash and required companies to hit the debt market to secure funding for projects.