Over the last 35 years, Master Limited Partnerships - commonly referred to as MLPs – have become a popular investment vehicle in the energy space. These publicly traded limited partnerships are attractive to investors because they tend to generate strong returns, have favorable tax implications and are often shielded from inflation. Over the years, Congress has enacted legislation to stipulate qualifying sources of income for MLPs. Today, most MLPs are in the energy industry – primarily in the midstream sector. However, some MLPs exist in the upstream and downstream space as well.
Potential investors should consider several factors when deciding if and how to invest in an MLP - including the overall level of risk, and a company’s growth trends, operating locations and management teams. Investors can become a limited partner directly, which is the best way to benefit from the tax advantages of the MLP structure. But closed-end mutual funds are a more popular investment option because they deal with the tax issues of being a limited partner and simplify the filing process each year.
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