Please read our terms and conditions of accessing our website.
Click either Accept or Decline.
Terms and conditions of accessing our website
Prior to accessing this website you are required to confirm that you are a wholesale client as that term is used in sections 761G and 761GA of the Corporations Act 2001 (Cth).
Furthermore, if you are not an Australian resident, you must confirm that you are in a jurisdiction where it is not unlawful for you to access information about Long Tail Asset Management Pty Limited’s products and services, namely operating a Fund or pooled investment.
The information contained on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation, or which would subject Long Tail Asset Management Pty Limited to any registration or other requirement within such jurisdiction or country.
In particular, the information contained on this website does not constitute an offer to sell or the solicitation of any offer to buy any product or provide any service in the United States to or for the benefit of any person in the United States.
Nigel said:
Unsustainable structures
Part of our analysis includes the evaluation of the longer term sustainability of corporate structures – we want to understand any inherent bias in these structures and their consequences over time. Our preference is to avoid contrived structures which disadvantage a particular party. Our view is that at times of stress or over the longer term such structures will come under pressure. The evolution of the MLP structure in the US is an interesting example.
Master Limited Partnerships (MLPs) have been an important vehicle to encourage the development of pipelines, processing facilities and related infrastructure in the US, including in relation to shale gas. MLPs provide a tax efficient vehicle for infrastructure development and are typically structured as two entities – a general partner (effectively, the manager) and a limited partner (effectively, the asset owner). The asset owner compensates the manager through an increasing proportion of the cashflow it generates – while the proportion starts low it typically rises to 50% of the incremental cashflow generated by the asset owner. Over time this increasing proportion of cashflow being paid to the manager is a material drain on the asset owner’s cashflow. While this is very beneficial to the manager (they capture up to 50% of the incremental cashflow with limited capital contribution), it makes future investment opportunities by the asset owner difficult to justify.
The MLP structure has been very lucrative to the managers / general partners. However, the structure outlives its usefulness once the asset owner matures as the increasing cashflow leakage “forces” the asset owner to buy back the manager (or restructure the partnership terms). These are large transactions – in some cases the capitalisation of the manager is approaching that of the asset owner.
While the MLP structure has worked successfully for many entities in the US, the longer term implications have become particularly apparent over the last 12 months with a number of MLPs reorganising their partnership arrangements.
Friday, November 19th, 2010