Master Limited Partnerships (MLPs) – Assessing Risks and Returns



Edge Capital Research Team


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As investors have sought assets capable of generating both yield and growth, Master Limited Partnership (MLPs) have attracted significant investor interest recently. This paper is not intended to be a detailed primer on MLPs but rather a concise discussion on the factors that influence returns and the risks associated with investing. For investors not familiar with the sector, in short, an entity can qualify as an MLP as long as 90% of its income is qualified as being derived from the transportation, storage, or processing of natural resource products. In return for favorable tax status, an MLP must distribute the majority of its cash flow to unit holders. Investors are typically interested in the high yields relative to bonds and equities and the favorable taxation characteristics. Investors who stayed the course over the past decade were rewarded with a 10 year cumulative return of 452%, which compares favorably to the S&P 500 return of ‐9.1%.