Sunday, March 22, 2009

Making money in pipeline LPs (Part 4): Capital losses

Like almost all other asset classes, LP unit prices nose-dived in 2008. The Alerian MLP Index, the sector's benchmark, lost 41.5 percent of its value last year, and as of March 2, 2009, it was 48 percent below its peak.
In part, MLPs suffered so greatly because of the credit squeeze. Since MLPs pay out most of their profits in unit holder distributions, they must rely heavily on loans to finance any growth initiatives. When lenders pulled back, the companies ran into cash shortages.
Mutual and pension funds that were heavily invested in the LPs, when they faced cash calls from clients who wanted to get out of the tanking stock market, sold off many of the LPs in order to raise cash to meet cash call demands, That helped to drive down their prices.
In addition, hedge funds that had loaded up on LPs in good times, dumped them as the market tanked. Due to the administrative and tax obstacles mentioned above, institutional investors were largely prevented from scooping them up.
But LP fundamentals remain strong.

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