Kayne Anderson – Master Limited Partnership Manager Interview

John Cole Scott, CFS
Author of Interview

Closed-End Fund Info & Education

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What is a MLP?

Master Limited Partnerships (“MLPs”) are limited partnerships that are publicly traded on a securities exchange. They combine the tax benefits of a limited partnership with the liquidity of publicly traded securities.

MLPs are limited by U.S. tax code to only apply to enterprises that engage in certain businesses, mostly pertaining to the use of natural resources, such as petroleum and natural gas extraction and transportation. To qualify for MLP status, a partnership must generate at least 90% of its income from what the Internal Revenue Service deems “qualifying” sources.

Who is Kayne Anderson?

KA Fund Advisors, LLC is a subsidiary of Kayne Anderson Capital Advisors, L.P., a leading investor in both public and private energy companies with four closed-end investment companies (KYN, KYE, KMF and KED). As of September
30, 2011, Kayne Anderson and its affiliates managed assets of approximately $12.6 billion, including $9.6
billion in the midstream/energy sector of which $7.0 billion was invested in MLPs and midstream companies.

Portfolio Manager Bio

Kevin McCarthy is Chairman, President and CEO of Kayne Anderson. Prior to joining Kayne Anderson in 2004, Mr. McCarthy was global head of energy at UBS Securities. In this role, he had senior responsibility for all of  UBS’s energy investment banking activities, including direct responsibilities for securities underwriting and mergers/acquisitions in the MLP industry. From 1995 to 2000, Mr. McCarthy led the energy investment banking activities of Dean Witter Reynolds and then PaineWebber. He began his investment banking career in 1984. In addition to his directorships at the firm’s closed-end funds, he is also on the board of directors of Range Resources Corporation, ProPetro Services, International Resource Partners, Direct Fuels Partners. and K-Sea Transportation Partners.

Mr. McCarthy earned a B.A. in Economics and Geology from Amherst College in 1981 and an MBA in Finance from The Wharton School in 1984.

We interviewed Kevin McCarthy via phone on November 2, 2011. Monique Vo, who heads Kayne Anderson’s investor relations department, was also present on the call.

The Interview: 

SL: What are the primary reasons for investors to have interest in MLPs?

McCarthy: MLPs are attractive to investors who seek income and total returns [price appreciation plus distributions]. In the past several years, the total return of the Alerian MLP Index has exceeded the total return from the S&P 500 as shown in Table 1 on the next page. The outperformance is especially striking for the years since the 2008 financial crisis.
Many income-oriented investors invest in MLPs because their yields are significantly higher than those of other
income-producing investments such as Treasuries, municipal bonds, CDs, utilities, REITs and other fixed income securities. In addition, MLPs have consistently increased their distributions over time. The yield for the
Alerian MLP index is 6.46% as of November 1, 2011.

SL: Is there a tax advantage to the MLP structure?

McCarthy: Yes, distributions from MLPs are generally tax-advantaged, generally between 80% and 90% of a MLP’s cash distributions are treated for tax purposes as “return of capital”. Return of capital reduces an investor’s cost basis, and in very simplistic  terms, the taxes on the portion of the … FOR MORE SUBSCRIBE at: www.cefadvisors.com/scottletter.html