Since 1984, the strategy of Kayne Anderson Capital Advisors LP, a Los Angeles-based investment firm, has been to identify and exploit investment niches not well understood by the broader market. One of those niches is clearly energy. Since last July, the firm's total assets under management have grown from $1.4 billion to $3.2 billion. This includes the raising of $550 million of new capital for its latest oil and gas private-equity fund-Kayne Anderson Energy Fund III. In addition, the firm grew by $400 million its Kayne Anderson Capital Income Partners, a now $1-billion-plus hedge fund that is one-third focused on energy-related master limited partnerships (MLPs). More notably, however, Kayne Anderson last September decided to leverage the favorable experience it has had with MLP investments since 1998 by launching a new publicly traded entity: NYSE-listed Kayne Anderson MLP Investment Co. (KYN). Distinct from the firm's previous forms of MLP investment, the closed-end fund-whose oversubscribed IPO raised $830 million-provides a permanent source of capital better suited to investing in midstream partnerships, says Robert V. Sinnott, a Kayne Anderson Capital Advisors partner. "KYN will invest 50% in the publicly traded units of midstream MLPs, their general-partner affiliates and other midstream companies, and 50% in private investments in the unregistered or otherwise restricted securities of MLP entities-both private and public-that have entered or will enter the midstream space." Sinnott points out that KYN-rather than being merely a passive investor-has the ability to privately purchase the equity, or units, of an MLP at a negotiated discount to prevailing public-market prices. "This will help entities that might need a major equity infusion to move quickly on a large acquisition; at the same time, the transaction would be accretive to us." Emphasizes Sinnott, "Such capability, coupled with the use of financial leverage-up to 30% of KYN's total assets-will enable us to extract attractive returns from a relatively small asset class that nonetheless has a high current yield, stable cash flows, imbedded growth, acquisition opportunities and high barriers to entry." Meanwhile, he says, the closed-end fund allows retail investors-who would be buying a portfolio of partnership securities-to solve a lot of the tax issues associated with owning MLPs directly. Example: the fund generates one simple 1099 rather than a blizzard of K-1s that an investor could be required to report in each state in which an individual MLP operates. The bigger benefit for the retail investor, however, is the return (yield plus distribution growth) profile of MLPs. Sinnott observes that the current yield on midstream MLPs is a little north of 6% while their growth in distributions last year was nearly 8%. "There are few asset classes out there providing that kind of return." J.C. Frey, senior manager and portfolio manager for Kayne Anderson Capital Advisors, points out that as oil and gas demand grows in the U.S. at a projected annual 2% to 2.5%, so will throughput on the pipelines that transport those commodities. "Because the MLP sector is a high fixed-cost business, its bottom line is very leveraged to such growth." Frey also notes that a significant amount of assets have not yet entered the MLP space but likely will as the U.S. energy infrastructure builds out in the coming years. He cites the construction of new LNG (liquefied natural gas) facilities which will need access to main transportation systems throughout the country. Also, increasing levels of Canadian heavy crude are going to need access to new areas of the U.S. "So for 2005 and beyond, we're looking for new MLPs to be formed while existing ones get bigger." Frey is one of KYN's three managing directors. The others are David Fleischer, former head of energy research for Goldman Sachs, and Kevin McCarthy, former head of UBS' global energy investment-banking activities. Sinnott adds that as growth occurs within the midstream MLP universe, new pools of capital will be attracted. He stresses that new legislation passed by Congress last fall opens up investment in MLPs to mutual funds and registered investment companies.

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