Last year, the public-equity market witnessed the IPOs of four new closed-end master limited partnership (MLP) funds largely focused on the midstream energy space, representing retail and institutional investors' appetite for yield-oriented investments. More importantly, however, they create a long-term source of funding that didn't exist before for energy MLPs. Two of these funds are the Energy Income and Growth Fund (Amex: FEN) that came to market in a $128-million June 2004 offering and the Fiduciary/Claymore MLP Opportunity Fund (NYSE: FMO) that debuted in a $330-million December 2004 IPO. "The emergence of these two funds-which not only invest in the public securities of MLPs but also make private-equity investments in these entities-was a positive step in addressing the capital-raising needs of the now rapidly growing universe of energy MLPs," says Jim Cunnane Jr., managing director and senior portfolio manager for Fiduciary Asset Management LLC in St. Louis. Cunnane, whose firm is the sub-adviser to both funds, notes that in the past, if a midstream MLP needed capital to make an acquisition, it would typically borrow half the money it needed, then raise the other half through a secondary offering of stock to retail investors. "But in the wake of the Enron debacle, the window suddenly closed on the ability of energy-related MLPs to raise capital from those sources," he says. "Now, however, with the emergence of these energy-focused MLP funds, there's a stable investor pool permanently committed to this space." Shoring up the financial clout of these closed-end funds is their popularity with retail investors who can now buy through them a portfolio of energy MLPs that have recently been generating an average 6% annual cash-distribution yield-and that have the potential for share-price appreciation which could boost total returns north of 10%. Importantly, from a tax-reporting perspective, these funds generate one simple 1099 form, not an avalanche of K-1s, says Cunnane. In addition, because these funds are taxable corporations and not flow-through partnership structures, tax-exempt institutional investors can buy into them without worrying about generating unrelated business taxable income (UBTI). Also, due to recent legislation, open-end mutual funds can now invest more of their capital in MLP entities. "As liquidity increases in MLP-oriented funds, they should be able to achieve higher market valuations since investors are willing to pay more for an investment they can readily exit," says Cunnane. "And as that occurs, more money should pour into the midstream MLP space where the number of partnerships and demand for capital is steadily increasing." (For more on the new MLP funds, see "Focused on Yield" in this issue.)

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