Listed Partnerships (also known as 'Publicly Traded Partnerships' or 'PTPs') are a special type of business that trades on public stock exchanges, just like a regular company. However, they are structured as a partnership, creating a unique hybrid. Instead of buying shares of stock, investors buy units and become Limited Partners. This structure allows the business to avoid paying corporate income tax. Instead, its profits and losses are “passed through” directly to the unitholders, who then report them on their personal tax returns. This clever setup avoids the classic problem of double taxation (where a company pays tax on its profits, and then shareholders pay tax again on their dividends). These entities are most commonly found in industries that generate steady cash flow, such as energy pipelines, natural resource extraction, and real estate.
So, why would an investor bother with this unusual structure? The main attractions are high income and potential tax benefits.
The biggest carrot dangled by Listed Partnerships is their impressive yield. Because they are designed to pass through the majority of their cash to investors, their distribution yields can often dwarf the dividend yields of companies in the S&P 500. For investors hunting for income, these high payouts can be incredibly tempting. The idea is simple: own a piece of a business, like an oil pipeline, and collect a steady stream of cash as the product flows through it.
The pass-through nature of a partnership offers a unique tax situation. A significant portion of the cash distributions paid to unitholders may be classified as a return of capital. This isn't immediately taxed as income. Instead, it reduces your cost basis in the investment, deferring the tax bill until you sell your units. For American investors, this all gets reported on a notoriously complex form called the K-1 tax form, which can be a significant headache compared to the simple 1099-DIV form for standard dividends.
While the high yields are enticing, a disciplined value investor, in the spirit of Warren Buffett, must look beyond the shiny surface and ask, “What are the risks?”
Listed Partnerships are anything but simple. Their legal structures and accounting can be opaque. The tax implications alone require professional advice for most people. Investing in a business you don't fully understand is one of the quickest ways to lose money. The complexity of a PTP can easily hide underlying problems with the business itself.
In a PTP, there are two types of partners:
This structure creates a potential agency problem. The GP's financial interests may not perfectly align with the LPs'. For example, many partnership agreements grant the GP incentive distribution rights (IDRs), which give the GP an ever-increasing cut of the profits as distributions rise. This can incentivize the GP to take on excessive debt to grow distributions in the short term, even if it harms the partnership's long-term health.
Many of the most common PTPs, especially Master Limited Partnerships (MLPs) in the energy sector, operate in capital-intensive industries. They often carry enormous amounts of debt on their balance sheet. A value investor must meticulously analyze this debt and determine if the company's cash flows are stable and strong enough to support it through economic downturns. A high yield is worthless if the company goes bankrupt.
Listed Partnerships can be a powerful tool for generating income, but they are not for beginners or passive investors. They represent a classic trade-off: in exchange for a high potential yield, you accept greater complexity, potential conflicts of interest, and often, higher risk. Before even considering a PTP, an investor must be prepared to:
For most value investors seeking simplicity, quality, and a true partnership with management, a wonderful business with a durable moat, purchased at a fair price, remains a far more reliable path to building long-term wealth.