The Rise of Distorporation - the New American Capitalism

[applegrove]

The Rise of Distorporation - the New American Capitalism

at the Economist

http://www.economist.com/news/briefing/21588379-mutation-way-companies-are-financed-and-managed-will-change-distribution

"SNIP.....................................


AT THE beginning of the 1980s capital was flooding into the American oil and gas industry. Apache Corporation, an erstwhile conglomerate spanning steel, dude-ranching and car sales, sought to tap into the flow in a novel way. It wrapped a bunch of private oil and gas assets into a new ownership structure that was akin to a partnership but was publicly listed. It was a useful idea—until steep declines in tax rates and energy prices put the Apache Petroleum Company to rest in 1987.

This time round the master limited partnership (MLP) structure which Apache pioneered is no longer just a footnote. In the 2000s such companies allowed the capital-intensive energy industry to attract vital funds even during a devastating financial crisis. Kinder Morgan, a complex entity built around interlocking MLPs, has an enterprise value (its market capitalisation plus its debt) of $109 billion. The collective market capitalisation of MLPs recently passed that of Exxon Mobil, the most highly valued energy company on the New York Stock Exchange.


The new popularity of the MLP is part of a larger shift in the way businesses structure themselves that is changing how American capitalism works. The essence is a move towards types of firm which retain very little of their earnings: “pass-through” companies which every year pay out more or less as much as they take in. Many of the standard rules that corporations which retain their earnings have to follow when dealing with shareholders do not apply to such firms. And, crucially, so long as they distribute their earnings such set-ups can largely avoid corporate tax.

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These arrangements can be spectacularly lucrative for their general partner. Richard Kinder, who founded Kinder Morgan in 1997, now has a $9 billion stake, and received dividends of $376m over the past year. In a conventional C corporation shareholders might complain. In a complex set-up based around a pass-through entity, the views of the “limited partners”—investors—matter little. Their contracts give management a much freer hand than in familiar corporations, where government regulation grants shareholders a lot of rights. And those who invest in distorporations do pretty well out of the deal. Shareholders, or to be more precise “unit holders”, have received dividends double or triple the market average.




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