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Master limited partnerships: Tax benefits fuel year's first IPOs

Don't expect MLPs to be a window into IPOs. Three master limited partnerships, one led by billionaire investor Carl Icahn, are poised to kick off the year's new listings. Higher taxes on the rich should make the sector more appealing to some buyers. That's why MLPs and their host of tax advantages are expanding beyond their traditional roots – and why the initial public offerings won't necessarily reflect wide investor sentiment.

Such partnership structures have nifty tax advantages that suit them well for steadier earnings generators like oil pipelines. Increased demand for shelters from the taxman is broadening their scope. For example, USA Compression Partners, which processes natural gas for vehicles, is among those entering the market with an IPO this week. Mr. Icahn is floating CVR Energy's refineries as an MLP on Wednesday. And SunCoke Energy Partners, a miner that supplies coke to steel makers, also diverges from the typical MLP profile.

There may be reasons to accept the extra risk of less predictable earnings. Partners can deduct a share of depreciation on company assets from their tax bills, which often shields the bulk of payouts from the Internal Revenue Service until they sell out. The provision is even more attractive after the top U.S. income tax rate jumped to 39.6 per cent from 35 per cent under the latest Washington compromise. MLPs also don't pay corporate income tax. The likelihood of a broader business tax overhaul, which might have threatened this break, now looks diminished.

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The appetite is becoming evident. USA Compression Partners raised nearly the entire $200-million (U.S.) it wanted. And the Alerian MLP index, which tracks the 50 largest, is up 8 per cent since the start of the year, against just a 3-per-cent rise in the S&P 500 index.

Strong debuts from the trio of MLPs, however, won't necessarily be a bellwether of investor sentiment. Bankers and a backlog of would-be issuers are keen to see if 2013 will be a better year for raising equity after the amount generated from IPOs last year, despite Facebook's whopper, declined 29 per cent from 2011, according to Thomson Reuters data. But not every seller can offer the same fringe benefits as an MLP.

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