A Boutique Bangs Drum for U.S. Energy
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Tuesday, March 05, 2013

A Boutique Bangs Drum for U.S. Energy

With two exchange-traded funds already under its belt, Yorkville Capital Management is revving up its product development and sales operations to beat the investing drum on the merits of the rapidly growing U.S. energy sector.

"Although this category is not that new or emerging, it is new to a lot of investors," managing partner Darren Schuringa recently told MFWire.

The firm already has in market the Yorkville High Income MLP ETF and the Yorkville High Income Infrastructure MLP ETF, which was launched last month

As the firm works to broaden its product offerings, it is also launching initiatives to promote better awareness of the strengths and workings of this asset class.

For example, according to Schuringa, many investors get confused by the concept of a master limited partnership, which is currently the most common vehicle for investing in this space.

"If you look at this asset class, master limited partnerships are the access point to this asset class-- they are not the asset class," he said. "What we want to do is get investors passed the idea of MLPs as an asset class."

MLPs are operating companies that invest in producing assets, just like any other operating company would do. They are structured like partnerships. Outside of that, they are publicly traded like any equity. The structure was developed in the 1980s by Congress to promote retail investment in the energy industry, which Schuringa has succeeded wildly.

In reality, he says, the asset class consists of two kinds of companies: U.S. energy infrastructure developers, such as those that build oil rigs, pipelines and electrical grids and such, and U.S. energy producers, the actual companies that drill for oil, generate electrify and mine for coal, etc. The infrastructure portion of the asset class represents about 80 percent of the market cap.

When beating the drum to investors, Schuringa's sales team hits on three big points on the benefits of infrastructure investments.
1. They will increase the current income of your portfolio because of the high distributions related to the high levels of free cash produced by these investments. 2. As operating companies they have demonstrated their ability, for over 20-years, to grow their cash flow. 3. As equities, they have demonstrated an average growth of 7 percent each year. OVer the years, you will double your income. This growth rate in income drives price appreciation.

Schuringa says that the firm has seen 10 percent of positive alpha with this asset over the past 12-years.

Another important component of this asset class, he argues, is that it is a "truly alternative" class with a low coloration to equities, fixed income and commodities.

"Whether or not you invest with Yorkville, you should definitely consider this asset class," he says is one of the messages Yorkville is drumming to investors.

Yet another important message: the category is growing.

He said that according to analyses conducted by his firm, as well as other experts, the energy MLP market is roughly $400 billion in size, with another $300 billion expected just to achieve energy independence goals currently promoted by the U.S. government. Another $300 billion over the next 15 or so years will likely be needed to meet future energy demand, he said.

"How many asset classes can you look at over the next decade or so and see a tripling of assets?" he asked.

To proselytize the potentials of this market, Yorkville has recently tripled its sales force, from two past year, to six. They plan to hire at least two more in the near future.

The firm is also expanding its marketing efforts beyond retail to include institutions, including investing consultants.

"There is no question that our sales and marketing efforts are focusing on influencers. We are getting in front of financial advisors, registered reps. We are getting approval from the various national counts and platforms so that our strategies are available to a broader base of clients and investors. It is still a underrepresented asset class. There has been tremendous growth in the fund offerings out there," he said.

Another important strategy in the works is developing products outside of the MLP format.

"Most people just know of MLPS in this space, but there are other structures that can work very well here. Really we are agnostic as to how investors was to access these assets. We want to be a consultant to investors, give them an understanding of the pros and cons of this category, and the different wraps for access, so they can decide what makes the most sense for them," he said.

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