Incentive Distribution Rights (IDR)

What Are Incentive Distribution Rights?

Incentive distribution rights (IDR) provide a general partner with a rising share of a limited partnership incremental distributable cash flow. Utilized in master limited partnerships (MLP), IDRs frame per-unit distribution increments to the limited partners.

The general partner's share of incremental distributable cash flow normally begins at 2% yet might be basically as high as 20% or even half.

In recent years, numerous MLPs are wiping out IDRs, taking note of that the structure of making such payments isn't sustainable over the longer-term.

Incentive Distribution Rights Explained

A master limited partnership's IDR schedule will in general be structured to energize the general partner to drive distribution growth for limited partners. On the off chance that the payouts for limited partners arrive at a foreordained level, the general partner gets an undeniably higher payment in view of the limited partnership's incremental cash flow. Incentive distribution rights are generally resolved in view of quarterly distribution figures.

Break down the Structure

IDRs are generally exceptional and can be complex. They are frequently misconstrued by MLP investors. What's more, a few general partners might abuse the IDR mechanism to produce outsized payments to themselves.

Each IDR inside a MLP is structured in an unexpected way, and prospective MLP limited partners need to dissect that structure in any potential investment carefully. A few structures might advance or hindering distribution growth for limited partners.

Some incentive distribution rights are structured in a manner that unjustifiably benefits the general partner (GP).

Dependable Cash Flow

The general partner incentive can be substantial. That generally means that the limited partner has likewise done well'over a long period of time. Also, assuming the MLP's performance ought to vacillate, the limited partner ought to see their cash flow hit less radically than the general partner in light of the IDR's structure.

A few limited partners surrender big gains for consistent cash flow.

The bargain for limited partners is that they trade some (or a great deal) of the upside for all the more consistent, dependable cash flow. Yet, cash flow and the risks of IDRs much of the time lead to petulant relations between limited partners and the general partner. A few GPs abuse the IDR mechanism, making terms that radically favor them over the limited partners.

Highlights

• Incentive distribution rights award a general partner a greater share of the profits of a partnership as revenue increments.
• It is intended to urge the general partner to drive growth for limited partners.
• The system can be abused. Limited partners need to examine agreements completely.