The gas-infrastructure universe of MLPs had a good run, showing significant growth of MLP IPO activity during 2005 and 2006. In July 2007, the group started to lose value, and in 2008, some IPOs were delayed or cancelled.

The sector may not see growth again until the capital and equity markets rebound, according to Frank Murphy, managing director at Wachovia Securities LLC. “Analysts and investors are waiting to see the market recover its liquidity before attempting to estimate the MLP environment going forward,” said Murphy, speaking to attendees at the Midstream Gas Assets A&D Summit held in Houston.

Many owners of midstream assets are rethinking their IPO strategies. Those that have sellable assets are expected to shift from IPO to A&D strategies, he said. Meanwhile, potential buyers for assets will be those companies that want to increase their infrastructures to establish a footprint in prolific plays such as the Barnett or Fayetteville.

“Hedge-fund managers feel that MLP liquidity has been reduced due to the sub-prime event and the huge amount of PIPE (private investment in a public entity) overhang still out there. So unit prices dropped, trading volumes shrunk and every time the unit prices rise, investors sell off to capture value,” he said.

MLPs that are highly leveraged and have outstanding PIPE-offered units will continue to be challenged in the marketplace. The MLP space must now “tilt back to retail investors” to raise capital.

The busiest MLP A&D area for a number of transactions and value has been gas gathering and processing. At times, those segments have held steady at six to eight times transaction value to EBITDA (earnings before interest, taxes, depreciation and amortization), and sometimes increasing to 10 to 12 times, due to higher gas-liquids margins tracking oil prices.

As the issue of capital scarcity diminishes, higher multiples will be seen in acquisition transactions. Two examples of high-multiple transactions include Copano Energy LLC’s acquisition of Cantera Natural Gas LLC for 19.3 times EBITDA, and GE Energy Financial Services’ acquisition of 91% of Regency Energy general partners for 13.9 times.

The good news is that, while volatility in the equity and debt markets will affect transaction volumes and valuations in the near term, the fundamental dynamics of energy and infrastructure point to an active A&D environment in the future, Murphy said.

He expects to see MLPs increase focus on organic growth, and although the long-anticipated MLP consolidation hasn’t yet occurred as previously predicted, it should begin to occur soon.

“Also, while sellers are looking for transactions, most buyers are looking to integrate what they have already bought, and are planning more organic growth.”

On the investor’s mind is the upcoming election, and possible changes to tax treatment of MLPs. While it is unlikely that Congress will remove the pass-through tax advantage of MLPs, it is possible that new legislation could tax fees earned by hedge funds and incentive distributions rights as ordinary income, as opposed to capital gains, Murphy said.