A Rocky Ride

Limited partnerships, a once popular investment vehicle initially created to help investors avoid paying taxes, and a vehicle used to retain high broker transaction fees, has become a diversification dinosaur that many believe will disappear completely in the next decade.

With primary partnerships (publicly traded offerings) and secondary partnerships (private offerings sold in some cases as a result of death or divorce) no longer being thought of as primary investment options, the state of the industry is somewhat up for debate.

“In every industry, there are highs and lows. Tax law changes caused limited partnership investments to fall out of favor with investors and their advisors, and many partnerships began to fail,” Neal Buckley, sales manager of Englewood, Colorado-based American Partnership Board, a secondary market broker, told us via e-mail. “While the stronger partnerships survived, limited partnerships . . . never truly recovered as an investment.”

A Fading Raison d’?tre?

Larger players in the primary market such as CNL, Wells Limited Partnerships, WP Carey, and Boston Capital all provide public offering and tax credit funds for anyone to invest in. But for those dealing in the secondary market, these larger investments no longer seem to make much sense.

Limited partnerships were never an efficient investment vehicle, says Dan Foreit, owner of A-1 Partnership Service Network in Indian Rocks Beach, Florida, a private LP placement broker. “I don’t think they ever were. Historically, the reason they put them together was to avoid paying taxes.” Currently Foreit only deals in the secondary market and works with a very small staff.

“I don’t think they should ever resurrect the partnership format,” Foreit says. “It is too illiquid. It’s great for you and your ten doctor friends to buy a building somewhere in town and all live there,” he says. “But to parcel it out to the large wirehouses across the country makes no sense at all.”

“I deal with secondary level people waiting to trade, waiting for sellers, death, and divorce,” he continues. “That industry is shrinking. LPs created such a huge bubble in the 1980s, sat on it for a while, and then in the mid- to late-1990s started trading and people were sick of it.”

Many brokers [in the secondary market] really don’t care what they are buying and what they are selling, Foreit says. As long as they make their transaction fee and get their percentage they are happy. “I evaluate every single thing that I purchase. If I am buying it, it is because I want it. If I don’t want it, I don’t deal with it,” he says. “Now we are seeing that a lot of it has been moved, or consolidated, or it is coming full term and getting sold out and paid back.”

Paul Frain, owner of Frain Asset Management, in Seminole, Florida, agrees with Foreit that secondary markets hold more opportunity for investors than the primary markets. As a secondary market maker for all publicly traded partnership units–typically in oil, gas, real estate, cable television, equipment leasing, and tax credits–he says that because he trades LPs at discounts, there are some good opportunities for investors. “You are buying an investment that is already invested, so you know what the portfolio consists of,” says Frain. “You know what the risk, net asset value, and earned cash flow are, and you are buying it at a discount. So it is actually a lower-risk type of investing.”