Energy MLPs like to cite big numbers for their assets: so many thousand miles of this transporting so many hundred thousand barrels of that.

But when it comes to pipelines and impressive numbers, they can’t compete with the financial asset managers who’ve set up shop under the same publicly traded partnership tax shelter.

This clubby financial elite measures its throughput at a trillion investment dollars funneled to it by every large pension system and sovereign wealth fund.

Source: Blackstone investor presentation, June 2014

The leading alternative asset managers boast the resources, scale, connections and, perhaps most importantly, a painstakingly nurtured reputation, all of which spare them from having to compete on price.

The result is a lucrative fee structure paying 1.5% to 2% annually based on committed funds, and up to 20% of the ultimate fund profits. In contrast to many energy MLPs, these fees are shared with  unitholders without the general partner claiming an outsized share. The tycoons in charge aren’t selling their assets to the partnerships; rather they derive much of their income from investments in their own funds and the distributions to unitholders.

Another difference is that the alternative asset managers’ money pipeline, not being physical, is not subject to heavy construction costs or the ravages of time and depreciation.

The flows into private-market investments have certainly benefited from loose credit conditions and dislocations like negative yields on European government bonds. Rallying stock and bond markets have produced big gains on past investments in credit, private equity and real estate.

Current returns to unitholders as represented by the generous yields could well be higher than they might prove on average over the full economic and market cycle. But this is an industry that, on the whole, has produced very good returns most of the time for a long time, and as a result is currently enjoying very brisk growth.

 
Source: Preqin

I screened the leading asset managers organized as partnerships for basics like yield and earnings growth using Fidelity’s stock screener and the main takeaway is that the leading names remain underappreciated relative to their recent performance and potential.

We’ve recommended Oaktree, the leading distressed debt and credit shop on the planet, since late 2013, with a small positive return over that span even as distributions and the yield have dropped. Like most of the financial partnerships, Oaktree pays a variable distribution tied to the timing of its fund liquidations, and it’s going through a relatively slow stretch on that front now, having already cashed out much of windfall from the investments made during the last financial crisis.

The private equity cycle seems to be somewhat less advanced, with plenty of inventory remaining to be sold to the still eager IPO buyers. In any event, it would be unwise to assume that the next downturn will be as dire at the last one, and even that one proved only a speed bump.

Still, the durability and sustainability of the currently favorable macro environment is unquestionably the industry’s most immediate risk. The other, chronic one, is posed by the periodic calls to strip financial partnerships of their tax perks, including the controversial carried interest provision that lets them treat much of their incentive compensation as long-term capital gains rather than income.

Somehow, though, that cause never seems to make much progress against the permanent legislative gridlock in Washington, so that, as with periodic criticism of the tax breaks enjoyed by MLPs, it’s probably best to tune out the noise until there’s a credible threat to the current arrangements.

We’ve never been shy about straying from the beaten path, whether in profitably recommending the corporate sponsors of MLPs, renting Carl Icahn’s Icahn Enterprises (NYSE: IEP) for a few well-timed months in 2013  or, more recently, taking a ride on amusement park operator Cedar Fair (NYSE: FUN).

Alternative asset managers offer investors in publicly traded partnerships income diversification, an upside not capped by sponsor incentives and, in some case, businesses that are both cheaper than energy MLPs and less vulnerable to competition.