Introduction
Every founder knows the feeling of designing something that works. The harder question that rarely gets asked early enough is whether it will still work when the business is ten times its original size.
In Nigeria, we see this tension play out regularly. A family business structured around founding-generation control becomes an obstacle to outside investment. A joint venture agreement drafted for a $5 million project starts to strain when the parties are negotiating a $200 million expansion. An incentive arrangement that motivated a management team in year one becomes a source of conflict by year five. The structure was not wrong. It simply was not built for what the business became.
This edition of The Deal Talk examines one of the most instructive examples of this problem in modern corporate history: the story of Kinder Morgan, a company that grew from a $40 million asset purchase into North America’s largest midstream energy business, only to discover that the financial structure behind its success had quietly become its biggest constraint. In 2014, it took a $76 billion transaction to fix it; not because anything had broken, but because everything had worked exactly as planned.
The Story: From Discarded Assets to a Continental Empire
In 1996, Richard Kinder resigned from Enron after being passed over for the top job. Shortly after leaving, he and a colleague, William Morgan, purchased a collection of pipeline assets that Enron no longer wanted, for approximately USD $40 million.
That modest acquisition became the foundation of what grew into North America’s largest midstream energy company. The engine behind that growth was not just the assets themselves, but the structure used to own and finance them. The business was built using a Master Limited Partnership (MLP), supported by an incentive mechanism known as an Incentive Distribution Right.
Understanding both is key to understanding how the story unfolds.
The Structure: What Is a Master Limited Partnership?
A Master Limited Partnership is, at its core, a Limited Partnership listed on a public stock exchange. That single difference is what made it powerful.
What the MLP adds beyond the basic LP structure is two things. First, public listing: instead of a small group of private investors whose capital is locked in, the partnership can access public markets, with investors buying and selling their interests freely like shares. Second, tax efficiency: unlike a typical company where profits are taxed twice, once at the entity level and again when distributed. An MLP removes that first layer entirely, so income flows directly to investors.
The MLP is simply the ownership wrapper around of the underlying assets, one designed to attract capital at scale. However, because most of that income is paid out rather than reinvested, the business cannot fund its own growth internally. It must keep returning to the capital markets.
An MLP in the narrow sense is not recognised under Nigerian law. Although, Nigeria has a structure whereby a sponsor sets up an SPV to hold a pipeline concession or power asset, brings in outside investors, and structures returns around the asset’s fee income (project finance). Think of a gas distribution network like Gaslink, the Lekki toll concession, or an NNPC pipeline arrangement. Each is an infrastructure designed to serve third party investors. This is the same architecture as Kinder Morgan.
The Incentive Distribution Right (IDR): The Mechanism That Changed the Economics
The IDR was not unique to Kinder Morgan, it was the dominant incentive structure across the MLP space at the time, present in roughly seven out of ten partnerships. IDR is a contractual arrangement that gives the General Partner (sponsor in a typical Nigerian SPV), a growing share of cash distributions as the business performs better. At lower levels, the share is modest but as performance improves and certain thresholds are reached, the share increases, in some cases reaching up to fifty percent of every additional dollar distributed at the highest tier.
Think of it like a performance arrangement between a property developer and a manager. At the beginning, the manager earns a modest share of rental income. As rents increase beyond certain levels, the manager becomes entitled to a larger portion of each additional naira earned. At peak performance, the manager may keep as much as fifty kobo of every additional naira collected. In the same way, in an MLP, the intention behind an IDR is to align the interest of the General Partner with the interest of the investors because the General Partner earns more only after investors’ distributions grow.
The problem, as Kinder Morgan would eventually discover, is that alignment has a ceiling. Beyond a certain scale, the mechanism designed to motivate growth begins to make growth more expensive.
How Kinder Morgan Grew
Starting from USD $40 million of assets acquired from Enron, Kinder Morgan expanded through a series of acquisitions, building a pipeline network across North America. By 2006, the combined enterprise value of the business exceeded $35 billion.
That same year, Kinder Morgan’s founders announced a management buyout that took the parent company, Kinder Morgan Inc, private in a transaction valued at approximately USD $22 billion. The publicly listed MLP subsidiary, Kinder Morgan Energy Partners LP, remained on the stock exchange, open to outside investors, while the private parent retained control of the General Partner and the IDRs. This meant that as the listed partnership grew and distributions to investors rose, the IDR payments flowed to the private parent rather than the wider investor base. This meant the structure was performing exactly as it was designed to.
When the Structure Became the Constraint
Over time, however, scale began to change the economics. By 2014, Kinder Morgan had grown into North America’s largest midstream energy company, controlling approximately 80,000 miles of pipelines and 180 terminals. At that level, continued growth required consistent access to new capital.
This is where the IDR structure began to work against the business.
At the highest IDR tier, up to fifty percent of every additional dollar distributed was allocated to the General Partner. For new investors evaluating whether to commit capital, this was a fundamental consideration because a significant portion of incremental returns would not accrue to them.
As a result, the cost of raising capital rose. For a business that depended on affordable capital to fund expansion, the structure was not a minor inefficiency. Rather, it had become a limitation and a structural problem.
What makes this particularly worth noting is that no one had done anything wrong. The General Partner had not acted in bad faith. The IDR was performing as contractually intended. The issue was that a mechanism designed for one stage of the business had survived into a stage where its costs outweighed its benefits with no easy way built in to adjust it.
The USD $76 Billion Reset
In August 2014, Kinder Morgan made a decisive move that the company would merge all its publicly listed subsidiaries into one single corporate entity and eliminate the IDRs entirely. The deal, valued at approximately USD $76 billion, closed in November 2014.
The transaction was not without tension. The General Partner sat on both sides of the negotiating table; as seller of the IDRs and as controller of the entities acquiring them. Some investors pushed back on the exchange ratios, arguing they undervalued their holdings. These are the kinds of structural conflicts that complex incentive arrangements tend to produce at the point of unwinding.
What is worth understanding, however, is that the General Partner did not simply walk away empty-handed. Richard Kinder and the other GP holders did not surrender the IDRs, they exchanged them. The IDR stream, representing the right to collect up to fifty percent of every incremental dollar distributed in perpetuity, was capitalised at a negotiated value and converted into equity in the new consolidated entity. In practical terms, a future income right was traded for an ownership stake in a simpler, more valuable company.
The calculation behind that trade was straightforward: a lower cost of capital would make the consolidated business worth significantly more overtime than the IDR payments would have yielded if left running. For Kinder, already the largest individual shareholder, that was not a concession, it was a better deal.
This is perhaps the most instructive part of the story. The restructuring was not a capitulation by one party or a loss imposed on another. It was a negotiated reset in which both sides concluded that the existing arrangement was leaving value on the table. The art was in agreeing on what a fair exchange looked like and then executing it at scale.
With the IDRs removed, the company reduced its cost of capital, simplified its structure, and restored its ability to grow efficiently. The IDR, a mechanism that had once accelerated growth, had become too costly to maintain.
Why This Story Matters
The Kinder Morgan restructuring was not triggered by crisis. There was no fraud, no market collapse, no regulatory intervention. It was a proactive decision to address a structure that had become inefficient simply because the business had grown.
The same principle operates at every level of business. Consider an adviser that negotiates to be paid in both cash and equity by an early-stage fintech client, inserting an anti-dilution clause to protect the value of that equity if new investors came in at terms that would otherwise water it down. The clause was rational, well-drafted, and served its purpose. Several years later, the fintech is growing, attracting significant new capital, and the anti-dilution clause has become a friction point in that process. The firm is now being asked to waive the clause in exchange for additional shares, in effect, to capitalise a protective right and convert it into a fixed, immediate benefit so the business can move forward unencumbered.
That negotiation is, in miniature, exactly what Kinder Morgan did at $76 billion.
Similar tensions can emerge even in modern technology companies. Tesla Inc. is a good example. At Tesla’s annual meeting in 2018, shareholders approved a performance-based incentive package for Elon Musk. The compensation included no salary or cash bonus, but sets rewards based on Tesla’s market value, rising to as much as $650bn over the next 10 years. In few words, the uncapped package was Elon’s incentive to drive extraordinary growth for Tesla.
In 2022, Tesla’s market value had grown to over $790 billion, exceeding the original $650 billion target, and Elon’s compensation had ballooned to $56 billion as a result. This caused pushbacks from shareholders who instituted a court action on the basis that the arrangement has become disproportionate to the realities of a much larger and more mature company. In 2024, Elon’s USD $56 billion pay was rejected by Kathaleen McCormick of Delaware’s court of chancery, who termed the compensation granted by the board as “an unfathomable sum” that was unfair to shareholders.
Notwithstanding, a similar performance-based incentive proposal that may run up to USD $1,000,000,000,000 (One Trillion Dollars) in compensation for Elon, was up for shareholders’ deliberation at Tesla’s 2025 annual meeting. Fortunately, for Elon, the proposal secured a 75% shareholders’ vote.
The underlying principle is remarkably similar: arrangements designed to incentivise extraordinary growth can become sources of friction when the business reaches a different stage of maturity.
Three principles are worth drawing from all of these:
First, financial structures should not only be evaluated at inception, but also for how they perform as the business grows. Incentive arrangements that work well in the early stages can become more costly over time. Arrangements that make sense at $40 million may look very different at $40 billion.
Second, growth does not always benefit all stakeholders equally, particularly where distribution mechanisms shift over time. Understanding exactly how value is shared and how that sharing changes as the business scales is not a mere detail. It is a core part of structuring a deal.
Third, flexibility matters. Structures should allow for adjustment as circumstances change are almost always preferable to rigid ones. The cost of building in that flexibility at the outset is almost always lower than the cost of restructuring it later as $76 billion worth of transactions makes clear.
Conclusion
A structure can be rational, well-designed, and effective at one stage of a business and quietly become its biggest obstacle at the next. Success does not remove the need for reassessment. In some cases, it creates it. The key question, therefore, is not only whether a structure works today, but whether it will continue to work as the business grows, because that is where the real test begins.
The Finance and Projects Team at Tope Adebayo LP comprises seasoned, commercially savvy finance professionals well-positioned to assist clients in structuring and executing complex financing transactions. We work with clients across capital markets, energy, and infrastructure to design arrangements that are built not just for today, but for where the business is going.
