Tuesday, February 8, 2011

Real-World DPPs

One of the most frustrating aspects of studying for the Series 7 is that most of the information is presented as if totally divorced from the so-called "real world." The term "DPP" or "direct participation program," for example is not something most people actually say in the day-to-day world. Usually, these investments would be called "partnerships" or "limited partnerships." The business is established as a limited partnership, and what your investor buys is a limited partnership (LP) interest. The GP is also the sponsor of the program, the one who puts it together and oversees the management of the business. The LPs provide capital and stay out of day-to-day management. In exchange for staying out of the management decisions, the LPs maintain limited liability in terms of lawsuits against the partnership. For the Series 7 we seem to only talk about limited partnerships involved with oil & natural gas or real estate. But many of you are sports fans, so it might help to remember that many pro sports teams are also limited partnerships. Here in Chicago, the Chicago White Sox are owned by Chicago White Sox Ltd, a limited partnership. The LPs are all high-net-worth investors, and while they can vote through "partnership democracy," they can not get involved with day-to-day management of the business. If the Sox want to trade a left-handed reliever for two triple-A outfielders, the LPs would have no say over that, for example. The LPs would get to inspect the books of the business, just as a shareholder of a corporation would get to. The General Partner (GP) runs the business and happens to be Jerry Reinsdorf. Turns out, Reinsdorf is also the chairman of the limited partnership that owns the Chicago Blackhawks and co-owns the United Center. I wish I could sell enough Pass the 7 full packages to buy into either of these partnerships, but, so far, I don't find myself traveling in these circles.

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