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Timberland Investment
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Timber Industry | Deals & Transactions | Investment Rationale | Financial Performance | Investors | Asset Managers
Curated by
Prentiss & Carlisle
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In Callan’s Ask the Expert research paper “Investing in Farmland—Looking to Buy the Farm,” Jamie Shen, senior vice president and head of Callan’s Real Assets and Alternative Investments consulting groups, reveals that farmland investing has reached an unprecedented level of interest among institutional investors looking for higher returns on their investments.
... Interest in farmland is also up because the asset class is no longer considered a standalone investment or part of a real estate allocation— which usually required a meaningful portfolio allocation of approximately 5%. Now that farmland has been re-categorized to the real assets category (which includes timber, infrastructure, private energy, real estate, commodities and TIPS), a 1% allocation to farmland is considered notable. 
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Florida State Board of Administration, Tallahassee, named Cambridge Associates, Hamilton Lane Advisors and StepStone Group as finalists to become the board's private equity consultant, according to an FSBA statement. ... FSBA has allocated $6.4 billion to private equity and $5.9 billion in strategic investments, which consist primarily of hedge funds, distressed debt and timberland. Because it uses a number of strategic investment consultants depending on the nature of the investment, FSBA wants to consolidate the reporting. Strategic investments consulting isn't affected by the change. Among its strategic investments consultants, FSBA uses Cambridge Associates for hedge funds, Townsend Group for timber and Hamilton Lane for distressed debt.
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Fixed income's dwindling return expectations and equities' volatility are causing institutional investors to lean more heavily than ever on alternative investments. ... While the trend toward alternatives is old news, what's new is the quickening pace. The reason: Investors have no where else to go. Alternative investment hirings skyrocketed to $20.5 billion so far this quarter, accounting for the bulk of the $27.32 billion money managers in all asset classes — including stocks and bonds — were given this quarter to date. This is an increase of almost 67% from the $12.3 billion investors committed to alternatives in the third quarter of 2011 and more than 122% above the allocations in the first quarter of 2011. ... Even though some alternative asset classes such as real estate got battered during the market downturn of 2007 and 2008, investors are reconfirming their belief in the return and diversification benefits of alternative investments. Institutional investors, especially public pension plans, are expected to continue to shift into alternatives and out of fixed income and equities.
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This FAO study aims to reveal barriers and opportunities to investments in timber production assets in developing countries. It surveys 42 investment decision makers in North America and Europe, collectively representing US$36 billion in forestry investments. It finds that investors: invest in forestry as a means of diversification and inflation hedging; seek forest investments that can be certified as sustainably managed; and do not invest in forest-based business such as processing and manufacturing. The study also highlights the importance of investment policies and conditions at the country level to attract investment capital.
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Jane Mendillo of Harvard Management Company, which manages Harvard University’s $32 billion endowment, told the gathering of investors at the Delivering Alpha Conference last week that she looks at an increasing world population, and a wealthier middle class in developing countries, and believes that the demand for natural resources such as timber, food, and water will increase in the long term. Therefore, she is bullish on companies that do business in related industries, calling natural resources “our favorite area.”
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Is expanded investment in forest assets by Chinese state-owned companies an opportunity for or a threat to TIMOs6 involved in international forestry? While some TIMOs may find themselves bidding for assets in competition with Chinese firms, we note that the other owner of Wenita (38%) is the US-based TIMO GMO Renewable Resources. And we know that other TIMOs have been having conversations with Chinese firms to discuss possible collaboration. Whether Chinese state-owned companies will choose to work with established forest asset managers, or try to invest directly, will likely depend on the particular projects, whether processing facilities are to be included, history of the enterprise, and so on. But we have little doubt that Chinese capital will be playing an increasing role in the international timberland investment markets in the next several years. This will add an interesting dynamic to the timberland markets, as Chinese firms are not known for spending much time or money in carefully dissecting potential investments with Western style analysis. Their preferred strategy of "shoot first, aim later" will no doubt lead to a few more failures, but will also lead to some more positive results, especially for those Chinese companies who pair up with the right partners in the right locations.
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According to Russell Investments' 2012 Global Survey on Alternative Investing, institutional investors are making significant allocations to alternatives (on average 22% of total assets). Importantly, up to one-third of respondents are expecting to increase their allocations to alternatives over the next one to three years. ... The survey finds real estate, private equity and hedge funds remain the preferred alternative types, but there's increased interest in commodities and infrastructure. Respondents acknowledge that volatile and uncertain markets are the new normal, but seek to structure portfolios to prudently manage risks, and use alternative investments to support their investment objectives.
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Pennsylvania Municipal Retirement System, Harrisburg, in the next two or three weeks will search for a timber manager to run $70 million. *** The contract of the pension fund's current timber manager, Forest Investment Associates, expires in March 2013. State law requires that external manager services be put out to bid every five years, Mr. Allen said in a telephone interview. The firm can rebid.
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Almost half of defined benefit pension plan sponsors in Canada intend to increase their allocation to alternative investments, such as real estate, infrastructure, and private investments, as they seek long-term returns that are less connected to public equity markets, according to a survey by RBC Investor Services. ... Canada’s largest pension funds have been making significant investments outside traditional stock and bond portfolios for several years, driven by record low interest rates and volatile stock markets. ... Teachers’ Infrastructure Group manages an international portfolio of about $11-billion involving water and wastewater, electricity distribution, airports, power generation, high-speed rail, port facilities and timberland. According to the RBC survey, 48% of Canadian pension plans intend to increase their allocation to alternative investments, and that figure rises to 88% for those with more than $1-billion in assets. “For respondents already holding alternative assets or those looking to invest in them, real estate is the preferred choice,” RBC said, noting that 45% plan to add real estate investments and 34% plan to invest in infrastructure assets.
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At a time when states and municipalities face more than $2 trillion of unfunded pension fund liabilities, states are increasingly turning to private infrastructure investments to help close those funding gaps, an investment banker told treasurers meeting here this week. All institutional investors in North America — including public pension plans, endowments, sovereign wealth funds and foundations — are expected to increase their investment allocations for infrastructure by 32%, to 5.7% from 4.3% of their portfolios over the next two to three years, said Mark Weisdorf, chief executive and managing director of global real assets infrastructure investments at JPMorgan Asset Management. ... In the next decade, real assets will move from an alternative to a mainstream asset class, according to Weisdorf. JPMorgan forecasts that over the next 10 years U.S. pension plans will increase their investment allocations for infrastructure to between 5% and 10% of their portfolios on average, he said. ... Real assets are characterized typically by investments in tangible “hard” assets that offer stable income, equity-like upside potential, inflation hedging and lower volatility, he said. Real estate, infrastructure, shipping, commodities, timber, farmland and natural resources can be classified as real assets.
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From
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When it comes to devising a forest management strategy, recommendations for rotation lengths, thinning years and thinning intensities are usually made. However, a new EU-funded study from Finnish researchers now suggests that in light of uncertain growth and economic conditions, these methods may no longer be the most effective. Writing in the journal Forestry, Timo Pukkala and Seppo Kellomäki from the University of Eastern Finland explain that forest management should adapt to changing situations, in particular the uncertainties surrounding tree growth and timber price. ... Results show that an increase in tree growth rate under climate change does not strongly affect the optimal management if the timber price is fixed. However, when timber prices vary, it is usually beneficial to delay clear-felling, irrespective of the presence or absence of a climate-induced trend in tree growth. It is also beneficial to distribute the incomes more evenly among different cutting events when risk and risk aversion increase. ... 'The study showed what clever forest landowners already know. When future round wood prices and uses are unknown, the landowner should continuously have several tree species and timber assortments in his forest. Growing only spruce in even-aged stands is risky business. We hope that our study will promote diversified forest management, leading to diversified forest structures,' comments Timo Pukkala.
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Most private equity fund sponsors that are out raising money this year know it's an investor's market and are cutting fees to attract capital. ... Limited partners are receiving a greater share of the fees that portfolio companies pay to general partners, and they're demanding — often successfully — that GPs delay collecting any profit as portfolio companies are sold until investors are paid back their investments.
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“The commodities story is changing subtly from one where the tide is lifting all boats to one where the supply side of the equation is becoming really important,” said Ewen Cameron Watt, London-based managing director and chief investment strategist for BlackRock (BLK) Investment Institute. ... Historically, there are two favored rationales to invest in commodities — diversification to equities and inflation protection, said Tapan Datta, principal in the global asset allocation division at Aon Hewitt based in London. “Both characteristics have become problematic,” he added. ... Some institutions have attempted to mitigate the volatility and risk of long-only strategies by investing in active and/or hedge fund commodities strategies. ... Others have focused on niches. For example, forestry and timberland are commodities in which “biology is entirely on your side,” BlackRock (BLK)'s Mr. Cameron Watt said. Storage cost for timber is a benefit to investors. In comparison, the storage cost of corn or copper can hurt returns when supply exceeds demand.
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Driven by record low interest rates, volatile equity markets, and other cyclical and structural factors, institutional and retail investors are fueling strong growth in alternative investments. Last year, assets in hedge funds, private equity, real estate, commodities and infrastructure reached a record $6.5 trillion, according to a recent report from McKinsey & Company. Despite poor performance, illiquidity and serious redemptions during the financial crisis, alternative assets grew at a 14.2% compound annual growth rate from 2005 through 2011. That compares to 1.9% growth for non-alternative investments. ... Besides cyclical factors such as low rates and market volatility, structural factors also are driving investors toward alternatives. For institutional investors, the desire to better match assets to liabilities has led many pension funds to increase allocations to fixed income securities. However, fixed income investments cannot generate the returns needed to pay benefits.
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Dennis Moon, of U.S. Trust’s Specialty Asset Management division, says there has been a big uptick in the rush to farm and timberland as investors, who do not need liquid assets, look for places to avoid everything from inflation to a depression. ... Returns on timber and farmland come from two sources: the gross cash generated by the production on the land and the long term appreciation of the land itself. The total long-term return is in the low double digits.
... Timber however doesn’t produce any annual income as farmland does. Timber is more of a big payday down the road investment, so you have to be able to live without the income during what Moon described as a 10- to 15-year investment.
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In a world marked by so many unknowns and potential pitfalls, institutional and pension fund managers need a new way to look at investing — one that starts with the characteristics of the institution and then works up from there. ... [Editor: This article cites a commercial real estate solution, but could not timberland serve the same purpose?]
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