Céline Claudon presents the key findings from IWC’s comprehensive database of institutional timberland investment funds
Since the 1980s, forest investments have grown increasingly attractive to investors looking for asset diversification and competitive risk/return characteristics. Nevertheless, timberland is still a small asset class in which $50bn (€37bn)is invested by institutions today. The International Woodland Company (IWC) has developed a proprietary in-house database in which selected information about all timberland investment opportunities presented to IWC are monitored. The following is an excerpt of IWC’s data (as of 31 December 2010) regarding timberland fund managers and their fund offerings since 2007.
At the end of 2010, IWC identified 87 organisations that manage or have aimed at managing timberland funds for institutional investors within the last four years (this data excludes organisations focusing on retail investors, direct investments or separate accounts). Among these, 17 timberland investment management organisations (TIMOs) have raised more than $500m (€369m) to be invested in timberland, nine have raised $200-500m, 34 less than $200m, and 27 have not raised any capital so far.
With 36 TIMOs, the US continues to be the principal domicile of timberland fund managers. However, there has recently been a significant increase in managers domiciled in Europe and South America: 30 and 13 TIMOs, respectively, have emerged in these regions during the past four years. Such development provides investors with a larger universe and an increased number of regional specialists to choose from but also highlights the necessity for thorough manager due diligence.
IWC is aware of 110 timberland funds that have been offered to institutional investors over the past four years (21 in 2007, 34 in 2008, 25 in 2009, and 30 in 2010), of which 45 have had a closing. Since the dates refer to when IWC reviewed an opportunity for the first time, opportunities might have been marketed before or after IWC’s vintage year. Aggregated target equity size is over $30bn over the period (average equity fund size of $280m), while actual capital committed is around $10bn (average fund size of $230m).
For the purpose of this article, the funds’ target geographies have been classified into seven categories reflecting different risk/return expectations:
• North America: US and Canada;
• Mature Latin America: Chile, Uruguay and Southern Brazil;
• New Latin America: All of Latin America, with the exception of Mature Latin America and the Amazon region;
• Europe: All of Europe except Russia;
• Oceania: Australia and New Zealand;
• Emerging markets: Africa, the Amazon region, Asia, and Russia;
• Multi-regional: At least two of the above defined geographies. Several of these are mandates to invest in mature and new Latin America together.
Figure 1 shows that North America is the primary destination of timberland investments and that there is a significant share of broad mandates (multi-regional funds). 10 years ago, funds targeting emerging markets and new Latin America were an exception. Today, they are more common but only very little capital has been committed to such regions until now. This development was anticipated by IWC and we believe it will continue. There are, however, still a significant number of opportunities in the more established markets.
The ranges of net real IRRs that managers believe they can deliver for each specific geography are presented in figure 2. Note that it does not reflect actual performance but only the managers’ expectations when the funds were marketed. Dispersion of target returns within a region is due not only to different underlying assumptions used by the various managers, but also because of the specific assets targeted within the still heterogeneous geographies in terms of tree species and markets.
As the number of timberland investment funds is growing, investors are today able to access a wider range of strategies and target regions. There is however still some way to go for the industry to become more transparent; only in-depth and structured due diligence, along with forestry and timber markets knowledge, will support investors in selecting the top tier investment opportunities.
Céline Claudon is due diligence manager with the International Woodland Company (IWC), an institutional timberland investment adviser