The Arbaro Fund, a partnership between forestry manager Unique and agri impact investment firm Finance in Motion, has secured commitments of $50 million from investors including the European Investment Bank. Targeting $200 million, the fund will invest in sustainable forestry in Latin America and Africa. We catch up with Markus Grulke, executive director and co-owner of Unique, and Marco Kaiser, director at Finance in Motion.
How did you choose your target markets?
Grulke: When we developed the fund concept, we applied two main filters to select the geography. The first was to focus on the biophysical conditions of different regions. We are looking at investments where maximum timber growth per hectare can be achieved. In the tropics the limiting factor is rainfall and soil conditions. We are only going into regions that have annual rainfall of over 1,200 mm per year. The second filter is that we are only going into countries where we have a long-standing track record and know the forestry business and timber processing [players].
How do you ensure you invest responsibly in emerging markets?
Grulke: First of all we are a commercial timberland fund, but we will have huge impact. We believe in investing in social impact and integrating the local population in a positive way. We will transparently and regularly report on our impact in terms of carbon dioxide sequestration, local employment and certification procedures.
Why are your first investors development finance institutions?
Kaiser: From our discussions with the private sector we learned that for many [investors], forestry in emerging markets is a new asset class. They may have invested in timber in the more developed world, but these are new geographies. Many would like to have the stamp of approval from a large DFI. It was our strategy from the beginning to win two to three anchor investors, which we now have, and then start with fundraising. We are targeting a broad range of private investors from pension funds to family offices and, to a limited extent, high net worth individuals, and are in the due diligence process with a couple of investors.
In some emerging markets, owning the land is not an option. How do you deal with this issue?
Grulke: We have learned in [recent] years that [land-lease models are] also positive for returns. We have had very good experiences in land-lease models.
You see much higher land-price volatility in emerging markets, which is an issue for some investors, and access to good land is protected. [With leases], you may have access to great land that is not for sale. Then most of your capital is invested into operations. This means that the creation of economic value and impact is much higher because you are planting a much larger area with the same amount of money. Your mitigation of carbon and production of timber is also much higher with the same amount of investment capital.
What other models work for forestry in emerging markets? Email: email@example.com