AP3 takes direct road to timber – exclusive

The Swedish pension fund is pursuing a more direct co-investment route for its timber exposure, having spent the past 10 years investing predominantly via third-party funds.

The Kr258.5 billion ($37 billion; €28 billion) Swedish pension fund AP Fonden 3 (AP3) is shifting to a co-investment strategy for timber, according to Bengt Hellström, head of alternative investments.

“The advantage [of co-investments] is that they make it easier for us to underwrite the return expectations,” he said. “Funds or separate account mandates are usually blind pools – and these are more difficult to present to the investment committee that obviously wants to make a judgement call by comparing the return expectations to others in the ‘risk class’.”

Timberland comprises part of the pension’s inflation-linked allocation, or ‘risk class’ as Hellström calls it, alongside real estate, infrastructure and inflation-linked bonds. It has a target allocation of between 12.5 percent and 22.5 percent and AP3 currently has about 17 percent invested so “there is room for more”, Hellström said.

AP3’s existing timber investments account for 1.5 percent of its overall portfolio and consist mostly of fund commitments, but after developing relationships with timberland investment management organisations, or TIMOs as they are better known, it decided to pursue the more direct co-investment route.

When asked whether direct investing would require more work Hellström gave a mixed response.

“It is potentially some more work although it very much depends,” he said. “It might be a more intense sourcing process but that won’t pose much of a difference with regard to actual due diligence,  especially if you are working with a manager that you knew before as you can work closely with them in evaluating opportunities.”

AP3 has $540 million invested across 12 investment vehicles investing in Latin America, Europe, the US and Australia. It last made a timber investment in 2012, with a A$36 million commitment to the ‘Green Triangle Forest Trust’, managed by Australian TIMO New Forests. The pension also has two undisclosed-sized stakes in Russian farmland investment management companies Alpcot Agro and FK Volga Farming.