In September 2015, the $50 billion Alaska Permanent Fund Corporation (APFC) joined WSIB and OPERF in helping to establish Twin Creeks Timber, a joint venture between Silver Creek Capital Management and Plum Creek Timber. APFC’s $100 million commitment enabled them to invest directly in timber, starting with an initial 260,000-acre portfolio across five US states worth $560 million.
Later that year, Plum Creek merged with Weyerhaeuser to create the largest timberland owner in the US. Marcus Frampton, APFC director of private income, offered Agri Investor his views on the current state of the timber market, the benefits of the Twin Creeks structure, and whether it can be applied to other agri sub-sectors.
How did the collaboration with other investors on Twin Creeks come about?
I’m personally comfortable with timber and forest products because my first job was covering timber and paper at Lehman Brothers, so I had some familiarity with the asset class. It’s not a coincidence that Oregon and Washington, the two largest equity investors in the joint venture, are geographically in our backyard, and that Weyerhaeuser is based in Seattle.
The two state plans are like-minded investors with similar time horizons and objectives, so we discussed opportunities in the market. When this one came up we spent some time finding an entry point and putting together the right structure.
Twin Creeks marked your first timber investment. How come?
There are two main factors that previously prevented us from making timber fund investments: one is the shorter life of the fund structure, and the other is that the fee profile tends to be higher.
When you are investing at this size, there are always going to be firms willing to do separate accounts that could have longer lives than a co-mingled fund. Each has its drawbacks, but if you compare timber to LBOs, infrastructure or commercial real estate, the deal volume is really low. So if you go into a blind pool fund, you don’t have a whole lot of certainty about what assets are going to come up for purchase and you don’t have control over what the sponsor does.
What made the structure of the Twin Creeks investment appealing?
In this vehicle, we have a limited number of investors, with well-defined governance rights, and we have 260,000 acres of very high-quality, institutional timber. Funds typically don’t come with contributed acreage, so the initial capital we deployed marked a deal that would probably not have happened otherwise. Plum Creek was not looking to run an auction to sell 260,000 acres, they were interested in developing a partnership with institutional investors.
The fees are also much lower than a fund, we’re involved at the board level and we own LLC units, we’re not just a LP in a vehicle that bought assets. We’re a shareholder of this vehicle and own the same type of shares that Weyerhaeuser does.
Given that they are a large timber owner, Weyerhaeuser is more involved with operations than we are, but as significant equity investors, the structure gives us some governance rights for on-the-ground property management that is typically done through contractors.
Would you consider using a similar direct structure for investments in other agri categories?
All else equal, we like the Twin Creeks structure and we like working with similarly-minded investors like Oregon and Washington. We have flexibility within the private income portfolio I manage to look at almost anything we want that generates privately-sourced income, and we similarly have flexibility in how we access it. If we got excited about a particular agricultural category and there was a fund that is already very well positioned in it, I wouldn’t rule out the possibility of us investing in an agri fund at some point.
What is your current view on the broader timber market?
It’s an interesting time for timber because of where log prices are and the fact that some of the funds that were raised in the early to mid-2000s may be liquidating portfolios in the coming years. If liquidations of legacy timber funds proceed as some people think they will, it should be a decent time for deploying new capital.
Separately, if you look at long-term trend lines for log prices, they are also relatively depressed right now and certainly were when we made this investment. If you’re investing in timber in the Southeast as we are, you need to have some confidence around what lumber and housing is going to do in the US, but this investment was not really a short-term call on housing as much as a more long-term investment.
That said, there is an expectation that housing starts will move closer to the long-term trend. I don’t think we need that to happen in order to make this investment case, but there’s more upward pressure than downward pressure on log prices because of it.