Craigmore launches NZ$300m forestry vehicle

A third of the fund’s returns will be derived from carbon credit sales marketed in New Zealand’s internal marketplace which is not open to foreign purchasers or credits.

Craigmore Sustainables has launched a forestry fund with a target of NZ$200 million ($143 million; €119 million) to NZ$300 million that will target New Zealand forestry.

The New Zealand-based firm expects to reach a first close of “somewhere between NZ$25 million to NZ$50 million” by March, Craigmore chairman Nick Tapp told Agri Investor, based on the strength of indications received from potential investors.

Totara Forestry Partnership will acquire a mix of established mid-age forests and grazing lands suitable for planting Pinus radiata, which is a construction softwood.

The open-ended vehicle will target returns in excess of 6 percent and could make its first acquisitions by June. TFP will also plant up to 30-meter-wide strips of riparian trees beside waterways to protect biodiversity and “to stay ahead of the curve in terms of regulation, because it’s possible that there will be obligations around riparian margins and it reduces risk,” said Tapp.

Roughly one third of returns delivered to investors will be derived from carbon credits generated through the life of the fund’s forestry assets, which will be traded on New Zealand’s Emissions Trading Scheme which is exclusively open to credits generated in the country. Purchasers of credits must also be from New Zealand.

“From roughly year-three through to year-17, you can receive a carbon credit cashflow… which changes the dynamic of investing in newly planted forests because when you normally plant a tree, you wait somewhere between 27 years in New Zealand and 90 years in Finland and then you go and harvest it,” said Tapp.

“But if you can get some cash in those first years it really makes a difference to the economics of the return. Most of what we look at now for new plant forestry is roughly one third of the return derived from carbon credits and two thirds from the ultimate sale of timber. We should not lose sight of the fact we are also growing commercial timber which is in demand from China, Japan, Korea, India, and the US.”

Existing investors into Craigmore’s agriculture funds who are now going through their due diligence processes before committing to the TFP include institutional investors and large family offices, confirmed Tapp, the majority of whom are based in Europe.

Craigmore’s return investors have become accustomed to the need to invest over the long-term when committing to farmland and forestry, added Tapp, with many now looking at forestry with a 30-year term mindset and “a number of our investors talking about 100-year time horizons.”

Craigmore has three open-ended ag funds currently in market, the oldest of which is the NZ$176 million 2011-vintage Craigmore Farming Partnership, which features an 80 percent exposure to dairy and 20 percent exposure to permanent crops. The NZ$84 million 2014-vintage Craigmore Dairy II Partnership is wholly invested in dairy.

The firm’s 2016 Craigmore Permanent Crop Partnership has taken in NZ$170 million to date and, alongside other permanent crop investments into areas such as apples, kiwi and wine grapes made by the 2011 vehicle, has “done really well,” said Tapp.

“The permanent crop partnership is ahead of our expectation, it’s up on the original budget. We’re up 15 percent in performance over not a very long time period and the permanent crop assets in the farming partnership are still low 20 percent IRR for an eight-year hold,” he explained.

Craigmore’s close-ended 2011-vintage forestry fund has exited all its assets and returned capital to investors, delivering a 6.18 percent IRR net of fees and taxes. Tapp said the firm is “not unhappy” with the performance of the vehicle over its 10-year life, adding investors in the fund “were early supporters who tend not to be very long-term holders.”

Craigmore farm investment analyst Jack Acland added: “The 6.18 percent return was partially supplemented by revenues from carbon offset credits in New Zealand, during a period when the price of carbon offset credits was probably half or lower than half of the price at which it is now.”

The price of carbon credits traded on New Zealand’s Emissions Trading Scheme has risen from NZ$25 in March 2020 to NZ$38 in early 2020, said a statement from Craigmore.

The fund manager has $700 million in total assets under management as at January 2021.