Criterion Africa Partners plans to deploy up to 50 percent of its $115 million second timberland fund in the next six months, managing director George McPherson told Agri Investor.
The 2018 vintage Africa Sustainable Forestry Fund II had its final close in April and is the successor to the $160 million 2010 vehicle of the same name, which McPherson said has so far “underperformed.”
“Where it’s marked today, it has underperformed what our expectations were,” he explained, but declined to disclose the inaugural fund’s target return rates.
He added that “there are some things going on in the portfolio that will help us move the performance needle much higher from where it is today,” one of which is an exit that is due to close this year but has not yet been publicly announced. The fund has also been challenged by currency devaluation in South Africa, a country in which it holds multiple assets.
Criterion will put the lessons learned from its first fund into practice by pursuing a portfolio of assets that is roughly 75 percent weighted to timber processing facilities, and 25 percent to brownfield tree and timber resources – a reversal of the respective allocations for Fund I.
“[Processing] businesses aren’t necessarily prevalent in Africa yet so we’re looking a little bit more on the industrial side, and looking to deploy capital in existing and developing new industrial processing capacity,” explained McPherson.
One area where there is “low hanging fruit” is in utility poles, he added, due to the ongoing electrification of African towns and cities. The fund has deployed $20 million of capital into three business so far, McPherson said, one of which is a pole company in South Africa.
Criterion is also pursuing timber assets on which a parcel of the land can be used for agricultural production, as a way to ensure “you’re not waiting 10 years to get dollar revenue, you’re waiting let’s say two to three years.”
“For avocados, by year five you’ve got full maturity and you’re pumping cash. Part of the lessons learned from fund one is we need to look at what can we do here other than forestry, now that we own the asset, to enhance the return potential. The first transaction in fund two is a brownfield forestry asset that’s currently producing poles and it will also have an HBU [higher and better use] component with it as well,” McPherson explained.
Fund II is exclusively backed by seven development finance institutions, including FinDev Canada, CDC Group, African Development Bank, and SIFEM, the last three of which are return investors. The vehicle will target assets located in sub-Saharan Africa, with a focus on Eswatini, Gabon, Ghana, South Africa, Tanzania, Uganda, as well as East African countries.
Certain assets in fund one, for which Criterion has struggled to find exit opportunities but continue to be good performing businesses, could be placed into an evergreen vehicle, confirmed McPherson.
Africa continues to be the lowest cost region for good forestry assets anywhere in the world, he added, and the firm has always believed it is only a matter of time until timberland investors in areas such as Australia and North America would invest in the continent.
“It hasn’t happened yet, but I think there’s a chance that it will happen here moving forward, driven largely by the climate change benefits of forestry,” he said.