Changing expectations for timberland’s function within investors’ portfolios were apparent throughout Domain Timber Advisors’ first concerted fundraise since 2017, according to an executive leading the effort.
Patrick Neuman, director of business development at Domain Capital Group, told Agri Investor soon after the firm’s September announcement that it had raised $225 million across a fund and separate account vehicle that the fundraise revealed changes in the nature of demand for timber from some LPs.
“It’s gone from an interesting financial tool for investors to something that’s both a financial tool for investing with capital preservation, inflation hedging, to also now being something they are looking for to check a lot more boxes within their portfolio,” he said.
Investors within the Domain Timber Opportunity Fund, which closed on $75 million in April, include a US insurance company, several US pensions and one German insurance company, he said. The $150 million separate account vehicle referenced in the September announcement is supported by a sovereign wealth vehicle based in Australasia, according to Neuman.
Both vehicles, he said, reflect how new entrants to timberland are increasingly focused on considerations outside purely financial returns.
“Various GHG requirements, carbon reporting, biodiversity – literally, if I have 20 conversations with LPs, 20 of them are going to have a different requirement of what they want timber to do in their portfolio,” Neuman added.
One size not fitting all
Atlanta-headquartered Domain is a subsidiary of investment services provider Domain Capital Group that was established in 2016. In 2017, the firm acquired existing timber funds and assets raised and managed by Atlanta-headquartered Timbervest.
Neuman said while much of Domain’s focus over the past five years has been on managing those portfolios, the firm has also added some separately managed accounts during that time. In addition to its heightened profile, new entrants looking for climate change mitigation, and its inflation-hedging potential, Neuman said the firm also noted changes in the structure preferences of some timber LPs.
“Smaller investors seem to be interested in separate accounts, where I do not believe they would consider those separate accounts in other alternative asset classes,” said Neuman, who has experience raising capital in other parts of private markets. “We are finding that groups that are smaller – and this is recent – are considering SMAs as small as $30 million to $50 million. That’s because they are finding that their ESG requirements, and desire to have certain biodiversity elements added into the strategy, are not being met by the one-size-fits-all fund structures.”
Neuman said Domain has brought in smaller investors for SMAs in the years since the Timbervest acquisition, including high-net-worth individuals that also value timberland for their own recreational use.
“Some of the high-net-worth SMAs ask more and better questions than some of our more institutional fund LPs.” he said. “It matters to them and they are more attuned to it.”
Domain focuses its timber investments on smaller, non-contiguous properties of between 2,000 and 30,000 acres with potential for value creation through active, sustainable management. Neuman summarized the firm’s investment approach as attempting to take a private equity management style to timber that often results in his firm being the first institutional owner of properties in its portfolios.
Terms governing most of the firm’s smaller SMAs, he added, do include specific targets for enrolling properties into sustainability certification schemes that reward strong management.
“That improvement, that’s just regular blocking and tackling for a TIMO [Timber Investment Management Organization], but we like to think we are getting the real additionality there because if not for us, those properties would have not been managed under a certification regime,” he said.
Neuman said growing attention to timberland’s carbon potential has also played a role in supporting demand for separately managed accounts because it can be difficult to co-ordinate what to do with credits among various entities with different strategies and approaches to the market. Carbon does provide an example, he said, of opportunities available to managers capable of adapting with investors’ growing demands.
“It seems like there are more and more LPs knocking on our door on a regular basis,” he said. “Our industry will benefit from that interest and will capitalize and invest, the more flexible we are with meeting those LPs where their needs are, versus trying fit everyone into neat and tidy buckets.”
Domain managed a total of $578 million across fund and separate account vehicles as of a March filing. In March, the firm assumed management of a separately managed account including properties in the US Southeast and Pacific Northwest that brought its total timberland portfolio to 250,000 acres.