Having held a first close on its sustainable Irish forestry fund, SLM Partners has made further strides towards a final close on the vehicle’s €50 million-€60 million target, according to executives at the firm.
The initial milestone, hit on March 28 on an undisclosed amount, was reached after the Silva Fund received pledges from five investors. These comprised the European Investment Bank, two European insurers, one Irish endowment and one Irish family office, investment director Darius Sarshar told Agri Investor.
The fund has since subscribed an additional limited partner, and a further investor is also finalizing its commitment, Sarshar said, adding that both are European high-net-worth individuals. He noted that one or two more investors would be enough to bring the Silva Fund to its final close. SLM had until March 2019 to hold the close, but Sarshar reckons it could happen much sooner.
Sarshar described the two Europeans that committed as “blue-chip, very large institutions” that typically write equity checks in the hundreds of millions. He reckoned SLM could have raised more money from institutional investors if it had launched a bigger fund.
“But because a significant component of our strategy is aggregating smaller properties, we didn’t want to take on too large a fund before we were able to demonstrate that we can actually aggregate over a reasonable time frame.”
Launched in Q4 2015, the Silva Fund has a 10-year tenure, with possible extensions. It is focused on Ireland’s fragmented forestry market, where an array of small-scale properties are set to become available for purchase in the coming years.
“Over the last 25 to 30 years, there’s been quite a lot of planting by the private sector in Ireland, and predominantly by farmers. That’s been driven by grants from the European Union, who wanted to see Ireland re-establish and expand its forest cover,” says Sarshar.
At the turn of the century, the country had the lowest forest cover in Europe, hovering around 1 percent. The EU supported reforestation through grants as well as “premium payments,” meant to compensate the farmers for the lack of revenue on the forests during the first 15 to 20 years.
Many such payments have now expired, and farmers are no longer keen to hold on to these assets, Sarshar explained, because they don’t generate regular revenue anymore. “A lot of them are looking to sell out.” By aggregating disparate properties of 8 to 10 hectares, he said, the fund will put together a low-risk portfolio that is likely to attract the interest of institutional investors when an exit is due.
“The forests are not well described or actively managed so most need thinning immediately and generate cash income straight away,” Sarshar said. “The farmers have planted them, there’s some basic maps of what was planted, but they haven’t got a good inventory or management history. We will sell on a portfolio that’s well described with a good inventory and permanent sample plots.”
Paul McMahon, co-founder and managing partner at SLM, says the fund is progressing at a time when asset prices are high, and discount rates low, in mainstream forestry markets. “So people are looking at these smaller and more niche markets, and Ireland fits into that.”
The Silva Fund is aiming for returns on par with peers in Australia and New Zealand, “among the best outside emerging markets,” said Sarshar, adding that total returns in Australasia typically stand at 8 or 9 percent real before fund costs and fees. Along with capital appreciation, an important component of that total performance will be cash yield, “in the region of 3 percent,” he noted.
That owes to the vehicle’s sustainable strategy, dubbed “continuous-cover,” under which forests are thinned according to regular cycles rather than in one go, which is the case of mainstream “clear-fell” strategies. In addition to maintaining permanent forest cover, a likely factor in the EIB’s decision to back the fund, it allows for recurrent yield rather than a big lump of cash every few decades.
The Silva Fund has already sealed its first two deals, which are now going through the settlement process. Sarshar thinks the vehicle targets a vast addressable market: out of 100,000 to 150,000 hectares of “sweet-spot” assets, the fund will end up buying 3,000 to 5,000. “There’s no reason why you can’t have a rolling process where every year you’re acquiring a number of properties and growing over time your territory through different vehicles,” McMahon concurred.