Funds reaching the end of their lives will bring assets to market amid LP appetite for long-term ownership, New Forests argues in its latest market update.
Investors frustrated by the dearth of primary timberland transactions in the US will soon have reasons to cheer, according to specialist manager New Forests.
In its biennial update on the forestry market, the Australia-based firm observes that assets acquired “in the heyday” of 2003-2008 are now starting to be sold back into the secondary market. Rising interest rates may also put pressure to improve cash yields, creating volatility for returns and prompting investors to delist assets.
Taken together, these trends will help bring annual timberland transaction turnover in the US from about $1 billion over the past seven or eight years – net of big consolidation deals – to $2 billion over the next half-decade, New Forests said.
Not every investor, however, will be inclined to part ways with assets held in the vehicles they back. “It is likely that most funds will sell down their holdings, but there may be some instances where a follow-on vehicle will be used to roll over the assets,” David Brand, chief executive of New Forests, told Agri Investor. “We understand there are some LPs looking to hold on to underlying assets – particularly for large, quality assets – even amidst fund exits.”
Yet action will not be limited to the US. Australia and New Zealand will see an annual turnover of between $400 million and $800 million over the next five years, the firm reckons, largely boosted by the sale of remaining government plantations but tampered by rising political uncertainty around foreign ownership. South America and Asia are forecast to generate up to another $700 million of deals a year.
Return expectations are likely to remain varied across markets, reflecting diverse levels of risks and maturity. In recent times, Brand observed, timberland assets were aiming for 4.5-6 percent real returns, with about 200 basis points more for Australia and New Zealand. Latin America was expected to generate yet a sliver more, with Africa and Asia still higher at 10 to 12 percent real IRRs.
The perk-up in activity is set to take place amid appetite for longer tenures, with innovation regarding fund structures a likely produce of a competitive environment. “In funds, the longer terms we have seen are 15-20 years. We also see potential for funds with longer dated and repeatable renewals of similar lengths, which approach a ‘semi-permanent’ structure,” said Brand.
“An example of more permanent capital models includes unit exchanges as some investors leave and are replaced by others while the underlying investment vehicle continues to hold the assets. In these cases, there can be pre-planned liquidity points where the fund must provide an exit to investors or be wound up.”
Longing for long-term
A stumbling block to the roll-out of new structures will be the need to redefine remuneration arrangements. The typical management and performance fees charged on closed-ended funds will not be suited to long-term or permanent capital vehicles.
“Under a long-term model, factors for consideration include what is the appropriate level of the management fee over a long period of time; how will the manager be compensated for inflation; and how to reward active management through up and down market conditions,” the report said.
Brand noted that new structures were being adopted from other asset classes. “In general there is probably a lot of room for asset owners and asset managers to have direct and open discussions around the evolution of timberland management structures, not only in terms of length but also on the issues of fees, alignment, and how performance will be evaluated over time.”