Twin Creeks, a co-investment between a REIT and four institutions, is keeping fees below 1% and eschewing carried interest. But what does that mean for timberland investing?
Timberland fundraising is rebounding in 2016 driven by new investment models, the possibility of alternative revenue streams like mitigation banking and an emphasis on emerging markets.
Data from Preqin shows that this year there are 14 funds in market across the globe targeting $3.3 billion, a sizeable figure compared with the $1.5 billion raised by three funds in 2015 and the $2.1 billion collected by six funds in 2014.
But there is one new vehicle whetting institutional investor appetite for timberland not only because of its innovative structure, but also because of its low fees and lack of carried interest. Real estate investment trust (REIT) Weyerhaeuser and Silver Creek’s joint venture, Twin Creeks, which investment firm Silver Creek manages, had raised $950 million by the end of last year. A merger between REITs Plum Creek and Weyerhaeuser at that time also made the latter the largest timber owner in the US, with an equity value of $23 billion.
The State of Oregon, the State of Washington, the Alaska Permanent Fund Corporation and Maine Public Employees Retirement have all committed alongside Weyerhaeuser, which has a 25 percent interest. Silver Creek managing director Bob Ratliff told me this week that the co-investment model and his own firm’s experience in credit and hedge fund management allowed Twin Creeks to keep all fees charged under 1 percent.
Expected to reach a close on its debut investment a $560 million US forestry purchase early next week, their debut investment, the fund is likely to be one of the first to allow institutional investors to partner directly with a large operating company, with access to its vast resources.
“We are substantially co-invested alongside the investors. We have Weyerhauser with a 20 plus percent ownership interest. It’s aligned because we are invested right alongside them,” Ratliff told me. He added that lower fees were probably possible for others: “If you feed at the trough where you are getting these big fees, it is hard to go backwards. And if you start out with a lower fee structure and build your business around a lower fee structure, my premise is we will be rewarded over time.”
He also said that investors had been heavily involved in setting up the fund structure.
Twin Creeks’ team and investors are not the only ones restructuring – TIAA has aligned its own management firms to create TIAA Global Asset Management and handle many of its new real assets investments, including co-investments with other institutions. It’s not clear whether fees were key in this decision, but cost is more likely than not an important factor when pension funds consider how they invest.
Management fees are a sensitive issue in any asset class, so much so that investors like CalPERS have been calling for increased transparency and considering non-fund structures, such as separate accounts, partly in an effort to lower fees.
When I’ve asked timberland fund managers what they think of Twin Creeks it has made them uncomfortably tight-lipped. Maybe it’s because its size and management resources could further restrict access to large tracts of US timberland for other funds; or maybe it’s because managers targeting large investors might be forced to reconsider their own fees.
One thing is clear: big-ticket investors have responded to Twin Creeks’ call. With $950 million raised, Twin Creeks already accounts for 29 percent of the $3.3 billion currently being sought by timberland managers. If it hits its $1.1 billion target, it’ll make up over a third of that figure, leaving 13 other funds to raise $2.2 billion. With such a large take, don’t be surprised if its model increasingly comes up in investor conversations.
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