Frontier-market sustainable forestry fund reaches $60m close

The fund will target 12% annual returns as the profile of developing-world timber rises among impact investors, says Arbaro Advisors MD Marco Kaiser.

The Arbaro Fund, a sustainability-focused forestry fund being raised by a pair of German firms, has reached a $60 million first close in support of a strategy targeting Latin American and sub-Saharan investments.

Impact-focused asset manager Finance in Motion and Unique, a consulting firm focused on forest management and sustainable land use, have established a joint venture, Arbaro Advisors, that will act as investment advisor to the vehicle.

The Arbaro Fund has a target of $200 million and secured a commitment of up to $20 million from the European Investment Bank. The Finnish Fund for Industrial Co-operation is also an investor in the fund, which has raised half of its capital to date from private investors including Lithuania-headquartered transport company Girteka Logistics and Fair-Finance Vorsorgekasse, an Austrian pension.

Arbaro Advisors managing director Marco Kaiser told Agri Investor the Arbaro Fund will target a 12 percent annual internal rate of return net of fees and expenses. He expected the vehicle to reach a second close on about $100 million by the end of the year, with a final close scheduled near the end of 2019.

Speed bump

Kaiser explained that the Arbaro Fund had previously announced an imminent close on $50 million in mid-2016, but that progress slowed after an investor backed out. Kaiser declined to identify the investor, but said their decision to rescind their commitment came as a result of a change in strategy at the investor’s firm.

More recently, this summer’s heatwave in Europe has helped drive interest in investments that can help mitigate climate change, according to Kaiser. He said six private investors – including family offices, foundations and insurance companies – have made commitments to the Arbaro Fund of between $1 million and $12 million.

“Investors are only starting to look at forestry as an asset class and are building up their internal capacity to analyze forestry funds. If you go to many family offices, there’s a lack of track record in investing in funds like ours.”

Given the long-term nature of timber investments, the limited track record of investments that have been entered and exited successfully has emerged as a key issue among investors, according to Kaiser.

“Forestry as an asset class is set to become much more mainstream over the next years. We are lagging far behind renewable energy as an asset class, but give it another 10-15 years and know-how and track record in these asset classes will be at a different level.”

Kaiser said that because they are more experienced in the asset class, DFIs often come with a lengthy list of questions regarding social and environmental impact. As private investors have become more involved with impact investing, he said, their reporting expectations regarding impact have evolved as well.

“They [LPs] don’t believe any more in the case studies that used to be the typical way to show impact to private investors,” Kaiser said. “They also want to see more concrete, co-operative reporting and evidence about what’s going on on the ground.”

Know-how, know-who

Finance in Motion director Hanna Skelly told Agri Investor that even amid wide interest in such assets among investors, the level of competition for developing-world timber assets offering potential for both financial and social return depends largely on the type of assets an investor is looking for.

That is not so much a problem for the Arbaro Fund, she said, as the vehicle seeks timber assets located in frontier markets that require further development.

“They [such deals] are not out there in the market; you have to know who they are and where they are. They require a bit more patient capital.”

Skelly said that all investments from the Arbaro fund will come in the form of equity and focus on projects located in areas with good growing conditions, where demand for wood products exceeds sustainable supply.

“We always want to be growing new trees, but this doesn’t mean entering into pure green-field projects. It’s more about looking at projects where you need to increase the planted areas in order to get to scale.”

The Arbaro Fund will avoid developed, competitive markets like Brazil and South Africa, Skelly said, favoring Latin America markets including Paraguay and Colombia and regional markets of West and East Africa.